Thursday 23 November 2017

Weak Government is giving in to union wage demands, says leading economist

Expenditure and Public Reform Minister Paschal Donohoe. Photo: Tom Burke
Expenditure and Public Reform Minister Paschal Donohoe. Photo: Tom Burke

Anne-Marie Walsh

A leading economist has claimed there is no room for more pay rises for public servants and the Government is tolerating union demands only because it is weak.

Colm McCarthy notes State employees' wages are already improving through hikes agreed under the Lansdowne Road Agreement. They also get increments, and inflation is close to zero.

He does not understand why Expenditure and Public Reform Minister Paschal Donohoe says further pay hikes are on the agenda.

During the week, Mr Donohoe said "thankfully" the Government was at a point where it could consider and negotiate modest improvements to public service pay and conditions.

"Pay is improving anyway and the rate of inflation is virtually zero, so I don't understand," said Mr McCarthy, famous for his An Bord Snip Nua report.

"If you had a Government in place with a majority, it would resist these demands and would be saying that the Lansdowne Road Agreement still has two years to run."

His comments come as talks are due to begin on Monday on an extension to the Lansdowne Road Agreement, which expires in September next year.

Unions are pushing for pay rises. Their goal is to tell their members they have taken down the Fempi emergency legislation that cut their pay. If they get between 1pc and 2pc a year over three years, they would wipe out the €692m pay cuts left under Fempi that still take a hefty slice from pay packets.

The Government is likely to agree pay rises but the other measure imposed under Fempi - a €720m a year pension levy - may be replaced by a higher pension contribution.

There is just €500m spending capacity, or fiscal space, next year, although €2.7bn is available for each of the three subsequent years.

But Mr McCarthy argues that a recent Draft Stability Programme update by the Department of Finance that went largely under the radar shows there is very little revenue that won't be spoken for. This report highlighted the demands an ageing population in the public and private sector, and most particularly their pensions, will put on the Exchequer.

He also emphasised the burden of a €50m deal for gardaí, and follow-up €120m for those that did not get it, while staff at every other State company want a deal "as if the public finance problems have been solved". But the debt has gone up.

"You can only spend €10 once," he said. "The bottom line is there's not a lot of fiscal space. The other point is that the Brexit threat is very serious and large sections of Irish industry could hit a stone wall in the next few years. There's no good news coming out of this, bar a couple of hundred thousand refugee yuppies coming to work in the banks.

"What I'm really afraid of, is because there isn't really a government at the moment, is that they'll give in to all this stuff. You can do that while you can borrow money cheaply, but it's just a few short years since they couldn't borrow money at all and the national debt is higher than it was then."

He can't think of a single Dáil deputy who has reminded us that the State is heavily over-borrowed or that there are a lot of risks out there if its finances are not kept under control.

Economist Dan O'Brien is in a similar camp to Mr McCarthy. He said the fiscal space was very tight and there was a little money to cover huge demands like school places and social housing due to population growth. He said a 2.5pc annual increase in Government expenditure was anticipated up to 2021. "That kind of increase given the demographic and capital expenditure pressures is a pretty tight one," he said.

The fact that the money coming in to cover increases in spending is not on target, is a really big problem.

Based on that, he believes even the public pay rises already committed to - €290m this year and €287m next year - are looking more difficult. "It's very difficult to see how restoring pay to bubble-era levels is justified and from a fiscal space perspective, it's looking increasingly difficult. An increase in spending on public pay now has to come from other taxpayers, so it's very difficult to say on equity grounds that that is fair."

However, economists are divided and former ESRI Professor John Fitzgerald said it was appropriate to pay an increase linked to what was happening in the rest of the economy. However, a pay rise next year would be closer to 1pc as commitments already made should be taken into account.

Goodbody stockbrokers economist Dermot O'Leary said there was capacity for pay rises but it was limited. It should not exceed the private sector and be matched with productivity.

Irish Independent

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