Our fiscal hole continues to deepen

ONE of great mysteries of modern times is why the Government and, indeed, the employers, place such store in the partnership process.

It was important in the early days but it has become a monster which took decision-making out of the Dáil, thereby emasculating the democratic process.

The monster was a Bertie Ahern creation but was it in the national interest? How did Fr Sean Healy of CORI become such a cog in the wheel that he made it all the way to the Fianna Fáil “tent” in Inchydoney? Who represents the taxpayers, the group that is suffering the consequences of the money squandered?

By last week, the partnership process had effectively evolved into a discussion between an employer, the Government, and its employees as represented by the unions. Not surprising then, that the unions failed to agree to effective pay cuts for their members.

The big question is why did the Government spend so long talking to them? I suspect that the answer has to do with their inability to get across the message about the severity of the current budgetary situation.

Had they done so, the nurses instead of threatening strike action, would have given thanks that all they were being asked to do was take a pay cut.

After weeks of wrangling, the final announcement fell short in that the total amount saved in 2009 was €1.8 billion instead of the €2bn target and €300 million of this was capital, a soft option. In addition, a further €1bn was saved in 2010 by scrapping the wage deal, say a round €3bn in all.

Contrast this with the fiscal slippage that occurred in the few days around last week’s announcement.

The live register jumped by 33,000 in January. Though the Taoiseach said it could hit 400,000 by end year, the reality is that it is more likely to be in excess of 500,000 by then.

This, in turn, means that social welfare spending will overshoot the January estimate by €1bn. The end-January tax returns were also behind target, implying a shortfall of another few billion revenue. The Government laboured mightily to save €3bn but lost as much or more in just a few days.

The €16.5bn that they thought they were going to have to find between now and 2013 has suddenly become €20bn — €3bn done, €17bn more to do. They will struggle to cut current spending by more than another billion or two.

That means that the next few budgets will have to either raise taxes or cut capital spending by a cumulative €15bn, a task which is so big as to be virtually undoable. And the nurses are talking of going on strike while the unions’ response is to call for “flexicurity” a Danish system that pays unemployment benefit equal to 80% of previous salary. By next year, we are more likely to be cutting social welfare rates than raising them.

Bankers’ pay was also in the news last week. Brian Cowen signalled his intent to reduce top remuneration packages by 25%. He was immediately trumped by Barack Obama who announced a $500,000 cap on executive remuneration in bailed out US banks. As bank salaries here were inflated in line with trends abroad on the way up, it is reasonable that they should follow them on the way down.

The ESB decision to rush to pay the terms of therecent abortive wage agreement came in for renewed criticism. The Government has recently appointed directors to the bank boards in order, inter alia, to control bankers’ remuneration.

In the case of the ESB, the Government appoints most of the directors, yet appears to have exercised no control.

It is unacceptable that an organisation that produces some of the most expensive electricity in the world should increase wage costs at a time when companies are having to reduce them.

Pat McArdle,chief economist, Ulster Bank.