Back to When We Were Winners
The following appeared in the Sunday Business Post on April 19, 2009
Sunday, April 19, 2009 By Ed Walsh
Only one word matters in rescuing Ireland from its downward spiral: competitiveness. This was the focus of government policy in the 1990s. It created the environment for investment, jobs and spectacular growth. It made Ireland the fourth most competitive country in the world by 2000 - and one of the most prosperous.
But then the plot was lost, and many government decisions carelessly ignored competitiveness. Numbers employed in the public sector grew at the fastest rate in Europe: 85,600 were added to the payroll in the past decade. The number of state organisations grew to more than 700. Labour laws were enacted that pleased the unions rather than those who create jobs and make global investment decisions.
A succession of national pay agreements caused public sector wages to grow at a rate far in excess of productivity resulting in teachers, health workers, politicians and all on the public payroll receiving bigger salaries than anywhere else in the EU, apart from anomalous Luxembourg.
Welfare payments were increased even more dramatically, making the Irish jobseeker's weekly allowance, at €204, three times greater than the €68 paid in Northern Ireland.
Ill-conceived ideas such as the misnomered 'decentralisation' distracted public-sector leadership, while corrective actions to deflate the construction bubble were not taken.
Government and opposition parties closed their eyes to -or failed to interpret- the looming statistics, and rebuked those of us ho pointed out the obvious for "talking down the economy". The inevitable economic downturn not only came, but was aggravated by international events that transformed a national economic hazard into a national catastrophe. Initially in denial, then dazed, the government failed to respond for nine months as the gulf grew between public revenue and expenditure.
But now it has. The April 7 emergency budget and the creation of the National Asset Management Agency (Nama) signal nationally and internationally that the government recognises the gravity of the situation, is prepared to take radical and unpopular decisions and appears to have a recovery plan. Not much of a recovery plan some say: raising taxes, rather than cutting expenditure. But the government had no option: in the crisis situation, instant results were called for.
Cutting expenditure takes time; taxing is immediate. If the government now moves with determination to the next part of the plan, drastically cutting public expenditure and addressing a range of issues towards regaining competitiveness, Ireland will be on the road to recovery.
Ireland has still much going for it, and resolute steps to restore competitiveness can make it prosperous once more.
The logical path towards cutting public expenditure is to retrace our steps to 2000, when we were a highly competitive country with 85,600 fewer public servants and a pay bill of more than €6 billion a lower. Those on the Irish public payroll are now among the highest paid in Europe, whether politicians, teachers or health workers.
The pay gaps created by benchmarking are extraordinary. Irish teachers are paid 37 per cent more than their British counterparts and 26 per cent more than those in Germany. Irish ambulance drivers are paid as much as junior consultants in Finnish hospitals.
Benchmarking against other EU countries provides the framework within which Irish public sector salaries can be brought into line again. Halving the number of public bodies from 700 to 350 would be a worthwhile goal and a potential win-win: less bureaucracy and less public expenditure The vivid stories of tax-dodging and other doubtful activities by some Irish business leaders at the top have given credibility to the view that high earners fail to pay their fair share of tax. In reality, the situation is extraordinarily otherwise.
Unlike any other EU country, 38 per cent of the workforce, or 900,000 people with lower incomes, pay no income tax at all, while the top 6.5 per cent of earners contribute half of the income tax collected.
The tax base is narrow indeed, and reforms must be directed to bring those who pay no income tax into the net, whether their incomes are high or low.
The extraordinary gulf that has opened up between welfare payments in Ireland and elsewhere must be reduced. Being on welfare in Ireland at €204 a week compares to pre-tax average weekly earnings of €107 in Lithuania, or €89 in Romania.
In fact, if tax (at, say, 30 per cent) is taken into account, being unemployed in Ireland is more attractive than average pay in any of the EU accession states. Welfare tourism and welfare fraud are now a major burden on taxpayers and those attempting to run business and make ends meet in Ireland. Border areas are producing some alarming statistics -Ballyconnell, Co Cavan, with a 2006 census population of 747,has registered 1,044welfare claimants.
Many of the steps that are necessary to make Ireland competitive again do not involve expenditure. They involve legislation and getting the words right. The notorious rigidity and complexity of Irish labour law, that discourages investment in Ireland, with its 25 pieces of legislation and eight regulatory bodies, should now be reformed along lines of good practice in places like Denmark and Australia.
In a decade, Ireland’s industrial electricity costs have moved from average to among the most expensive in the EU. Energy policy has been determined more by ideology than economics. Energy policy needs review, with the emphasis on competitiveness.
The school system needs reform. Curriculum reform has been hogtied by the teacher unions for the past 30 years. They have no place on the National Council for Curriculum and Assessment: the legislation should be amended. In other countries, the teacher unions are not directly involved in determining the curriculum. Ireland has poor international rankings in science and maths. The McKinsey Report highlights that the quality of teachers, rather than what they are paid or class size, determines the outcome. Excellent teachers seriously influence the future prospects of students: poor teachers do likewise. Rigorous teacher assessment, and perhaps periodic licensing, is necessary to ensure that excellence is recognised, and poor teacher performance is rigorously addressed.
Excellent universities at the top of the educational system are key components of a competitive economy. There is much scope for higher educational reform. The Australian funding model provides the solution to the funding crisis. In Australia, all school-leavers can aspire to participate without paying fees.
Those who do so repay their debt to society later, once their incomes reach a certain level. The Danish system of university governance by external leaders should replace the existing incestuous arrangements that apply in Irish universities and institutes of technology.
Urban governance needs reform. Small urban areas of 100,000, such as Limerick and Waterford, need a single city council, rather than the existing three feuding local authorities: again, a win-win, with cost savings and the prospect of more coherent planning and better management. National governance needs reform.
Unlike the large majority of EU states, Ireland does not have a list system that provides a means of co-opting into cabinet some of the country’s most effective achievers. Even without the list system, the constitution permits the Taoiseach, through his nominees in the Seanad, to introduce two such people into cabinet.
Given the national crisis, it is not beyond the bounds of possibility that people of the calibre of Peter Sutherland and Michael O’Leary would answer the call. The Taoiseach needs this kind of talent at the cabinet table -and so do the rest of us.
Dr Edward Walsh is founding president of the University of Limerick.