An Alternative to a Chilling Threat

There was something chilling in Minister Ruari Quinn’s comments after the TUI conference:

‘The economic gap, the financial gap in Brendan Howlin’s figures will not disappear because of a vote that rejects the proposals that have come out of the negotiations. The alternative is that if we have to find the money elsewhere, I’ve only one other place to go and that’s front-line services. ‘

So if public sector workers reject cuts in pay and working conditions, the Government will take the money out of hospital and health care, classrooms and children’s education, policing and fire-fighting.  This is holding those in need as ransom for a vote.  It is chilling.  It is cynical.  It is also economically irrational.  For there are other places – better places to go to close the ‘financial gap’; actions that would actually improve the economy or at least not damage it as much wage and job costs.

Alternative 1:  A Special Investment Programme

UNITE and the trade union movement have been campaigning since the crisis began for a special investment programme.  The ESRI (John Bradley and Gerhard Untiedt) has recently published the results of a modest investment programme which can be funded without any extra borrowing.   They proposed a temporary three-year programme of €1 billion in the first year, €1 billion in the second year and €500 million in the third year.  What did they find?

Alternatives 1

An investment programme is far better at reducing borrowings (the deficit) than cutting wages.  Why?  Because it puts people back to work which increases tax revenue and reduces unemployment costs; in other, words it grows the economy.  An investment programme ‘saves’ more than Croke Park 2 whether its based Minister’s estimate or UNITE’s estimate which uses Michael Burke’s more rigorous analysis.   And an investment programme doesn’t cut front-line services.

How do we pay for this investment programme without extra borrowing?  That’s easy.  At the end of last year, the Government had nearly €30 billion in cash and National Pension Fund assets on hand.  That’s right – nearly €30 billion; at a time when the economy is starving, the Government is hoarding food.  Even if we used a small fraction of that cash mountain to fund investment, the Government would still be sitting on a cash mountain.

But it doesn’t stop there.  What are the comparisons when we take look at the impact on the economy?

Alternatives 2

Investment grows the economy, Croke Park 2 cuts growth; investment grows employment, Croke Park 2 cuts job creation.  That is the key to sustainable and ‘growth-friendly’ deficit reduction.

Alternative 2:  Taxing Wealth and High Income Groups

Let’s look at another way to reduce the deficit without cutting wages or front-line services.  The CPSU’s General Secretary, Eoin Ronayne, argued that a third rate of tax for high income groups could be introduced, rather than cutting wages.  Similarly, UNITE has argued for a wealth tax.  Let’s compare these two measures with Croke Park 2.

Alternatives 3

All measures reduce growth and employment.  However, as seen, both a 3rd tax rate and a wealth tax are less damaging to growth and jobs and, therefore, better at reducing the deficit.  There are two things to note:

  • First, with both the 3rd tax rate and a wealth tax, the fiscal adjustment is €500 million.  For Croke Park 2, the fiscal adjustment is nearly €1 billion.  This means that a smaller adjustment is needed to get the same deficit reduction if the Government opted for taxation on high income groups.
  • Second, the ESRI data used is for income and property tax that is applied to everyone (they don’t have data for taxation on high income groups only).  We can reasonably assume, since a 3rd tax rate or wealth tax only impacts on a small number of high earners, the deficit reduction will be more because the impact on growth and employment will be less.

So there we have it.  Here are two far superior alternatives to Croke Park 2 – investment and/or taxation on high income groups.   When those who oppose Croke Park 2 are asked, ‘What would you do?’ –  the answer is simple.

Grow the economy through investment

Introduce fiscal adjustments that do the least damage to the economy

We don’t need to hold health, education, security and other public services to ransom in order to get a vote for a deeply flawed policy.

* * *

NOTE:  We use the ESRI Hermes data to assess the impact of Croke Park 2, except for GDP when we use the Minister’s own assessment in his letter to Jimmy Kelly, UNITE’s Regional Secretary.

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2 Responses to An Alternative to a Chilling Threat

  1. Brendan says:

    Why only take €1bln from the pensions reserve? Why not throw the whole €30bln into the economy. Give everyone pay and social welfare rises again. That will get some sectors of the population spending again, drive domestic growth and expand the economy. It’s sitting there doing nothing useful anyway, right?

  2. UNITE says:

    Brendan – there is a necessity to maintain a level of cash reserve to help funding throughout the year and in anticipation of rolling over bond repayments so that the Government doesn’t have to go to the markets with a big debt issuance. However, even the Department of Finance has accepted that this level of cash reserve is on the high side. The example used in the post envisages using €2.5 billion – but more could be used while still maintaining a healthy cash balance. As to the cost/benefit of a high cash reserve – the €5 billion in the Pension fund is adding value (through investments); but the state has to pay interest on €24 billion. After all, it has already been borrowed. That’s a considerable cost the Exchequer.

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