ECONOMICS:While workers may oppose tax increases, extra funds could provide world-class public services to benefit economy's competitiveness, writes Jim O'Leary
ADDRESSING A plenary session of the social partners a few weeks ago, David Begg said that the Irish Congress of Trade Unions (Ictu) no longer supports the policy of wage restraint for tax cuts that is commonly perceived to have been the defining element of Ireland's social partnership model since the late 1980s. He went on to say that investment in social infrastructure should now be the Government's priority.
Some media coverage of his statement suggested it marked the end of civilisation as we know it and, in particular, it signalled that negotiating a new wage agreement would be more difficult than ever. I don't think it signals any such thing (although the upcoming wage negotiations will undoubtedly be difficult).
As I see it, tax cuts are most unlikely to be on the table and so Ictu's rejection of a formula centred on tax cuts won't pose a problem. On the contrary, it may represent an opportunity, of which more later.
But first, a few words about social partnership and wage determination. Yes, it is true that the tax cuts of the 1990s brought wage restraint. The mechanism at work here was labour supply: lower taxes boosted the supply of labour. They did so not because the social partners ordained it (that's just a conceit), but because Irish workers behave in a way that suggests that they are only interested in their take-home pay and do not attach value to the public services paid for by taxes.
Indeed, it can be argued that the great flaw in the social partnership model is that it has failed to embed the notion of the social wage and has instead promulgated the idea of tax as an unmitigated burden to be minimised.
This flaw was not apparent when the economy was growing vigorously and generating enough revenues for the exchequer to permit tax rates to be cut and public spending to be increased rapidly. This week's exchequer statement for February provides a sharp reminder that such circumstances no longer prevail.
Tax receipts in the first two months of 2008 were 8 per cent below the corresponding period of 2007 and, even at this early stage, the official forecast of a 3 per cent increase for the year as a whole looks fanciful in the extreme.
As I've said before, there is a chance that this year's tax shortfall will be big enough to threaten a breach of the 3 per cent of GDP budget deficit ceiling stipulated by the Stability and Growth Pact.
But even if that doesn't come to pass, it looks increasingly like we're facing a future in which keeping the budget deficit within acceptable limits will require either increases in tax rates or real cuts in public spending.
My inclination is to argue against the tax-raising option, not because of any ideologically-based antipathy to taxes, but because raising taxes has generally led to compensatory wage increases and, by extension, to an erosion of competitiveness, lost output and falling employment.
That was, in a nutshell, what happened in the 1980s - the obverse of the virtuous circle that characterised the relationship between these variables during the 1990s - and we must fervently hope that it doesn't happen again.
However, the notion that tax increases lead to compensatory wage increases and damaged competitiveness should not be regarded as an iron rule of economics.
What if, instead of merely paying for higher rates of pay for public servants, for example, the tax increases are used to fund the creation of a world-class health system or a world-class education system or indeed a world-class police service? Would the attainment of a world-beating standard in any of these areas not greatly enhance Ireland's attractiveness as a place in which to live, work and do business, and thereby make a significant positive contribution to the economy's competitiveness in the long run?
What if it could be demonstrated to taxpayers that their money was being well spent, that public services were being delivered efficiently, that waste had been reduced to a minimum and that any money raised by an increase in taxes would be used to finance a desired improvement in the quality or range of social infrastructure? In these circumstances, workers would be more inclined to view taxes as payment for public services that are valued and less inclined to pursue compensatory pay claims when taxes are raised.
It is not clear where exactly David Begg's remarks place Ictu in this context. I'm not sure whether his rejection of the "tax cuts for wage restraint" formula of the past is merely an acceptance that tax cuts are off the agenda, or whether it implies support for raising taxes to avert spending cuts or improve public services.
If the latter, I'm not sure whether this means that Ictu will henceforth be directing its members to bargain in terms of gross pay rather than take-home pay.
If this is in fact what he is signalling, then it is to be applauded. But for it to gain traction with his membership and with employees generally, will require that major efforts are made to visibly increase the efficiency and effectiveness of public spending programmes.
