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News : Irish Last Updated: Jul 29, 2009 - 10:00:27 AM

Lenihan publishes Bord Snip report; Proposes €5.3 billion in spending cuts and public sector staff reductions of 17,300; Says public pension cost at 30% of salary
By Finfacts Team
Jul 16, 2009 - 3:03:06 PM

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The Minister for Finance, Brian Lenihan, T.D., released today the Bord Snip Nua report on recommendation for public spending cuts. The officially known Special Group on Public Service Numbers and Expenditure Programme sat for six months and was chaired by UCD Economist Colm McCarthy. The Group’s mandate was to examine all current Exchequer spending across all Departments and agencies, to see where expenditure and staff savings might be made, as necessary in the current financial crisis. The Minister noted that the Group had made a series of recommendations in that regard coming to €5.3 billion in total in a full year, and entailing staff reductions of 17,300. With the majority of private sector workers having no occupational pension, the accrual cost of a public pension is 30% of salary according to the report.

“The Report is a thorough and detailed examination of all Departmental spending looking in particular at what is intended to be achieved by each spending programme, whether it has been achieved or not, and whether the level of spending is justified in current resource-limited conditions,” the Minister said.

He pointed to the extremely difficult budgetary position as the context for the Bord Snip Nua’s findings.

“Since the beginning of the economic crisis last year, this Government has taken resolute action to stabilise the public finances. Starting in July 2008 and culminating in the Supplementary Budget in April, expenditure reducing measures and revenue raising measures amounting to approximately 5% of GDP in 2009 have been introduced.

“Even after these measures, this year alone we will spend €20 billion more than we will bring in in taxes and other revenues. That gap will be filled by borrowing money on the international markets, thus adding to our overall level of debt. Quite simply continued borrowing at that level is not sustainable. Unless we as a state can continue to show good faith in correcting our public finances by putting them on a sustainable path, then the interest premium charged on our borrowing will escalate."

Bord Snip (BS) said the Government has announced a series of measures over the last twelve months designed to stabilise the public finances and to commence a return to a sustainable fiscal position. These included expenditure reductions announced in July 2008 and February 2009 as well as the annual Budget in October 2008 and the Emergency Budget in April 2009. In the absence of these measures, the deficit, measured on the General Government Balance (GGB) basis used by the EU Commission, would have reached somewhere between 15% and 16% of GDP in 2009. The actions taken include a mixture of current and capital expenditure reductions and tax increases. Notwithstanding these actions, it is expected that the GGB deficit will be about 10¾% of GDP in 2009, well in excess of the 3% upper limit which Eurozone member countries are expected to observe.

BS noted the upward pressures on spending, including the rising cost of social transfers due to the increase in unemployment and the rising debt service burden, have more than offset the expenditure economies already announced. As a result, total gross current spending will reach over €62bn in 2009, an increase of €5bn or 8.9% over 2008. In 2009, Government current receipts (including taxes and social insurance receipts) are projected to amount to just over €51bn, leaving a gap of €11bn to be borrowed to fund day-to-day spending. When the capital budget and the contribution to the National Pension Reserve Fund (NPRF) are included, the overall gap between spending and revenues in 2009 is over €20bn.

This means that ever increasing proportions of our tax revenues will be needed to service the national debt. In 2009 over 11% of estimated tax revenues will be used for this purpose, compared with a figure of about 4½% of tax revenues as recently as 2007.

On the basis of BS’s consideration of the issues arising in each area, it says it has been able to identify potential expenditure savings of €5.3bn in a full year, with associated reductions of over 17,300 in public service numbers. The breakdown of savings, amounting to 9.3% of relevant expenditure, by each Ministerial Vote Group is set out in table 1.4.

The cost implications of public service pensions, both in the shorter and longer terms, are an area of concern to BS. The real annual cost of providing public service pensions is some €7.7bn each year, made up of an annual accrual cost of €5.4bn each year over and above the €2.3bn cash cost of existing pensions in 2009 (on the assumption of an accruing pension cost of, on average, 30% of nominal salary).

Public servants are generally entitled to retire on a full Defined Benefit pension (calculated at half of the average annual salary over the final three years of service), after 40 years’ service, together with a lump sum of up to one-and-a-half times the final salary. Employees may retire after reaching the age of 60 (the compulsory retirement age is 65), with pro rata reductions for those with fewer than 40 years’ service, although those retiring between the ages of 50 and 60 incur an ‘actuarial reduction’ to reflect the longer retirement period. (The key benefit of the recently-introduced Incentivised Scheme for Early Retirement is that it eliminates the actuarial reduction for this age group.) After retirement, it has been the practice to index pension rates in line with earnings, which carries a very high actuarial cost and is not generally available in the private sector.

In addition to the basic public service pension system, BS notes the existence of a range of accelerated / ‘added years’ arrangements across various areas of the public service. These accelerated arrangements are more costly to the Exchequer, and their existence and budgetary implications do not appear to be widely known or appreciated by the general public. For example, Gardaí are free to retire on full pension at the age of 50 (an effective 10 years’ added service on the assumption of an entry age of 20); some engineers, who might enter the public service at the age of 35, would accrue full pension entitlements at age 65 (again an effective 10 added years); teachers with 35 years service are eligible to retire from age 55 on; some hospital consultants may be entitled to up to 10 added years of service; and a High Court judge, who might typically be appointed to the bench at 50 years of age, is entitled to full pension at age 65 (an effective 25 added years).

Accelerated accrual terms also apply in certain top-level public sector posts although it must be said similar pension arrangements at these levels can apply in the private sector. Given the above arrangements, the Group observes that the annual cost of purchasing similar pension arrangements (including the earnings-linking of pension benefits) in the private sector would be very high indeed: ranging from around 27% of annual salary in the case of a typical civil servant employed prior to 2004 to 31% for a teacher entitled to retire at age 55; 33% for a hospital consultant; 48% in the case of a Garda member; and as high as 87% of annual salary in the case of a High Court judge. The cost of providing similar benefits in a Defined Contribution arrangement, which is more generally applicable in the private sector, would be significantly higher in all cases.

Bord Snip chairman Colm McCarthy said the reduction in jobs could be achieved without compulsory redundancies, stating that a recruitment embargo, retirements and an existing voluntary redundancy scheme could be used to achieve savings.

However, he said the trade union movement would have to agree to changes which would facilitate the redeployment of staff between Government Departments and other parts of the public service.

In his report, McCarthy and colleagues say a range of outdated and restrictive working practices and allowances add greatly to the cost of providing public services.

The report says the closure of the Department of Community, Rural and Gaeltacht Affairs and the redistribution of its functions reflects the need to prioritise scarce Exchequer resources. It also calls for a critical examination of the need for a Department of Arts, Sports and Tourism.

Minister Brian Lenihan noted that the April Emergency Budget set out a multi-annual plan to bring the public finances back to a sustainable position. As part of the Plan, additional expenditure savings and revenue raising measures amounting to €4 billion were signalled as being necessary for the 2010 Budget package.

“On the basis of its analysis, the Bord Snip Nua presents some difficult policy options. These are the choices that we as a people, and not just as public representatives and Government, will have to face up to in order to get this nation back on track, creating jobs, meeting public needs and promoting fairness, which we have proved we can do as a society over the last twenty years,”the Minister said.

The Minister called for considered and honest debate of the specific policy options set out in the Report:“I recognise, and the Government recognises, that the choices facing us are not simple or pain-free. Following them through requires a collective social effort and not one motivated by protecting one’s patch or pursuing one’s special interest to the exclusion of all else.

“That is why I would ask people to read the Report carefully and critically, and avoid knee-jerk and defensive reactions to each and every suggestion raised by the Bord Snip Nua. All of us, including those of us in public administration, will have to accept that the old ways of doing things need to be looked at afresh, so that we can deliver excellent public services with the dramatically lower level of resources now available.”

The Government will be reflecting on the Report’s recommendations over the months ahead. The final decisions will rest with the Government and the Dáil, on behalf of the people, and the Government will be anxious to hear the views and input of all concerned.

“For this reason,” the Minister said, “the Government will refer the Report without delay for analysis and comment by the Oireachtas Committee on Finance and General Affairs prior to the Budget in December.”

The Minister thanked the members of the Bord Snip Nua for their unstinting work over the past six months and for the comprehensive and cogent review they had undertaken in the public interest.

Report of Special Group on Public Service Numbers and Expenditure Programmes Vol 1
Report of Special Group on Public Service Numbers and Expenditure Programmes Vol 2

SEE Finfacts articles:

The Waste Land - - Bord Snip, Irish Public Spending Transparency and the motto "Never do anything for the first time"

The 2001 economic consensus that paved the road to economic ruin

Celtic Tiger Aftermath: Guilty Irish politicians remain in denial and clover while ignoring their victims

Report says Irish Financial Regulator’s failure to control property bubble contributed to economic crash and consumer wealth losses

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© Copyright 2009 by Finfacts.com

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