Cuts to wage and welfare costs needed - economists
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Thursday May 21 2009
FURTHER cuts in pay, and cuts in social welfare benefits and the minimum wage, may be needed to prepare Ireland for recovery, a major conference on the economy's long-term future heard yesterday.
John FitzGerald, senior analyst at the Economic and Social Research Institute (ESRI), said Ireland must wait for recovery in the global economy. The longer that takes, the greater the permanent loss to the economy, he said.
"Each year of the global recession means another 2-3pc loss in output (GDP), and a delay of another two to three years before we return to full employment," he told the conference organised by Trinity's Institute for International Integration Studies (IIIS).
"Talking to colleagues in Europe, they are pessimistic about this year and next. There seems no sign of 'green shoots' as yet," he said.
He estimates that a 7pc fall in wages across the economy would put Ireland in a competitive position to benefit from global recovery. "But it is not just about wages -- prices and costs must come down as well."
He suggested more competition for the ESB, a single national water utility, and changes to the law on rents, as ideas which could help cut costs.
Philip Lane of the IIIS said the budgetary challenge suggested further cuts in public sector pay are appropriate. "While the Government has announced a review of pay levels for senior grades, the scope of the pay adjustment needs to be broader than this group."
Impact
Next year's Budget will be the critical one, because of its impact in 2011, when there might be a return to growth. "Since the recession is projected to deepen in 2010, this Budget will be decided against the backdrop of an even worse macroeconomic environment than we are currently experiencing," he said.
Brian Nolan of the ESRI, who specialises in studies of inequality in the economy, said the legal minimum wage ought to be cut if wages in general fall, "but it is not entirely clear that this is going to happen".
He said the sharp rise in taxes in the two Budgets, alongside the significant increase in social welfare rates, meant they were the most re-distributive Budgets in the history of the State. Several speakers said the Government should avoid further increases in income tax, to maintain competitiveness and avoid making work less financially attractive than welfare.
"It is not that people give up jobs to go on benefit, but it does make it more difficult to get them back into work," Prof FitzGerald said. "Go for a property tax; go for a carbon tax, if we want to get back to full employment. Some people will lose out, but the economy as a whole will be better off."
That economy will look very different, even after recovery, Karl Whelan of UCD said. "Ireland's sustainable growth rate may now be only 2pc a year. The factors which drove the high growth rates of the past all peaked around 2007," he said.
Colm McCarthy of UCD told the conference that present pension arrangements were not credible. "In 1950, 53 years of production was expected to pay for 11 years of retirement. By 2004, 47.6 years of production was expected to pay for 20 years of retirement."
No plausible investment returns or tax revenue growth could support that kind of arithmetic, he said.
- BRENDAN KEENAN
