The Dublin Economic Workshop in Kenmare 2009 conference was told the Government needs to impose cuts in public sector wages and social welfare payments, and impose taxes on carbon emissions and property. On the upside, several economists advised against increasing taxes on workers.
Professor John Fitzgerald of the ESRI said: “Today, the task of the Irish Government is like that of Odysseus — the population will have to go back to the oars in a very unpleasant sea. Whether the crew will mutiny and fire Odysseus remains to be seen.”
Prof Fitzgerald said that the Government’s April 2009 budget proposed deficit cut of around 3% of GDP would do half, but not all, of the work of restoring the public finances to sustainability.
He said that, in the long run, taxing labour would cost the state rather than gather necessary revenues.
But, if the 2010 tax increase is less than the €2.5bn envisaged in the budget, then taxation would have to rise in 2011.
Prof Fitzgerald argued for temporarily shifting some of the burden from employers’ social insurance and onto the employees’ contributions.
“Normally, this would achieve little, because the incidence of all taxes on labour is ultimately largely on business. But, where wage rates are above the equilibrium, there is little chance of employees getting higher wages. Such a rebalancing would mimic the effect of a wage cut on competitiveness.”
Prof Fitzgerald also called for a two-year restructuring plan for public sector expenditure. He proposes public sector cuts of €2bn to €2.5bn in 2010 and a further cut of €1bn to €1.5bn in 2011.
He said that those in the social welfare system need to be prepared for a world where wage rates and prices are lower than they were in 2008. The system needs to be redesigned to avoid creating poverty traps or hindering a return to work.
“The 7% public service pay cut in March has made a significant dent in the difference between public and private differentials, while still leaving a substantial public sector premium.
“The tacit acceptance by the public sector of these cuts was remarkable. It is very hard to find a similar adjustment in recent history in the OECD area, with or without industrial unrest,” said Prof Fitzgerald.
“To achieve competitiveness, we need a further cut in wage rates across the board, public and private, of at least 5%. The delivery of such a reduction in the public sector would be greatly facilitated if it was clear that such cuts were taking place in the private sector.”
Kenmare 2009 is an annual conference hosted by Dublin Economic Workshop, a weekend-long event in the Andrew Carnegie Hall, in Kenmare, Co Kerry.