Colm’s columns

Colm Rapple
Irish Mail on Sunday, March 7, 2010

Pensions are set to become a hot election issue next time round. The Government can not deliver on the plans it unveiled during the week in advance of the next election that has to take place before July 14, 2012. Only a few of the proposed changes will have been introduced by then. The first increase in pension age isn’t to come into effect until 2014, neither is the proposed auto-enrolment pension scheme for those without private pension cover. There is unlikely to be any change in tax relief before then, either.

So there is plenty of time for the opposition parties to come up with their own variations of the Government’s National Pensions Framework.  There are many alternatives to the proposed changes. The electorate has the right to expect concrete plans and also an indication of how Fine Gael and Labour would reconcile their different approaches. Given their ideological predilections, their proposals will undoubtedly be different.

The electorate should demand concrete rather than fudged proposals. The issues involved are not complicated.

The changes to be introduced by 2012 are not particularly contentious. They include changes in public services pensions. Most will apply only to new entrants. In particular, their pensions will be based on average earnings over their years of service rather than final pay. More contentious is the suggestion that the post retirement increases for all public servants would be related to consumer prices rather than pay rates but that’s obviously open to negotiation with the public sector unions in the context of general public sector reform.

Private sector workers in defined contribution schemes have currently to use the bulk of their depleted pension funds to buy an annuity on retirement. They are to be given the option — already available to the self-employed and in respect of additional voluntary contributions (AVCs) –  of transferring that money into an approved retirement fund and drawing it down as they see fit.

That change is long overdue but there is no mention in the Government proposals of the complementary or alternative option of the State providing annuities at guaranteed rates. This failure is indicative of the overall thrust of the Government’s proposals. They are clearly designed to discommode the private pensions industry as little as possible.

The industry was successful in fighting off compulsory pensions in the past pushing voluntary PRSAs as a way of extending pension coverage to that 50% of workers who have no company or private pension cover. It was evident to anyone that had a bit of sense that it wouldn’t work and it didn’t. But they are still fighting shy of real compulsion and want to retain the management of the funds. The Government has agreed, although there is no reason to believe that this approach will be any more successful than the last.

The auto-enrolment pension scheme will not be compulsory. All workers over 22 who don’t have adequate private pension cover will be automatically signed up but after three months they will be able to opt out although after six months they’ll have to leave their money in the pension fund. That’s not compulsion. Many low income workers are likely to see it as a forced saving scheme providing a lump sum for Christmas or the holidays after three to six months.

For every 4% of pay put in by employees, the employer will contribute 2%. Pay is likely to be defined as anything between €127 and €1,000 a week. That’s a lot less than most employers with occupational pension schemes contribute. So there is a great danger that employers who might have considered setting up their own schemes will opt for this cheaper State version instead while many with existing schemes will close them at least to new entrants.

The end result will be less rather than more pension cover.

It’s right that the contributions should be collected through the PRSI system. Even the pensions industry would agree to that. It’s a cheap and effective collection system. But having collected the money it shouldn’t be transferred over to private pension fund managers. If people are to be encouraged to put money into acquiring pension rights or encouraged to accept a totally compulsory scheme, they need a greater degree of certainty than any private pension fund manager can currently offer.

The solution, which hopefully at least one of the opposition parties will promote and promise to introduce, is a totally pay-related State scheme supplemental to the current PRSI State pension. The extra contributions collected through the PRSI system should be retained and managed by the State to provide a minimum pay-related top-up to the State benefits for all citizens.

The money could be used partially to pay pensions on a pay-as-you-go basis and partially as a pre-funded source of extra finance to cover the inevitable bad years when revenue into the scheme was reduced. The State would, in effect, be guaranteeing basic pensions, partially related to what people had contributed over their working lives and partially related to what society could afford at the time.

That ideal should form the basis of an alternative to the Government model that some political party will hopefully put to the Irish people at the next election.

Colm Rapple
Irish Mail on Sunday February 28, 2010

A high proportion of Irish employers are flaunting employment laws by failing to give their workers pay slips and statements of the terms of conditions under which they are employed. Yet legislation to give extra powers to the National Employment Rights Authority and to establish it on a statutory basis has been languishing in the Dáil for two years.

Survey results published this week by the Central Statistics Office show that only nine out of ten workers get pay slips, and the proportion is significantly lower in some sectors and among low pay workers.

Some 35% of workers in the agricultural, forestry and fishing sector have to accept their pay on face value with no written indication of what tax, PRSI or other deductions have been made. That applies equally to some 16% of workers in the construction industry and to a similar percentage in the hotel and restaurant sector.

By law, dating back to 1991, all employees are entitled to a payslip outlining gross pay, net pay and details of all deductions. The need for such information is obvious if only to check that the calculations have been properly made and to provide some assurance that tax, PRSI and other deductions are being made and paid over to the State, health insurance or pension fund.

Workers are also entitled, by law, to a written statement of terms and conditions. It’s supposed to be provided within two months of a worker taking up employment or moving to a new job with the same employer. But according to the CSO figures, one-in-three employers fail to comply with the law.

The CSO survey zoned in on workers who had taken up new jobs during the previous two years. Presumably that was because there was a greater chance that other workers might have difficulty remembering whether or not they got a statement of terms and conditions. Of those surveyed only 65% confirmed that their bosses have complied with the law, while 31% said that they hadn’t. The other 4% did not know.

That’s a worryingly low level of compliance with the law and the situation is even worse in the construction industry where over half of those surveyed, 51%, said that they hadn’t been given a statement of terms and conditions. The figure was a slightly lower 48% in the hotels and restaurant sector.

It was to ensure a greater level of compliance that the National Employment Rights Authority was established early in 2007 as a separate entity within the Department of Enterprise, Trade and Employment. Initially it was simply a change of name although it is intended to establish it as a statutory body. But it has been given extra functions over the past couple of years including answering the current heavy volume of queries about delays in processing the State element of redundancy payments. It also took on an enforcement role in relation to employment permits.

No doubt its resources are under pressure but it did undertake almost 9,000 inspections last year – not much down on the previous year.  But only 69% of those surveyed were found to be in full compliance with the law. That confirms that the results of the CSO survey, which was carried out in 2008, have not been overtaken by events.

The upgrading of the National Employment Rights Authority to a statutory body and the provision of extra powers to enable it to more easily carry out its functions were promised as part of the “Towards 2016” social partnership agreement. An early draft of the legislation, The Employment Law Compliance Bill 2008, did get a second reading in the Dáil but numerous amendments are expected. The expectation that it would be enacted helped to gain trade union support for the Lisbon Treaty in the face of worries over some European Court judgements.

But it seems to have been long-fingered and may never make it to the statute book. Fine Gael is opposed to many of its provisions so if it dies with the Dáil it may be some time before it is resurrected. Until it is passed the work of the Authority is hampered by the lack of adequate powers to enforce employment law and the regulation of immigrant work permits.

There is also currently inadequate protection for workers who report non-compliant employers. One of the provisions of the proposed legislation is designed to protect whistleblowers.

But instead of getting additional power and extra staff the National Employment Rights Authority is facing cut-backs. The McCarthy “Bord Snip” report recommended that it be merged with the Health & Safety Authority. McCarthy estimated that some 33 jobs could be trimmed from the combined operation providing cost savings of at least €5 million a year.

That may come in the near future as part of a restructuring of Government departments and services. But the Authority’s budget has already been cut this year. The savings related totally to pay costs. Staff numbers are down from 128 in 2008 to 113 this year and, of course, pay rates are down.

Getting employers to comply with the law is clearly not a Government priority yet in the current economic climate workers need more, rather than less, protection.

Colm Rapple
Irish Mail on Sunday, Oct 25, 2009

Many private sector workers have suffered a drop in income not because of any cut in basic pay but rather because they are working fewer hours. So why not achieve a reduction in the public pay bill in exactly the same way. Paying for two less hours a week would provide a saving of over 5% in the overall pay bill. Indeed if some of those savings were at overtime rates the overall saving could well exceed the 6.8% reduction targeted by Finance Minister, Brian Lenihan.

There are, of course, some areas in the public sector which couldn’t function on lower staffing levels. But two hours a week is less than half-an-hour a day. There are few workplaces, in either the private or public sectors, that are so stretched that that loss could not be made up with a little extra flexibility and productivity.

It would be preferable in the cut in working hours could be applied selectively, exempting the lower paid and those whose duties require direct interaction with the public. It might be difficult, for instance to cut back the hours of firemen without leaving gaps in the coverage.

But any such exemptions could be offset by greater cuts in the work hours in areas where there is obvious over capacity.  That would encourage flexibility in accepting transfers into areas, such as social welfare, that are understaffed.

The change could be viewed as temporary. Basic pay rates and pension rights could be left unchanged. In time the working week might be increased again although the trend is toward a shorter working week. Nurses have had their week reduced from 39 to 37.5 hours while the new consultants’ contract sets their working week at 37 hours.

But, whatever about the length of the working week, the increased productivity and flexibility would hopefully take some time to be eroded.

That’s for the future. This is now and in the current climate this is an option that must be more palatable to the unions than enforced pay cuts and staff reductions. Basic pay rates are retained and there is no cut in employment.

While they can be some debate over the timing of the adjustments needed to achieve balance in the public finances, there is no doubting the need for lower spending or increased revenue. The only alternatives to achieving a reduction in the public sector pay bill are either increased taxes or a cut in the quality or quantity of public services, including social welfare benefits.

If they are to gain and retain of their private sector colleagues, the public sector unions need to show a willingness to do more than simply say No!

A carbon tax will be the only new tax in the December budget, according to Brian Lenihan, but he didn’t rule out an increase in existing taxes although he believes that there is little or no scope to impose extra taxes on the higher paid. He’s wrong, of course.

We need higher taxes, not to offset the targeted reduction in the public sector pay bill, but rather to avoid cuts in the level of State services – social welfare, health, education and justice.

Mr Lenihan was at pains to point out that 4% of taxpayers account for about 48% of income tax receipts.  What he didn’t say, however, is that that 4% of taxpayers account for over a quarter of all income reported to the Revenue. Nor did he point out that the 98,000 taxpayers who reported income of more than €100,000 in 2006 earned a total of €19.8 billion between them and paid only 17.5% of that in income tax.

It is true that these taxpayers face a marginal tax rate a lot higher than 17.5% but that’s the average rate of tax. Pushing that average rate up by 5 percentage points would raise almost €1 billion a year and those high earners would still be only paying 22.5% of their income in tax.

That might be a bit much but it shows that Mr Lenihan’s claim that there is no pot of gold to raid is far from the truth. And if he doesn’t want to hit high incomes, how about wealth?

Colm Rapple
Irish Mail on Sunday

With consumer prices down 6.5% over the past year, the case for cuts in social welfare benefits may seem to have some validity. But it doesn’t. The drop in the cost of living has been far less marked for those on social welfare and low incomes. Even if that wasn’t the case, cutting the incomes of the poorest and most vulnerable in our society should be way down the list of ways to get the State finances back in balance – so far down, indeed, that it need never be reached.

Consumer prices have fallen by 6.5% over the past year. But that’s an average. The price of most goods and services has fallen but some items have gone up in price. The real impact on a household’s cost of living depends on how they spend their money, how close to the average they are.

In broad terms, those with big mortgages have experienced the biggest gains while those on low incomes, particularly those on social welfare, are likely to have gained less than the average.

Mortgage interest payments have almost halved over the past year. Anyone who was paying out half of their income in mortgage interest this time last year are now only paying out a quarter of their income. Their cost of living has dropped by at least 25%. Ok, most people aren’t that heavily burdened but when mortgage interest is taken out of the equation, the drop in other customer costs over the past year has been not 6.5%, but only 3%.

Even that overstates the impact that falling prices have had on the living costs of most social welfare recipients. Their spending patterns are likely to be far removed from those of the average household. A larger proportion of their income is spend on the very good and services which have bucked the general trend and actually risen in price over the past year.

Poorer households tend to spend more of their income on fuel and light and a high proportion of the heating bill goes on solid fuel and bottled gas which have both gone up in price over the past year. Solid fuel is up 6.2% and bottled gas by 3.8% while fuel oil is down 36% and natural gas down 11.3%.

The average household spends just under 4% of its income on fuel and light. But it’s 11% for those in the very lowest income category (lowest ten percent) and over 7% for those in the next lowest category.

Solid fuel, coal and turf, will get the biggest hit from any carbon tax that may be introduced in the December budget. They are the most polluting but their users face the highest costs in switching to cleaner alternatives. Have the Greens thought this one through?

Petrol and diesel have both fallen in price over the past year but bus and rail transport on which social welfare recipient are more likely to rely are both up. Bus fares are 12% higher than a year ago while rail fares are up 8.7%.  Transport costs overall are actually down 4% and that is what’s reflected in the index but for those relying on public transport the costs are up significantly.

Food prices are down by 6% on last year and poorer families do spend a higher proportion of their incomes on food but the price of basic foodstuffs has fallen less than the average. The price of those items which used to be controlled under the Grocery Orders has fallen by only 3.4%. These items which shops were barred from selling below cost included sliced pans, breakfast cereal, packets of rashers, tinned vegetables, baby drinks and juices, sugar, flour, baby milk compound, and milk.

There is undoubtedly scope for trimming in one way or another those social welfare benefits which go to people who are not poor. Child benefit is just one example but there is no case on the basis of the consumer price trends or otherwise for any general cut in benefits.

It’s been estimated that the Government’s tax take this year will amount to no more than 28% of national income. The latest available figures for some of our EU neighbours are: Sweden, 48.2%, Belgium 44.4%, France 43.6%, Italy 43.3% Denmark 48.9%, Germany 36.2%, Britain, 36.6%, Spain 37.3%, Portugal 36.6%.

There’s an obvious message there.

Colm Rapple
Irish Mail on Sunday, February 8, 2009

It may shave €1.4 million off the public sector pay bill, but the “pensions levy” proposed by Taoiseach Brian Cowen during the week, is patently unfair. It takes no account of widely differing pension entitlements among public servants or of the way those entitlements have influenced benchmarking pay awards. And although the levy appears to bear heaviest on those with higher incomes, the opposite is actually the case when tax relief is taken into account.

A more honest approach would be to simply cut pay on the basis of a sliding scale that would exempt those on low incomes while taking significantly more from those on higher incomes.

In the longer term a fair pension levy related to actual pension entitlements might be devised although the ideal would be to take differing pension entitlements into account in pay rates. The actual value of pension entitlements should have been built into last year’s benchmarking pay awards but, at the behest of the Irish Congress of Trade Unions, they weren’t.

The cost of pensions, according to a report commissioned by the body, varied from a low of 12.4% of pay in the case of some low paid public servants to a high of 32.9% in the case of gardaí. But instead of  taking account of the actual cost of pension entitlements for each group of workers, Congress got the benchmarking body to use an average which was calculated at 20%.

So for the pay determination exercise, the low paid were taken to enjoy pension entitlements worth 20% of pay although they are only really worth 12.4%.

Gardaí are a special case but that 20% average used by the benchmarking body is also certain to greatly understate the true cost of the pension entitlements of top public servants who will normally have spent many years at the lower rungs of the ladder but whose pensions are based on final pay. The opposite is true of staff nurses whose pension entitlements were estimated to be worth only 13.8% of pay mainly because most of them tend to remain at that grade for most of their working lives.

So the recommendations in the latest benchmarking report, while taking some account of pension entitlements, were greatly skewed in favour of the better paid.

That fact highlights the inequity of imposing a supposedly pension related levy simply on the basis of pay while taking no account of all the other factors that go into deciding the value of pension entitlements.  Although public servants will automatically be given tax relief on their levy payments, they are clearly not pension contributions and are in no way related to pension entitlements.

The proposal envisages three rates of levy: 3% on the first €15,000, 6% on the next €5,000 and 10% on the balance. That implies that there will be no exemption for those on very low incomes.

According to Department of Finance figures there are 55,000 public servants on less than €30,000 a year and another 74,000 on between €30,000 and €40,000. So let’s for example take the case of a married man on €35,000 whose wife is not earning. He would be liable for a levy of €2,250 a year or 6.4% of his gross income of €35,000. He’s unlikely to be liable for income tax so won’t qualify for tax relief but will get some relief from PRSI and health contributions. That should reduce the impact of the levy from 6.4% to just over 6%. That’s assuming he’s paying full rate PRSI, as he would if he joined the civil service after 1995.

His boss on €150,000 a year will be subject to a gross levy of 9.2% but will be eligible for tax relief at the top rate of 41% together with relief from a 2.5% health contribution. That brings the effective rate of levy down to 5.2%.

The effective rate for someone on €300,000 will be 5.4%.

So a public servant on €35,000 will be paying an effective levy of 6% while someone on €150,000 will be paying 5.2% and a top earner on €300,000, 5.4%.

That’s hardly fair or progressive without even taking into account the fact that the pensions of higher paid public servants are likely to be costing the taxpayer much more than the pensions of the lower paid not only in absolute amounts, as is obvious, but also in percentage terms.

It’s unlikely that Messrs Cowen and Lenihan are going to back down on their proposals although there may be some room for adjustment at the edges particularly in exempting low earners from the imposition. Even if that is done, however, the package as a whole will remain grossly unfair.

It was possibly right and fair that public sector pay should be cut as a first step towards getting the State finances back into order. Most private sector workers have already suffered, if not job losses or pay cuts, then a sharp erosion in the value of their pension funds. On average Irish managed pension funds values have declined by a third over the past year and are now worth less than they were ten years ago.

But the measure should have been better targeted to ensure that those who have most bear proportionately more of the burden, not the other way around.

It’s unusual for RTE’s Economics correspondent, George Lee, to take the optimistic view but he did see some hope in the inflation figures released on Thursday. And he wasn’t alone in reporting a drop in inflation, good for those hoping for a new pay deal. To be fair to George he did stress that inflation was only down “by a smidgen”.

But he could just as easily have reported that it was up. It’s all a matter of how you look at it. As the man said “there are lies, damn lies and statistics” and there are those, not including George, who use statistics like a drunken man, more for support than illumination.

It certainly suited some to have a drop in inflation, however slight, reported during the pay negotiations.  But it would have been just as accurate, and more illuminating, to have reported a rise in inflation.

Of course George, and the other commentators who reported a downturn, were correct in saying that the annual rate of inflation was down from 4.4% in July to 4.3% in August. Given that the Central Statistics Office produce the figures to one decimal point the actual drop might have been only from 4.36% to 4.35%, but a drop is a drop.

Given the smallness of the change, however, it’s strange to be zoning in on the annual figure, particularly when the underlying trend is upwards.

The plain fact is that while consumer prices actually fell by 0.3% during July, they rose by 0.5% during August. That may look like a small rise but if prices rose by 0.5% each month for a year, consumer prices at the end of that year would be almost 8% higher than they were at the beginning (Ok, 7.96% to be accurate).

It won’t be that bad but there are some significant energy prices increases in the offing. Apart from the direct impact on households, businesses are reported to be facing a 75% increase in energy costs next year which will undoubtedly be passed on to consumers. Also, food prices seen set to continue rising.

The August figure was, of course, affected by the  sharp 17.5% jump in electricity prices imposed from August 1. But that was only the first of a two phase increase. The second increase, due to be implemented from January 1, won’t be as sharp but it will be significant, and the inflation figures have yet to reflect the proposed 20% increase in natural gas prices.

It’s easy to accept the claim by some union leaders that consumer prices will rise by 5% this year. That may even be a conservative estimate. It certainly understates the impact of the energy price hikes on the poorer members of society who are forced to spend a very high proportion of their income on fuel and light.

The average household spends just under 4% of its income on fuel and light. But it’s 11% for those in the very lowest income category (lowest ten percent) and over 7% for those in the next lowest category. Those latest CSO figures for household spending relate to 2004 and the percentages have undoubtedly risen since then, given the spiralling increase in energy costs. But there’s also no doubt that the gap between rich and poor undoubtedly remains. Indeed it may have widened.

That alone justifies the emphasis being placed by the trade unions on the lower paid, a emphasis that hopefully extends to those on social welfare who comprise the vast majority of those in the lower income groups. Mind you there was a lot of lip service paid to low earners in advance of the last pay deal. But very little was delivered.

This unequal impact of inflation is not, of course, evident from the headline figures but it deserves more attention.

While the inflation figures have been reported as being better than the underlying trend suggests, the jobs figures have been made to look worse.

Of course, the rise in unemployment is a clear matter of concern. The suffering caused by involuntary unemployment can’t be over estimated. And there has been a significant rise in the number affected. But just what number should we use.

Most commentators have in recent times been using the Live Register figure and that even seems to suit the Government at this time. If you want to be particularly gloomy about it, you can imagine lining up 247,384 people currently on the Live Register into a single national dole queue. Allowing a metre between them they’d stretch from Dublin all the way to the outskirts of Cork.

But the Live Register was officially discredited as a measure of unemployment many years ago. It includes many part-time, casual and seasonal workers. As the Central Statistics Office still stresses it’s not designed to measure unemployment. The official jobless figures, based on May’s household enquiry, is 115,100. .

Undoubtedly it’s a bit higher now but not as high as the Live Register suggests. In the bad old days every effort was made to play down the bad news. Now many commentators seem to delight in generating doom and gloom. The news is generally bad, but not as bad as many would have us believe.

So let me end with a bit of good news. Employment levels are at a record high. There have never been so many people at work in the country, not since the famine in any case.  The latest official figures, for May of this year, put the number at 2.1 million, up 7,000 on May 2007 and 98,000 up on May 2006.

Colm Rapple
Mail on Sunday, 10th August 2008

Tax increases are definitely on the agenda for the December budget. It’s not a novel idea although it may seem so after the tax cuts of the Celtic tiger era. The plain truth is that we went too far with the tax cuts and at this stage, increasing taxes is a much more sensible option than cutting spending on social services or on essential infrastructural investment.

Those are the choices which are now facing finance minister Brian Lenihan as he prepares his first budget.

Of course, the wrong mix of tax increases could greatly worsen our economic prospects. Impositions on the lower and middle-income groups would obviously be reflected in wage demands whether they eventually get formulated through a national pay deal or a free-for-all.

But there are many people in well paid secure public and private sector jobs who are riding out the recession quite comfortably. Having done very nicely out of the boom years, they are well able to handle a year or two of static or even slightly declining incomes. And while their assets will have dropped in value, they are not going to be forced to sell. The equity market is already on the way up again and, in due course, the property market will follow suit.

These recession proof individuals will gain the most from the upswing and can’t complain too much if asked to pay a little to ensure an easier passage through this bad patch for the less fortunate.

There are many solutions to the Government’s budgetary difficulties. There’s obviously scope for judicious cutbacks that wouldn’t adversely affect State services or curtail future economic progress. But that type of fat trimming is always opposed by the public servants and is difficult to achieve.  It will take more than that to solve the problem.

There is reason to hope that some of the budgetary gap will be bridged by taking a holiday from contributions to the National Pension Fund and/or by getting the fund to invest a small part of its massive resources in infrastructural projects that would otherwise have to be funded directly by the Exchequer. But that may not be enough either.

There is plenty of scope for borrowing a bit more. But the Government seemed very anxious not to exceed the EU imposed borrowing limit of 3% of national income. So in the end it may come down to a choice between raising extra taxes or imposing spending cuts that will impact on the level of public services and benefits.

The case for raising taxes in such a situation is overwhelming.

The simplest option would be to simply raise the top level of income tax. Over the past ten years it has been reduced from 48% to 41% and there is a commitment in the programme for Government to reduce it further to 40% “if economic resources allow”.

They clearly don’t. Alongside that commitment, in any case, is one to reduce the standard rate from 20% to 18%. That’s not possible either.

Neither commitment should have been made. It’s very obvious that tax rates have been reduced too much. They should be at a level sufficient to fund public services not only in the good, but also in the bad years.  This is the time to create a tax base that will be sufficient to meet our needs through thick and thin. It will be time enough to talk of tax cuts again when all our capital infrastructural needs have been met.

If the 41% rate was raised to 45%, the Exchequer would benefit by over €1,100 million a year. To put that in context it would in one fell swoop make up about a third of the amount by which this year’s overall tax revenue is expected to fall short of target.

It would affect some middle income earners. A single person currently pays the top rate on anything over €35,400 but, of course, the higher the earnings the greater the imposition. So someone on €40,400 would only pay an extra €200 a year in tax while someone on €150,000 would pay an extra €4,584.

That seems fair enough and the bottom threshold could be raised or else a new high rate of tax could be imposed only on incomes above a higher level, fifty, sixty or seventy thousand. Only about 15% of taxpayers declare incomes in excess of €70,000 but they account about 35% of all declared income.

The unions could hardly baulk at such a development given their new found commitment to favouring the lower paid. The decision by the private sector unions to look for a flat rate increase of at least €30 a week for all lower paid workers stands in stark contrast to their willingness last time around to cave in to employer opposition to flat rate increases for anyone.

Perhaps it reflects a recognition by the union hierarchy that they will need the support of the lower paid in a free-for-all industrial relations climate, while they could effectively ignore them in national agreements.

But that’s a by-the-way. If there is a willingness to share the current burden equitably then some form of extra progressive taxation is clearly an option. If not an increase in the top-rate of tax, then maybe abolishing the current €50,700 ceiling on PRSI contributions. Indeed the Programme for Government promises that linked to a cut in the rate from  4% to 2%. But why not abolish the ceiling and not cut the rate.

The Programme does also commit the Government to “building an equitable tax system” and to “maintaining a sound budgetary position which encourages economic growth”.

Colm Rapple
Irish Mail on Sunday, July 27, 2008

For every 1,000 people employed in the public sector a year ago, there are now 1,025, and, on average, each of those additional 25 people is earning €941 a week and costs the exchequer at least €1,100 a week when pension and other incidentals are included.

There are, in fact, 6,300 such people. They are going to cost you and I over €360 million in wage costs this year. The cost will go up in line with inflation for ever and a day.

Will we be getting value for that money?

This March there were 258,000 employed in the public sector. A year earlier there were 251,700. It’s the sharpest increase in public sector employment for a number of years. The suspicion must be that this is an example of the horse being allowed to bolt before the stable door could be shut.

The increases occurred across all sectors of the public service except health and defence, with the largest increase of 3,700 in education. Some 2,200 of those extra jobs were in the primary sector.

Surprisingly enough there was no increase at all in the numbers employed in the health services. The HSE may be doing something right. The official figures released this week show the number at work in the health services down marginally from 110,400 in March 2007 to 110,300 this March.

What’s happening on the ground, of course, is any bodies guess. It may be that the number of administrative staff has continue to rise while the number of front line workers has decreased. Or the opposite could be the case. The point is that it’s not absolute staff numbers that’s important but how they are deployed.

Under the current pay deal, which runs until September, pay increases for the public sector were supposed to be dependent on the delivery of improved effectiveness, efficiency and user friendliness of public services. In the private sector that might have been described as improved productivity which is generally translated into more work from fewer workers.

That doesn’t seem to have been the case in the public sector. But it will have to be achieved under any new pay deal if the Government is to meet its proposed spending cut-backs. Abolishing those 6,300 extra jobs created since March 2007  could in one fell swoop provide the Government with payroll savings very close to the targeted 3%.  But that’s easier said than done. Cutting back, once an increase has been conceded, seems to be almost impossible.

Anyhow, it’s reform that’s needed rather than heavy handed cut-backs. Many state services such as education and health are labour intensive. Better services very often require higher staff levels. But higher staff levels don’t always produce better services. It all depends on how the staff are deployed and how they are managed.

It’s not just the type of staff either.  It would be nice to think, for instance that the employment of extra nurses would improve health services. But we already have 15.4 active nurses for every 1,000 population compared with 9.1 in Britain, 7.7 in Denmark and France and 10 in Canada.

We have 5.5 nurses per practicing physician compared with an OECD average of 2.9 and 3.8 in Britain and we have only 2.8 acute hospital beds per 1,000 population compared with an OECD average of 3.9.

That’s just an example proving that numbers, even of front line staff, can not be taken as a measure of the quality or quantity of a public service. We need to measure outputs.

But there is reason to worry about the continuing increase in the numbers of public servants. Back in December 2002, the then Minister for Finance, Charlie McCreevy, in one of his famous or infamous budget surprises, announced an immediate cap on civil service numbers and a promise to achieve a reduction of 5,000 over three years.

It was a promise he never delivered on. The number employed has jumped by 32,300 since then to 368,300 – an increase of almost 10% — while average pay levels have soared by almost 30%. That average was exceeded by administrative civil servants whose pay is up 34% and in the third level educational sector where pay is up 33%.

Average industrial wages rose by only 24% over the same period a point that won’t be lost on private sector workers when it comes to considering proposals for a new pay deal. They’ll need to be convinced that the gains achieved by their public sector counterparts are not going to be totally met by a combination of poorer state services and extra tax.  A deal is going to be hard won.

Feeling poorer?

The average Irish household has lost €33,000 over the past year. For most it’s only a paper loss but it is having some impact on our spending plans. According to latest Central Bank figures Irish households own some €598 billion of assets. Our homes account for most of that, about €484 billion of the total.

Per household, that amounts to €441,000 in total assets of which €330,000 relates to housing. Those figures are net of outstanding loans which amount to an average of €134,000 per household.

We’ve poorer now than we were a year ago solely because our housing and financial assets has fallen in value. But despite the drop of €33,000 we are far from poor – on average that is.

Colm Rapple
Irisih Mail on Sunday, 6th July 2008

While the mandarins in one section of the Department of Finance were preparing a list of potential spending cuts for this week’s cabinet meeting,  some colleagues in another section were pushing through increases in civil service expense rates and pension scheme improvements.

The improves mileage and subsistence rates came into effect  from Tuesday last, July 1, while the pension improvements are backdated to April 1, 2004.

They are both legitimate changes and would hardly be worth mentioning if it wasn’t for the fact that they were introduced just days before the revelation that tax revenue this year is expected to fall some €3 billion short of expectations while higher unemployment  is likely to add about €500 million to social welfare expenditure.

A private company faced with such a deteriorating budgetary position wouldn’t be giving the nod to higher mileage rates and improved staff pensions no matter how much they were justified by inflation in the case of the expenses or a desire to improve flexibility in the case of the pension change.

The Government, it seems, has decided to cut spending this year but by no more than is needed to meet the original spending targets set out in the budget. That’s the position at present. It may change on Tuesday when the Cabinet meets, but the current objective, it seems, is to offset the €500m extra social welfare bill by cuts elsewhere.

Mind you, there’s no question of us not paying enough PRSI to meet the extra bill for unemployment benefits. Contributions to the Social Insurance Fund this year were initially expected to exceed spending requirements by €548 million and that should be just about enough to cover the extra bill for unemployment benefit that’s now expected to emerge, even allowing for some fall-off in contributions.

Despite the doom and gloom the number at work this year is expected to rise but by about 13,000 rather than the 23,000 originally forecast. So PRSI contributions will fall a little while the bill for unemployment benefit will rise with the average claiming now put at 210,000 over the year, up from the 170,000 forecast at budget time.

But extra spending is extra spending, no matter where the money comes from. So it makes sense for the Government to try to save the money elsewhere. And the Department of Finance undoubtedly has a little list.  As outline previously in this column the obvious solution is to get the National Pension Fund to take responsibility of some capital investment but, even if that is done,  this is obviously an opportunity to trim a little of the fat that has undoubtedly accumulated in the public service during the Celtic tiger years.

The €500m to be saved this year amounts to only 0.8% of the Government’s total budget of €62 billion. But the saving has to be achieved in six months rather than a full year and out of the two-thirds of spending that doesn’t go on pay. So while small, it’s not insignificant. It could certainly be saved by simply trimming fat but those who benefit from the fat are already circling the wagons.

That’s obvious from those improved mileage rates and pension improvements.
It’s not unusual for mileage and other expense rates to be increased with effect from July 1 in any year. But the change is normally announced after that date.  This year the revision was announced on June 26th.  The increases themselves are nominal enough and can be well justified by inflation. But private sector workers, who often use the civil service rates as a kind of benchmark, may find it hard to negotiate similar increases with their employers in the current economic climate.

If you want to put in a claim the mileage rates have been increased by up to 4.4% while day subsistence rates are up 3.6%. Some of the mileage rates and overnight expense rates are up by far smaller percentages, however.

The point is not the amount of the increases but rather the fact that they seem to have been rushed through before the axe fell this week.

The pension scheme improvement benefits those who get extra allowances on top of their basic pay. Not all such allowances are included in pension calculations, but, where they are, the rule up to now was that, on retirement, the average over the last three years was taken into account.

Now, the pay during the best three consecutive years out of the last ten can be taken into account. So someone easing up on work in the years immediately prior to retirement can have their pensions calculated on the basis of higher past earnings. And those past earnings are adjusted upwards in line with pay increases.

It’s not a major change but it will mean a lot to some civil servants including many who have retired since April 2004. It’s a logical enough improvement but the timing is a tad insensitive.

Private pension schemes are under increasing pressure. Fund values fell by almost 21% over the past year. In the last month alone, the value of group managed funds fell by 7.8% bringing the average annual return for the past ten years to 2.8%. That’s less than the rate of inflation which averaged 3.8% a year over the same period.

Colm Rapple
Irish Mail on Sunday, 29th June 2008

Don’t blink or you might miss the recession. If it happens – and it might not – it won’t last for long. Of course, it is going to be painful for some and you might need to keep your eyes closed for a bit longer than a blink to avoid all of the adverse fall-out. But the actual recession predicted by the Economic and Social Research Institute (ESRI), will be short-lived.

That’s the view of the ESRI itself, as presented in its quarterly economic bulletin published during the week. But that part of the forecast got scant attention from most commentators. The word “recession” was latched onto without very much thought of what it really means in this context.

There are recessions and recessions. The impact depends on how deep they are and how long they last. Technically an economy goes into recession when output in one period is less than in the previous period and the ESRI expects output this year to be down about 0.4% on 2007. So, if the forecast is even marginally wrong, we may not be in recession at all.

The ESRI has been more pessimistic than most this year. In March it was expecting the economy to grow by only 1.8% although a month later the Central Bank was forecasting a 2.4% growth rate. In April the EU put the figure at 2.3% while the IMF was forecasting 1.8%. Earlier this month the OECD forecast that the economy would grow by 1.5% this year

Forecasting isn’t a very exact figure but supposing that the ESRI economists are right,  it’s going to be a very shallow recession from which the economy is expected to bounce back next year with a 2% growth rate.

So for every €100 of wealth created in the economy last year, the ESRI expects us to produce €99.6 this year and €101.6 next year. That’s in real terms, and not a money value which would be higher because of the impact of inflation.

An individual suffering such a set-back wouldn’t feel too hard done by. It would simply means an 0.4% drop in purchasing power one year followed by a 2% increase the year after. Such a reversal is, of course, a bit more serious for an economy. But the problems should not be overstated.

There will be fewer at work. But the extend of the job losses predicted by the ESRI is relatively small. Average employment levels next year are expected to be only 13,000 down on this year and 59,000 above the 2006 level. Actual job losses will exceed 13,000 but that’s relatively small when set against total employment of 2.1 million.

That doesn’t ease the pain, of course, for those affected – a fact that highlights the need, recognised by the ESRI, for targeted action by state agencies on education and retraining.

The prospect of a return to net emigration has hit a emotional cord in some people. The ESRI expects a net outflow of 20,000 in 2009 but that must be seen in the context of the massive immigration of recent years. Many of the immigrants are here to stay but many others, particularly in the construction sector, consider themselves as internationally mobile. They expect to move to where the jobs are.

It’s not quite the same as the emigration of the past which stultified both Irish society and the economy for far too many years.

Those who keep their jobs may suffer a drop in income but it shouldn’t be too severe. On the basis of the ESRI figures, national income per head will fall by 1.9% this year after rising by more than 6% over the past two years. It’s expected to rise again by 1.5% next year.

Other incomes will also take a hit as consumers and businesses spend less. The impact will be that much worse if the Government’s takes fright imposing unnecessary cuts in public spending while depressing consumer confidence with demands for pay freezes.

There will certainly be less money in the State coffers and it’s at times like this that Governments try to trim out the fat that they allowed to accumulate in spending programmes during the good years. Undoubtedly there is waste that could be eliminated without affecting the quality or quantity of many state services.

Ideally it should have been tackled in better times but it wasn’t, through a mixture of bad management and political cowardice.  It’s possibly better late than never provided the cuts don’t got further than the fat and bite into the flesh. There’s no need to.

In the medium term it will be necessary to increase taxes in order to finance the level of state services to which we aspire. There will be no return to the revenue bonanza that was provided by the overheated property market of recent years. On the back of that flood of money, successive government curried favour with the electorate with tax cuts that aren’t sustainable in the long-term.

But this isn’t the time to raise taxes. As outlined in this column last week, there is no need to. If the Government doesn’t want to resort to too much borrowing, it could always tap the National Pension Fund to help fund its capital investment programme in infrastrutural projects.

But extra borrowing shouldn’t be ruled out. Our national debt as a proportion of national income is about half the EU average and unlike some other eurozone countries we’ve never before exceeded the 3% deficit guideline.

Let’s not panic.