Saturday 20 January 2018

'Tackling public service pay was strikingly courageous'

Patrick Honohan explains what Brian Lenihan was trying to achieve by his introduction of four tough budgets

The late Brian Lenihan. Photo: Getty Images
The late Brian Lenihan. Photo: Getty Images

Patrick Honohan

Brian Lenihan announced a schedule of four more tough annual budgets that would have to be implemented by 2013.

Even this would not prove to be enough, though it broke the back of the problem.

In the end, between spending cuts and tax increases, budgetary adjustment actually implemented during 2008-13 amounted to about €28bn on the annual total, just about €8bn more than Brian's mini-budget of April 2009.

There were a few defeats for Brian on this front, perhaps most spectacularly on the over-70s medical cards.

On income tax, Brian's political sense was more finely tuned. A sizable part of the boom-era revenue had been employed, in effect, to reduce income tax rates in the previous decade and Brian realised that much of this lowering would have to be reversed. Tax increases for higher income groups in particular would have to be more onerous.

The average fall in real disposable income for the poorest 30pc of the population was held to about 5pc, while that of the top 30pc averaged more than 10pc.

Minimising the regressivity of the fiscal policy adjustment was a hallmark of his years in the Department of Finance.

Strikingly courageous was the decision to address public service pay. In two steps, during 2009, pay rates in the public service were, in effect, lowered by an average of over 13pc. Furthermore, Brian Lenihan did not favour the Croke Park Agreement of early 2010 which froze further cuts until 2013.

While other stressed countries followed suit later, achieving needed adjustment through actual pay cuts was a path-breaking political achievement.

Sunday Independent

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