Thursday, June 26, 2008

It's the unions that have a brass neck

Despite the looming storm-clouds of recession, calls for public-sector pay-restraint appear to have fallen on deaf-ears at Liberty Hall. SIPTU's head of research Manus O'Riordan said that there cannot be a recovery in consumer spending growth unless the real wages of workers are increased. He said that a pay increase in line with inflation was the same as pay restraint because it would only be enough to maintain living standards.IMPACT union leader Peter McLoone said the social partnership process would be over if public sector workers were asked to accept a pause in pay, even if Taoiseach Brian Cowen was to forgo a €38,000 wage rise. "Fifteen or 20 people giving up a pay rise and expecting a quarter of a million workers to accept a pay freeze because of that is not much of a hostage exchange," said Mr McLoone, General Secretary of the largest public sector union, IMPACT. "We have not got into the subject of pay at the talks yet, but if the Government position is that it wants a pay freeze, my view is that there won't be a continuation of the social partnership process. "I don't think people will accept it. The problem is that everyone's cost of living is increasing, whether they are public servants or not." He said reports at the weekend that a pay freeze was on the way in September, after the final award under the last pay deal is made to public servants, is "pure speculation". It was also speculation that a freeze would be more palatable if the Taoiseach and his ministers further postpone or turn down a pay rise also due that month. The total cost to the taxpayer of the increases would be around €16m a year. Mr McLoone said there had been no indication of a pay freeze during the pay talks, which are still at an early stage. He said the social partners expect a statement from the Government on the public finances within weeks. There is concern that the deteriorating exchequer returns will range between €4bn and €6bn. Blair Horan, head of the Civil, Public and Services Union, which has over 13,000 members, said a pay freeze this September was "out of the question". In digging their heads, ostrich-like, into the economic sands, the unions' irresponsibly threaten the revival of the Celtic Tiger and much of the gains it has accrued for Irish society. It is imperative the Government stands up to them. This might be one area where Brian Cowen's much-vaunted 'dictatorial' leadership-style is perhaps the answer to our economic woes, unlike his frogmarching of his backbenchers into supporting the doomed Lisbon Treaty. Fresh from defeat on the latter, he is now presented by the Irish people with an opportunity to get his priorities right.

To diagnose how to revive the Celtic Tiger, we ought to rediscover the goose that laid the golden eggs from which it hatched. In large part the foundations of the rapid economic growth were laid not by the EU, but by the economic reforms of the late 1980's and 1990's. Part of this was restraining the growth in public-spending, a key factor in necessitating higher taxes under the Fitzgerald government. In Ireland from 1991-2001, receipts from privatisations (Irish Sugar/Greencore, Irish Life, B+I, Irish Steel, Eircom, ICC Bank, TSB Bank, INPC and ACC Bank) accrued €8,128.51 billion to the Exchequer. The following activities still remain under state control in Ireland: Electricity Generation and Distribution, The Agricultural Credit Corporation (now trading as ACCBank), The Industrial Credit Corporation (another bank),Aer Lingus, Aer Rianta, VHI, An Post, Bord na Mona, BGE, The ports, Irish Rail, Bus Eireann,Dublin Bus, INPC (Whitegate). Many of the industries owned by government are ones where there is some degree of monopoly power e.g. electricity generation and distribution. Note that monopoly power is not absolute in these cases since for some of its functions electricity competes with gas, coal etc. While it could be argued that Irish Rail is a natural monopoly, I strongly believe that a compelling case for the others to remain in State ownership has not been made. In the context of an expected deficit of 5 billion, I would contend they are expensive luxuries that would better be managed in the private-sector.

The blame for the economic crisis of the 1980's can in large part be laid at the door of the neo-Keynesians in Fine Gael and Labour. They inherited an economy with 10% unemployment and bequeathed to Fianna Fáil in 1987 one with 18% unemployment and a doubled national-debt. In classical centre-left economic lunacy, their reaction to the difficult economic conditions which they admittedly inherited from Fianna Fáil but also from a difficult international economic environment was to jump from the frying pan into the fire through runaway borrowing and spending and higher taxes. The National Debt rose from €15 to €30 billion (112% of GDP), with 35% of tax-revenue required to service it in 1985 compared to 7.5% in 2002. The standard and marginal rates of income-tax were raised to 35% and 60% respectively, based on a wrongheaded Socialist mantra that when the economy experiences hard times that the Government can increase its revenues by raising tax-rates.

Haughey's subsequent good centred handling of the economy from 1987 to 1992, began to restore sufficient credibility to public policy to trigger the inflows of foreign investment that created the Irish boom. Current government spending was actually lower in cash terms in 1989 than it had been in 1986. Current revenue continued to rise , as tax reductions lagged spending cuts. Exchequer borrowing for capital purposes was slashed. Exchequer borrowing declined from 13 per cent of GNP in 1986 to just 2.4 per cent of GNP three years later. The second part of the strategy was the revival of national agreements. The trade unions had been excluded from corridors of power since the collapse of the national understandings of the early 1980s. Their bargaining power was severely diluted by the very high levels of unemployment then prevailing. The Programme for National Recovery provided for basic pay increases of 2.5 per cent annually in each of the three years 1988 through 1990 - an effective pay freeze - in return for a promise of €225 million (€286million) in tax cuts over three years. By 1992, economic growth had reached 5% per annum, and by 1996 the Celtic Tiger, with annual growth rates of 11% per annum, was well under way. As we enter what seems to be another recessionary-cycle, Begg, McLoone, Horan et al. would do well to remember the lessons of last time before digging in their heels in in the aforementioned way.

No comments: