independent

Saturday 19 April 2014

Brendan Keenan: Public pay plan passes cruelty check

WHO will stand on either hand, and keep the bridge with me? The plea of the old Roman hero came to mind when several respected colleagues in the commenting game began to complain about the "unfairness" of new schoolteachers earning perhaps 30pc less than established ones.

It is an odd business, to be sure. But as the economists (and commentator) Colm McCarthy said on a different matter: there is no shortage of compassion, only a shortage of cash.

A big shortage of cash. The plight of new teachers and other new entrants to the public service cannot be separated from the Croker arguments about cuts to existing public sector pay. Yet already, it is being separated.

At the core of this oddity is the incontrovertible evidence that Irish government workers are paid too much -- whether by comparison with the output of the Irish economy, or the earnings of private sector workers or government workers in other EU states.

We also know exactly how this happened, and when. A perhaps genuine belief that the private sector was creaming it during the boom years led to a benchmarking exercise. The exercise discovered that the belief, however genuine, was mistaken.

There was no falling behind the private sector. But the pay rises went ahead anyway.

So much is history. But such a history means that the only reason for not cutting public sector pay by a further 15-20pc is that it would be just too cruel. Spending expands to meet incomes and public sector workers have mortgages and other basic commitments based on their existing pay.

It would impose huge hardship if their pay were brought back to where all the graphs show it should have been in 2012, crash or no crash.

History, however, is being ignored. Public sector pay levels are defended as justified, rather than on the grounds that, while they cannot be justified, there is a limit to how much they can be cut.

Unless that argument is accepted, it is only a matter of time before the first relativity claims are made to reduce or remove the differential with new entrants -- helped by the harping on about fairness.

That would spell big trouble. It seems plausible to say that what happens over the next five years will largely determine the next 50. Half a century is a long time but the longest journey starts with a single step, as they say. The first steps will be vital, and have to be taken soon.

Last week's three-year forecast from John FitzGerald, of the ESRI, suggested that the underlying "structural" public finances, which are not affected by the ups and downs of the economy, may not be in balance by the target date of 2015.

It might take a year or two more, and only then can the austerity programme come to an end. But its ending is not what many people probably imagine. There can be no room for any significant increase in public spending, or reductions in tax, even after balance is achieved.

The reasons were set out convincingly in last month's report from the semi-official Fiscal Advisory Council.

Ireland will have to move from that balance to a surplus, both to reduce debt levels (whether bank debt has been restructured or not) and to comply with what is now a legal requirement under EU fiscal rules.

By then, it must be assumed, the economy will have returned to normality, but public spending will have to grow at a much slower rate than economic growth and tax revenues.

The analysis from the council is stark: "This scenario allows for very low expenditure growth and would require strict expenditure restraint in the absence of discretionary tax increases, with spending continuing to fall as a share of GDP."

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That share is already at 40pc. Taxation will reach crippling levels if it goes any higher, but those cost pressures from an ageing population will show as early as 2025.

Which in turn means even tighter control on other areas of spending, as well as radical changes to health and pensions. The hybrid public/private Irish health service looks like it may well collapse over the next decade without the annual injection of money at twice the rate of economic growth to which it has become accustomed. It will have to move either to a fully public system, with a cap on spending as a percentage of national income, or a fully private one, funded by insurance but tightly regulated by government.

Neither looks politically possible at present, but officialdom had better have the plans ready for when the present system is finally seen to fail.

Pensions are simpler, but all pretence of having a policy has vanished in the past few years. As the British introduce automatic enrolment in private pensions -- ideas mulled over at length here in the early 2000s -- the Irish private system heads for extermination and the public one for bankruptcy.

The problem with public sector pensions is the same as with public sector pay. The present system is simply incompatible with all, but ridiculously optimistic about future economic growth. This seems to have escaped everyone in the fuss about allowances and increments. Provided no more allowances are handed out, they are a fixed cost and pose new problems for the future.

Annual increments, on the other hand, add almost 1.5pc a year to the public pay bill.

As such, they come close to half the total increase in pay, which will be affordable for many years -- and perhaps forever if we are finally to manage our affairs properly.

Unless this is dealt with now, when the crisis can be blamed, it is unlikely to be feasible once the troika has packed its bags.

Even with increments absorbed into normal pay increases and future pensions capped and indexed to state pension increases, the existing levels of pay look incompatible with an anticipated future of 4pc cash growth in the economy and a permanent underlying surplus in the public finances.

That is why new teachers, and all new government workers, will have to earn less than incumbents.

They will still earn a premium over their private sector equivalents, but not such an egregious one.

All of us will have to pay for many years to maintain the privileges of the lucky generation in public sector employment before 2010.

While I do think that is the fair thing to do, I would point out that their colleagues in Greece, Latvia and Iceland enjoyed no such protection.

It would not take much to make me change my mind, but it would take nerve to say so. Even Horatius got some support in the end.

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