Public sector pay must fall 6pc to balance books
Wage cuts better than any job losses, says research body
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A SIX per cent cut in public sector pay will be needed to make the Government's budgetary sums add up, according to calculations from the Economic and Social Research Institute (ESRI).
Those sums are already under strain, the latest quarterly commentary from the ESRI says. It expects a deficit on government operations of €20bn this year -- equivalent to 12.2pc of the economy's output (GDP). For next year, as the economy continues to shrink, the deficit will be 11.4pc of GDP.
Finance Minister Brian Lenihan's targets in the April emergency Budget saw deficits of 10.75pc of GDP in each of the two years. But the real slippage could come in the following years, with the ESRI seeing little sign of good growth in the medium term.
"We are not really seeing any sign of robust growth, even after 2010," said senior researcher Alan Barrett. "The recession continues into next year, with a risk that ECB interest rates will start rising while the Irish economy is still vulnerable."
The Government also expects continuing recession next year, but is banking on growth of 4pc from 2012 onwards to get the public finances back to stability by 2013. Prof Barrett said the Department of Finance's figures implied pay cuts of 6pc.
Unfair
"Our forecasts contain an implicit 3pc pay cut, but the deficit still comes out at €18bn next year. The Budget figures have cuts of €1.5bn a year in current spending, but no change in government 'consumption' of goods, services and labour. The only way to achieve that is with pay cuts."
The ESRI believes public sector pay cuts are justified because of its own research showing they are 20pc above private sector equivalents, when comparing like with like.
"The raw comparison of a 47pc difference is unfair to public sector workers. But our view is that there is still a way to go on public pay. We have to understand that what the Government is trying to achieve in correcting the public finances is enormous."
He said there was little hard evidence of cuts in private sector pay, although they would be needed to restore lost competitiveness. "We would prefer pay cuts to job cuts. It is better for firms to keep staff if possible, to take full advantage of recovery when it comes."
The report says the most optimistic sign is the fact that the shape of the recession is becoming clearer. It is the first time for several quarters that it has not had to reduce its short-term forecasts, and is sticking with a 9pc contraction this year. It expects the fall in economic activity to come to an end in the middle of next year.
"A return to more robust rates of growth will require a number of factors to operate in Ireland's favour," it says. International recovery will have to feed into Irish exports, which will improve confidence, but there will also have to be an improvement in the budgetary situation and a banking system able to resume flows of credit."
The ESRI has improved its forecast for unemployment to 16pc next year, but this is based on higher emigration of 40,000 -- much of it from unemployed foreign workers leaving Ireland.
"Job losses among foreigners amounted to 55,000 in the 12 months to March, but the number in the country went down by less than 21,000," Dr Barrett said.
The ESRI expects interest rates to remain at 1pc until at least the middle of next year. But it worried that fears of inflation might persuade the ECB to raise rates at the first signs of recovery, which might be too soon for Ireland.
- Brendan Keenan
