Taxpayers in Baltics, UK and Ireland facing the toughest questions

Two weeks ago, I examined the IMF’s estimates for growth prospects in 2009 and came to the conclusion that in a year where countries such as Afghanistan, Ethiopia and Laos are among the world’s fastest growing economies, more open economies are being hit by a collapse in the globalized consumer’s demand.

The temptation may be to regard this as a somewhat academic question but a closer examination of eurostat figures and the latest European Commission estimates for 2009-2010 shows why this has practical fiscal implications. Eurostat figures show that the EU’s budget deficit between 2000 and 2007 averaged just over 2%. Faster-growing countries such as Bulgaria, Estonia, Ireland and Sweden ran surpluses (Finland ran quite large surpluses in fact), while most of the Old Europe stalwarts, such as Germany, Italy and the UK, ran what would until recently have been termed sizeable budget deficits (i.e. greater than 2% on average).

The EU’s budget deficit grew from 0.8% in 2007 to 2.3% in 2008 and, according to the Commission, is set to almost treble this year to 6%. Next year, that deficit could increase even further to about 7% of EU GDP. Four countries face the prospect of their government balance undergoing a double-digit swing from what they were used to up to 2007 and what they will have to face in 2010 – Spain, the UK, Latvia and Ireland.

Given that foursome, I thought it might be worthwhile to see what groups there are within the EU – when it’s clear that the global trough has been reached, unanimity of purpose may pass, so these groups could have a political as well as economic relevance. The graph below shows mean budget deficits across seven relatively self-explanatory regions in the EU (GAF = Germany, Austria, France; PIGS = Portugal, Italy, Greece, Spain; CEE = Central & Eastern Europe). The regions are ordered from left to right by how ‘in balance’ the economies were from 2001 to 2007. What’s worth noting is that the ordering of the regions will have changed by next year – the Baltics and the British Isles (if I may call them that!) face significant budgetary deficits.

Budget deficits, 2001-2010, by EU region

Budget deficits, 2001-2010, by EU region

With more open economies being harder hit, their governments are facing pressure from all fronts. Alarming statistics are still coming in from places like Latvia, where output is down 30%, and Ireland, where tax revenues are down 24%. If exporters are being hit, their workers are likely to be hit – and the longer the recession goes on, the more workers will hold their consumption in check (not to mention unemployment).

The problem is that government deficits are the last point in the cycle – increasing taxes may have to wait unless the government wants to be responsible for second-round effects. This leaves Ireland in quite a conundrum, as its 2001-2007 tax base will not be coming back any time soon.

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Tackling the thorny issue of teachers pay

Earlier this year, I calculated average salary estimates for the public and private sectors in Ireland. The answer, that the average worker in the private sector earned €40,000 last year, almost €10,000 less than their public sector counterpart, has proved if not controversial than certainly a starting point for debate. Given some of the comments on that blog post, and the fact that the teachers conferences were being held last week, I decided to look in a little more depth at the education sector. How much do teachers in Ireland earn? How does this compare with other people in Ireland? How do teachers’ salaries in Ireland compare with other eurozone teachers?

Trade unions have been clear on one point since the size of Ireland’s fiscal crisis became clear: those most in a position to pay should bear the brunt. At the same time, teachers unions have said that their pay is not up for discussion. This implies that teachers presume that they are not among those most in a position to pay. How does that stack up with the stats? The chart below shows average earnings in mid-2007, the latest data across all sectors, with public sectors marked in dark blue, private sectors in light blue, and semi-state in mixed blue.

Salaries by sector in Ireland, 2007 (source: cso.ie)

Salaries by sector in Ireland, 2007 (source: cso.ie)

The single most striking thing is that all the best paid sectors in Ireland are either public or semi-state industries. (Those looking for more detail might start with Dept of Education figures out last week showing that primary school teachers earn on average €57,000.) Surely, any objective trade union leader should be arguing that whatever burden workers have to bear, the bulk of it should be borne primarily by the public and semi-state sectors.

There are a few common queries people have with the relevance of these statistics. The first often runs: “Hang on, you’re not comparing like with like. All teachers have a degree, while who knows how many people do in, say, paper and printing.” Ideally, I’d like to have the stats to hand to explore this. Unfortunately I don’t. My only comment before we move on is that if finance and business services had come out as the best paid sectors in Ireland, would the same people have argued that we should wait and see whether their higher wages were justified by qualifications/experience/profit created? Or would people have argued that as they were best paid, they should pay most?

Let’s move on, though. If comparing education with other sectors in Ireland is not fair, let’s compare Irish teachers with their eurozone counterparts? After all, our old trick in situations like this was just to devalue and hope for the best. Now we share a currency with a dozen or so other countries. Are our teachers overpriced?

The graph below uses OECD statistics to examine teachers’ salaries across the eurozone. (I’ll take this chance to recommend the OECD’s Education at a Glance 2008: even if you hate absolutely everything I’m saying here, do take the opportunity to wander around its facts and figures.) In Ireland, a teacher in the job 15 years, single with no kids, earns more after tax than his or her counterparts do BEFORE they’ve been taxed in most other eurozone members. Marry that teacher off and give them two kids and – despite Germany’s best efforts to catch up – Irish teachers are by far the best paid of the ten eurozone countries shown.

Average salaries (gross and net) for teachers in the eurozone, 2007

Average salaries (gross and net) for teachers in the eurozone, 2007

OK, so Irish teachers are well paid relative to other Irish workers – they may just be better qualified. And yes, they’re paid substantially more than their eurozone counterparts. Perhaps price levels are so substantially higher in the rip-off republic that teachers in Ireland need this extra pay just to break even? Unfortunately, eurostat figures on comparative price levels don’t back that assertion up. Whereas prices in Ireland are indeed 15% higher than in France, the single teacher above enjoys 75% more take-home pay. In Finland, prices are just 2% below Irish prices, but an Irish teacher enjoys a wage that is 54% higher than a Finnish counterpart.

If prices don’t explain the international gap, maybe Irish teachers work a longer year than their eurozone counterparts, explaining why they get paid more. Unfortunately again for Irish teachers, the opposite seems to be the case, as the graph below shows. Teachers – particularly secondary school teachers – work less days on average than almost all their eurozone counterparts. This leaves the amount paid for every day spent teaching in Ireland looking pretty unsustainable. Factoring in the pension levy only scratches at the surface of the problem.

Days taught by teachers and earnings per day of teaching

Days taught by teachers and earnings per day of teaching

Ireland is currently grappling with a huge fiscal and economic crisis. The government faces lots of tough choices about what stays and what must go. The fact that they’ve chosen to cut back some education services suggests that they are missing what should be obvious: the more we bring Irish teachers’ salaries back in line with counterparts elsewhere in the eurozone, as well as with other sectors in Ireland, the less we’ll have to cut back on the range of education services we offer.

As teachers of maths should appreciate, the arithmetic is simple. The government needs to make savings across the board in publicly-funded services, including education. To make savings in education, we can either cut back on education services (quantity) or cut back on teachers salaries (price). Teachers have so far been successful in passing those two issues off as one, and thus creating a somewhat bizarre alliance of service providers (teachers) and consumers (parents/children).

Given how Irish teachers’ pay compares domestically and internationally, it’s time we separated out teachers’ pay from education cutbacks and took a long cold look at what our teachers are paid.

The Humpty Dumpty threat: Will the euro fall apart?

Ricky Gervais has a very funny sketch about how ludicrous the children’s rhyme, Humpty Dumpty, is. In particular, employing horses, who don’t even have thumbs let alone opposable ones, to put him back together again. Actually, it’s so good, I’m going to embed it here:

Anyway, spurious introduction aside, apparently according to the Financial Times (thank you irisheconomy.ie), the euro is in danger of becoming our very own Humpty Dumpty, thanks in no small part to the risks associated with Ireland (as well as Spain and Greece). The video is well worth a watch for the spreads he shows emerging for the triumvirate of risky eurozone members. He refers also to intrade prices of 30% for one country pulling out of the eurozone in the near future, which he rightly points out are amazing odds for what would seem to be such an extreme event.

And if that were to happen, would anything policymakers try to do in response to fix the euro as a viable reserve currency be just the equivalent of sending all the King’s horses to mend a broken egg? Interesting times…