Mismanaging expectations at early stages building up to the budget

Wed, Aug 27, 2014, 01:00

To govern is to choose, not to speculate and to raise public expectations that cannot later be met. The Government needs to manage economic expectations carefully, and this is best achieved by underpromising and later overdelivering. Since Ireland’s successful exit from the bailout programme, and with clear signs of economic recovery evident – robust growth, falling unemployment, and increased consumer confidence – Government ministers have hailed the end of austerity, and promised better days ahead. But, in their enthusiasm – and anxiety to recover lost support – they may have gone too far, too fast.

Last month, Minister for Agriculture and Defence, Simon Coveney, promised “relatively modest” tax changes in the 2015 budget. This month Public Expenditure Minister Brendan Howlin assured public sector workers that negotiations would start next year to reverse public sector pay and pension cuts.

Transport Minister Paschal Donohue then moved quickly to reassure private sector workers that they too would not be forgotten. For weeks, the public has heard a succession of senior and junior ministers promise lower taxes in what seems like a competition between the Coalition parties to outbid each other before Budget Day on October 14th. This week Minister of State for Finance Simon Harris again signalled the likelihood of income tax cuts, with a reminder of how a high marginal tax rate (41 per cent) applies to what by international standards is a low level of income – earnings over €32,800.

Mr Harris has accused some in the media of trying “to drag the country” into a debate about who should benefit first from an improvement in the public finances. However, any media involvement in the issue followed, rather than preceded, the comments of the respective Labour and Fine Gael ministers. In the private sector the market remains the ultimate arbiter of pay levels. In the public sector the Government, as the employer, ought to base its decision on pay restoration on what the public finances can actually afford.

In that regard, the latest Central Statistics Office figures indicate that average weekly pay rates in the public sector are almost a third higher than those in the private sector. And, even after adjusting for differences between both sectors the sizeable pay gap represents a significant pay premium. It is also widening. Between 2003 and 2008, pay rises in the public sector, boosted by benchmarking and other agreements, far outstripped the private sector. The cut in public sector pay in 2009, via the public service pension levy, was offset for many by continued payment of increments, while the remarkable pension benefit for retirees – the pay parity link – where pension paid is linked to the current salary of the grade held before retirement, has been retained.