Cut, cut, cut — or we’ll all end up shattered just like Waterford Glass

IN the early stages of this recession, politicians assured us we were not returning to the 1980s. Now we are facing something much, much worse. How bad will it get? How long will it last?

Donald Rumsfeld’s words at the time of the Iraq invasion come to mind. He spoke of “known knowns, known unknowns and unknown unknowns”.

Let’s start with the “known knowns”.

By January 2010 the live register of unemployed here will be greater than 328,000, perhaps more than 400,000. The national debt will be at least €25 billion higher, a lot more if there is a banking default.

The Government will take more money out of the economy next year — at least €4bn. Disposable incomes from those at work are likely to be down 5%. Our annual GDP will be reduced by about 5%.

The “unkowns” are even worse. At some point our banks are going to have to declare that our major developers are “dead men walking”. They will have to announce loan impairments (bad debts) and significant goodwill write-offs of more than €10bn. Property prices could drop further. The extent of the toxic debt losses will have to be faced up to, as National Irish Bank and EBS did last week. Another ‘no’ vote for Lisbon might herald EU alienation towards us. A series of industrial disputes in the public sector could paralyse the nation. Violent protest and rampant crime cannot be ruled out.

This year offers no prospect of economic recovery. Instead, a sustained period of economic correction lies ahead. There is no avoiding the necessity to stabilise the public finances. Those advocating nebulous economic reflation here haven’t done the maths.

The Government’s fiscal deficit will be at least €20bn this year. Based on the January exchequer returns, tax revenues could drop €5bn on last year’s out-turn. The anticipated level of unemployment could cost the State €6bn in benefits and supports. Our capacity to borrow beyond €100bn will be in jeopardy if we do not cut public spending ASAP.

We need to cut public expenditure this year by €7bn. Last week’s Government package was an incremental and insufficient, but important, step in this direction. The anger of our public sector representatives is well noted. They argue it is unfair they should be asked to carry this burden unilaterally. Original estimated income losses were overstated. The average reduction is about 4%, after tax deductibility.

Little attention has been paid to the fact that in 1995, public sector employees were fully compensated with a payment of 20/19ths (equals 5.263%) of salary for the 5% PRSI pension contribution. In contrast, 50% of private sector workers have no private pension provision at all. More than 200,000 private sector workers will lose their jobs. Those in continuing employment face pay cuts of up to 20% to ensure the survival of their employers’ business.

The politics of this are simple. If the Government parties back down on this proposal, whether you like to call it a pension levy or pay cut, they may as well fold their tent. The opposition parties should not play politics with this issue. They should cast their minds forward to the next general election. Those same public employees will then ask Fine Gael and Labour if they will reverse this measure in government. They won’t.

Any short-term gain from political opportunism will be shortlived and eventually negatived.

Much more needs to be done to restore credibility to the public finances. The mantra of all politicians has been that the annual public capital programme of €8.2bn is vital for jobs and our future competitiveness. These projects all derive from our fanciful national development plan of yesteryear. This indulgence has to end. We can afford capital spending of less than half of that amount.

The construction industry will be out in force lobbying their friends in Fianna Fáil to maintain this spending at all costs. This allegiance to developers has led us to our present woes. We should not write off their past debts and finance their future.

Now that the public sector pay issue has been dealt with it is time to move on to the payroll problem. Sooner or later we have to downsize the Government apparatus by 20,000 through a severance scheme.

Bord Snip needs to identify wastage, inefficiencies and top heavy administrations. We have 3,000 HSE bureaucrats sending memos to each other. Senior layers of public administration are riddled with expensive, unnecessary ranks of mandarins.

A 30% cull at the top is needed. We still have more than 500 quangos urgently requiring rationalisation. Oireachtas savings are long overdue.

Reductions in pay, staff numbers and capital projects will still be insufficient to control the escalating debt. Universal benefits of welfare, education and health confer entitlements to all. This is unfair and socially regressive. Equity demands reform. Only a start has been made on reducing the overseas development aid budget.

You may recoil in horror at all of the above. If you keep your head in the sand, within two years the International Monetary Fund will prescribe their adjustments in order to obtain continued credit. This will include welfare cuts. Would our politicians prefer to have an alibi and avoid the odium? The political priority is now: jobs, jobs, jobs. Newsflash: jobs exist when viable businesses need work done.

According to a recent Forfás report it is 25% more expensive to do business in Dublin than in Belfast. Salaries in Dublin are up to 33% higher than in the North. Waste and water charges are also significantly more expensive here.

Our electricity costs are the second-highest in Europe, yet ESB workers take a pay rise. Before we start raising taxes, we should realise that lack of competitiveness is killing Irish firms. No businesses equals no jobs. Get real.

THE sudden, stark and painful termination of production at the Waterford Wedgwood plant was a body blow to employment in the south-east. A consortium will hopefully purchase the plant at Kilbarry and preserve glass manufacturing therein.

This disaster is a classic example of what may happen to the wider Irish economy. For many years this firm has been trading at a loss. It accumulated debts of €800m. It couldn’t finance its own private pension fund. It traded at zero cent on the ISEQ over the past year. The Government refused to guarantee any of its loans.

The manure hit the fan two weeks ago when the receiver ran out of cash. Bank of America would not release more money. The extent of the calamity only became apparent to all then. In reality there has been inevitability about this outcome which management failed to address much earlier. Receivership should have occurred ages ago, with a better prospect of transition to a new enterprise.

As a nation we face the same dilemma. Do we take action now to correct the Government’s daily losses of €55m on the current budget or do we wait until we literally run out of cash beyond 2011?

The painful choice is just not that of our politicians, but ours as a society. All the warnings on the property bubble were ignored. Are we going to make the same mistake with the public finances? Rhetoric is no substitute for decisions.