Howlin must get on with his heavy task
The minister needs to wake up to problems in the free-spending public sector, writes James Fitzsimons
The Budget this week will take €3.8bn out of the economy so that we can reduce the imbalance between tax revenue and spending. It seeks close to twice as much in spending cuts as it does in extra tax. But there is another €400m of tax revenue being collected in 2012 from for the USC that is not included in the €3.8bn. That makes the split between expenditure and revenue closer to 50:50.
There is nothing wrong with running a Budget deficit to maintain essential services and growth. But when the main objective preserves waste and condones harmful spending it will destroy the economy. The reliance on tax to prop up public spending is crazy. Tax is being taken from the wrong people and it is applied inefficiently. Even the French have finally admitted that European debt is too high and it cannot all be paid back. Mr Sarkozy, the president of France, warned last week that there would be greater cuts in the future before balance can be restored.
Less income tax would have been collected this year but the new Universal Social Charge (USC) was imposed to avoid this. Stamp duty is up but that is because of the theft of €490bn from private sector pensions. VAT will account for less than 30 per cent of total tax revenue this year and income tax will make up about 40 per cent. Combined with excise duties they will account for 80 per cent of tax revenue. Consumers are being hardest hit and what they don't pay in income tax is taken when they spend. The VAT rate might increase to 23 per cent but less tax will be collected if spending falls.
The PAYE system is crucial to sustainability of what tax we collect. The taxpayer never even sees the money and the employer carries all the risk for tax collection. If we had a full self-assessment system in Ireland, under which each person was responsible for payment of his or her own tax, the Revenue Commissioners would have a job on their hands to collect anything close to what they get. And they know it. That is why they have little or no control over the yield from those who have the most. The PAYE system and consumer taxes have facilitated waste in public spending. And it will continue.
The Government might as well have dumped our taxes into a black hole in the last three years as the foreign banks that we paid back may now default on their own creditors. Last year, we ran a current account deficit of nearly €20bn that crippled the taxpayer. We need to get our balance of payments under control, not because the troika says so, but because we cannot afford to live like this. It's in everyone's interest that we regain stability in our finances. But we may never reach the point where we can justify the public sector that we have now.
Brendan Howlin, the Minister for Public Spending and Reform, will announce his cuts tomorrow. Based on reports already published he will not tackle the real issues of pay and pensions, and he is more likely to cut frontline services. Public servants don't want to hear about pay cuts and pension changes. While the Department of Finance reminds us every month that the average pay in the public sector is 50 per cent higher than what it is in the private sector, it will continue to attract our attention.
Over 300,000 jobs have been lost in the private sector, but for numbers to fall in the public sector outrageous payoffs are being made. And the cost of public service pensions, which doubled in the last six years, are continuing to spiral out of control.
It isn't a matter of victimising public servants. It's simple economics and we cannot afford what senior public servants have taken for themselves. There may be compelling arguments as to how they have inalienable rights and entitlements that they want to keep.
Many people in the private sector thought they had too. Some were business people who created jobs and generated the national income that supported the public sector. Maybe their success fuelled the waste. But when economic reality struck in 2008, those inalienable rights went out the window. Public servants were cushioned from the impact, and the rest pay the price. We cannot afford the easy landing. A lot of the spending is necessary, but the waste is unforgivable. It was clear when the economic crisis began that everything would be changed forever.
Now we are expected to believe that public servants should be treated differently. The sooner the better the government realises that the deepest cuts have yet to come. Whether it is the union stranglehold or basic self-interest that is preserving reform, eventually something will have to give. Until ministers have to survive on a basic minimum wage they cannot understand what they are asking of others.
Brendan Howlin defended his failure to tackle public sector pensions. He claims public servants have property rights that they paid for. Then why is it possible for property rights in the private sector to be ignored? If public servants have valuable pension rights why are they not subject to the 0.6 per cent pension levy like the private sector? The fact is that they are less than worthless unless the private sector make up the shortfall. At the end of 2009 there was a deficit of €116bn for public sector pensions. It's up to the Government to protect the rights of all its citizens. It isn't doing its job.
We cannot afford public sector pensions and we cannot justify borrowing €20bn a year to maintain public spending. If it is not corrected everyone will lose out and not just the private sector as has been the case until now. Public service pensions can only be sustained if there is a significant cut in public sector pay to cover them. Even if we sort out the problems with pay and pensions, that still leaves sweetheart deals for expenses and other benefits.
James Reilly came under pressure when the HSE refused to pay travel and subsistence expenses in December. This is a case of the bureaucrats failing to do their job. They couldn't work within their budgets. Then they washed their hands of the problem. If they get a bonus for success, cut their pay when they fail. This highlights how the public sector pay bill cannot be justified or defended. It is out of control. Minister Howlin needs to wake up to the problem, as do all government ministers.
Last year we learnt of the many expense allowances that are paid to certain public service staff. It was revealed that some allowances were based on long established custom and practice and couldn't be taken away. In reality they are a means of providing benefits that are not treated as pay. How much would the pay bill increase by if this changed? Maybe that is what the HSE is trying to expose!
If Brendan Howlin did his job, it would leave more leeway for Michael Noonan to do his.
James Fitzsimons is an independent financial adviser specialising in tax and financial planning