One in five workers in the private sector will be unemployed by the end of next year. Game over. This Government is toast.

The ESRI forecast of a 17% unemployment rate doesn’t translate into the true rate of job losses in the private sector which is bearing the brunt of the onslaught. The rate of projected unemployment in the public sector is zero. It’s time we started using the correct words:

• Unemployment is being privatised.
• Recession in no longer the right word. This is a catastrophe.
• Blaming it on international events isn’t just wrong, it’s a lie told by liars.

By Christmas, job losses in Britain will be 7.7%, France 9.9%, Germany 8.9% and the European average will be 10%. Ireland will be shooting past 13% on its way to 17% by the end of next year but coming off an unemployment base of 4%. That’s why the right word is catastrophe.

• Government is also the wrong word.

Government assumes power rests with it. But what we’ve seen instead has been a damage limitation exercise, much of it driven by wishful thinking and propaganda, by a puppet administration, until the April budget. At the cliff edge, action was forced upon it and Minister Linehan finally acted. But even then this puppet , for that’s what it is, hasn’t squared up to its masters in the ruling classes – the public sector unions. True, the scene was set in the budget by intentions to benchmark Government pay to other countries, but nothing material was done to address the big spending areas.

The ESRI forecast is damning. Already the tax revenue forecasts are wrong. There isn’t room to tax pay packets much further without sinking the economy. While widening the tax base to property and carbon will help, spending still has to be slashed. But the puppet Government dallies in talks with public sector union chiefs. It’s laughable to think that these union bosses put themselves about as protecting the unemployed but embark on policies that worsen the public finances and threaten our ability to support social welfare. The truth is that public sector pay has to come down sharply. It’s no longer a case of reverse benchmarking ie protecting pay at 20% over the odds nor is it a case of paying the public sector more than competitor countries. Based on the ESRI forecast it is now the case that we may not be able to afford public sector pay cheques at all next year.

The math is that simple. How can we pay unemployment benefits to nearly a half a million private sector workers and finance our national debt but leave the public sector pay and pensions bill unadjusted at €20 billion, that’s 60% of all our tax revenues. Don’t they get it?

Ireland’s desperate need to boost competitiveness to bolster exports and increase taxes to pay for public services now depends entirely on the public sector taking the hard road. The only route out of this siege is by cuts in pay. The longer the public sector engages in the politics of denial and flexing it’s power over this moribund intermediary we call Government, the worse it’s going to get for all of us.

Already encircled in a vice grip of events and miscalculations, the upcoming local and European elections will be like Stalingrad for Fianna Fail. Heaven help them because nothing else will.

Still down in the dumps after getting shafted in the Budget? Here’s some cheerier news.

Although we’re far from out of the woods yet, the darkest days look behind us as light is finally beginning to peep through the global economy, especially at the epicentre of the banking collapse - the US economy - vital to the interests of export-sensitive Ireland. Sure, there are still lots of minuses but at least now we’re seeing the positives finally beginning to gather some fragile momentum. So let’s start with the minuses:

Minuses

• Much like in Ireland, US house prices are likely to fall another 10% to 15% before hitting the bottom. Result – more negative equity
• Unemployment continues to rise but the pace is slowing 10% to a little over 600,000 per month. Result- less workers spending money
• Loan losses, defaults, bankruptcies and repossessions continue to rise. Result- more loan write-offs, bailouts and misery
• Retail sales are weaker than expected and industrial production is feeble. Result diminished sales, more saving less spending

Pluses

• Housing affordability is at historic highs, just like here, thanks to lower borrowing costs. Result; Increased incentive to buy in large numbers as the price bottom nears.
• Manufacturing orders are rising, consumer expectations strengthen, and US trade imbalance is narrowing. Result; Confidence is improving albeit slowly.
• Interbank lending, where the heart attack started, is now stable for three months. Result; the credit crunch is thawing a little.
• Weathervanes like General Electric, JP Morgan and Google have surprised with strong first quarters. Result; some corporate earnings are already improving and investors are returning.
• Some big companies are once again able to raise capital in debt markets. Result; Less risk perceived in corporate debt markets, a vital lifeline to big employers.
• Sensing some real evidence of stabilisation, stock markets have recorded several weeks of gains. Result; While fears of a sharp reversal in May remain high, the absolute floor could yet prove to be March 6th, allowing pension funds and investments to begin the long road to repair.
• Chinese retail sales boomed in the first three months keeping China’s growth above 6%. Result; Chinese consumer demand has defied results elsewhere.
• Despite falling exports Europe’s muscular German economy is recording improved business and consumer confidence.

Result; The world’s third largest exporter seems to be unfazed.

After many months of turmoil the overall position now looks to be stabilising. Even the most pessimistic forecasters are downgrading the risk of depression as expectations are now growing that the US will pull out of recession within the next 3 to 8 months. Of course it’s not written in stone but Obama wasn’t playing small town politics with the US economy when the American President recently said that green shoots are appearing and it wasn’t just from the shamrocks Brian Cowen gave him.

Unquestionably the US, European and UK economies upon which Ireland relies to kick start an export-led recovery, will each record negative growth this year but the signs are growing that we may be over the worst. That means 2009 may go down in history as both the year the recession hit its worst point and the year the recovery began.

So, expectations that Ireland will flat line next year but begin to grow again in 2011,may not be unreasonable. The speed of the Irish recovery may yet surprise critics especially if Government finally hit the last tackle bag – wasteful public spending and the Euro weakens a little against the Dollar and Sterling to aid our competitiveness.

Time to light those votive candles and pray that the recovery will be sustained and not simply the first leg in a W-shaped bust, boom, bust story. 

If Carlsberg did pensions it would hard pressed to better the Irish public sector. Last week, the Government supercharged public sector pensions, reinforcing the common perception of its timidity in the face of powerful public sector unions. In the run up to the budget, public sector workers close to retirement and queuing up to go early, fearful of rumoured tax on retirement lump sums, couldn’t believe their luck. Instead the Government boosted the unique pension package much further than is generally understood by enhancing early pensions and lump sums. The enhanced pension is immediately payable to over 50's together with 10% of the lump sum with the balance delayed until normal retirement age is reached. Our analysis shows that the result is a massive giveaway to public sector unions in an early retirement scheme exclusive to its constituents. We price the Governments largesse, measuring the enhanced benefits in the only accurate way - by reference to commercial market prices.

Before the budget a 50 year old earning a hundred grand a year with thirty years of service whose normal retirement age is 60 could exit with lump of €92,475 and a pension escalating in line with salary grade increases beginning at €23,400. In the open market a worker in the private sector would need to accumulate €1,121,951 in a pension fund to enjoy the same benefits. This is the commercial cost calculated on the day of the budget by reference to the cost of buying pensions. But by changing the rules that normally apply, the post-budget pension, in this example jumps 1.6 times to €37,500 escalating per year and the open market cost to a whopping €1,744,280. Even allowing for postponing most of tax free cash until normal retirement age under the new scheme, this is an increase of €622,328. In simple terms the saving in the difference between salary and pension by commuting the worker to a retiree earlier than normal is costing us all 6.2 times of his salary. Quite how this is value for money for taxpayers defies logic and smacks of a sleight of hand.

Notes: The Value as a Private Pension Fund includes tax free cash lump sums and is based on commercial prices on budget day. The example is based on a male normal retirement age 60, salary €100k p.a. The outcome is pro rata for lower salaries.

Multiplied across the numbers now expected to apply for the scheme the legacy may be to burden future taxpayers with billions more in pension costs.

The Government hopes to save the difference between current salary and pension payments but as our report shows, much like extending a mortgage term, the saving is a sham. In return for an immediate gain in cash flow, the long term cost to taxpayers is excessive. Once again the Government has fumbled the real issue which is inflated public sector pay and pensions and, when faced with thinning numbers on the active payroll, it has resorted to bribery masked in guff about patriotism. But there is nothing less patriotic than passing the cost of failure to future generations of taxpayers or more cowardly than concealing it in the smoke and mirrors world of pensions.

Medusa, once a beautiful woman, so offended Athena, her hair was changed into snakes and her face made so ugly that anyone who looked at her was turned to stone. Even after she was dead her head retained its power to petrify, so too with yesterday’s announcement. This is just the beginning. It is not a budget as we know it but a five year plan that intensifies the squeeze all of us with each passing year.

The Ugly Stuff

• Misdirection dominated the opening as the Government failed to accept responsibility of the so-called structural deficit, about 2/3rds of the black hole created by its reckless policies from 2002. This marks a catastrophic failure to provide real leadership and is its single biggest failing. You cannot lead a nation on false pretences. Where is the honesty?
• Taxes more than spending cuts will be used to fill the void, starting with a treble whammy of Income, Health and PRSI Levies. This risks nose-diving the economy into a downward spiral as people save more rather than spend.
• There is no effort to reduce VAT or suspend stamp duty to encourage more transactions.
• Although the tax hits are progressive, a minimum wage earner will still pay €350 per year on a tiny €17,500 salary. Meanwhile he or she is disproportionately hit by the increase in indirect taxes like a 25% increase in a packet of cigarettes and by unemployment risk.
• Spending cuts are woolly but expect Child Benefit to be means tested next year. Help for crèches to be cut by 65% as Childcare Supplement is abolished and replaced with a new scheme.
• Mortgage interest relief is being restricted to the first 7 years of a mortgage.
• Increasing CGT and CAT is more likely to yield less rather than more tax, especially CGT.
• That public sector pay has to be brought in line with our competitors is mentioned but no immediate action is taken. The Government has funked telling the public sector the truth in crystal clear terms that rates of pay have to come down.
• Incremental pay increases based on longevity and costing up to a half a billion a year remain in place.
• Although Ministerial pensions for serving members gets the chop, some perks get removed and expenses get cut 10% but unvouched expenses remain for TDs, the only workers in the country allowed to do so.

The Pretty Stuff – it’s all relative!

• The government is finally getting its arms around the problem.  International investors who finance Irish debt should not be overly displeased, despite some of the obvious political fudges.
• The income tax hit is progressive which means those on higher income pay more, but there are problems around those earning €75,000 per annum.
• The controversial pension levy is being adjusted at a cost of €100 million to protect lower paid workers.
• The establishment of NAMA (National Asset Management Agency) is the right step, transferring a huge amount of heavily discounted land and development loans out from the banks to reverse the credit crunch.
• Investment in capital projects, although being trimmed, will remain at 4% of GNP for the next number of years.
• Property related taxes are being introduced – interest relief on residential investment mortgages is being cut by 25% and trading profits from residential development land is finally being treated as normal income and subject to income tax or, in the case of companies, 25% corporation tax.
• Banking supervision is being reformed and this time no insider gets the top job.  An outsider, Sir Andrew Large, former Deputy Governor of the Bank of England is to oversee the birth of the new system.
• Further state support for Irish banks will come at the price of ordinary share capital for Irish tax payers.
• A business support fund of €100m over 2 years is being established and investment in crucial research and development is being maintained at 2.5% of GNP for the next number of years.  In addition, tax relief on investment in intellectual property is finally being introduced.
• €128m is being targeted to support 25,000 people in training, experience and education schemes.

All told the beginning of a five year period of austerity in Ireland but the Government hasn’t tried to con the electorate this time. It’s a start, there’s still a long way to go but at least now we have a poxy plan!

In our brief history as a modern economy no budget will so test us like this one. It is the ultimate litmus test of whether we’ve evolved into a mature democracy capable of putting our own house in order or whether we are to revert to type, putting a premium on the electoral cycle and handing the country over to pressure groups before eventually transferring it to the ECB or IMF. Will we get a hard headed economic budget or a slippery political one calculated to do a half job as Fianna Fail buy time and shore up market share for the June elections? Will we face the truth or will we face a fudge? We’ll know today. Here’s a list of ten top priorities.

1. Slash transactional taxes to encourage sales. That means cutting VAT and eliminating Stamp Duty entirely until the end of 2010. What’s the point in having 9% tax that nobody will pay in a falling housing market?

2. Commonsense tells us what must be done, hammering the economy with high taxes on work and success to avoid accepting that we must primarily cut spending, will extinguish the economy faster than any single measure. A top income rate which together with PRSI pushes over 50% will kill the incentive to earn more money by those that already pay most of income tax. So widen the income levy and hit the old reliables but don’t increase the top rate of income tax past the half way mark.

3. Inject further capital into banks but with severe conditions about unfreezing lending and set up a special asset recovery agency to strip out and manage bad debts.

4. Face the truth, we can’t afford our day to day spending. In the awful conundrum between protecting the most vulnerable, those on social welfare or protecting the least vulnerable, those with jobs and pensions for life, who are we to choose? We can’t fork out €20 billion on pay and the same again on social welfare. Scrap the dishonest pensions levy and call it what it is, a pay cut but this time apportion it properly. Abolish incremental pay increases based on longevity. Immediately replace increments with bonus pay for merit only.

5. Announce a voluntary redundancy and early retirement package for public sector employees. Tell the sector the truth, Irish public sector pay has to start gradually coming down to the same level as competing economies. Private sector pay is already rapidly adjusting. Start de-layering bureaucracy now. There are 49,000 administrators supporting 62,000 front liners in the Health system, that’s a crazy ratio heading towards one to one. Same in other sectors. Cull the number of agencies and cut Directors fees across the board to 2003 levels.

6. Widen the tax base. Having boosted property transactions by suspending stamp duty incrementally introduce a tax on investment properties. Don’t include holiday homes unless you’re prepared to go after pads in the sun. Introduce elegant not crude carbon taxes but offset with incentives.

7. Redirect capital spending to job dense activities like home energy efficiency but accelerate the delivery of these schemes. Free up the investment and banking finance bottleneck for strategic projects such as commercial wind farms and energy technologies. Introduce more not less tax incentives for R&D initiatives and the sciences for businesses especially those that gel with our universities.

8. Be very careful of reforming pensions without very clear understanding of the complexities and interlinks. Do not touch reform of private pensions especially for middle income earners unless you’re prepared to introduce a quid pro quo cap on public sector pensions. A thirty grand public sector pension is worth about a million Euros. Few private workers will ever reach those heady numbers so if you hit their incentive to save for retirement you must be prepared to cap public sector pensions at thirty grand a year.

9. Leadership is vital if you are to sell the package. That means steeply cutting pay and pensions to The President, the Taoiseach, the Ministers and eliminating all the perks like committee chairman and conveners fees.

10.; Sell us a vision of what we can be in the years ahead. Know the way, show the way and go the way.