Monday, 14 December 2009

Budget 2010: public sector pay cuts in context

Paul Sweeney: As reported by the Financial Times, the Greek Prime Minster admitted on Friday December 11th that the Greek public sector has systemic corruption: “However he made it clear that Greece would not follow Ireland’s example and enforce drastic wage cuts”.

The viciousness of the attacks on the Irish public service in the run up to the Budget was such as to lead an observer to believe that it was corrupt and bloated (the adjective used with the words “public service” by certain commentators). In fact, of course, up until now the Irish public service has been relatively free of corruption and, as I show below, is scarcely bloated. The downsides of the second tranch of imposed pay cuts - in addition to deflation and a possibly delayed recovery - could potentially include, in the long term, creating some of the conditions favourable to corruption.

Regarding its 'bloated' size, the Irish public service is actually small and similar in size to that of the USA. The recent OECD report into its performance called for some improvements, but did not indicate that it was in any way bloated. There is always room for improvement in reforming public services. Similarly, there is plenty of room for reform of private sector governance – especially in banks and with regard to remuneration.

The campaign to soften up the public to accept pay cuts was remarkably successful - in the short run. The public were tuned into expecting pay cuts in the public sector.

It was argued that the public sector enjoyed massive “premia” over the private sector. The ESRI, which may have suffered some damage to its valuable reputation as an independent, learned institute, appeared to adopt a campaigning role, on behalf, it seemed, of the Government. It appeared to publish the same report over and over, asserting a huge premium. Yet, when the dust settled, a more sophisticated study by Callaghan and Foley of the CSO, read to the Statistical Society, narrowed the premium very considerably. Internationally, public sectors do pay more - in general - than the private sector (except Greece perhaps?).

Remarkably, this latter study got no publicity, whereas the reports by the ESRI got screaming headlines. If more and more people are now questioning the independence of ESRI, its important contributions, for decades, to evidence-based policy-making would be undermined. However, the institute was a victim of exaggerated reporting by certain campaigning journalists.

TINA - “there is no alternative” - was invoked to justify the cuts. We did need to make an “adjustment” of around €4bn. It was originally planned by Government that it would comprise cuts and taxes. In the end, the representatives of the very well-off won the battle. No taxes were to be raised, beyond even more taxes on consumption (carbon) which impact hardest on low-income groups.

Of course, there were many taxes which could have been raised. Among mainstream economists, only Garret Fitzgerald is making this vital point and he makes it well and regularly. Is he Ireland’s only Saltwater Economist? Are the others all Freshwater Economists?

The tax on higher earners utilising avoidance schemes could have raised €207m instead of a paltry €50m, if it was on earnings of over €100,000 (it is levied only on tax avoiders), and if it had included pension tax-avoidance schemes. A temporary levy of a mere 2% on corporate incomes would have raised €614m. A tighter tax on fugitives would have raised up to €65m in its first year, and increasing DIRT tax would get €125m, with other taxes raising much more again.

Instead of raising these taxes, this government took money off the blind. It took money off carers, and off those on the dole.

Before the Budget, it was said that if public service workers’ pay was not cut, then welfare would be cut. It was presented as either/or. Why then did public service pay get cut AND welfare also get cut?

And now the ground has been prepared. Private sector workers will have their pay cut. Overall, contrary to assertions by many campaigners, only about 15% of private sector workers have had cuts in their basic wage or salary. Many more have had reduced earnings due to less hours, cuts in bonuses and overtime. Only in the public sector have all workers had pay cuts. If the public sector workers have had pay cuts, why should private sector workers not have pay cuts too?

“When I become Minster for Finance, Ireland had the highest unit labour costs in the Eurozone”, Mr Lenihan said repeatedly on Budget day. This is untrue. Ireland has the second LOWEST unit labour costs in the Eurozone, after France (OECD). He has not corrected this yet. It is probable that he meant to say that the rise in unit labour costs in Ireland has been one of the highest (though not the highest) in recent years. All the erroneous claims around productivity and competitiveness are part of a broad campaign to get a competitive devaluation by pushing down wages.

Ireland has high consumer costs. We see this when we go abroad, and the data shows us second highest after Denmark. Cuts in wages will bring our price levels closer to the Euro average, but not in the way or with the speed the devaluationists want. The link between pay and price levels is not clear. Prices are determined externally, and much more by exchange rate movements. And why should only workers (so far - mainly public sector) take the pain. Have you asked your solicitor or GP for a cut in fees? You know what s/he will say!

The cut of €4bn is a massive deflationary cut of 2.5% GDP and 3% off GNP in 2010. If the carry-over of €3.5bn is added, the total deflationary cut is 5.6% (not 2.5% as Garret Fitzgerald said on Saturday). With these deflationary cuts, Ireland is in danger of sinking into a long decline.


Paul Hunt said...

"Prices are determined externally, and much more by exchange rate movements".

Wow! As a SOE Ireland is, in aggregate, a price taker in international markets, but the sheltered, non-traded sectors make up a big chunk of the domestic economy. Almost all final prices to consumers are determined in Ireland, irrespective of the imported component.

I think the majority of citizens at the mercy of these "externally determined" prices would be pleasantly surprised if the Competition Authority were empowered and resourced to investigate price formation across all the state, semi-state and private sheltered sectors.

Proposition Joe said...


Regarding its 'bloated' size, the Irish public service is actually small and similar in size to that of the USA.

You wouldn't be counting the 2 million employed by the US military as public servants, now would you?

A similar proportion of the Irish workforce would require nearly thirty thousand in the military. And we have how many?

Slí Eile said...

@Proposition Joe
Paul was referring to the statistical fact that employees in public services, here, as % of the total workforce is below average.

Referring to the 2008 OECD Report, former Taoiseach Bertie Ahern stated that: 'The OECD Report highlights that, while the numbers employed in the Irish Public Service have increased significantly, general government employment as a percentage of the workforce in Irelandis relatively low in the OECD cohort. For example, the numbers employed in the Irish Public Service are significantly less in relative terms than the level of public employment in Norway, Sweden, France, Finland or Belgium.'

Check out Figure 1.2 in Chapter 1

Proposition Joe said...


The basic problem with any county-to-country size comparisons is that these public sectors are very different beasts. Which renders such a coarse grained comparison pretty much meaningless.

Fully operational or largely symbolic militaries. Public or private pre-schooling. Universal or two-tier health care. You get the idea ...

Saying our public sector is smaller than the norm tells us nothing about the bang we get for our buck. If its say 85% of the norm in size but produces only 65% of the output, then we have a problem that's not going to be fixed by expanding the size of the public sector.

marise said...

@Prop Joe

What would the perfect public sector look like if you could design one? How small/big (per capita or GNP)? What generally would be their bailiwick be(not a complete list, but given their purposes now, what functions might you add/remove)?

I ask because I am not clear, after reading many of your posts, what you expect from the PS and what you are willing to pay for those services. I thought it may be a nice baseline to build from in discussion. We do talk a lot here about what is, and some about what should be or what we think is the correct approach. Maybe we can get some new ideas about the kind of change that could have a majority of the Irish people in agreement.

Michael Burke said...

Ah Joe, you're kidding us right?

All along, you were never concerned about the size of the public sector, just how efficent it is. Now confronted with the fact that Ireland's public sector is one of the smallest (in fact the third smallest in the OECD), the terrain has shifted to productivity.

Total government spendding on the public here is 34.4% versus an OECD average of 42.7%. This includes all services and goods paid for by the State, irrespective of whether they are actually carried out by the State or by private enterprise 'the public domain'. Only S Korea and Mexico below. Ireland also 19th of 28 counties in terms of total compensation of government employees.

In the category 'employee numbers as % of population, in public adminisistration, armed forces excluding defence, and social security', Ireland was 20th of 27. (All above, Source: OECD Employment in Government, etc. GOV/PGC/PEM(2008)10.

In the EU, Ireland is joint bottom in terms of public spending, alongside Lithuania (and if calculated on GNP, Ireland would be second bottom). Including private health care spending, Ireland goes back to the lowest.(And both Poland and NZ spend less on public administration and defence). The third lowest spending on education, and only average levels of employment in educaton.

Now, where did you get those 65% versus 85% numbers from, or were they just dreamt up to support a specious argument?

In the efficient allocation of public reources (one measure of productivity), Ireland is categorised as a 'higher income, lower expenditure' economy and came top of 22 countries and top in cost effectiveness of resource allocation (Source: Public Sector Performance, Social and Cultural Planning Office, The Hague).

ps, in no country were average public sector wages below those of the private sector.

Proposition Joe said...


What would the perfect public sector look like if you could design one?

Glib as it may sound, I want a public sector that works.

Where at least 50% of high school students get a solid foundation in math, not the current 15%. Where waiting times for life-saving diagnostics are measured in days as opposed to months. Where a decision on jobseekers benefit is made in 22 hours as opposed to 22 weeks. I could go on, but I'm sure you get the picture.

We have to stop obsessing about the inputs (percentage of GDP consumed by the PS) and instead concentrate our attention on the outcomes.

I could say we should spend 42% of GDP but that would be essentially meaningless if such a figure was achieved by simply adjusting public payroll and social welfare spend so as to goal-seek a particular number.

And for a PS that works I'm personally willing to pay lots, future income allowing, as I've done in the past. I totally see the need to build a consensus around an increased tax burden, but we need to be honest about the across-the-board impact this have. I'm blue in the face advocating tax-base widening, so its not as if I'm tax-cutting hawk or anything :)

@Michael Burke

Now, where did you get those 65% versus 85% numbers from, or were they just dreamt up to support a specious argument?

Yes of course I made them up, it was intended as an illustration. The clue was in the "If its say 85% ..." :)

Of course the alternative is possible also, whereby our PS produces proportionately more output that the European norm, despite being smaller. Or it might even produce exactly the same amount of bang per buck invested or person employed.

The point though was that this output comparison is the only useful question to ask.

The course grained bulk comparison (gross headcount or % of GDP) is just too simplistic to really tell us anything useful.

Michael Burke said...

@ Proposition Joe

It's an impossible debate when one side produces data and the the other admits, "Yes of course I made them up, it was intended as an illustration".

In the run-up to the Budget PS workers were subject to vilification both as to their numbers and their pay, yourself included. Now it has been shown that both of these assertions were untrue, the campaign simply moves on to the productivity of the PS. But the job is done.

Now, for the camaign to continue you simply ignore data showing that Ireland comes top of 22 countries in the efficient allocation of resources and in the cost-effectiveness of that allocation. I know of no other sector where Ireland can claim leadership in that way.

Unless of course, you count spurious invective against all types of workers that wouldn't pass muster in most saloon bars.

Proposition Joe said...

@Michael Burke

It's an impossible debate when one side produces data and the the other admits ...

It was absolutely clear for the context that the 85%/65% was just an example.

I'm sure you're familiar with the idiomatic use of 'if say' in the sense of 'suppose for a second that something is true'. Its a way of introducing an idea so as to examine to logical consequences that would flow that idea, if it were true. A mini gedankenexperiment if you will.

My intention was to illustrate that a lesser spend in gross GDP terms than the European norm doesn't necessarily indicate that the core problem is the spend being less that the European norm.

In the run-up to the Budget PS workers were subject to vilification both as to their numbers and their pay, yourself included.

To criticize or demand better performance from is not to villify. Nor even to demonize. These terms have been cheapened by their use as a blanket defence to any criticism of the PS.

Finally, I'll leave you with a quotation from the Public Sector Performance study you reference above ...

After mining some of the most outstanding sets of international comparative data on public sector performance, our main, sobering conclusion is that policymakers can draw no quick and easy lessons from our analyses ... In particular, in many cases there is a lack of robust and comparable data on output of the agencies concerned and on outcomes of government policies pursued of these data ... Participants in national policy debates often point out that their country spends a smaller share of gdp on, for example, health care or education that other nations do, with the implied message that expenditure on the government programs involved should be raised. However, our report demonstrates convincingly that there is no one-to-one relationship between resources
made available to sectors like health care and education and the (overall) performance of the public sector. Put simply, in many cases more money does not guarantee more effective policy outcomes.

My point exactly. I'd recommend a close reading of the "'Concluding comments' on pages 25 & 26.

Michael Burke said...

Hey Joe

Any honest assessment of recent weeks will conclude that there was a campaign which asserted the the PS in Ireland was too big, with the government spending too much and the workers paid too much. Relative either to other advanced economies or to the EU, it has been demonstrated that not one of these assertions is true.

These are facts which you do not acknowledge, but do not challenge.

Neither is there any explanation as to why Irish citizens are uniquely able to go short on education spending (despite a large 0-14 cohort) or are uniquely robust so as not to require at least average health care outcomes, and so on.

Instead we are invited to take a stroll down the path of 'what if' scenarios, "A mini gedankenexperiment if you will". But pretension rarely disguises a lack of argument.

The same study quoted, while drawing no firm conclusions on the relation between expenditures and outcomes does so (in part) precisely because of the experience of Ireland, which it designates as a 'higher income, lower expenditure' economy of the group analysed that came top of 22 countries in both the cost effectiveness and efficiency of resource allocation.

But you already know that, because I quoted it above. So I wonder why we keep returning to generalities and what ifs about Ireland possibly providing low productivity in the public sector, which is the opposite of the case.

It couldn't be, could it, that just like the campaign against the 'bloated' public sector, that there are no facts to support these shifting assertions?

C'mon Joe, say it ain't so.

Proposition Joe said...


You're conflating the recent orchestrated campaign of pre-budget softening up (a political/media issue) with a very specific point about inputs versus outputs.

The Irish public sector may be bloated, or it may not be. The point is that simply comparing gross headcount or % of GDP consumed will not tell us either way.

In order to determine whether the PS is under-performing or punching above its weight, we need to consider the outcomes as opposed to the euros shovelled in the other end.

Now we should expect to be spending less on health, due to our relatively young demographics. The question is whether we get as good an impact per euro spent as countries with older (sicker) populations.

Similarly we should expect to be spending less public money on 0-14 education, given that unlike the European norm our kids' pre-schooling is largely parent-funded, or else non-existent. The question again is around the bang for the buck that we do spend.

But in terms of your reference to that report placing Ireland tops for resource allocation. You have of course read the authors' own caveats, some of which I've quoted above? No doubt you also read their description of their ranking methodology?

For example this gem: "No suitable performance indicators are available for public administration". A-ha, well OK then, I guess we'll just exclude public admin from the rankings.

Or the fact that the law and order element was measured by the crime rate. For which their are many other drivers, apart from the performance of the police and judiciary system.

The authors' themselves point out:

Ireland achieves its top position thanks to its excellent crime rate, a good score for education and an average score for health. Finland has a very good score for education and health, but is beaten to the top position by Ireland because of its poor score on law and order.

Honestly, do you really think we're ahead of Finland? I'd take their chronic alcoholism (driving up crime rates) in exchange for their stellar education system, any day of the week.

Slí Eile said...

@Joe The metrics around 'value for money' in the public service (as in in non-public-service) are fraught. How do you measure the value of a life well spent nurturing, educating, caring for and protecting the young, the elderly, the sick, the vulnerable? Social workers, parents, teachers, community activists, garda etc contain extraordinary heros as well as villains in their ranks. I think that most of these are hard-working, honest and principled citizens who want to do their best and take pride in it.

Measures of 'outcomes' are useful in informing discussions - however what is measurable is sometimes missing the point about what is really important. By any measure of 'outcomes' in health or education it is possible to argue that Irish public services deliver good value for money considering the relatively low spend and investment in these areas compared to the outcomes (increased longevity in the last decade, reasonable international scores in maths, science and especially reading). However, these sorts of comparisons do not tell us much about:
What causes the outcomes (investment in schooling, hospitals, community care etc is only part of the explanatory story)
The range of outcomes that are difficult to measure.

A feature of Finland's much vaunted educational experience is the extent to which teachers in Finland are (i) well trained and (ii) engaged in pastoral care and not just narrow focus on test outcomes). Some of this comes down to community norms, culture and politics in a society that is both relatively homogeneous and egalitarian (although the two are not necessarily complements).
Coming back to the central point that started this particular line of discussion - there is no evidence internationally or nationally that the Irish public service is 'bloated' in the sense that it employs too many people or the total investment is too high relative to some norm. That is not to say that there is scope - and possibly large scope - for lots of 'productivity improvements' and service-enhancing changes in work practices, demarcation lines, work culture. Many factors are involved here that include but go well beyond issues such as core working time in the health services, redeployment etc - that caught the headlines in November and early December. The over-centralisation of decision-making, the uneasy rapport between political and executive, the culture of clientilism and localism in the body politic all constrain a public service which, if it were given greater freedom, delegation allied to accountability and performance measures (where these mean something) could transform the quality of life for people. An agenda for positive and consensus built reform in the public services is possible alongside a strategy to invest in and expand rather than retrench our very inadequate social infrastructure. The great tragedy of the failure to move this agenda forward is that conflict and sectional interest will now define where groups stand. People are, in many cases, frightened under threat and vulnerable. The onslaught by media (lets face it … it is a veritable McCarthyite wave these last weeks) coupled with real hardship for low-paid public service workers means that people are being driven into a defensive and reactive mode. I would make the case that every cut in public spending must be resisted not because some areas need not be pruned but because money should be diverted from some areas of the public purse to wealth-creating, job-creating and equality-promoting areas and that the total spend is not too high but … too low relative to the need to stimulate economic activity and raise the standard of public services in Ireland. This, also, needs to be linked to a public service reform agenda governed by human values of service and solidarity and not models imported from the business world of manufacturing widgets. We need to imagine a radically different public service in a radically different society. I am with you in that regard.

Paul Sweeney said...

There is broad agreement that in Ireland prices are determined externally. Of course, there are exceptions, like in the sheltered sector, especially services, professions etc, where prices are much less so determined.

On the size of the public sector, there has been a good debate in the past about the its appropriate size in Ireland. Those, who favour an even smaller one, talk of the small size of the Irish army, the younger population and so less need for health expenditure etc etc. This view has been seriously challenged by Maev Ann Wren and others.

All modern democracies need an effective, modern public service. In Ireland, we have had a most distorted picture on public service provision over the past 10 years. Public spending grew rapidly (though not as fast as current revenue - even with major direct tax cuts) and so more could be and was spent on public services, while taxes were simultaneously slashed on incomes and profits (and increased a little on consumption etc).

Those commentators who say some of the money was not well spent have a good point. But my opinion, and everyone has an opinion, is that the quality and level of public services here are inferior to what most Irish people want. Many contributions to Morning Ireland during the boom were about this issue. But we did not spend more money when we had it. I also think that the critics have a point on efficiencies – there is always room for improvements.

Now thanks to our Government, which blew the boom, we are in dire straits. The Left will get its wish – public spending will rise to 41% of GDP next year. But only because GDP has imploded! The level of spending, especially after the Budget cuts, will be lower. Will the Right be then happy now that it is lower in absolute terms? No, as it is up hugely, albeit only in proportionally terms! So we get none of what we want - wherever we are coming from!

Marise is correct. We have to decide what kind of society we want in Ireland. This is so important and is the key to modern politics. Then we decide how much we are willing to pay; ensure both public and private services (many are always bought in) are delivered efficiently; and that it is equitable and not aimed upwards i.e. like subsidies to private schools, to developers, bankers, or in the oxymoron of “free” fees. Will we grow up during the recession and make adult choices?

I read the tennis match between Joe and Michael. Not really productive.

I’ll also end on a negative note. On top of Brian Cowan’s massive cuts in spending,
by imploding the 22 years of Social Partnership, (over a bit of pressure from a few backbenchers, pressurised by narrow business types), he has ensured that Ireland’s public service will not improve for the foreseeable future. This will impact on overall productivity and will delay the recovery.

Paul Hunt said...

@Paul Sweeney,

"There is broad agreement that in Ireland prices are determined externally. Of course, there are exceptions, like in the sheltered sector, such as services, profession, etc, where prices are much less so determined."

Very few final consumers in Ireland import goods and services directly. The vast majority of purchasea of final goods and services are ar prices determined by suppliers in Ireland - ireespective of the extent of the imported component.

Even with the current general price deflation the price level of final consumption of goods and services (incl. taxes) is more than 15% above the Eurozone average. This, unexectedly, but quite justifiably, feeds into the demand to maintain the nominal level of pay.

I personally believe it is totally unjust to target public service pay while this price wedge (which is comprised of inefficiences, monopoly rents and implicit tazes) remains untouched. Initially I was surprised that the trades unions were not targetting this profit-gouging in the retail, distribution and professional sectors, but then it dawned on me that the biggest contributor to this price wedge are the state and semi-state sectors.

But it wouldn't do to start looking at these excessive costs and inefficiencies, would it?

Paul Hunt said...

Oops! Seem to have killed debate on this thread. Must have upset the "free-thinkers". Oh dear.