Wednesday, 25 February 2009

Revealing assumptions of former senior civil servant

Peadar Kirby: The article by Cathal O'Loghlin in today's Irish Times headlined 'Union response to public sector levy fails to find a better way' is more revealing for what it doesn't say than for what it does. Essentially, this former assistant secretary in the Department of Finance and director of the International Monetary Fund (presumably Ireland's representative in the 13-country group through which this country is represented in that organisation) criticises the ICTU's alternative proposals to deal with the current crisis on two grounds, both of them disingenuous.

The first is his claim that ICTU fails to make any case against the planned public pension charges and the second is that the trade union group fails to put forward a comprehensive plan for reforming our taxation system. The first claim overlooks the fact that union leaders consistently affirm that they are not against cuts in public sector pay but that they want to see any cuts being implemented in a fair way with those who have contributed most to the present crisis being the ones who pay the most. Secondly, it beggars belief to expect Congress to design a comprehensive reform of the taxation system when the government itself is failing to do this. Most astonishingly O'Loghlin dismisses ICTU's call for a tax on high earners by stating that the 'net yield might reach €3 billion' while asserting that cuts in the order of €15 billion are in fact needed!

But the most revealing thing of all is O'Loghlin's inability to grasp the essential core principle of ICTU's position, a core principle that finds a ready response among many ordinary Irish people to judge by Saturday's huge march in Dublin. This is the principle of fairness. He fails to mention ICTU's call to introduce a tax on properties other than the principal family residence, its proposal for a 48% tax band for high earners and its call to end the general tax subsidies for the hospital co-location scheme. Indeed, his comment on tax relief for union subscriptions (a petty issue indeed) is perhaps most revealing of a hostility to trade union membership. All in all, his article seems to be motivated by an attempt to argue that public service pay needs to be cut back, missing any of the points made by Paul Sweeney in his recent contribution to this blog. While ICTU's plan may not amount to a full strategy for resolving the huge crisis our political and economic elites have landed us in, it is by far the best beginning towards some equitable and fair way of addressing the crisis.


SlĂ­ Eile said...

Regarding tax relief on Trade Union subscriptions - this comes to about €60 per year - a flat rate write off against a person's tax bill. There are a host of other tax reliefs the value of which are much higher for those earning typically above €40,000 per annum and paying higher tax rates (41%). By contrast union subs tax relief are small fry.

Gaius Baltar said...

I don't actually see how Cathal O'Loghlin's points have been refuted, and his passing reference to tax relief on trade union subscriptions seems to have provoked the defensive attitude that he probably intended.

To take just one of his valid points, he points to the ESRI's unrefuted research suggesting that junior public service grades are far more generously paid than their private sector equivalents. In other words, those junior staff have received great benefit from the tax our Government earned from the property bubble. Are those junior public servants included in the people that ICTU have in mind when they talk of "those who have contributed most to the present crisis being the ones who pay the most"?

I hope this blog improves. Thus far, it falls far below the analytical content to be found at ''. But I accept its early days.

Michael Taft said...

Gaius - the issue is not 'refuting' the ESRI's paper on the public/private differential among recent graduates. But it is a matter of, in the first instance, reading it closely. For instance, the paper acknowledges, citing other work, that the public sector premium at an early age may be overturned, to the point of becoming a penalty, in older age. In addition, the paper cites research showing the public sector premium to be 5%-6% in three other EU countries. Among Irish recent graduates, the premium is 7%; pretty much the same.

Further, (and this is only a small criticism) the paper may have under-estimated the effect of the 'large organisation' premium. Regardless of the size of the immediate public sector workplace, all public sector workers neogiate centrally with one employer. This gives all of them a 'large orgaisation' premium which may not be fully represented in the authors' calculations.

There are two factors, however, that were not included: first, is the trade union premium. European and US studies puts this at anywhere between 8 and 15%; for younger people it tends to be at the upper range. That many young people in the private sector are actively discouraged from trade union membership can be deduced from UCD's Professor John Geary's survey showing that 70% of workers would join a trade union but are reluctant because of employer hostility. This hostility is given unique legal vindication as Irish workers are denied what workers in nearly every other industrialised have: the right to collective bargaining.

A second factor suggests it may not be unjustifiably high public sector wages but, rather, unjustifiably low private sector wages. The OECD's Benefit and Wages database shows that Irish private sectors wages are approximately 10% below the EU-15 average; this rises to over 20% when compared to the wealthiest ten EU countries. Were Irish private sector wages at the European norm, the differential would be greatly reduced.

Cathal O'Loghlin might have done better had he examined the 'analytical content' of this wider landscape. He chose not to.

Gaius Baltar said...

In fairness to you, Michael, you have given a substantial answer there. But I just wonder if the survey of recent graduates you refer to is the same as the report here which is the one I had in mind, and which I thought (maybe wrongly, as I can only claim to have skimmed it and read the summaries of it in the press) had a wider scope.

In any event, isn't it fair to say that there is a big gap in the Government finances at present, which is unlikely to be filled by tax alone. I took that to be the significance of Cathal O'Loghlin's comment about taxing of all income over 100k only yielding 3 billion. Adding property taxes on second homes is fine in principle, but surely unlikely to give us a bonanza as ultimately the tax must be paid from someone's income.

And that surely pushes the focus back to pay - and, incidently, I can't see this as being the perfect time to consider a 10 to 20% increase in private sector wage levels. Are you confident that you are truly looking at the wider landscape?

Michael Taft said...

Gaius, I mistakenly assumed Cathal was referring to this ESRI report (, an excellent study; it was on the basis of that report that I made my comments. Thanks for the link to this latest report. I look forward to reading it and, if I can get to it quickly, I'll reply - though I'm sure we will be discussing these issues for a long time on other posts on this site.

Yes, it is fair to say that taxation won't fill the gap. But, no, that doesn't push the focus back on pay - either in the public or private sectors. With a €20 billion plus annual deficit, no amount of cutting - wages, public services or even the capital programme - will close this gap. Indeed, engaging in general tax increases or cuts in Government consumption/investment will lead to a further reduction in economic activity, depressing private consumption, reducing tax revenue, increasing social welfare (through higher unemployment), etc. Reducing the deficit by reducing output is self-defeating. The fiscal deficit did not cause reduced output, it was caused by reduced output. If we treat the symptoms, the disease will spread (the last time deflationary measures were used in a similar situation, the Great Depression resulted).

Ultimately, the focus should be pushed back on to stimulus measures that will regenerate economic activity. Growing the economy, not cutting it, is a better way to approach the situation. That is the wider landscape - the causes, not the effect.