Monday 22 December 2014

People are weary of cuts but it's still too soon to start restoring public sector pay

Published 12/08/2014 | 02:30

Public Expenditure and Reform minister Brendan Howlin has taken the initiative in rethinking public sector pay levels. Photo: Frank McGrath
Public Expenditure and Reform minister Brendan Howlin has taken the initiative in rethinking public sector pay levels. Photo: Frank McGrath

Commentators - and even his coalition partners - are queuing up to slam Minister for Public Expenditure Brendan Howlin for suggesting there will be a roll back of public-sector pay cuts.

Pretty much everybody who is not actually related to Minister Howlin is having a go.

In fairness to the commentators, it is now clearly pre-election season for the government. But, in equal fairness to Mr Howlin, it is also the silly season, so things have become a bit overblown, too.

The issue animating our cadre of Howlin-slammers is the lapsing of parts of the legislation allowing a series of pay and pension cuts. The Financial Emergency Measures in the Public Interest (Fempi) Acts were introduced in 2009 - two in that year - and in 2010, 2011 and 2013. In 2013, the gross pay bill for the public sector was 29pc of all current expenditure, with pensions adding another 6pc. That's just under €19 billion.

Unlike last week, when employer and employee representatives were united in celebration of the government opening the sweetie tin at budget time, this week the employers' groups are dead set against any increases in the public sector wage bill, citing vast differences in pay.

Meanwhile, the unions are welcoming any increase in pay and conditions their members surrendered after 2009. It's nice to be back to normal, I suppose.

The data tells a conflicting story.

The CSO's recent earnings and labour costs report showed that, in the three years to the end of 2012, public sector earnings fell by €43 per week, or around 4pc, as compared to a decline of €7.60 per week or 1pc in the private sector. In net terms, the reduction for public sector workers would have been more, because their pension contributions are now at 17pc of their income.

Of course, this masks the fact that in the private sector during the collapse people were just let go, seeing their wages fall by 100pc, so these are not reflected in the CSO's figures. Around 32,000 workers have left the public service since 2009.

Despite this confusion over who exactly has taken more pain, I suspect many of those having a go at Mr Howlin haven't actually read the Fempi legislation. This is, as the title would suggest, emergency legislation. It is not supposed to last forever.

Each piece of legislation requires the Minister of the day to review it each year and provide a written explanation for why it has to continue for another year. Just look at section 12 of the 2013 Bill, for example. Rather than speculating on a giveaway to public servants, Minister Howlin actually has to re-introduce this legislation again each time if he wants it to continue. Fempi is not a bag of sweeties there to help buy off public sector workers and their votes.

It is a political time bomb to be defused.

If he does nothing, next year Mr Howlin will have to lay before the Dail the reasons for keeping public sector workers' pay cuts for another year, and then go out and ask them for their votes. Not a pleasant thought when your party is trailing in the polls.

So Mr Howlin has taken a bit of initiative in starting to think about which parts of the public sector can see their pay cuts reversed. Now is certainly not the time to increase government spending on pay and pensions. It's likely that 2015 will also probably be too soon, given the available macroeconomic projections. I say this as a public sector worker with three children.

The State's finances are too exposed to any kind of macroeconomic shock to allow any increase in government expenditure beyond the minimal increases required to keep the show on the road. Certainly, higher-paid public sector workers should not see any increases before 2016. They will benefit from the income tax cuts Minister for Finance Michael Noonan has flagged in the budget, and perhaps changes to the universal social charge.

Ireland will have to run a large surplus just to pay down its debt levels. Ireland's policy makers may be deceived by historically low borrowing costs for small peripheral States. The argument I have heard is: "Sure, if we have to borrow more to keep people happy, aren't we borrowing at cheaper rates?" This argument is a mistake, an expression of the market's need for yield when interest rates and inflation rates are very low, and nothing more. It also forgets about the stock of debt already outstanding, which the government will have to work to reduce in better times. People are weary of cuts and new taxes and increased work loads. Public sector workers and their families in particular sure are.

But the time is not right for these pay cuts to be restored.

Irish Independent

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