Pay deal spells less cash for services

The big questions never change in economics. That’s why it is so interesting to study. The context shifts constantly, which means the answers to the big questions might change over time, but ultimately the big questions endure. Questions like: Why are we so rich and why are they so poor? Questions like: Given the choice, would you opt for lower taxes or higher public services, paid for from increased taxes? Your answer depends on where you come from, on your personal context, but the big question remains the same.

On the Claire Byrne show last week, government minister Aodhán Ó’Ríordáin was asked by a citizen with a life-limiting illness what he would do to help her, and the thousands like her. The lady’s dignity, quiet composure, and poise showed through, even as her illness made it harder for her to talk, and she needed notes to make sure she got her point across. The minister’s answer might have struck some as cold, even harsh.

He said she and citizens like her needed to make a choice: to vote in parties promising lower taxes or parties promising higher levels of public service. That, fundamentally, is the choice. He was exactly right. It was not what the lady asking the question wanted to hear, but it was certainly true.

The key complication to that argument is the trust citizens have that their taxes will be used efficiently and effectively to deliver more, or better, services to them.

This lack of trust is something the public sector itself is responsible for. It is not simply a matter of communicating the importance of the work the public sector does, it is a matter of substance. Everyone knows and praises ‘front line workers’, but probably thinks there are too many public sector administrators.

And yet every front line worker needs administrators and back of house staff to do their jobs properly. Nobody questions the value of an accountant to a private business, and the same should be true for the public sector, but it isn’t. The public sector has a job to do convincing those who pay for its services that it is worth it. As a public sector worker myself, I think it is worth it. But then I would say that, wouldn’t I?

But let’s say the public sector isn’t worth it. Let’s say the system is expensive, the people who work in it overpaid, its processes bloated, sclerotic and inefficient. Without tearing up employment contracts, the only way to slim down the system is to deliberately underfund it, or in that horrible right wing US Republican phrase, ‘starve the beast’.

In 2007, the economists Christina Romer and David Romer found in the case of the US that ‘starving the beast’ didn’t actually work. They found “no support for the hypothesis that tax cuts restrain government spending”. Quite the opposite: in fact tax cuts might increase spending over time.

Whether planned or not, austerity has certainly starved the beast since 2009.

Thanks to the Spring Statement we know the government intends to spend €600 to €750 million on services, and give back €600 to €750 million in tax cuts, mostly to those on less than €70,000 per year. The public sector pay deal to extend Haddington Road for another two years includes spending of €249 million focussed on the reduction of the pension levy, which averages 7.5 per cent of public sector salaries. In essence, this is money the government won’t collect as taxes now, and so needs to cover against.

The Haddington extension needed to be done, in the context of how public sector workers’ pay was reduced under emergency legislation, but it does nothing to improve services for the woman on the Claire Byrne show and the thousands like her. It is a legacy issue from the crisis, and nothing more, but there is no doubt service delivery will not be extended by this move.

Contrast the impact on services of the public sector pay deal with the planned expenditure of between €100 million and €200 million on early childhood education. This expansion will help every eligible child in the country, increase female labour market participation and help solve the problem of low work intensity households, which was identified as a major problem by the European Commissioner Pierre Moscovici during his visit to Dublin this week. A household is considered jobless if the total time in work over the last year by all the working-age adults in the house is less than 20 per cent of their working time. Irish households have, simultaneously, very high childcare costs, low female labour market participation, and low work intensity.

The government can intervene to solve this problem with targeted and sustained expenditure over a number of years. Early childhood education is a pure public good, like street lighting or infectious disease control. Having it generates net benefits for everyone.

The government should intervene to make sure these services are produced to the highest standard. But it might not intervene. Politics being what it is, funding might be given for equally important services, such as mental health care, elder care, or crucial infrastructure projects. The work of politics is to make these choices. The work of citizens is to decide on who chooses.

The choice is as stark as Minister Ó’Ríordáin says, and it is a very good thing the next election is being framed in this way right from the start.

Sunday Business Post, 31 May 2015