IBEC and IBRC and the IMF

This is a version of a column published in the Irish Examiner

It must be dangerous to be a bird in Dublin these days. The government that promised transparency has instead adopted a kite-flying approach. The kites pop up, and like modern day Benjamin Franklins the government minister hangs on as it drifts into the storm, and then gauges the lightening. Occasionally they get singed, sometimes they escape, and withdraw for another day. And its not just the government. Every other aspect of social partnership is busy with economic bals and fiscal paper and silk, constructing and testing kites. In the best Japanese tradition, and as we are heading towards a Japanese style lost decade why not, we even see kite wars. Some kites are saw edged and designed to cut down others. Some kites get smashed down and then amended get relaunched.

 

IBEC have joined in this pleasant pastime recently, with their proposal that public sector increments be paused. The saving from this would be approximately 1b per annum it appears. The problem with such increments is that they are generally paid regardless – one is on a salary scale along which one advances by dint of survival. In a modern managerial environment that doesn’t make a lot of sense – there is little incentive to excel, and little disincentive to slack. Of course, we have know this for decades and for a long time it suited IBEC as a member of social partnership to allow this to go on. Peace at any price was the seeming mantra. Cutting a billion euro from the state budget is eminently justifiable in the context of borrowing a billion. However, throughout the crisis the argument on cutting public sector wages has been notable for a lamentable lack of follow on argument. Cutting X does not save X. At the most basic it saves less than X due to the fact that yes, public sector wages are subject to tax. So 0.7X might be the after tax savings. And then there is the knock-on effect…

 

we have seen recent estimation from the IMF of these effects. In economics the effect of changing one item on another is known as a multiplier. The assumed and conventional multiplier for government expenditure was in the region of 0.5-0.7. This would imply that cutting X would in the end result in a fall in overall economic output of 0.5 – 0.7X. In other words, cutting wages would not have the overall effect of reducing the economic cake by the same amount as the wage cut. This may now need to be revisited in the light of the IMF world economic outlook report which suggested that far from being less than 1 (implying that cutting public sector pay would result in a small fall in output) these shortterm multipliers may be significantly greater than 1. In other words, cutting X will result in a decline of 1.5 X– 1.9X .

 

Whatever the attraction from a government accounting perspective of cutting the short and medium term effects on the rest of the economy would be significant and negative. In the Irish case the effects are complicated by the GNP/GDP issue – while GDP can be growing or contracting slowly the GNP component can be falling more rapidly. Thus we cannot say with confidence that based on the IMF analysis the multiplier is too small we can take it that some very significant work on same needs to be done, pronto, by a combined ESRI-DFinance-C Bank team to ascertain the best evidence. In that context, we might want to hold fire on accelerating the pace of consolidation

 

IBEC have not, to my knowledge, come up with a comprehensive set of implementable performance metrics – that to be fair is not their job – but one must applaud their desire to save a billion. However, why stop at a billion? Why not save three times that much, and harm nobody? Part of the problem with cutting government expenditure is that it gets recycled into the economy. It is rare to have government expenditure which is totally isolated from the economy, and yet we have such.

Each year the government spends 3.1b feeding the IBRC (anglo/inbs) black hole. This year in a cunning plan instead of real money they issued a bond to the beast. The borrowed or tax derived money, you will recall, is given to the Central Bank of Ireland who then destroy it. As far as I can ascertain IBEC have not expressed concern about that, except in so far as the technicalities of the bond v cash 2012 payment impacted on government aggregates. It is abundantly clear that there is little appetite in the ECB for a deal on this money. At the very best we might replace this promissory note (which is not government debt) with a 40y bond. At worst we will be stuck with the full repayment schedule. It would cause nothing but the closure of IBRC and a technical temporary accounting headache for the Central Bank if the government were to announce that in framing the 2013 budget they were not going to make the March 2013 (or any subsequent payment). The ECB would be unhappy but I guess we can live with that. What they would not be able to do is to “cut us off” from liquidity. It would be nice if IBEC were to advocate saving 3.1b but then again IBRC is a member firm of IBEC. This money does not get spent in the Irish or European economies. It vanishes. We borrow it, and we destroy it. Why not…not borrow it.?

 

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6 thoughts on “IBEC and IBRC and the IMF

  1. Fergus Monaghan

    Agree totally with you on the prommisory notes. On the increments why not cut them save the billion then pass it on in tax cuts.

    Reply
    1. brianmlucey Post author

      That might work. Although prob is distributional. Cutting all increments hits lower paid ps as well as higher paid and as lower paid pay less tax it’s within system regressive. That’s technical tho. Your point of finding offsetting approaches is spot on. I’d prefer myself no blunderbusses: have a proper evaluation system and use that. I think of one person who hasn’t published in years, no phd students in a decade, low teaching, no admin- they get same rise as I do. And that’s replicated across.

      Reply
  2. JeromeK

    Hi Brian
    Agree on the prom notes, but I wonder is it fear of the unknown that prevents us acting in interests of our country.

    Re the public spending, I have not read the report but is the corollary of the 1.6 multiplier saying that increasing public spending will lead to 1.6 multiplier in returns – in that case we should increase spending by 10 billion per annum and problem solved? I can see Sinn Fein getting a lot of mileage from this view.

    Secondly, does the report take account of fact that when money cannot be raised sufficiently in taxes (and therefore must be borrowed), the cost of repayment should include the interest on that borrowed money – and as anyone who has a credit card bill that never seems to pay off, when you borrow on top of debts it can be a very long time if ever when that money is repaid.

    Cheers.

    Reply
  3. bossbutteringbee

    The problem with public sector payroll shrinkage comes not from considerations about multipliers but more basic functional ones. Based on the principle that on average one gets what one pays for, surely the corollary applies, i.e., given that service is being rationed more, as it so obviously is in areas such as hospital treatments, policing, then why should citizens not see a commensurate reduction in social charges via redistribution of some tax revenues from paying numbers of functionally semi-redundant people on the public payroll towards those few things the state can do that provide an economic return?
    It is instructive to read about the evolution of social sentiment in Germany and Austria in the aftermath of the WW1 Treaty of Versailles and subsequent disintegration of economy social ‘glue’ and polity as described in Kurtzman’s The Death of Money publ. 1993. France, like Germany with a wrecked economy, tried to beggar its neighbour with the connivance of other nations.
    There are some parallels with our own times including the conflict between paying reparations (gov, corporate and private debt premiums) and delivering enough public service and transfers to maintain a functioning tax base. The Germans attempted to resolve this by trying to inflate the debt away while simultaneously raising direct and indirect taxes and promoting hypercompetitive exporting. These were fundamentally irreconcilable and chaos ensued.
    Perhaps Morgan Kelly’s prescription was correct. The deficit should be closed asap so Ireland can face the music regarding our debt obligations from as strong a position as is possible in the circumstances

    Reply

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