The three national agreements have played a crucial role in turning the economy around and building competitiveness. As negotiations on a new agreement to succeed Partnership 2000 get under way, unrest is evident among some groups in both the public and private sectors. This is due in part to perceptions that the rewards of economic growth have not been fairly shared.
We are proposing a model for consideration by the negotiators which we think addresses this issue of sharing prosperity. It also aims to safeguard competitiveness and maintain fiscal stability.
It is specifically designed to provide for "gain-sharing" in the public service but it can be extended (with or without modifications) to the private sector, to pensioners and social welfare recipients.
The broad lines of the next Partnership Agreement should be determined as before, i.e. the social partners should negotiate a multi-annual arrangement. In contrast with previous arrangements we see two elements in the agreement:
Provisions for a "platform" or basic pay increase;
An annual lump-sum growth dividend, which if reinvested, could be tax free. Payment of the growth dividend would be conditional on agreement between employers and employees to appropriate productivity measures.
The basic increase should be relatively low. Ideally, it should be pitched at the expected rate of inflation in the euro zone.
The growth dividend parallels private profit-sharing schemes - except that we propose that the percentage pay increases resulting from the dividend should be linked to the percentage increase in real GNP per person at work.
This measure mirrors national economic performance and provides a measure of the additional wealth created by people at work and available for distribution.
The basic concept is very simple. It would mean that every employee would receive a percentage increase related to the increase in real GNP per person at work. We go into the technical details in the full version of this paper, available on the web at www.ireland.com.
We propose for example that the Minister for Finance make annual payments into a statutorily established "Growth Fund" and we outline arrangements for smoothing out payments to take account of annual estimates of GNP and employment growth.
We have looked at the effects of this approach by using the central forecast for economic growth published in the recent ESRI Medium term Review 1999-2005. In this forecast the adjusted measure of GNP per person at work is projected to increase by 19.3 per cent over the three years 2001, 2002 and 2003.
If the growth dividend were linked on a one-to-one basis to this growth rate and if growth turned out to be in line with ESRI projections, the dividend would result in a pay increase of 19.3 per cent over the three years, over and above whatever basic increase was negotiated.
We don't think, however, that a 1:1 ratio would be justified, particularly if the agreement were to include, as we propose, a basic pay increase and if it included tax reliefs and increased public expenditure on key social services.
The ratio would be a matter for negotiation. For example, a ratio of 0.6 between the growth dividend and the increase in GNP per capita would yield an increase of 11.6 per cent for the dividend. If growth were higher than the ESRI predicted, the dividend would be greater; if lower smaller.
The growth dividend we have described depends essentially on the performance of the market sector of the economy. The public service contributes positively to economic performance if it provides efficient services. We do think it important for both equity and incentive reasons that the payment of the growth dividend should not be an automatic entitlement to be paid regardless of productivity improvements in the public service as a whole or in parts of the service. Payment of the growth dividend should be linked to agreement on appropriate productivity measures.
There is no reason why similar mechanisms could not apply to the private sector. However, where a company exceptionally felt that payments by reference to GNP could put its competitive position at risk, it could by negotiation substitute an alternative reference point.
We believe that the "growth dividend" should be paid to public service pensioners, as their pensions are linked to current pay levels.
The position for private sector pensions is more complex. At present these schemes are funded and some provide for defined benefits and others for defined contributions. At present, many post-retirement increases in funded schemes are related to movements in the cost of living. The consequences for such funded schemes need more detailed consideration.
The position is also complicated for social welfare beneficiaries. An argument in favour of including them is that it is generally accepted that social welfare benefits should move in line with general income movements. On balance we think that the dividend payment should be made to social welfare beneficiaries on the basis that all should share in the benefits of growth.
Should the performance-related element attract some form of favourable tax treatment? From an equity standpoint all forms of income should be treated in the same way. On this basis the "growth dividend" would be liable to tax.
However, it is very important to establish the principles of gain-sharing and flexibility. To accord the "growth dividend" a certain measure of tax relief would substantially increase the prospects of getting the concept accepted.
One option is to follow the treatment given to payments under approved profit-sharing schemes in the private sector. For example, if the "growth dividend" were invested in approved or designated investment funds for a minimum of three years, it could be free of tax. If it were taken in the form of cash it could be subject to tax in the normal way. Such a scheme would give an important impetus to private savings, which would be useful as we prepare for the demographic shift towards an older population.
The next Partnership Agreement is the first one which must take account of the disciplines of EMU. This will be difficult, at a time of rising expectations. The alternative to the model we have proposed is for a high basic pay increase, which could damage competitiveness and cost jobs.
Our model provides flexibility and equitable sharing of economic growth. If the economy does well the fruits of growth are shared more widely. If there is a shock, the adjustment is made more efficiently as the costs of adjustment are widely spread. It would also give further substance to social partnership which has underpinned the national agreements.
Dr Donal de Buitleir works in the private sector and was formerly Secretary to the Commission on Taxation.
Dr Don Thornhill is chairman of the Higher Education Authority and is a former Secretary General of the Department of Education and Science.
The authors are writing in a personal capacity and the views expressed should not be attributed to any organisation with which they are associated.
A full version of this paper is available at www.ireland.com
:quality(70)/cloudfront-eu-central-1.images.arcpublishing.com/irishtimes/VR3765MFOBH2NMV2QNICYDF67M.png)