FF may tear up Croke Park deal
Corporate tax rate under threat as cuts forecast in public service pay and social welfare benefits
Published 03/10/2010 | 05:00
THE Government is considering tearing up the Croke Park agreement in an effort to bolster the public finances before the December Budget.
Political sources were last night admitting that the downwards lurch in the economy brought about by the massive payments to Anglo Irish Bank and AIB have forced them to take a new look at the deal agreed with the unions in the summer.
Last week the revelation that the Government estimated the potential cost of bailing out all the banks at €50bn sent shudders through global markets.
Department of Finance insiders are insisting that the public service pay bill is back on the agenda after the sudden need to make additional cuts to public expenditure -- above and beyond the initial €3bn figure already announced.
Yesterday a leading consultant economist and commentator Moore McDowell asserted that "there is now no basis in economics for the agreement being kept. It is unsustainable in present circumstances that 70 per cent of current spending is off limits to cuts. This will certainly be a case for a new government when all bets will be off".
McDowell's call for an end to the deal echoes a similar demand from former Central banker Willie Slattery two weeks ago. Mr Slattery told a conference that the commitments given in the deal were not capable of being met.
Any attempt to scrap the Croke Park deal is certain to meet fierce resistance from the public service unions. The agreement extracted a promise from the Government that there would be no further pay cuts or any compulsory redundancies in the public service plus promises of the restoration of the cuts if certain performance targets were met.
In return, the unions promised cooperation by staff with a widescale programme of reforms to the public service including increased efficiencies and modernised work practices. But yesterday a government source told the Sunday Independent that "all items of public expenditure -- including pay -- are back on the block".
On Thursday the Taoiseach Brian Cowen, a long-time devotee of social partnership, appeared to rule out a renegotiation of the Croke Park agreement in isolation, but had earlier admitted that "there is provision in the agreement in the event of any serious deterioration obviously to go back and discuss that with the social partners, but the situation as things stand is that we are seeking to implement the deal that we have agreed".
Reliable political sources are claiming that the "further deterioration" has already occurred and that the Government is looking at further savings in public pay as part of its commitment to produce a four-year plan, due in early November.
There are also strong suggestions that Ireland's 12.5 per cent corporate tax rate could come under pressure, with EU Commissioner for Economic and Monetary Affairs Olli Rehn suggesting that Ireland may have to rethink its "low tax" strategy in order to reduce the deficit. While the Department of Finance has indicated that it is committed to the current low rate, it will come under increasing pressure to nudge rates higher.
Rumours of an early Budget circulated in Leinster House last week with no sacred cows being excluded from the possible candidates for cutbacks. A "bonfire of benefits" is on the cards, as Minister for Social Protection Eamon O Cuiv seeks to dramatically overhaul the social welfare system. The department is understood to be examining proposals to introduce a "single family payment" to replace the current jumble of often overlapping social welfare benefits and payments.
The last Budget saw cuts to social welfare payments, with child allowances and the dole cut. As the State's €12bn plus expenditure of welfare payments is one of the biggest single costs, it seems highly unlikely that there will not be further cutting in payments. This is very likely to see a major extension of means testing to cover the whole country. It is believed that a number of major consultancy firm have been preparing plans to provide an updated means-testing system to the Government.
The introduction of university fees are also considered a shoo-in as expenditure on education is targeted. The need for voluntary payments to national schools may also rise, as funding for the primary sector is cut.
The Government's capital spending programme is now in tatters. The €5bn Metro underground rail link to the airport is likely to be deferred, as is further expansion of Luas lines. The €2.5bn underground Dart rail link between Heuston Station and Connolly will also be mothballed. However, the relative success of the Public Private Partnership scheme for construction of infrastructure is likely to see any projects built and operated by private contractors.
The Government is also certain to press the button on the disposal of State assets. Economist Colm McCarthy's report on potential sales of ESB, ESB International, RTE's transmission service, Bord Gais and Coillte is likely to provide the framework for this asset-disposal programme. Most semi-states have provided detailed information to the McCarthy review group which is expected to make recommendations shortly. However, pension fund deficits at some semi-states remain a major hurdle to a sell-off.
The Government's 25 per cent stake in €560m-valued Aer Lingus will also be sold off, subject to assurances on the number of landing slots at Heathrow. Aer Lingus's share price has doubled in the last year, valuing the State's shares at €141m.
Efforts to find outside funding sources will also be accelerated. In recent weeks, sovereign wealth funds of Norway and Qatar have expressed interest in buying government debt from the peripheral European countries. Last week, the Qatar Investment Authority signed a deal with Greece, which could see the oil-rich Gulf state invest up to $5bn in infrastructure, real estate, tourism and banking projects.
Meetings between the Taoiseach and senior Chinese diplomat Li Changchun last week may see the vast Chinese sovereign wealth fund, China Investment Corporation, approached as an investment partner. The Chinese have already indicated that they will help fund part of a new development in UCD.
The four-year programme is being written with an eye not only on the European Commission but also on the bond markets where the Irish economy is being monitored on an hourly basis. The plan will map out the Government's strategy for returning the national deficit to less than 3 per cent of Gross National Product (the value in monetary terms of the goods and services produced by the economy) before 2014.
Any slippage in the economic programme targeting a reduction in the nation's yawning €20bn deficit is likely to send the cost of borrowing higher, adding further annual interest payments to the nation's burden.
Last week the interest rate paid on Irish bonds hovered around all-time highs although it dipped following the announcement of a final figure for bailing out the banks.