Monday 25 March 2019

On top of the world

Irish public sector pay is growing at a faster rate than that of any other country in the EU and the actual pay levels have overtaken those of almost every other OECD country

Danny McCoy

The public sector pay and pensions bill for 2008 has been set out in the Pre-Budget Estimates at over €18.6bn on an existing level of service basis. This public pay bill already constitutes 38pc of the overall current public expenditure and is a 6.2pc increase on this year.

We do not know what awards, if any, the Public Sector Benchmarking Body might make, but what we do know is that for every 1pc extra proposed, it will cost an extra €186m per year to the taxpayer. Such an amount could be used to widen the standard rate tax bands by €1,500 or reduce the top rate of tax from 41pc to 40pc in 2008.

What we also know from official earnings data collected by the Central Statistics Office is that public sector workers in Ireland are on average better paid than those working in the private sector.

We know too that Irish public sector workers in general are paid more than their international comparators. The European Commission's EUROSTAT data show that in Ireland the average public sector employee earned €46,000 in 2004 compared to €36,000 in the private sector.

The data also show that Irish public servants are higher paid than their counterparts in each of the countries reviewed. Indeed, in Denmark, Germany, Netherlands, Finland and the UK the public-private wage differential is reversed.

On average, public sector pay in the other EU countries examined was €11,000 lower than in Ireland.

An average teacher's salary in Ireland in 2004 was found to be over €48,000 -- some 35pc ahead of that in the UK and 25pc higher than Germany. Health and social workers in Ireland earned an average of €46,000, which was nearly double average earnings for the sector in Finland and about 30pc ahead of those in the UK.

These were the highest rates in the study. Data, also from the EU Commission, show that average economy-wide earnings in Ireland are 13pc higher than in the euro area.

The differential of 30pc enjoyed by Irish public sector workers is considerably larger than this and suggests that public sector pay in Ireland has fallen out of sync with that elsewhere in Europe.

Public sector pay claims in Ireland are often based on the fact that Ireland is an expensive country in which to live.

While there is evidence to suggest that Ireland has become more expensive than the EU average, the higher cost of living is more than compensated for by comparably low income tax rates. The Irish income tax burden is the lowest in the OECD and when public sector wages are examined on an after-tax basis the pay premium enjoyed by the Irish public sector rises to over 50pc.

The previous Public Sector Benchmarking exercise has been central in accelerating the pay premium enjoyed by Irish public sector workers in recent years. Research from the European Central Bank (ECB) sheds further light on this.

It found that between 1999 and 2006, average public sector pay in Ireland increased by 67pc, while that in the euro area grew by just 22pc.

In the private sector, average pay in Ireland increased by 42pc compared to just 15pc in the euro area. Benchmarking has resulted in Irish public sector pay growing faster than any other country in the EU and actual pay levels overtaking those in almost every other OECD country.

A vibrant, efficient public sector is a critical component in the competitive success of trading nation like Ireland.

The nature of the activities carried out within the public sector, particularly in administration roles is broadly comparable with those undertaken in any other advanced society.

A situation that significant pay premiums exist over comparable international economies, must either be justified by verifiable greater productivity or is a competitive drag on the internationally tradable sectors of the economy.

If the differential is productivity justified, then there can be few qualms about the significant international pay premium observed in Ireland. Without sufficient transparency, such a benign assessment cannot be easily arrived at.

A loss of competitiveness in the private sector gets remedied by either wage adjustment or job reductions. Such mechanisms are not readily apparent within the public sector.

Building permanent costs into the public sector pay and pensions bills should not be done lightly. The public sector has shown capacity to respond and modernise across a swathe of institutions.

The reality may be a lot better than the perception. A more transparent benchmark process on this occasion will go some way to aligning both.

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