Monday 24 October 2016

Borrowing to boost public sector pay is unfair on other taxpayers

The Government has caved in to demands for public pay hikes and it is the rest of us who will foot the bill, says Dan O'Brien

Published 03/05/2015 | 02:30

Greek municipal workers protest
Greek municipal workers protest

Who awards pay increases? The answer, almost always, is profitable entities. Loss-making businesses and organisations are much less likely to add to their costs by inflating their wage bill. If they do so, they make even bigger losses. That can put the entire organisation at risk.

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The Government is still loss-making. Last year, one euro in every nine that it spent was borrowed. The gap is expected to close a little this year, but the latest set of figures from the Government, published last Tuesday, showed it will not narrow by much.

This year's deficit is projected to be €4,600m. That amounts to almost €2,500 for every working person. Next year, the Government plans to shrink its overspend further, but only to €1,800 per employed person.

Despite still being deep in the red, the Government is planning on giving its 300,000 employees a pay rise. The increase will be funded with borrowed money. This gain for public sector workers will be paid for by everyone, as taxes will have to be used to pay the interest on this borrowing and, ultimately, to repay it.

Few people disagree with some form of redistribution in society. But very few believe, as a matter of principle, that wealth should be redistributed from people who earn less to people who earn more, or from those who can lose their jobs to those who enjoy cast-iron job security. But that is what the Government is committed to doing.

Average pay in the public sector is 50pc higher than average pay in the private sector. Not only has that gap widened over the years, but the usual explanations for its very existence are dubious, if not spurious.

One of those arguments is that skills levels tend to be higher than in the private sector and, as such, pay should be higher. While it is true that skills levels are on average higher, it does not mean that pay should be 50pc higher.

In many northern European countries, where fairness is taken seriously, public sector workers are paid less than their private sector counterparts because it is recognised that greater job security is worth a great deal. In the troubled Mediterranean countries, by contrast, large public sector pay premiums exist. In terms of the power of public sector vested interests, it is clear that Ireland has long been much more southern European than northern European.

But the Government's caving into pressure from public sector unions to increase pay before it has stopped adding to the national debt is depressing, even in the context of Ireland's Mediterranean traditions. Rather than stating that the legislation it enacted to cut its pay bill would remain in place until it is balancing its books, the Coalition has refused to stand up to one of the most powerful vested interests in the country.

If the Coalition had ever been serious about facing down those who wield most clout, it would have rejected from the very beginning the notion that pay increases should be "restored" to 2008 levels, as if bubble-era pay levels were a right.

The very notion of "restoration" is absurd. The tens of thousands of unemployed building workers would like to have their jobs restored. But there is no prospect of that happening because building employment up to 2008 was a bubble. Bubbles burst because they are by their nature transitory.

That is well reflected in the public finances. Total government revenue last year stood at just under €65bn. That is €5bn lower than in 2007, when revenue peaked. It is lower despite everyone who is at work paying a lot more tax on their incomes and pretty much every citizen paying more in other taxes, such as VAT.

Yet another reason the notion of restoration does not stack up is because most of the pay increases in the public sector in the years up to 2008 have been maintained.

Adjusted for inflation, Ireland's public pay bill doubled between 2000 and 2008, six times greater than the real increase in spending on public pay across the eurozone (where the aggregate bill rose by just 17pc). Last year, Ireland's public pay bill was down from its 2008 peak, but it had only returned to levels recorded between 2006 and 2007.

If the Government has failed the fairness test when it comes to who benefits from the money it will borrow, it has also failed in addressing the public pay issue for the longer term. Over more than four years in office it did not put in place any mechanism to ensure fairer and more transparent arrangements for the setting of public sector pay.

The traditional way of setting pay has never been good, and the good times up to 2008 showed just how bad it is. Closed door negotiations between unions and the Government alone are a terrible way to set pay for a number of reasons.

In the private sector, pay bargaining between employer and employee is clear and straightforward because each side has relatively narrowly defined interests. But governments, when negotiating as employers, have interests far beyond getting value for money from the public pay bill. They have an innate instinct to buy off those who are capable of kicking up most, both because they want a quiet life and because those who benefit are more likely to re-elect them.

Setting pay for 300,000 employees across the many functions of the public sector is necessarily complicated. It is therefore necessary to have an in-depth understanding of many issues concerned, including, among others, comparable pay rates in the private sector, comparable pay rates in other countries' public sectors, basic affordability issues and the size of the total pay bill compared with other countries.

Such analysis needs to be done and it needs to be done in a transparent manner. The need for transparency was underscored during the bubble era, when attempts were made to benchmark public sector pay to equivalent rates in the private sector. In principle, this was a very good idea. But in practice, it was rigged to provide cover to a Government intent on buying off public sector interests. So blatant was this rigging that one member of the group tasked with doing the analysis quit in disgust.

A more formalised arrangement, along the lines of the public finances watchdog, the Independent Fiscal Advisory Council, would be the best option. Such a body could be tasked with carrying out analysis, improving public understanding of the issues and making recommendations on public pay changes.

Public servants have suffered significant reductions to their incomes over the past seven years which they never expected to suffer. This has been very difficult for many people and it would be unfair not to acknowledge it. And the effects of that income loss have been confounded by a sense that some of the criticism of the public sector in national discourse has been less than fair.

The divisiveness generated by issues around public sector pay is bad for everyone. If transparent exercises were conducted by independent people in properly structured institutional arrangements, there would be far less scope for division because nobody would feel somebody is getting something that they shouldn't be getting. How public sector pay is set is not simple, but the process can be made far better than it has traditionally been. It is a great pity the opportunity to do this during the economic crisis was not taken.

Sunday Independent

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