Sunday 23 October 2016

Government deal risks being populist fudge

If our political leaders can't take necessary but difficult measures, we are in danger of becoming ungovernable, writes Dan O'Brien

Published 01/05/2016 | 02:30

Good news: 'Last week brought a raft of positive developments on Europe’s economy'
Good news: 'Last week brought a raft of positive developments on Europe’s economy'

Let's start with some good news. Last week brought a raft of positive developments on Europe's economy. This is to be welcomed because for a long time, the greatest risk to Ireland's recovery has been renewed recession on the continent leading - almost inevitably - to the flaring up again of the euro crisis. If that were to happen, we could very easily land right back in the very deep hole we were in five years ago.

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Thankfully, last week's news makes that less likely. On Friday it emerged that the eurozone economy surged unexpectedly in the first three months of the year. The bloc has not enjoyed a stronger increase in its GDP in half a decade.

Even better news came on the jobs front. Unemployment across the zone is down by a million people in a little over six months. It very much looks as if the rate of joblessness is about to fall into single digits over the next couple of months to reach its lowest level since the last decade (the good jobs news from Europe is discussed in greater detail in my column in the business section of this newspaper).

There are still more weaknesses than strengths in Europe - from the never-ending Greek fiasco to the tensions among the countries of the euro over how Frankfurt should use its money-printing powers. But a spell of decent economic growth will make almost everything easier to deal with across the continent.

That includes Ireland. And with a new administration looking likely to be formed next week, all this augurs well.

But it is the domestic front which will be most difficult for the minority government to deal with. Squaring so many circles - on public sector pay and on water, most notably - will require extraordinary political skill.

But one major issue is relatively straightforward - handling the housing crisis. It augurs very badly that the deal reached by Fine Gael and Fianna Fail in recent days appears to include a large, across-the-board increase in rent allowance. This would be monumental idiocy based on economic illiteracy.

There are 70,000 people receiving the allowance. The vast majority are not at risk of homelessness.

Spending more on subsidising rents when the number of properties available for rent is almost static will lead to only one outcome -inflation of rents. Whatever money the new administration allocates to housing should be spent on increasing the number of homes, ie, via a building programme, and in the short-term, targeting rent allowance increases only for those who face homelessness. To give all 70,000 people a 15pc increase would amount to the Government writing cheques to private landlords with taxpayers' money.

A much more politically difficult issue will be remuneration for state employees, as the clamour for a return to bubble-era pay levels grows ever stronger. That is well known. What is less well known is that the public sector pay bill has been growing for more than two years and was almost €1bn higher last year than in 2013.

Even less well known is that the wage costs of Ireland's public servants have grown at twice the average for the eurozone over the past two years, according to Eurostat, the EU's statistics agency. Indeed, Ireland's increase has been one of the highest in Europe, and that is despite our public finances still being in the red and more vulnerable than most other countries.

Of the increase in total spending in last October's budget, more than half of the increase was taken by pay and the Department of Finance expects the bill to rise by another €500m this year. The proves, as if it needed proving, just how powerful public sector lobby groups still are when it comes to grabbing resources. And this is all happening even in the absence of the pre-crash social partnership structures which became a mechanism for interest groups to be granted money and other benefits.

The increases in pay since 2013 happened despite the absence of evidence to warrant them. The outgoing administration never stood up and said that "restoring" pay to bubble-era levels, despite the fact that the property-related taxes which were used to pay for them will never be restored, would be grossly unfair because others are having to pay for it. Despite that, half of the decline in the pay bill in the years of austerity - from 2008 to 2013 - has already been clawed back.

It is also worth noting that the same Eurostat public pay bill figures show that Ireland's increase in just eight years to 2008 was a massive 138pc. This was by far the biggest increase in the bloc in those years and almost four times the average across the eurozone as a whole. There was no justification for such huge increases and it needs highlighting that if they had been more modest, the amount of austerity from 2008 would have been considerably less.

The inclusion in the FG-FF deal for an assessment of what should happen to public sector pay is to be welcomed if it is done by independent people who base their findings on hard evidence. The UK model for public sector pay setting - a standing commission - has worked well and is one that could very well be recreated here. But if it turns out to be an non-transparent exercise with a pre-determined outcome, as Bertie Ahern's benchmarking scandal was, then we will be in real trouble.

The water issue is, in some ways, the most difficult. For a nation that does not do street protests - much of the rest of Europe marvelled at how calmly and seemingly stoically austerity medicine was swallowed up until 2014 - the biggest mass movement in living memory says something profound about Irish society. But try as I might, I still don't understand what that is. I have yet to hear or read a good explanation on why the charge, which cost most households less than the 2011 VAT increase, triggered such an extraordinary grassroots reaction.

It is all the more extraordinary given that it was, at first glance, among the most inoffensive measures introduced - every other developed country charges for consumption and doing so has positive environmental consequences.

We in Ireland consume more water per person each year than any other country among the 28 in the EU, and six times more than Belgians, who use the least. If anyone believes that there is not a link between our highest-in-the-EU consumption and the fact that we are unique in not paying on the basis of consumption, they inhabit a fantasy land. Those who claim that charges don't help to conserve a costly resource should also advocate abolishing electricity meters - after all, there are as few homes today that are without electricity as there are without piped water.

But despite the logic of charging, the political reality is that the issue has become so toxic it is hard to see its reintroduction, at least during the lifetime of the 32nd Dail.

If the new Dail produces a government which can't or won't take needed but difficult measures, the quality of our governance, which has always been mediocre at very best, will decline further. Caving in to every interest group and producing the lowest common denominator position on every issue would move us quickly in the direction of ungovernability.

Sunday Independent

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