The economics of mid-recession public sector pay cuts

[feargach]

Thread to discuss the purely economic immediate and medium-term, euros and cents, consequences of a large public sector spending reduction program.

Please confine your comments to effects to be felt in Ireland in 2009 and the first quarter of 2010.

Please justify economic forecasts for that period.

[Kevin Doyle]

Thread to discuss the purely economic immediate and medium-term, euros and cents, consequences of a large public sector spending reduction program.

Please confine your comments to effects to be felt in Ireland in 2009 and the first quarter of 2010.

Please justify economic forecasts for that period.

First off, get your thread title correct, a 'large public sector spending reduction program' and Public Sector pay cuts are not the same thing.

[feargach]

First off, get your thread title correct, a 'large public sector spending reduction program' and Public Sector pay cuts are not the same thing.

Meh, choose one and respond to it. They both represent cutting off a flow of funds into the economy. Why are you averse to giving your guess as to the possible effects of such a course of action?

[tic tac man]

This seems to be getting at a point that's troubling me.

Why is it that a tax increase is considered a bad thing for its delationery effect but a cut in pay to several hundred thousand workers is not? A broadly based tax increase would first of all be more equitable, but also it takes less from each worker, and as people will reduce their savings before their spending, should be less deflationery.

Surely the tax increase is the lesser of two evils.

[pfkf]

First off, get your thread title correct, a 'large public sector spending reduction program' and Public Sector pay cuts are not the same thing.

Or you could call it, recovery through reform

[SPN]

Meh, choose one and respond to it. They both represent cutting off a flow of funds into the economy.

They both represent the removal of a requirement to burden future generations of taxpayers with unsustainable amounts of debt.

If public servants want to retain their current income levels let them go down the Credit Union and negotiate a top up to their salary.

Why should I, my children, or my grandchildren, have to pay back somebody elses borrowings?


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[patslatt]

This seems to be getting at a point that's troubling me.

Why is it that a tax increase is considered a bad thing for its delationery effect but a cut in pay to several hundred thousand workers is not? A broadly based tax increase would first of all be more equitable, but also it takes less from each worker, and as people will reduce their savings before their spending, should be less deflationery.

Surely the tax increase is the lesser of two evils.

Given that the Irish public sector is wildly overpaid as the highest paid one in the EU,pay is the logical place for cuts needed to balance the massive,unsustainable budgetary deficits. Cutting public sector pay would reduce the need for present and future tax increases on lower paid private sector workers to balance the budget. This can be considered a form of negative Keynesianism,a transfer of income from high paid to lower paid workers occuring outside of the tax system. Usually,Keynesian income transfers occur when taxes are raised on high incomes,cut on low incomes,cut on regressive taxes like VAT which hit low income earners the hardest and when taxes are used to boost spending on social welfare and pensions. So the deflationary effects of public sector pay cuts would be more than offset by the negative form of Keynesian effects.

[tic tac man]

Given that the Irish public sector is wildly overpaid as the highest paid one in the EU,pay is the logical place for cuts needed to balance the massive,unsustainable budgetary deficits. Cutting public sector pay would reduce the need for present and future tax increases on lower paid private sector workers to balance the budget. This can be considered a form of negative Keynesianism,a transfer of income from high paid to lower paid workers occuring outside of the tax system. Usually,Keynesian income transfers occur when taxes are raised on high incomes,cut on low incomes,cut on regressive taxes like VAT which hit low income earners the hardest and when taxes are used to boost spending social welfare and pensions. So the deflationary effects of public sector pay cuts would be more than offset by the negative form of Keynesian effects.

How does one even begin to rebut such a wild mish-mash of ideas, so poorly articulated?

Keynes central idea was that in times of recession the state should release money into the economy and in times of boom, they should try to withdraw money from the economy.

A pay cut to a large body of workers is against anything he would have promoted, but of course he wouldn't have got us into this mess to start with.

A large amount of our problems are due to the fact that in the boom years we reduced progressive taxes and taxes on the wealthy (such as CGT) while collecting more from the relatively regressive taxes such as VAT and property tax. This had little to do with Keynes either way. It was just inequitable and dumb.

To create a situation where the whole state budget was dependent on property tax was particularly crazy, but that is what happened.

A good beginning to solve our problems would be to increase taxes on the well off (and unfortunately the moderately well off). Only to the levels that are common throughout Europe.

Once that has been done, we could talk about public service cuts.

[kerrynorth]

The first thing to consider is that circa 33% of any cut in public service pay (and pensions by extension) will not materalise through income taxes and social insurance contributions foregone that would otherwise be paid. Proabably 2/3rds+ of public servants are in the 41% tax bracket (plus PRSI, Income, Health and Youth Employment Levies) whereas maybe 3/4ths+ of pensioners are in the 20% bracket or even outside the tax net and also outside of PRSI (over 66). So in the round a circa 33% figure is appropriate. Therefore if the government set out to achieve a 10% reduction in the annual public service pay and pensions bill of €20billion then this will amount to a net €1.35billion exchequer saving. The €2billion in pay and pension cuts could be achieved by renaging on the pay deal (circa €650million), allowing numbers to fall through attrition and some targeted redundancy programmes (say €350million) and the final €1billion to come from an average 5% pay cut across the board - and there is your €2billion off the pay and pensions bill!

As already stated this €2billion cut would result in a net exchequer position of €1.35billion from which we must also deduct taxes foregone from the element of this income not flowing in the economy (allowing also for the propensity to save and purchase imports), say €200million. So in truth a saving on public sector pay and pensions may leave the exchequer with a net €1.1billion gain. Plus you will also have to add in the opportunity cost of servicing the debt if you did not make the cuts at say 5% pa. So the €2billion cut in public sector pay and pensions will in the end result in an annual circa €1.2billion gain for the exchequer, and so on with other cuts in spending.


A better outcome would be achieved from reversing the €500million Social Welfare package as well as cutting the €400million Early Childcare payment. In the case of Social Welfare there is a high propensity to consume 0% VAT rated goods as well as imports, the Early Childcare payment also shares the same characteristics plus also a high savings ratio among the middle classes. Therefore this combined €900million in spending may lead to say a net €750million saving to the exchequer.

Whereas by my rough guesstimate just 60% of public sector pay and pension cuts results in a net exchequer gain, in the case of the two transfer payments above it could be a net 90%+ net exchequer gain.

If the government are as stated looking for €5billion in cuts including €2billion in pay and pensions then you are looking at a net exchequer position of circa €3.5billion as a result.

[droghedasouth]

This seems to be getting at a point that's troubling me.

Why is it that a tax increase is considered a bad thing for its delationery effect but a cut in pay to several hundred thousand workers is not? A broadly based tax increase would first of all be more equitable, but also it takes less from each worker, and as people will reduce their savings before their spending, should be less deflationery.

Surely the tax increase is the lesser of two evils.

A reduction in public pay, benefits, minimum wage and also charges made by the public sector on individuals and companies back to say the 2004 level will be deflationary in the short term.

But after having up to 20% inflation relative to ur competitors over the past 10 years, we need to quickly restore the competitiveness of the economy.

Surely pay cuts are fairer than job cuts.