Tax and Spend

[Since this was written, the Irish government has shown its mettle in pushing through public spending cuts, despite greedy and ignorant resistance from the public sector. The Irish government is positively heroic compared with the UK, where The Bloat continues to fester like a huge turd beside the Thames.]

I’ve had it with greedy government workers! Sorry if it hurts, but sometimes you have to be direct.

Ireland has a lesson for all countries trying to stop recession turn into depression.

The public sector unions run Ireland. It’s the only explanation of how quickly the Irish premier Brian Cowen backed down when the unions threatened to strike in defence of their bloated pay.

Did I say bloated?

If you want to see fat, just look at this chart of Ireland's government spending as a proportion of its economy, compared with others in the EU. Government spending is a long phrase, so I'll just use the word bloat.

Ireland's bloat was already above the EU average in 2008, and in 2009 goes through the roof. Graph courtesy of Ronan Lyons.

Note that public services in Ireland and the UK (also above average bloat) - are far, far below the standard of the Netherlands which has less bloat. I'm speaking from personal experience of living in all  three countries and I'm talking about hospitals, schools, public transport, police service, cleanliness.

So why did prime minister Cowen capitulate to the public sector unions?

Instead of further pay cuts, the budget is likely to require each public sector worker to take two weeks of unpaid vacation.

It’ll have the same effect on their wage packets but wreak havoc on labour intensive services like heath, emergency and social services. The government is likely to look for greater savings from welfare, like cutting child benefit. So much for the “caring” public sector.

Cowen’s fallen for not one lie but three:
1. Public sector staff aren’t in it for the money. Think of them as walking charities.
2. Government spending can get us out of recession and should not be cut.
3. Instead, taxpayers should pay out even more to keep the public sector afloat. (Unions always say tax the rich but what they mean is tax the taxpayer)

The truth is: Public sector workers are paid more in Ireland than their private sector counterparts and public sector and welfare payments account for 71% of GDP. Public sector pay is 25% higher than equivalent private sector job. The Economic and Social Research Institute and the Central Statistics Office both back that up.

Unions say the public sector advantage is not so big if you take account of inflation or the influx of foreign workers depressing private sector pay. The fact is, the unadjusted, raw numbers are what matters and the unions don't dispute that. They say managers account for much of the increase in pay. That's also true in the private sector. However, for taxpayers, only the total wage bill matters.

The second truth is: A country cannot tax its way out of recession. That’s the view of economist Jim Power of financial services company Friends First.

Ireland’s government is adding €495 million to the national debt each week. Yet in its pre-budget discussions, Brian Cowen’s government backed away from facing down the public sector unions.

The same reason public spending got to 71% of national output is the reason it can’t be cut. The political interests that pushed public spending so high are resisting any effort to cut back.

The third truth is: Ireland has low tax on companies, but not on individuals. An analysis by the Department of Finance reveals that next year, 143,000 people -- 6.5 per cent of the workforce -- will earn over €100,000 a year, and pay 47.93 per cent of all income tax.

The analysis also shows that next year almost 1.8 million people -- 80 per cent of the workforce -- will earn under €50,000 a year, and pay 18 per cent of all income tax.

So increasing income taxes may actually hurt government revenues and would certainly hurt the economy. Any homeowner knows, the first thing you do when your finances are in trouble is borrow more cut spending.

The public sector was able to expand, and pay itself so lavishly, because government finances were boosted by a booming property and construction sector. Now that the over-reliance on the property sector has imploded, why should we regard the gains of the public sector as permanent and untouchable?

It defies common sense.

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