OPINION:Short-sighted profligacy has seen social welfare costs rocket – McCarthy-type cuts are inevitable but the Government needs to engineer a trade-off between economic benefit and possible social unrest, writes MICHAEL CASEY
THE MOST critical decision confronting the Government relates to social welfare spending cuts. As Colm McCarthy’s report pointed out, expenditure on social welfare has reached €22 billion a year, or 38 per cent of total spending of €58 billion. It is simply too big to ignore.
Social welfare spending tripled between 1996 and 2007. This rapid rate of increase is very difficult to explain, given that the period was characterised by full employment.
There is little doubt that a foolhardy populism underlay this meteoric increase in social welfare. Children’s allowances, for example, quadrupled over a six-year period. Many of these payments are received by people who are far from needy.
It is worth noting that public sector pay also tripled between 1996 and 2007, but at least some measure of clawback is occurring now.
The short-sighted profligacy by government (and social partners) has now returned to haunt us. Once benefits are conceded it is virtually impossible to reduce them later on, even if economic circumstances deteriorate. Governments have never learned the basic lesson that prevention is infinitely better than cure. While it is difficult to make international comparisons, it does seem as if Irish benefits are high, even allowing for relatively higher costs of living.
Some weeks ago a young woman called a phone-in radio programme and said that she had been offered a job at €330 a week.
Since her social welfare payments came to approximately the same amount (there were a couple of children involved) she had no option but to turn down the job. By the time she paid bus fares etc, she would be taking home less money than she was receiving on the dole.
Many people called the show and some accused the woman of being a sponger.
Of course she is nothing of the sort. She is reacting in a perfectly rational way to the perverse incentives created by government.This situation is inimical to economic growth and job creation. Whether the Government accepts in full a cut of €1.8 billion, as put forward by McCarthy, remains to be seen. But anything less than that would scarcely be adequate.
Equality could be maintained by other sections of the community, eg public servants, taking larger cuts than welfare recipients. Given the correlation between the growth in public sector pay and social welfare over the last decade, some kind of linking formula could presumably be worked out.
Something along these lines might be regarded as a reasonable prescription in a normal situation. Unfortunately, we are in a completely unprecedented situation which gives opponents of welfare cuts a powerful argument. A huge amount of Government spending is going, or will go, into bailing out the banks. Nama, the National Asset Management Agency, is likely to pay too much for the bad assets of the banks. If they don’t do this they will have to inject more capital into the banks; this may or may not lead to nationalisation. Taxpayers are likely to suffer for years even though shareholders will benefit from recovering bank profitability.
Although most welfare recipients do not pay taxes, any reduction in their benefits could be seen as a contribution to the coffers of banks. A PR genius could not spin this any other way. It comes across as obscene: the poor subsidising the rich. It must be the worst nightmare of spindoctors.
To make matters worse, one bank, Irish Life and Permanent (ILP), has been allowed to increase its mortgage rate by a half percentage point even though this is in direct opposition to monetary policy as formulated by the ECB. Instead of cutting its margins like every other firm in the country is having to do, ILP are increasing their margins by using their dominant market position. Having caused unprecedented damage to the country, banks like ILP are not showing any remorse but are ready and willing to exploit their customers all over again. And there is a deafening silence from the Central Bank and the consumer side of the Financial Regulator.
If behaviour like this is allowed by the Government, it will make it all the more difficult for them to bring in welfare cuts. If they do not, then they will have to burden the middle class with even higher taxation, thus undermining job creation for years to come.
The Government is now in a bind of its own making. Already there is fluttering in the dovecotes – TDs breaking the whip, the Greens wanting to revisit Nama, an Independent TD threatening to withdraw support if rural transportation is cut.
The Government could go in either of two directions. They could recognise that their time in office is now limited and therefore make the unpopular choices on the grounds that they have nothing left to lose. Or they could abandon ship sooner rather than later and pass the poisoned cup to the Opposition. The uncertainty is not helping.
McCarthy seems to be about right in his estimate of the cuts needed. But there is a wide body of opinion which will not accept this, especially in the light of the banking system bailout. The implications for civil unrest should not be discounted. At some stage the economic merits will have to be balanced against the wider social costs. One way of easing the dilemma might be to propose a special levy on banks.
Where is the National Economic and Social Council? According to its own website, it “formulated an agreed strategy in 1986 . . . to escape from stagnation, rising taxes and exploding debt . . .”
If it is working on a similar strategy for the present crisis it would be helpful to know what it is. What of its sister organisation, the National Economic and Social Forum?
Why do the political parties work together on the Lisbon Treaty but not on crucial questions facing the Irish economy?
Michael Casey is a former chief economist with the Central Bank and a former member of the board of the International Monetary Fund