Now that the Government has revealed a few more details behind its proposals, we can more clearly see the gap between the level of cuts and what will actually be saved – between the fiction and the reality.
To date, they have proposed two major cuts in the public sector; totalling €370 million – over a third of their target of €1 billion cuts. The first were the cuts in the Sunday premium. We discussed this before, but let’s drill further down in the numbers.
For a standard rate taxpayer the marginal tax rate is 38.6 percent (income tax/PRSI/USC as well as the standard pension/survivors contribution of 6.5 percent, minus tax relief). For those on the top of rate of tax, this figure rises to 57.5 percent. So the after-tax savings for the Government from a cut of €1,000 would be:
- Standard rate taxpayer: €614
- Top rate of taxpayer: €425
As we don’t know how many public sector workers in receipt of the Sunday premium are in the standard and top rate of tax, we will assume that two-thirds are on the top rate. This may seem to indicate a lot of ‘high-income’ earners in the public sector until one remembers that the threshold at which you enter the top rate of tax is €32,900. So what do we find?
- On a reduction of €1,000, the net savings to the Government is approximately €488.
In other words, the after-tax savings to the Government is 49 percent of the headline cut.
Let’s turn to the second major cut –the proposal to cut basic pay for those earning over €60,000. Almost all these employees will be on the top rate of tax. Since the pension levy applies, the marginal tax rate – including tax/PRSI/USC as well as the standard pension/survivors contribution minus the tax relief – will be 61.1 percent.
Now let’s apply this to the €200 million savings being targeted by the Government. What would the net savings after tax be?
- Approximately €78 million
In other words, the after-tax savings to the Government is approximately 39 percent.
So let’s summarise.
So a €370 million cut turns out to be a savings of €161 million. This may change slightly when the full details of how the cuts will impact on different category of taxpayers with different tax rates and contribution schedules, but only slightly. To put this in perspective, this is equivalent to reducing the deficit by less than 0.1 percent; in other words, a minuscule amount. But there are two further things to note:
- The above only estimates the after-tax savings. When you factor in the reduction of consumer spending from lower disposable incomes and the impact that has on businesses and their employees’ wages and jobs – the savings is even less.
- The ESRI shows that the savings to the Government from public sector wage cuts falls even further after the first year – as the fall in consumer spending becomes embedded in the economy.
So these after-tax savings are, if anything, on the optimistic side.
If the Government were honest in the negotiations and to the public, they would acknowledge the real savings behind their proposed cuts. They would acknowledge that consumer spending will fall, and, as a result, private sector jobs will be put at risk.
They would give us the reality and not the fiction. But if they were to do that everyone would see, from a deficit-reduction perspective, how inconsequential these proposals are. People would then start to ask: given the damage to the economy and people’s living standards, what’s the point?