Now that the property bubble has burst, it’s time to deflate the second great bubble that threatens to derail the economy: the public sector, which employs 373,000 people who suffer only pin-pricks of discomfort while the private sector is undergoing a a dramatic squeeze. It was remarkable that last week’s budget, rightly attacked for multiple reasons, failed to start the long-overdue process of reforming and reducing the excessive and unaffordable Irish public sector. It was Brian Lenihan’s single greatest failing, the economic consequences of which political cowardice threaten to be devastating.

This recession is going to get considerably worse. What Lenihan failed to make clear last Tuesday is that we have entered an era of permanently lower tax revenues, which means services will have to be cut because we just don’t have the money to pay for everything we want.

The idea that all our services can be paid from borrowing is nonsense. It’s true that we have some flexibility to borrow — because we paid down the previous national debt reasonably well over the past decade — but that is constrained and cannot be continued indefinitely. When we borrow it must only be for capital investment. But capital is where the bulk of next year’s cuts are going to be, while current spending is slated to increase by 7%, just a touch lower than the 9.5% increase this year. That’s insane, as is the decision to raise taxes in a way that will guarantee lower consumer spending next year.

Many public-sector workers and their trade union representatives hate this sort of analysis. They prefer the line that workers should not have to pay for the reckless business engaged in by banks and property speculators that has brought the economy to its knees. Redundancies are not up for discussion other than in the most extreme circumstances. All they are prepared to talk about is a few efficiencies here and there.

The irony, of course, is that the massive growth in public-sector workers, including civil servants, over the past eight years was generated by the taxes paid by those same reviled bankers and speculators. The government used unsustainable tax revenue from the property boom to add 71,000 public servants from 2000 onwards, more than half of them since 2002, a year in which the government announced a recruitment embargo.

Worse, it continues to throw manpower at perceived poor performance in the public sector rather than investigating whether reformed structures would be a better option.

Then there’s pay. Thanks to benchmarking and other increments, there has been a 118% increase in public-sector pay and pensions since 2000. The bill for 2008 will be not far short of €19 billion, which is almost half of all public current expenditure. And it is a permanently recurring bill unless the numbers employed are slashed.

New figures issued by the Central Statistics Office (CSO) show average annual pay in the public sector is now €49,000. In the supposedly more prosperous private sector it is €41,500, while the average industrial wage is €34,000. It is clear now why the recently concluded national pay deal built in an 11-month pay freeze for the public sector, but just three months for the private sector (not that the majority of privately owned companies have any intention of paying it after that). It is also clear that the 6% increase promised after the pay freeze thaws cannot be afforded.

There are many poorly paid public and civil servants who earn a lot less than €49,000 a year and who deserve protection in any reform programme. That said, few of them are on the minimum wage as many workers are in the private sector. The majority of state employees enjoy more flexible working conditions, guaranteed pensions and job security, too. Nice work if you can get it.

Incredibly, it was also revealed last week that the number of public servants, excluding the health sector, rose by 8,600 in the first half of this year, while 16,500 people were made redundant in the private sector.

An argument can be made that some public-sector workers should be immune from cutbacks, such as teachers, nurses and gardai, because they provide essential services. But as the transport minister, Noel Dempsey, argued cogently at an economic conference in Kenmare last weekend, it should be far easier to get rid of slackers than it is.

Can anyone in the public service really claim that all the extra numbers employed by the state in the past decade were absolutely necessary? That all of those employed work diligently? That the same work could not be performed by fewer people, as is happening in the private sector? Of course there are lazy and incompetent people in the private sector, too. The difference is they tend to be found out more often and removed more quickly.

The government’s approach to dealing with the public sector is cowardly. Last week’s “cull” of 41 quangos (only another 750 or so to go) provided no estimate of the financial benefits or the number of redundancies that will be achieved.

By studiously ensuring that it does not alienate one interest group — and its powerful leaders in the trade-union movement — the government has managed to outrage just about everyone else instead, particularly with its ham-fisted attempt to restrict medical card eligibility for pensioners. It is incredible that this particular €100m cost saving was identified in a €16.5 billion health budget rather than dealing with the overpaid, underworked pen-pushers who populate the Health Service Executive. Could not the overseas aid budget have been cut by this amount instead, still allowing a generous €750m to be exported to the third world? And why do we give €70m each year to fund prizes for horse and greyhound races?

The circumstances in which the medical card debacle arose is just another example of how this government wasted public money on vote-grabbing initiatives during the boom. There should never have been medical cards for wealthy pensioners, just as the massively increased child benefit payments (and the subsidies for parents of the under-sixes) should have been taxed to allow for greater equity. You can guess now that efforts to reform child benefit in the next budget will be forgotten.

By next October, however, the economy could be in rag order. The domestic economic position is deteriorating fast, and what's going on in the rest of the world is scary.

The scale of the tax “initiatives” introduced in the budget will depress consumer and business activity further. The budget, incredibly, is predicated on an increase in consumer sales of 0.5% next year, even though this year’s rise is a mere 0.7%. Does Lenihan really believe consumers will spend more next year when they have far less cash to spend?

In fact, almost all the projections upon which his budget is based are disturbingly optimistic. He is predicting negative growth of just 1% next year, but I believe the recession will be deeper and longer than he suggests and that it demands more rigorous action on spending than this budget has introduced. Last week’s medicine was painful, and it still won’t cure this economy’s ills.

matt.cooper@sunday-times.ie

Times Recommends

• Mandela’s tribe threatens President Zuma
• The French empire strikes back
• Wife of cheating governor exacts a political revenge