WAGE CUTS of 5 per cent in both the private and public sector are needed “to achieve the necessary improvement” in the economy’s competitiveness, Prof John FitzGerald of the Economic and Social Research Institute (ESRI) told an economic conference in Kenmare, Co Kerry, last night.
Public sector workers, who have already been hit by the 7 per cent pension levy, would more readily accept further cuts “if it was clear that such cuts were taking place in the private sector”, he said at the opening session of the Dublin Economic Workshop’s annual conference. To date, anecdotal evidence of pay cuts in the private sector has not been recorded in the official data.
Prof FitzGerald cautioned that it could be between 2015 and 2017 before full employment is restored.
UCD economist Joe Durkan, also speaking at the event, said the Government must learn from the mistakes made between 1977 and 1986 and act decisively to reduce the State’s debt. “It is relatively easy to design a system of graduated decreases in pay that can impose the greatest burden on the most well-off,” Mr Durkan said.
While economic output and tax revenues had fallen back to 2004 levels, current expenditure – or day-to-day government spending – is running some €20 billion above 2004 levels, he added.
“The debt is dynamically unstable and its growth has the capacity to impoverish the society within a very short time,” Mr Durkan warned.
But the renewed programme for government agreed between Fianna Fáil and the Green Party made it “very clear that politicians have no stomach for pay cuts or indeed any cutbacks”. Mr Durkan said he had lived through three major financial crises in Ireland and believed “our capacity for doing things wrong is boundless”.
The next budget should be designed on a “no regrets” basis, Prof FitzGerald said. If there was no recovery in 2010, a tough budget this December would not have been “wasted”, while if the recovery proved more robust than suggested, “it would still not have gone too far”.
There was “an argument” for temporarily shifting some of the tax burden from employers’ PRSI to employees’ PRSI or to income tax. “Such a rebalancing would mimic the effect of a wage cut on competitiveness,” he said. “I think we need to go back and start thinking the unthinkable.”
In his analysis of what went wrong in Irish banking, Prof FitzGerald said the collapse of the financial system “could and should have been prevented by the Financial Regulator” and that its “complete failure” to see the increasing dangers to which the banking system was exposed had “landed us in the current mess”.
Although the “primary failure” of policy lay with the Financial Regulator, the wider academic community also paid little heed to the risks, he said.
