Wednesday 26 October 2016

It's déjà vu all over again as pay rises set to blunt the chance of a competitive edge

Published 14/05/2015 | 02:30

Pensions are perhaps the most important hidden cost. Around 140,000 former
public servants are paid €3.1bn annually
Pensions are perhaps the most important hidden cost. Around 140,000 former public servants are paid €3.1bn annually

Here we go again. The Government has started talks to restore public sector pay to pre-recession levels. Critically, this process excludes 1.7 million non-State sector workers. Taxpayers and those dependent on welfare also have no say in critical decisions affecting their standards of living beyond 2017. Those representing employers will be personal beneficiaries for their future salaries and pensions. When determining whether the minimum wage should increase from €8.65 per hour there's preparatory independent analysis through the Low Pay Commission. But no independent body is put in place to consider all the criteria for public pay. Ministers have vested party interests in securing a populist vote-winning deal to gain re-election.

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The total Government pay bill in 2001 was €10.2bn. Subsequent to benchmarking and generous multi-annual increases, this rose to €17.6bn in 2007. While inflation was 18pc over six years, public sector pay rose by 59pc; the workforce increased by 38,000.

Post-crash, this was clearly unsustainable economically; pay costs were sustained only by deficits and borrowings. Private sector redundancies amounted to 330,000 - there were no compulsory redundancies in the public sector. Public sector pay peaked at €18.7bn in 2008. During the austerity years, numbers were rationalised from 279,000 in 2009 to 264,000 in 2012. If you exclude pensions, the current wages bill is €14.2bn.

But pensions are perhaps the most important hidden cost. Around 140,000 former public servants are paid €3.1bn annually. The vast majority of public sector workers receive 50pc of their final salary upon retirement, as well as a lump sum. Reliable actuarial assessments of future State pension costs stand at €98bn, entirely unfunded. Unions seek the absolute abolition of the 7.5pc pension levy as an opening bargaining chip.

This levy only partially covers actual pension costs. Half of private sector workers have no pension provision whatsoever. Defined-contribution pension schemes, without any guarantees as to minimum levels of stipends, are all that's available. Pension rates apply to average earnings over an entire career. This only applies to new entrants in the civil service; while the vast bulk of State employees had no alteration to pension benefits. There are no proposals to alter arrangements for incumbents, based on some form of averaging going forward.

A job for life (35 to 40 years) and guaranteed annual increases through increments (costing €1.4bn) are not available in private firms. Maximum job security in the market economy would be five years. Pay hikes are compensation for increased costs of living or earned through profits/performance.

Despite these gigantic gaps in job security and defined benefit pensions, average weekly earnings in the public sector are €905 per week, compared with €605 per week for exposed workers.

Variable skills within the public sector, including postgraduates, don't justify this differential. European surveys of salary comparisons reveal much narrower ratios, notwithstanding the same demarcations. There isn't anyone at the table to represent or articulate these disparities over the coming weeks. The Government says €250m-€300m is the maximum envelope available to be conceded in the context of €750m being allocated for all extra public expenditure. Politics is about choices and fairness.

More than 90,000 people depend upon the State for a roof over their head. Some €300m means 2,000 of those can have accommodation. Childcare costs for working parents often exceed €1,000 a month. What else can you get for €300m? It buys two years' free preschool crèche care at limited levels of 15 hours a week. Or it could reduce outpatient and hospital treatment waiting lists by many months by increasing capacity.

With no welfare increases for several years, a 2pc increase equates to what's to be given in these pay talks. The homeless, unemployed, sick and struggling young parents won't be there at the divvy up of pay rises. Union bosses lay down markers that productivity won't be included in return for any extra pay. Over the past two years, significant factors in end-of-year bailouts for Department of Health/HSE signalled the failure to implement agreed savings under the Haddington Road agreement. Some €1bn was to be saved off public sector payroll - only €500m is now targeted. This unfinished business seems to be forgotten.

New work practices involving longer rosters in hospitals for operating theatre capacity and diagnostic equipment mean greater asset utilisation and more efficient outcomes for patients. Application of computer technology in automated office administrative functions systematically reduces payroll costs across the industry. Government agencies lag behind, yet no one is incentivised to drive this agenda forward.

The price of buying a house or a meal has inbuilt tax costs. Perhaps 20pc of your restaurant bill and one-third of house building is attributable directly to Vat, payroll taxes and State levies. Beyond austerity, the country's future export levels and living standards depend on national competitiveness.

Yet nobody from the National Competitiveness Council is feeding data as to the impact of public sector pay increases.

The Independent Fiscal Advisory Council has no mandate to advise or adjudicate on issues of budgetary affordability of sanctioned pay hikes. Both bodies should be part of a public sector pay commission.

There's ample time for such an independent fair analysis, as the Haddington Road Agreement runs until the end of June 2016.

Such prior appraisal can also deal with internal issues, such as: a brain drain from the senior echelons of the public sector; the opening up posts at middle management; a moratorium/embargo on overall recruitment; incentives to reward better performance and enhanced accountability.

All workers, including public sector workers, equally increase net pay by cuts in USC/PAYE. Any attempt to repeat national gains, as in the late 1980s Programme for National Recovery, have been ignored, trading off pay restraint in lieu of tax concessions.

It seems Croke Park and Haddington Road are to be followed by Strawberry Beds - happy days are here again. The key lesson of the Bertie Ahern era was that public service pay processes should not be left solely to insiders, overseen by politicians looking out to garner 300,000 public sector votes. Once more we have wasted a crisis, and normal service resumes.

Irish Independent

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