Once again public sector is off the hook
VAT rise will hit everyone, but the civil servants have 50 per cent more in earnings with which to absorb it, writes James Fitzsimons
THE Government that lives in La-La Land has just created Disneyland for 300,000 public servants. The Croke Park Agreement saves them from redundancy. Now Brendan Howlin's Public Service Reform proposal protects what they have. A job in the public sector is for life. Pensions are not funded, so they add to our tax burden. The report states that we are borrowing €1.25bn a month to keep the country afloat. The long awaited changes won't save the economy. Public servants are calling all the shots.
There are five major reforms at the heart of the agenda. They focus on customer service, innovation in delivering services, reducing costs, changing work practices, and implementation. This should have been done three months into the economic crisis, not three years.
How can the service improve when they are preoccupied preparing meaningless reports that fail to make the necessary reforms? It is proposed to cut 37,500 jobs by 2015. This is 11.72 per cent of the 2008 figures when they were at their peak. Mr Howlin claims the gross public sector pay bill will fall by €2.5bn.
Based on CSO figures, the average earnings are €901.07 per week in the public sector. The savings for a cut of 37,500 jobs would be about €1.76bn a year. If 10 per cent of earnings constituted tax, the real saving would be less than €1.6bn. Of course when they get pensions (50 per cent of salary) the annual saving is less than €800m. If pension entitlements were not commuted to lump sums (a good approximation of real cost) the saving may be as low as €500m annually. And that is before we consider retraining costs and promotions for those that are left. Meanwhile, we are borrowing €1.25bn a month just to keep the ship afloat.
The infamous domicile levy that Brian Lenihan brought in to get something from tax exiles was a flop. It was a joke from the beginning. He thought the citizens who went to a lot of expense to avoid paying tax might give us a dig-out in our time of need. Patriotism is dead and gone. It's with Lenihan in the grave.
By the pay-and-file tax deadline last Wednesday, only 10 cases had paid the levy. It yielded less than €1.5m. The only sure way to collect tax is to hit PAYE workers. If Michael Noonan has his way, he'll increase VAT rates. That measure is a sign of desperation. It is likely to be accompanied by a rise in excise on drink and cigarettes. Excise is even more certain than VAT in generating revenue. The vulnerable will suffer most.
There are rumours that news of the VAT hikes was leaked so that the Government could renege on its commitment to leave income tax alone. Outraged consumers might then tolerate increasing tax for those who have jobs. That beggars belief. But even the existence of the rumours shows the growing lack of confidence in those we have chosen to make things better.
Those who cannot pay for basic essentials must pay tax. So why not take 10 per cent of the accumulated wealth of those who can spare it? After all, it is acceptable to rob €2bn from private sector pension funds. We need Warren Buffett's Robin Hood approach to tax reform.
Bureaucracy in the civil service stifles meaningful reform and is the main reason for our national debt. To motivate staff for 40 years they offer promotion that creates endless tiers of management. In the last decade average pay for public servants increased to one-and-a-half times that in the private sector. But even that is not enough to motivate staff to carry out the same mundane tasks in the same job for decades. They left it too late to change. Better service will do little to remove the financial burden.
Change cannot come from within. The job-for-life mentality makes the whole thing inefficient. Even the Government is largely made up of former public servants. They won't take the tough decisions because they have the most to lose.
The voluntary redundancy scheme is crazy. We are losing the most experienced staff without a thought for their replacement or what that will cost. The ludicrous pensions and payoffs will destroy our hopes for recovery.
It would make more sense if the money was used to motivate the rest. Those who were making the decisions have been driven by self-interest. The last government was first to jump on the bandwagon. New talent will be attracted to the public service. But they are paid less than those who have always been there. When the economy finally recovers, the talented new recruits will seek opportunities elsewhere. It is a recipe for disaster. When we begin to feel secure, the system will fall apart. It is discriminatory in the worst possible sense. Those responsible for putting it in place will have already retired on their fat-cat pensions.
Average public sector pay should be cut in line with that in the private sector, which sustains it. Even if this is only a temporary measure we need it to regain control of our finances.
The bankers have been bailed out, as have the developers and bondholders. We cannot keep spending like this. Essential services must be maintained but at a price we can afford.
The recession must cut what we pay for services, just as the boom increased it.
If we could honour our commitments we would, but we don't have the resources. If those who did best out of the boom are to be let off the hook, everyone else will pay the price. We saved the reckless bondholders. Now public servants will share the cost. The most vulnerable in the private sector have taken most of the pain. For many there is no prospect of recovery.
If the average pay in the public service were brought in line with the private sector, it would be cut by 30 per cent. This is without taking account of the cost of public sector pensions. It would achieve annual savings of €5bn to €6bn. We need this now, not in 2015 or 2020. Public servants might have to suffer the same increases in VAT as the rest of us, but they have 50 per cent more income to cover the cost. While their pensions bleed the private sector dry, the majority of workers will be impoverished.
Brendan Howlin hasn't found the savings that Michael Noonan needs to balance the books next year. Maybe it's enough if he can fool the troika. What is certain is that we are facing more outrageous taxes and loss of frontline services. The government may have changed, but not our dismal prospects.
James Fitzsimons is an independent financial adviser specialising in tax and financial planning.