Colm’s columns

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
Irish Mail on Sunday, July 20, 2008

Finance Minister Brian Lenihan won’t raid the National Pension Fund to help ease his budgetary problems. So he says. So what? Nobody said that he should.  The word “raid” suggests robbing the fund and frittering away the money. That would be stupid. But there are other options. Mr Lenihan could, for instance, take a contribution holiday. That would save the Exchequer about €2 billion a year – money that could greatly ease the need for cut-backs particularly in areas such a health, social welfare and education.

Of course, the opportunity should still be taken to trim some of the fat from the system. Undoubtedly a lot of fat has accumulated during the recent Celtic Tiger years when the Exchequer was flush with money.

But there are signs that some cuts are biting into the flesh. State services are going to be curtailed and the productive potential of the economy eroded. There was a small but significant indication of what may lie ahead this week with the announcement that third level grants were not to be increased for the coming term while the means-test income thresholds are being increased by only 2.8%, far less than the rate of inflation. That means that fewer students are going to qualify for a grant.

As a sop the special low income threshold under which a student qualifies for a top-up grant of up to €3,270 is being raised from €11,055 to €20,147. But not many students from families with incomes that low ever get to third level.

Grant levels may be increased in the December budget but the thresholds won’t.

If money had to be saved it would have been easier to reform the whole third level grant system which is riddled with inequities and anomalies. In particular the means test favours the wealthy and the self-employed who are able to adjust their incomes to ensure that their offspring qualify. That’s make easier by the fact that assets are ignored in the means-test.

The policy imperative should be to encourage greater participation in third level education. But it’s clear that Education Minister Bart O’Keefe’s objective is solely to save money.

There’s doubtless worse to come and taking a holiday from our national pension fund contributions could help to ease the pain and economic damage.

Alternatively some of the near €20 billion in the fund could be switched out of foreign stock markets and invested instead in developing Irish infrastructural assets that could yield every bit as good a return.

Those were suggestions made in this column some weeks ago when it was reported that the Fund had lost over 10% of its value during the first quarter of the year and that those losses were continuing.

The official figures released this week confirm that prediction. The value of the fund has fallen by 12% over the six months – a drop of about €2.6 billion.

While the investment performance has been dismal, the fund has fared better than the average Irish managed pension fund. Taking the long-term view, that pension fund managers can afford to take, the current downturn may be seen as a somewhat large blip, but blip none-the-less.

The money in the fund is to be used to help finance the State’s pension obligations from 2025 onwards so the investment managers are justified in taking a long term view and investment performance is not the issue at present. But it is still legitimate to question the fundamental investment strategy and, perhaps more urgently, to question the wisdom of actually borrowing to finance the one per cent of national income that the Government is committed to put into the fund each year. Because that’s what is going to happen this year and next and maybe even the year after.

When the fund was established, our politicians rather stupidly agreed that, in each and every year until 2025, the Exchequer would contribute one percent of national income. There is no doubt that the Merrion Street mandarins had a hand in getting the Dáil to sign away it’s discretion in the matter. It can be changed, of course, but not by a simple budgetary decision. It would require a specific vote of the Oireachtas.

In the buoyant Celtic Tiger years there was no great problem about putting one percent of national income aside each year but the State finances were obviously going to fall into deficit at some stage before 2025 when the first pay-outs from the fund will be made. So it was crazy not to give subsequent finance ministers a more easily applied discretion to postpone, reduce or completely cancel contributions to the fund as budgetary conditions required.

But the mandarins, of course, don’t trust the politicians. Not without reasons either. But the politicians are our elected representatives and they are supposed to call the shots. The mandarins have a personal interest in the fund, of course. While it is always stated that the purpose is to help fund social welfare and public sector pensions from 2025 onwards, the fact is that the first call on the fund will be for public sector pensions. Public servants have a contractual right to their pensions while social welfare recipients do not.

The investment strategy, of course, is also seriously flawed given that this is a State rather than a private fund. The performance of at least part of the fund should be measured not solely by the market value of the investments but rather by the total benefit conferred on the economy.

Colm Rapple
Irish Mail on Sunday, 13th July 2008
The Government has decided to give away rights to another large chunk of the continental shelf off the west coast. This time it’s an area larger than Leinster and Munster put together. The decision was taken this week to combine it with an even larger slice of our offshore area that is to be opened for licence applications later this year. The total area now on offer is greater than the land mass of all four provinces.
But despite spiralling energy prices there is no sign of the Government moving to harden the licence terms to ensure that we get a fairer share of the gas and oil that is undoubtedly under the sea bed. Yet this is the time to both demand more from new licensees and to introduce a windfall tax on the existing Corrib find off the Mayo coast.
Such a windfall tax may not have been a realistic option in the past. The risk to our international image was possibly too great. But the climate has changed with the spiralling increase in energy costs. Windfall profit taxes on energy companies are being openly advocated in Britain and the U.S. and not only by those who can all too conveniently be labelled left-wing radicals.
Our rights to the Corrib gas field were given away all too cheaply. Under the licensing terms then in force, and still applying to all licences issued up to last year, the oil companies get effective ownership of anything they find. All we get is the right to levy tax at 25% on the taxable profits and that’s after the company has written off all exploration, development and operating costs including an estimated cost of closing down the field when it is exploited.
The new terms introduced last year allow for the tax rate to be increased to 40% on highly profitable finds but these terms only apply to new licences and there’ll be no taxable profits generated in respect of these licences for at least ten years. In any case, it’s not enough.
Those terms need to be hardened further in respect of the licences under this latest round but more importantly the Government needs to take action to ensure that we get a fair return, not only from the Corrib find, but also from finds waiting to be exploited in those areas already under licence.
Two years ago the Department estimated that there was some 10 billion barrels of “oil equivalent” resources i.e. either crude oil or gas, under the sea bed off the west coast of Ireland. That estimate was based on a very detail assessment of the geology of the area, taking account of the difficulties and risks involved in exploiting the potential.
At our current rate of usage that would be enough to supply all of our energy needs for 90 years. At the time oil was selling for about $60 a barrel so the total estimated reserves were worth about $600 billion or €380 billion. Two years later with oil at $137 a barrel, these potential reserves are worth €870 billion or about €217,000 per head of population.
The value of the Corrib field has similarly soared. Shell and its partners, Statoil and Marathon are not worried about the delays in getting the gas ashore. The gas is going up in value by the day. In the US the wellhead price of natural gas is up three fold on where it was when Shell bought into the Corrib find back in 2002. Prices are up 37% since the beginning of the year.
A couple of months ago Bord Gais was predicting that household gas bills would have to increase by nearly 20% this winter. It may even be looking for more now and even if Corrib gas was flowing the outlook wouldn’t be any better. Shell will be selling the gas at the market price and Irish consumers won’t be getting any favours.
We’ll pay the same for our own gas as we would for the gas we are currently buying from the North Sea and further afield. That’s one good and sufficient reason why we should be demanding a larger share of the returns from the field. It is our gas and we won’t be taken for a banana republic for applying a windfall profits tax to what are clearly windfall profits. When Shell bought it’s share in the Corrib field back in 2002 the wellhead price of natural gas in the US was just short of $3 per thousand cubic feet. It’s now up to $9.
In euro terms the increase hasn’t been quite as sharp but euro prices have more than doubled. Shell and its partners are doing very well for themselves and showing a particularly mean streak in their approach to local environmental concerns. It’s time that they were put on notice that they’ll have to pay more than 25% of taxable profits for the right to exploit Irish gas.
And of course much stiffer terms should be applied to this year’s licensing round. It was announced back in April that licence applications would be sought later this year for some 71,900 square kilometres of the Rockall basin. That’s an area nearly as large as the whole 32 counties. This week Eamon Ryan’s Minister of State, Scan Power, to whom he seems to have ceded responsibility, announced that he intended to add a further 45,200 square kilometres to that. This new area stretches up towards Rockall north west of the Corrib find.
It would be a crime against the Irish people to licence the most prospective structures in this massive area on the basis of the current licensing terms.

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.