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The Latvia Option… Public Sector ‘solutions’… December 2, 2009

Posted by WorldbyStorm in Economy, Irish Politics.
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Some of you reading this mornings piece by Pat McArdle in the Irish Times might be forgiven for experiencing a degree of deja vu, for here is the concern [rightly] over €16bn in cuts over the next four – or is it five years, the throwaway mention of ‘Michael’ and the musings as to whether we should cut everything now rather than… well… you’ll find it strangely reminiscent of a piece he put up last week in the Finance section. Oddly though today there’s no mention of Latvia. Latvia – you ask? So what? So what indeed.

You’d go quite some way to find a more heady concoction of stereotypical views of workers, unusual economic analysis and er… a lack of what I like to call facts than the original piece. Under a heading that argues

Both public sector and Government must face reality
he gives of his experience:

I WENT on strike once. It was only for a day and it was more than 20 years ago but the memory is still vivid. At the time, I was a civil servant, one of those higher grades who recently caused a bit of a stir when they announced that they would participate in this week’s one-day action.
For most of us, it was a first experience; for me, it was also a last one. In the building where I was based only two people passed the pickets – I still remember their names.

Yet lest this proto-revolutionary fervour warm your heart, note the following.

Strikes are emotive and occasionally traumatic. Moreover, they are not something that senior public servants resort to easily. Civil servants are generally well educated and usually well informed.

Tell us more about these ‘well-educated and well informed strikers’… so different presumably to the great unwashed who usually (albeit curiously for the sake of his analysis not very often in recent years) take up placards.

I remember with affection the tea breaks at which people would club together to fund the tea and biscuits. This would be accompanied by a discussion of world affairs that was more informed than anything I came across in the private sector.

Well. I. Never. Patronising? McArdle? Why yes. For the record I’ve met informed people everywhere in my career, public private and no sector at all.

How then, could such erudite people resort to a strike that surely has to be fruitless? Do they not know that we are broke, that they have secure, well-paid, pensionable jobs, etc? Clearly, they think otherwise.

Ah, another profoundly patronising assumption. Firstly do we know the strike to be fruitless? I’d argue to the contrary. At least in the short term. Negotiations continued. Proposals were made – and apparently accepted. There’ll be a pay cut but in the form of (mostly?) unpaid leave thus sparing everyones blushes.

Secondly, this secure well paid pensionable mantra is okay as far as it goes, but in light of the recommendations in McCarthy, which McArdle supports and the rhetoric from government we know that all three of those supposed benefits are under serious question with at least two open now to significant change – pay and pensions. Even if we ignore how matters have changed in a short twelve months or so already on that front. And in light of what he advocates later in the piece you’d wonder about the ‘well paid’ bit too…

It was in this frame of mind that I encountered picketers on St Stephen’s Green in Dublin. Ironically, they were from the Department of Justice, Equality and Law Reform. I wondered if they would be somewhat shamefaced, half hiding behind their placards. Not a bit of it. If anything, they were exuberant, clearly enjoying their day off and responding to the occasional honk from a passing car.

Day off? Buddy, I lost a days pay that day. I picketed for hours during the day. And if there’s another strike anytime soon I’ll lose that as well. And I’ll be out picketing again.

The lesson I take from this is that there is a disconnect from reality here. Union leaders seem to be following rather than leading their troops. The situation is different from the 1980s, when we were beaten down by almost a decade of penury. Today’s Celtic Tiger cubs expect to have a job. As a caller recently told a radio interviewer: “I didn’t do a degree to have to resort to menial work.”

In the 1980s, we were glad to do menial work; the alternative was the emigrant ship.

Hmmm… I’ve never liked the ‘menial’ term or at least when used in a derogatory way – most humans in history and before it have worked in menial positions… Nor as it happens do I like the lazy lazy routine of giving out about the yoof simply because its expedient to those who give out that they are no longer of the yoof. But more broadly given that he’s unlikely to be doing ‘menial’ work any time soon it’s hard to know what his point is exactly… We know that he was a civil servant ‘more than twenty years’ ago. So presumably he didn’t have to be ‘glad’ too long. And clearly if he was on the emigrant ship he was on one which turned back fairly sharpish. Or perhaps he did emigrate, like many of us, but given his current job it doesn’t look like he was doing too much menial work in the interim.

By the same token, many public servants seem to believe genuinely that they are being discriminated against and that, having yielded one pay cut, they should now be exempt. The situation has not been helped by the Government’s stop-start short-term approach.

Well, I guess kudos in recognising, as does Karl Whelan on Irish Economy, that the PS has taken a pay cut.

At the beginning of the year, several months were wasted in fruitless discussions with the social partners. The best that can be expected from the current discussions is agreement on a €1.3 billion package of pay cuts, but this is nowhere near enough.
One of the strangest aspects of the present approach is its short-term nature.
Last April, the budget set out the scale of the task. The requirement is to find €16 billion “cuts”, not €4 billion. These estimates have since been ratified by a range of international bodies – the EU, the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development, etc.

‘Ratified’ is an interesting word. My read is that the international institutions have been very keen to rhetorically argue for cuts while not being seen to demand them. After all, if this all goes pear-shaped and the patient doesn’t do so well on the treatment I’d suspect they’re none too keen to have their finger prints all over the body.

We can only speculate as to how much of this should come from pay. Let us assume that one-quarter, or €4 billion, would be appropriate. The Government bill for pay and pensions is €20 billion. Cuts of €4 billion equate to 20 per cent.

Or I could pull a number out of the air. Yes, any number will do. Right out of the air.

Or will I leave it to him?

As studies by the Central Statistics Office and Economic and Social Research Institute show that public- sector wages are between 20 per cent and 30 per cent above equivalent private-sector levels, this would merely bring them into line.

Merely? What precisely does merely mean? What principle is at work where PS wages should be lower than private sector wages? That doesn’t make social or economic sense given that the state attempts, or at least has argued consistently in document after document that I have read on social programme after social programme, to give a lead for best practice, that the state unlike the private sector complies with equal pay legislation in both the letter and the spirit of the law and that the state has a broad spectrum of employees both clerical, administrative, managerial and – loath though I am to use the term – professional as well as, crucially, areas which are not replicated by the private sector such as the Gardaí and the defense forces.

But those studies, those CSO and ESRI studies don’t actually uniformly show that wages are 30% higher (and note the imprecision in the figures. 20 – 30% higher. That’s quite a range). I can – even putting aside the caveats above – point to reports that show that the disparity is much less. Some which point to almost no disparity at all. And I note that Niamh Hardiman in her excellent paper from the Statistic and Social Inquiry Society of Ireland’s Symposium on Resolving Ireland’s Fiscal Crisis which I will deal further with tomorrow, had rather less certainty on this issue as when she noted:

Accurate information about what is happening across the economy can only help in clarifying what is at stake. The evidence is mounting that benchmarking created systematic pay advantages for those in public sector employment, not only when we factor in job security and pensions entitlements, but in basic pay rates too (Boyle, McElligott and O’Leary 2004; Kelly, McGuinness and O’Connell 2009; O’Leary 2002). Although there has been much anecdotal evidence of pay cuts in the private sector, data are contested. In September 2009, IBEC reported a pattern of pay and recruitment freezes. A minority had implemented pay cuts; a minority awarded pay increases. Downward cost adjustment is taking place mostly through cuts in bonuses rather than pay rates. And many firms prefer to cut numbers than to
cut pay, which is borne out by rising unemployment.

Evidence mounting? Well perhaps, but that’s not uncontested. All she has to write is, if she believes on inspecting the data and evidence that there are clear public sector pay advantages, that the evidence is now unequivocal. It’s that simple. And yet curiously she doesn’t. And the anecdotal evidence from the private sector is hardly worth the newsprint it is printed on. Data is required. Accurate information… as she rightly says. Unequivocal information.

I could also suggest that even if one accepted the wage parity argument logically an average disparity doesn’t mean that one could impose an average wage cut across the PS of a given figure since wages wouldn’t vary in specific areas in that way. One would have to parse like for like and I suspect that would result in a rather different outcome.

Or I could quote Industrial Relations News which in a piece by John Geary of UCD Business School and Dr Anthony Murphy of the University of Oxford gives a more balanced view of such matters than is heard in many of these discussions…

The risk of imposing wage cuts across the board in the public sector is that it will result in industrial strife with huge costs both in terms of the country’s economic fortunes and social cohesion. There is no single, best measure of the public sector wage premium. The estimated premium varies over time and across occupations. It also varies across the income distribution and at the upper end of the distribution, is often a discount. It is also difficult to find good “like-for-like” comparison groups for some public sector occupations. Thus, the basis on which public sector pay might be cut is not as sound as some people claim on the basis of headline figures.

And they continue:

But there are enormous risks for unions as well. Despite the best efforts of union representatives to portray the government’s response to the economic crisis as an attack on all workers – private and public – it is clear that such unity will be very difficult to maintain. There is also a danger of divisions between public sector unions. The 24/7 Alliance group of unions (gardaí, nurses, ambulance drivers etc., who provide round-the-clock public services) are seeking to preserve their pay, a large portion of which is made up of allowance and premia payments. Other public sector workers do not rely on such additional payments. If the government seeks to preserve base pay but reduce allowance payments, the former group risk significant reductions in their standards of living. In these circumstances, it will thus be exceedingly difficult for senior union leaders to navigate towards a solution while preserving union unity.

These are very delicate moments in Irish industrial relations. What is needed is a voice of fairness and judgment. But one thing is certainly clear, a move on public sector pay which involves government by fiat and justified on the basis of headline research findings which are very open to debate, will result in a return to industrial strife and sectionalism, with huge costs both in terms of the country’s economic fortunes and social cohesion.

Anyhow, back to McArdle who does ask one very sensible question…

Assuming the present discussions are successful and deliver the €1.3 billion sought, are we going to have a rerun of the same debates, tensions and stoppages next year, and again the year after? The prospect is too depressing for words.

He then follows it up almost immediately with one that’s not sensible at all…

Could it be that the Michael O’Leary approach is the correct one and the Government should have gone for €4 billion in pay cuts in one go? At the moment, neither side appears to be taking the long view.

We’ll look at that ‘approach’ in a moment. But consider that an economic ‘commentator’ is arguing that we should strip away €4bn in a climate where mortgage costs etc remain static or are rising. What would be the effect of a 20 – 30% cut in expenditure for PS workers be? Imagine your wage cut by that and contemplate how you would meet mortgage repayments and all other costs? Have prices fallen by 20 – 30%? They have not. 6% is the figure. And let’s not forget the ‘pay cut’ imposed earlier, oh, and the tax increases at the last Budget… and…

Perhaps he really means a more nuanced approach, say one that cuts wages according to a more flexible yardstick fitting the cut to the grade or position… but one can’t second guess what he may think, one can only work with what he actually says.

Now, I’m no expert and have never claimed to be. But this to me seems like a bizarre proscription in the context of a serious argument. And yes, I’m not ignoring the fact that for individual private sector workers much worse has happened, but what he proposes here is a sectoral/systemic wage cut across the largest single groups of workers in the economy… at one fell swoop. Mortgage write downs for public sector workers would be the least of it.

Failing this, the prospects are fairly bleak. Failure by the Government to deliver in not only this year’s budget but in subsequent budgets could quickly see us back to a situation similar to last February.
While some have characterised this as inevitably leading to a bailout by the IMF, it is more likely that the EU would effectively front for the IMF, which gives balance-of-payments assistance. However, the end result would be the same: an enforced correction by an external agency. A somewhat extreme, but in many respects similar, example of what we could expect is provided by Latvia. Last December, it accepted IMF assistance. The accompanying IMF report stated: “To improve competitiveness, the authorities are cutting wages and bonuses in the public sector by 25 per cent in 2009 compared to 2008.”
The Irish approach, by comparison, looks “softly, softly”.

Yeah, I can imagine it does if you do absolutely no research on Latvia.

So, what has happened in Latvia, as distinct from IMF reports? According to the Wall Street Journal in recent months:

Latvia’s halting austerity program and its proposal to modify mortgages are causing “another wave of distrust” to roll over the Baltic nation, the central bank said Wednesday, issuing a warning for the country hit hardest by economic strains across Europe.
The criticism came as a government bond auction failed to attract buyers, and worries about the Latvian economy weighed on the currencies of Sweden — whose banks are Latvia’s major lenders — and other countries.

Moreover:

Latvia’s struggle has continued for months and its current woes revived market speculation that the country could try to ease its troubles by devaluing its currency, the lat. Such a move could trigger devaluations in the region as Latvia’s neighbors come under pressure from nervous markets, analysts said.
“There is a most urgent need for fixing the budget, by setting state expenditures at levels that are sustainable in the long run,” the central bank said. The bank warned that otherwise, “future prospects will worsen not just for the economy as a whole but also for each of its participants.”

And since that IMF agreement? Well, there have been riots on the streets, the government fell to be replaced by a coalition in March. And their much vaunted flat tax, gone, replaced by a progressive one. Always interesting when ideology impacts with reality.

Now some might say that’s where Ireland could be, and soon. But remember. Latvia is following the prescriptions of the international financial institutions – or trying it’s damnedest. And it isn’t working…

As the WSJ notes:

Latvia has been particularly battered by the economic crisis. The nation of 2.2 million people is being kept afloat by a €7.5 billion ($11.04 billion) package of loans from the EU, the International Monetary Fund, Sweden and other countries. In return, the lenders want Latvia to trim a wide budget gap.
The IMF has yet to weigh in on the current dispute over Latvia’s budget. The fund is waiting to hear back from a technical mission visiting Latvia this week, a spokesman said.

And most importantly:

Latvia has struggled for months to make budget cuts. This week, the [the latest] government said it could come up with 325 million lats ($670 million) in cuts, below the 500 million lats it agreed to with the IMF and other lenders. That prompted a rebuke Tuesday from the Swedish finance minister, who said international lenders were losing patience, and that further payments to Latvia from the package could be delayed.

Well, that’s nice of the Swedish. Very nice indeed. But this is an example of how easy it is to make commitments on paper and how difficult it is to implement them. Indeed, the Latvians appear to have had enough of the situation to date and:

Neil Shearing, emerging-markets economist with Capital Economics in London, said speculation has mounted in recent days that Latvia’s government is on the verge of giving up on a central tenet of its austerity program by allowing a devaluation. That could goose the economy by making exports more attractive, and it would eliminate the expensive process of buying lats to maintain the currency’s peg against the euro.
Devaluation would have serious consequences. The Swedish banks that made euro-denominated mortgages would see foreclosures surge as fewer borrowers would be able to make payments. Latvia also would likely lose any chance of being allowed into the euro zone soon.

But one feels that from the Latvian perspective that’s far from the issue highest on its list of ‘To Do’s’ at this moment. And perhaps this points to how glib commentary and off the cuff ‘solutions’ from Michael O’Leary might well founder on the rocks of ‘reality’.

I think the government’s course is wrong in almost every respect, but I won’t blame them one iota if they avoid the O’Leary ‘approach’. There’s bad. But there’s worse. What McArdle is correct in saying is that the pain and angst of the current environment will be replicated next year, and the year after and so on. But when he points to what is happening in Latvia it’s vital that he points to what has actually happened. Not the usual vainglorious sub-macho guff that characterises so many of these discussions.

A broken polity. A broken economy. No ability to raise finance internationally and only able to run a deficit which is necessary since a balanced budget would arguably sink them societally in social division due to the largesse of the international institutions. Who have driven the policy decisions of said polity since the crisis broke. If that’s success…

Oddly though, in today’s rather emasculated piece, which nods in the direction of his earlier thesis, but then comes over all coy about the actual implications still no mention of Latvia. Perhaps in the intervening days someone took him aside and suggested that wasn’t really the greatest example to use. Perhaps.

************************

Let me meanwhile say a half kind word about something Noel Whelan said in the Irish Times at the weekend too.

There is a naive view in some quarters that the public have become resigned to the need for the harsh measures likely to be delivered in this budget. The public debate in recent weeks has been calmer and more rational than that which surrounded last April’s emergency budget and last December’s budget. However, the anger at this year’s budget is likely to be even more intense.
It is easy for economists, international agencies or domestic commentators to call for the implementation of necessary measures. Most of those calling for such steps are from sectors of society most likely to be insulated from the harshest of the cutbacks. It is politicians rather than commentators who are accountable to the electorate for implementing these measures.

He’s absolutely right – and not only about the insulation of those cheerleading cuts and cuts and more cuts – and this may account for the disconcerting (to some) fact that the public remains convinced that increased taxation is the way to go, ahead of all other measures – as evidenced by the RedC polling data.

It is Government Ministers and backbenchers who must face the further political backlash to which this budget will inevitably give rise. The compliments of future historians for addressing the economic crisis will be of little comfort. The plaudits of present-day commentators or editorial writers will be of even less assistance.

Hmmm… what an interesting way to put it. Is he about to get his marching orders from the IT?

But I have another thought on that, not least due to the noises coming out about the decisions being made in Cabinet about the Budget.

Years ago, not long before he passed away, my father said to me about the hospital consultants who over the course of his last six years he had had more than enough of, ‘be careful when the hoors get in a huddle’. And that advice works in many many different contexts…

And when FFers start talking nice… and perhaps even half-remembering their always residual social conscience be doubly – or triply – careful.

Comments»

1. Michael Taft - December 2, 2009

Let’s put this soundbite ‘take the pain up front’ nonsense to rest once and for all. The idea is that if we just make the cuts now, it will hurt but once the immediate hurt is over, we’ll be on the way to recovery. This flies in the face of economic theory and economic fact. Take public sector wage cuts (permanent, not temporary as seems to be under discussion in Government buildings). Cutting public sector wages by 5% will initiate a first-year shock of -0.3% in GNP. This negative impact will grow to -0.5% by the 4th year. Similarly with consumer spending: -0.8% first year; -1.1% in 4th year; ditto with the small impact on employment: -0.1% in first year (or 1,800 jobs lost, all in the private sector), -0.2% in the 4th year. Impact on labour force, services output – all gets worse by the 4th year. The benefit to the borrowing requirement, therefore, lessens: from -0.3% to -0.2% by the 4th year.

What happens is that you embed these cuts into the economy going forward with the result that you produce a low-growth scenario. As the economy is trying to emerge from the recessionary trough and generate growth, you have this continual depressing effect keeping growth lower than what it might be otherwise.

There is nothing mystical or strange about this. Government use this measure all the time (Governments that know what they doing, that is) in the expansionary period of an economic cycle – that is, they take the ‘heat’ out of the economy. It’s not a first year effect; it’s a medium term effect. That’s why they do it. If, for instance, the Government had done this with the property market in 2004 – withdrawn tax reliefs, imposed a property tax, taxed sale of principal residences under capital gains, etc. – it would have taken the heat out of the property market and we’d all be a little better off now.

That we have to confront a structural deficit at the same time as take measures to support growth will call for a nuanced, sophisticated fiscal strategy. This, I fear, will elude this Government (and even the opposition parties have shown little evidence that they appreciate this). However, this I know – it eludes our ‘experts’.

So when ‘experts’ talk about pain upfront they show two things: just how ‘unexpert’ they are; and how ignorant they are of the fact that ‘pain up front’ measures will mean pain now and pain in the future.

What a debate.

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WorldbyStorm - December 3, 2009

It’s remarkable how many people set their face to this. I thought initially it was simply ideological but I’m beginning to wonder now. I think it really is as some have noted here that the ‘pain’ mantra is now so deeply embedded that the idea that something that might ameliorate it is seen as suspect, impossibilist, etc… In a way there’s more than a hint of the old sado-monetarism jibe about Thatcherism… I’m particlarly unconvinced by a language used by McArdle of ‘pips squeaking’. Glib little formulations to evade the fact that every penny not spent is causing someone somehwere some injury.

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Crocodile - December 3, 2009

Today’s media reports that FF backbenchers won’t be able to ‘sell’ the unpaid leave proposals to their constituents seem to suggest that the electorate of , say, Mattie McGrath can’t accept the prospect of the savings being made unless it’s accompanied by punishment of public servants.

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2. What is a Sacred Clone : Sacred Clone - December 3, 2009

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3. Lex - December 3, 2009

Just a short note. Latvia still has a flat tax of 26 percent. While there was much talk about a progressive tax, the flat tax was approved by the parliament this week. And it seems you’re way behind on other stuff when it comes to Latvia. Yesterday, Bloomberg reported that Latvia plans a hard-currency denominated bond sale in the near future.

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4. WorldbyStorm - December 4, 2009

Hands up on the flat tax, that was my bad and I hadn’t sourced info more recently than last month. I note though that their flat tax was 23% (25% in some accounts) and the discussion was about raising it to 26%. Or introducing a progressive tax.

Here are some interesting thoughts on this matter:

Latvia’s politicians are faced with unpalatable choices of cutting more expenditure and trying to raise revenue in a declining economy. They are being carefully watched by international institutions fearful that a total collapse in Latvia’s economy may rebound onto other countries, but concerned that Latvia is still able to meet its obligations to pay its considerable debts.
At the heart of the problem of revenue has been Latvia’s reliance on two taxes that most affect those on poorer incomes: an income tax with a flat rate of 23 percent and a value-added tax, which was raised from 19 percent to 21 percent this year for most goods. The huge property boom of the past 10 years, when Rīga prices hit those of the largest European capitals, was unhindered by any capital gains tax (a sure sign of the economic interests of previous governments), and unhindered too by any tax on bank interest.
The disproportionate reliance on income tax is linked to two features that underlie both official corruption and the sources of the private debt bubble that has now enveloped Latvia. As part of employees’ desire to reduce their taxes (and for employers to escape other charges associated with labour costs), the system of payment by “envelopes”  was widespread. In other words, workers were getting a lower official salary on which they paid tax but receiving under-the-table topping up that was untaxed. Readers will no doubt remember that President Valdis Zatlers fell into trouble with one variant: “envelope payments” to doctors and surgeons so that patients would be looked after better. For many in the workforce, such payments ensured a higher untaxed income at the expense of government revenue, a loophole that previous governments did very little to combat.
And here.

Of the measures proposed, the capital gains tax seems to now have approval. The taxes would amount to a tenth of a percent of cadastral value for owner-occupied properties, with progressive rises for those not owner-occupied, an important move but one that will only bring returns in future years and be very dependent on the property market improving. Intense debate is continuing over reform of income tax. It now seems clear that no progressive tax will be introduced, as no other Baltic country has one, and it is feared companies would register in Estonia or Lithuania to take advantage of flat tax. Debate now centres on whether there should be a reduction of the tax-free threshold (from LVL 35 to LVL 25 a month, a move that would hurt the poorest people) or an increase in the tax rate as a whole from 23 percent to 25 percent.

Which is from here…

http://latviansonline.com/site/print/6269/

By the way, it was the IMF, not socialist do-gooders like myself, who sought the repeal of the flat tax… as noted here.

http://www.reuters.com/article/marketsNews/idUSLU60304820090730

Re: the bond sale. The Wall Street Journal article was issue on 8th of October. That was directly after a bond auction failed to attract buyers. I’m puzzled as to how I can be way behind simply because the government plans a second auction. What else could they do? And what can we say about it until we see if this is more successful than the previous one?

None of which invalidates the central point in the OP that this sort of cant about ‘short sharp shocks’ is complete bollocks and the Latvian example shows it up to be.

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5. ejh - December 4, 2009

Quite.

Incidentally can anybody remember a couple of years ago where the blogosphere was full of people wanking themselves half to death about how good a flat tax would be because it was such a good thing for the poor?

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WorldbyStorm - December 4, 2009

Funnily enough though none of those wanking were actually poor. Odd that – eh?

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