Economists question public sector reform plans

THE ability of the Government to cut the numbers of public sector workers and drive efficiencies in the sector, as envisaged in the National Plan, is being questioned by economists.

Goodbody Stockbrokers chief economist Dermot O’Leary concedes that, while a new government in the new year is likely to alter the plan, he expects the broad parameters within it are likely to remain.

“We are somewhat sceptical of the ability to introduce efficiency measures in the public service that will yield real results, while there is uncertainty as to how the required reduction in numbers is to be achieved. Markets too are likely to remain sceptical until real results begin to be seen. Furthermore, actions on the banking sector are now arguably more important in the short term,” he said.

Mr O’Leary wonders why the Government has changed its proposed ratio of tax to spending cuts.

“The plan includes measures to raise an additional €5bn in taxes and reduce spending by €10bn over the period. This ratio has changed recently, as Minister for Finance Brian Lenihan had previously stated that the ratio would be 3:1 in favour of spending cuts over tax increases. We wonder has the involvement of the EU in particular changed this strategy, given the comments from the EU Economics Commissioner that Ireland would cease to be a low-tax economy.”

Mr O’Leary also points out that the pain being inflicted on Irish citizens is far greater than in other European economies. “For example, real spending will be reduced by 20% over the 2010-2014 period, relative to a 2% real cut in the UK consolidation plan unveiled in October,” he said.

NCB Stockbrokers’ Brian Devine said, while they believe the Government “did a decent job” on the fiscal plan, the shadow of the banks still hangs over the economy. “The problem with all these figures is that they do not account for extra funds required for the banking sector. Depending on exactly how the sector is to be restructured, there could be a significant impact on the debt level and future interest costs.

“Furthermore, there are no details on the costs of the funds to be drawn down from the European Financial Stability Facility (EFSF). In short, there is little new in these figures from the macro viewpoint and the picture won’t be complete until we see the details on the bank restructuring and the EFSF loan agreement,” he said.

Mr Devine said €85bn in funds discussed in the press as part of the EFSF agreement could be made up of something like €45bn for the state, €20bn direct for the banks, and €20bn contingent for the banks.

“Again these are simply postulations until we have the crucial details on the banks. Ireland’s agreement with the EU, regarding loans for the Government and the restructuring of the banks, rather than the four-year plan, will be the more important milestone.”