A new approach to public sector pay vital for recovery

ANALYSIS:In its fiscal strategy for the post-troika medium term, the Government should rethink public sector salaries

This is set to be a pivotal year for the Government’s economic strategy. At the same time that it seeks to run an efficient and successful EU presidency, it must devote considerable energy to addressing both short-term and medium-term challenges in supporting economic recovery and the restoration of sustainability to the public finances.

In the short term, a basic challenge is to fully implement the measures set out in the 2013 budget. Around the world, implementation drift is a common factor behind the failure of recovery programmes, so the successful execution of the announced measures cannot be taken for granted.

In addition to the property tax regime, a key task is to secure the public sector expenditure savings and productivity gains that the Government believes can be achieved under the Croke Park agreement.

Moving beyond budgetary issues, the restructuring of the banking system remains a fundamental ongoing task for the Government.

In this regard, 2013 is a critical year in relation to the necessary resolution of troubled household debts in the context of new personal insolvency legislation. At the international level, the Government’s financial exposure to the banking system should be ameliorated by a re-engineering of the promissory notes and further progress can be envisaged on preparing the ground for the future disposal of the State’s equity stakes in the banks, whether to the European Stability Mechanism or private investors.

As listed in the memorandum of understanding with the EU-International Monetary Fund-European Central Bank troika, the list of short-term tasks for 2013 also includes water services reform, labour market reform and greater progress on the sale of State assets. More broadly, the Government has to continue rebuilding Ireland’s reputation as an attractive hub for international business, while supporting the growth of sustainable indigenous enterprises (in both the export and domestic sectors).

What makes 2013 a pivotal year is that, in parallel to accomplishing these myriad short-term objectives, the Government must also develop and communicate a credible medium-term fiscal strategy that will shape policy decisions in the post-troika era. The spelling out of an explicit medium-term strategy is essential for several reasons.

First, the Government will only be able to raise the large amounts of medium-term funding it requires from the markets (to fund the projected deficits from 2014 onwards and refinance the debt issues that will mature in the coming years) if there is clarity about how it intends to deliver the challenging fiscal targets required to gradually reduce public debt.

The progressive reduction of public debt (relative to gross domestic product) is desirable in view of the risks attached to a persistently high stock of debt, while it is also mandated under the fiscal treaty.

Second, the planned end of the troika funding programme means that the Government will have to take on a stronger leadership role in articulating and justifying the annual targets for the fiscal balance and mix of spending and taxation decisions in its medium-term strategy.

Put differently, the implication of restored economic sovereignty is that the Government must take the lead in setting out a fiscal programme that is both convincing to the markets and politically acceptable to the domestic electorate. Of course, the fiscal programme must also meet the minimal fiscal targets for 2014 and 2015 set out in the troika agreement and satisfy the new European-level appraisal system but these are consistent with a considerable range of fiscal strategies, so that domestic leadership remains paramount.