If the Unions Fight, They Will be Right: The Recession Diaries – October 1st

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Imagine you’re walking a high-wire. You’re nearly at the end of line. You’re doing everything possible not to fall – balancing with your arms, moving snail-like, praying; the last thing you need is for some messer to start shaking the wire. That’s exactly what the Government is preparing to do as it mulls over its €4 billion worth of cuts in the upcoming budget – shaking the wire.

With ICTU’s launch of a campaign to stop the cuts, commentators will be queuing up to have a go at trade unionists – particularly public sector workers. You can write the script now – ‘privileged’, ‘sheltered’, ‘bloated’, ‘over-paid’, etc. That workers are engaging in action to protect the quality of public services and the living standards of the poorest is no matter; they are ‘not in touch with reality’ as Colm McCarthy might say (actually, he did).

Yes, there is the issue of protecting public services – which rank well below the EU-15 norm; and there’s the issue of protecting living standards – another vital issue given that the McCarthy Report wants to cut nearly €2 billion in transfers to low and average income earners. And, yes, many public sector workers will protest over wage cuts- but after social welfare cuts, levy increases, and the pension levy, this is reasonable.

But there’s another reason why trade unionists should be marching – to prevent the Government from shaking the economic wire and causing more people to fall off.

It appaears that the recession will end (at least in a statistical sense on a quarterly basis) anytime between the 1st and 3rd quarter of next year.  If these cuts are implemented, the end of the recession will be postponed, national output will fall further than it would have otherwise, more people will be on dole, more enterprises will go the wall – with only a minimal benefit in the fiscal deficit.

If the trade unions really engage the fight, they will be doing so, not on behalf of a sectional interest, but on behalf of the nation’s economic interest.

Let’s turn to the ESRI’s multiplier simulations. They modeled three public expenditure measures – cutting public sector wages, cutting 17,000 public sector jobs and cutting public investment. Each of these would reduce current expenditure by €1 billion each, or €3 billion combined. What would be the effect?

  • GDP would fall by a further 1.2 percent, or €2 billion
  • Unemployment would rise by nearly 29,000 – just as the recent Live Register figures showed almost no growth in seasonal terms.

And the reduction in the borrowing requirement? Less than €1.9 billion. Not €3 billion – that’s only the reduction in Government expenditure. When account is taken of the impact those cuts will have (on output, consumption, employment, etc.), the net gain is seriously eroded. At the end of the day, the annual deficit would fall by 0.9 percentage points. So, we have

  • Knocked off another €2 billion of our GDP, thus postponing the end of the recession and making it harder to generate the growth needed to absorb high borrowing costs in the future
  • Thrown nearly 29,000 on to the dole queues, ensuring higher social welfare expenditure going forward
  • Degraded public services further just at the point demand is growing
  • Cut people’s living standards and consumer spending
  • Reduced investment in an infrastructure that is one of the worst in the industrialised world (the Global Competitiveness Index ranks Irish infrastructure 65th out of 133 countries)

Fighting Unions

All this, to reduce borrowing by less than 1 percent of GDP? If that sounds irrational it’s because it is. And that’s why hardly any other government in the industrialised world is pursing this absurd course.

There are alternatives. For instance, using the ESRI’s simulations we find that €3 billion in tax increases (increasing income tax along with introducing a property and carbon tax) would:

  • Reduce borrowing by €2.5 billion (or €600 million more than public expenditure cuts)
  • Reduce the GDP by €800 million (compared to €2 billion under spending cuts)
  • Increase unemployment by 6,600 (22,000 less than under a cuts strategy)

The annual deficit would fall further if a tax strategy were used. The end of the recession would not be postponed and everyone would be better off. That is not to endorse the particular tax proposals used by the ESRI. They merely serve as an indicator.

Of course, we could get really creative – less deflationary tax increases on high incomes and wealth, public enterprise infrastructural investment (off the books), necessary social investment with high economic returns (early childhood education), front-loading the drawdown of the €20 billion in the NTMA’s coffers; a whole range of measures to stimulate the economy while at the same time setting the foundations for a fiscal consolidation that can only be effective once the economy has returned to growth.

But, really, the idea that this government, which has pursued deflationary policies from day one, is somehow going to change direction at this stage is pure fantasy. Inertia, not rational economic thinking, is propelling Fianna Fail. We can’t expect them to make things better, but we can try and prevent them from making things worse.

That’s where the trade union campaign enters. It is imperative that it succeeds – that it derails the Government from its determination to push through €4 billion in cuts. It is both an economic and social imperative. And if, in the meantime, the action derails the Government itself – who will complain?

If the trade union movement, in alliance with community and social organisations, and progressive political parties can prevent the Government from prolonging the recession and increasing unemployment- then they will have done the economy enormous benefit.

If the trade union movement and their allies fight – and I mean really fight – then they will be right. And all of us will reap the benefit.

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4 Responses

  1. AB

    October 2, 2009 3:53 pm

    Well documented article Michael.

    If your numbers are correct why couldn’t there be a combined introduction of ‘your taxes outlined above’ and a minimal reduction in pay for civil servants.
    Let’s say a cap of €100K on salaries. For people on €35K or under the salaries would be reduced by a max of say 5%.

    Salaries in between €35K – €99K would be subject to reductions in the region of 6 – 20%.

    Having been a previous union member, I believe union reform is needed and no union official should earn more than €80K.

    Just an idea……..

  2. Michael Taft

    October 3, 2009 9:59 am

    Thanks, AB, for the comment. There is certainly an argument for ‘redirecting’ expenditure on high pay into ‘job creation/retention’ measures that raise economic activity. This argument holds for both public and private sector, employee and self-employed. It holds for pre-tax wage cuts, or tax increases themselves. There’s many ways to skin this fiscal cat.

    One issue is where does one draw the line in all of this. You suggest cutting the wages of those on below average earnings. This could be both socially inequitable but economically counter-productive. Those on below-average earnings have already suffered two rounds of levy increases (along with other taxpayers), cuts in child income support (again, with others) and an effective wage cut through the pension levy. To suggest another wage cut would be even more penal. It would also hit consumption just at the time that the consumer spending numbers are starting to stabilise. This hit would, no doubt, have a strong negative multipler effect on the economy.

    To cut wages at the top end is all fine (but one has to be sure that in some instance the public sector is not weakened in its ability to compete for niche skill sets such as tax and finance specialists in the Revenue Commissioners and the NTMA). However, we shouldn’t expect this to generate much savings. Only 3 percent of public sectors earn six-figures. There may be other reasons for cutting at the top, such as demonstration effect, etc. But generating savings wouldn’t figure high up the list.

    This is not to dismiss reform in public sector pay. In an economy with one of the highest levels of wage/income inequality, it would be surprising that public sector pay didn’t reflect this. A new incomes strategy is needed to create a more prosperous economy – a strategy that includes public, private and self-employed income. The trade union movement has continually stated its willingness to discuss this issue – but, so far, the government and employers have resisted.

  3. AB

    October 5, 2009 8:50 pm

    You are correct there are many ways to skin the fiscal cat and I believe we have to use ALL of the measures available.

    With regard to the ‘average wage’ remark. Isn’t it the case that 40% of the workforce earn less than the average industrial wage? That being the case I think it’s fair to cut 5% of €35K salaries, especially if the people at the top are going to have theirs cut by 20, 30 or even 50%.

    Question, do you know what is the total expenditure on the 3% of workers earning six figures (including expenses etc.)

    With regard to specialist positions that require more money, they can be recruited on a contract basis.

    Generally speaking I think we are very close to agreement, however as previously stated. I have a problem with the existing union structures. In many ways they (senior management) are as bad as the incompetent fools in Government. The unions could provide part of the answer IF they reform. We are living in the 21st century, people cannot expect to get a wage increase every time they go on a training course or every time their role in work changes. Life/work is fundamentally different now than it was even 20 years ago.

    Change and adaptation are part of life – unions always seem to want something extra if anybody mentions change.

    We need to strike a balance, we need progressive union thinking, thinking that looks at the individual and at the business.

    For example, in my mind the idea of having mandatory sick days is a complete nonsense. I have worked in organisations where people treated their sick days as holidays.

    That has to change.

    Lastly, and probably most important of all. We NEED progressive government thinking. This of course is an absolute impossibility with the front bench of the FF party.

    Our government must lead by example, people who screw the system must go. As leaders of our country, they disgrace us all.