Tuesday, December 15, 2009

Signposts From Ireland

There must be some way out of here

Last week, the Irish government unveiled the toughest budget in the country's history. It was effectively the third budget in one year.

The centrepiece comprised further spending cuts, focused on two areas which had already suffered previous cuts - public sector pay and welfare payments.

On pay, there will be reductions of between 5% and 15%, plus additional savings on public sector pensions. On welfare, there will be cuts to a wide range of benefits, including Child Benefit and Jobseeker's benefit. Overall, adding in a further billion of capital spending cuts, the package will amount to €4bn next year, around 7% of expenditure.

Of course, it remains to be seen whether the Irish government will withstand the public sector strikes and/or riots that will ensue, but they've certainly stepped up to the plate.

So what can we learn?

First, welfare. Chatting to some civil servants last week, it's clear that Whitehall has already lined up welfare for the chop. And you can see why: welfare spending (so-called "Social Protection") now amounts to well over £200bn pa, accounting for one-third of all public spending (see here). It cannot escape some serious pruning, especially given its near 40% real terms increase since Labour came to power.

Second, public sector pay. For some reason the civil servants did not mention this as being a cuts target, but of course it must be. At over £160bn pa, pay accounts for one-quarter of total public spending (see here) - and that excludes the cost of those index-linked pensions. If imposed across the board, an Irish style 5-15% cut would immediately deliver more than £10bn pa in savings.

What's that? Such cuts would be unfair to the most vulnerable in society, as well as hard-working public servants?

Well, OK. But what's your alternative?

Given that we have to find something like £100bn pa to close our massive fiscal deficit, what would you do?

Because sitting on our hands is not an option.

The OECD's latest estimate says that our structural deficit (ie the bit of government borrowing that will not cure itself as the economy recovers) is now close to 10% of GDP, or about £150bn. And that's worse than Ireland even before its latest budget. It's also worse than Greece. In fact, as things stand, the UK will have the highest structural deficit of any OECD member in both 2010 and 2011.

Cut specific spending programmes, rather than across the board cuts to welfare and pay?

Yes, yes, we like that. Target the cuts on things we don't actually need government to do. Much better.

But what?

Last September the TPA/IOD proposed 34 specific cuts (including a public sector pay freeze) and got to £50bn pa of savings (see this blog). Unfortunately, we didn't notice a great rush of support for the measures from politicos of any colour. Nobody it seems wants to be seen as picking on particular groups (aka making tough choices)..

Which is why such exercises so often end up with broadbrush across-the-board cuts: to politicos, it feels much easier to spread the pain far and wide, rather than confront particular lobbies and interest groups.

Of course, the very worst kind of cuts are those where the central government politicos impose budget cuts on those further down the line without committing themselves on how those cuts are to be delivered.

They say things like "the education service will make 10% efficiency savings, and those savings will release cash for deployment elsewhere". Individual head teachers are then faced with the need to save 10% of their budgets, while still delivering all the government's targets for things like class sizes, and still paying nationally negotiated pay rates.

We saw that before back in the 70s and 80s, and it led to decaying school buildings, decaying hospitals, and a general air of public service decrepitude. It should not be allowed to happen again.

Which is why George needs to be so very bold. The cuts are unavoidable. But cuts without the accompanying specifics are a recipe for 20 years of public sector misery.

The Irish government has been specific on how the cash will be found - by cutting benefits and public sector pay. George needs to be equally specific.

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