Belfast Telegraph

Tuesday 21 October 2014

Much of our wealth has gone — now the question is, who will lose what?

U2 frontman Bono

The most interesting bits of the April Budget in the Republic — such as cancelling the disgraceful slush fund known as ministerial pensions — have already disappeared like snow in spring.

The Taoiseach did not want to “send out the wrong message” apparently, such as the idea that senior politicians might lead from the front.

One bit that is still there is the idea that the pay of senior civil servants (and, by a process of relativity, of ministers) should be decided, not in relation to the earnings of bankers and top managers, but by what their colleagues earn in other countries.

This raises all kinds of intriguing possibilities. So we had better consider them quickly, before this idea, too, vanishes. After all, it seems to send out all the wrong messages; such as the top brass, whose earnings so outstripped the ordinary brass, having to endure reverse relativities during the burst. Pay cuts, in other words.

One would be confident making a modest wager that no such de-leveraging will ever take place. Not on pay, anyway, given its implications for pensions.

All higher earners will certainly pay more income tax. Alistair Darling's example in setting a 50% top rate for incomes above £150,000-a-year may prove just too tempting not to copy in the December Budget. But, even for those whose pensions are not affected, it is a curious feature of politics that income tax rises seem much less difficult to impose than pay cuts with the same effect on disposable income.

There are many such examples of lack of logical symmetry in political attitudes. One current case is that Government insurance of bank losses, as in Britain, causes less political trouble than covering the losses directly, because the costs are not so obvious to voters.

As the row over the NAMA plan to buy property loans from the banks gathers steam, Irish ministers may wish that they had done something a bit less visible. Outright nationalisation of the banks may or may not be the better option, but it would certainly be less obvious than NAMA. Less transparent, if you like. Everyone calls for transparency in politics, but politicians know it spells trouble. Cutting pay is certainly transparent, and wildly unpopular.

In the particular case of top public sector earnings, the Government might go further along the tried and tested road of different terms for new entrants. New TDs, new ministers and public servants reaching a certain grade, might receive less than the incumbents.

The problem with top earners though, whether public or private, is that there are not enough of them to make any difference to the public finances, no matter what happens to their earnings. So it is very tempting to leave them alone, especially when “them” becomes “us” when it comes to the people making the decisions.

The point is not the money saved, but the message delivered. It is very hard to believe that the figures in the five-year fiscal plan can be achieved unless there is a clear lead from the top.

That, surely, is the right message to send out. But there may be a deeper message, and a wider problem. It is not just about top earnings, wildly inflated though they seem to be. Most ordinary Irish earnings would also not survive comparison with equivalents in other countries.

In the case of Britain, which may still be the most important comparator, the fall in sterling has widened an existing gap in average earnings to something like €10,000-a-year. One cannot be more precise because there are no good statistics for Irish earnings, which is about as damaging a gap in our knowledge as it is possible to imagine.

We do know earnings are high by any international standard. That would be fine, if we had actually earned them. But the ferocity of the crash adds to the evidence that, far from earning, we have simply borrowed. Not directly borrowing to buy, as in the US or UK, but through borrowings by the banks of 30% of GDP from 2004-08. These funds were not just used to buy property. They were recycled into jobs, pay rises and, critically, tax cuts. The implications are enormous.

Here we do have some CSO figures, from the annual survey on living conditions. This showed average disposable income for people of working age at €25,200 in 2007. The typical two-income family had disposable income of €49,000.

That is a lot of spending power. But, if much of it was borrowed money, it has now gone. Future income will have to be earned through our own productivity.

Frankly, there is no reason to think that the Irish economy is productive enough to generate average disposable income of €25,000 a year. The budget and unemployment crisis are the economy's way of telling us so. When it comes to the economy, rather than the individual; when all the adjustments are made for prices, US multi-national operations and so on, it has always looked as if a realistic figure for what the country generates in income is much lower than the debt-charged €160bn in GNP recorded last year.

How much lower is impossible to say. We could subtract the €8bn in external net borrowing required for the balance of payments deficit in 2007. But it could be more than that. We are not as rich as we thought.

Left to its own devices, the market will reduce average incomes through higher unemployment. The 15% recorded as at risk of poverty in that CSO survey will rocket. Meanwhile, the Government will have to do its bit through higher taxes and lower transfers.

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