Public finances - Few options but a lot of hard choices

Siptu chief Jack O’Connor, one of the union leaders who supported the Croke Park II deal, yesterday returned to the idea of increasing income tax for those earning over €100,000.

Mr O’Connor suggested that a new tax rate dealing with income above €100,000 might deliver the kind of savings that would make the €300m cut in the public sector pay bill for the remainder of the year unnecessary. Even if you put aside Fine Gael’s repeated rejection of that idea — usually counterbalanced by Labour voices advocating it — it is hard not to think that a new higher tax rate and cuts to public sector pay will both play a part in balancing the books before our economic crisis is resolved.

Fine Gael has insisted that they will not increase taxes on work but the rejection of Croke Park II changes the viability of their argument as does a renewed European focus on our relatively low corporation tax. To what extent they will hold the line depends on the Government’s stomach for a war on two fronts — the unions opposing cuts and advocating a new high rate of income tax and business lobbies diametrically opposed to those two arguments.

Yesterday’s announcement that the Government had asked the Labour Relations Commission to talk to trade unions to see if there is a possibility of reaching a deal on cutting the public service pay bill suggests a willingness to be thorough and imaginative though the insistence that the pay and pensions bill savings — €300m this year and €1bn by 2015 — must be made are unlikely to provoke a Pauline conversion among the unions who rejected the deal last week.

The Government position on demanding pay cuts is weakened by this week’s admission by European Commission president Jose Manuel Barroso that austerity is not working as had been hoped. Mr Barroso gave the strongest signal yet that the grim policy of spending cuts and tax hikes might be relaxed in an effort to provoke growth. That admission, the subject of so many warnings by so many voices for so very long, however, does not change the arithmetic of Ireland Inc’s deep-red, out-of-kilter balance sheet. We will have to do that ourselves.

The Government can, however, take comfort, if that is the right phrase, in the fact that German private sector output shrank in April and eurozone business activity contracted again. This raises the prospect that the European Central Bank will decide to cut interest rates next week after lower than expected growth rates. This modest slide may help in holding the line against the implications of Mr Barroso’s confessional moment and bolster those insisting that pay cuts must go ahead to restore budgetary sanity.

Whatever happens we are at a very delicate moment. Whatever happens in the coming weeks may have a legacy far beyond its immediate impact. Unions cannot dictate to Government but Government cannot rule without the moral authority to do so. This suggests that the future is strewn with compromise — compromises that will more than likely mean a new top tax rate and cuts to public sector pay and pensions. The experiences of the last five years suggest that anything else is wishful thinking.

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