Public sector pay restoration: your spending power is not back to 2008

The nurses’ pay dispute has focused attention again on the unwinding of public sector pay cuts introduced during the economic crisis.

Much of this process is now complete and the amount most public servants are paid is returning to 2008 levels. However there are a couple of key factors which mean that they will still have less cash in their pockets to spend.

There are also wider issues – relevant to public servants and to their employer, the State, again facing a rapidly rising pay bill.

What about overall public sector numbers? And newly recruited public sector employees and how they are treated?

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And finally, is returning to 2008 pay rates for public sector employees leaving the exchequer finances exposed?

Remember, the build up in public spending in the 2000-2008 period, based on a shaky tax base, left the exchequer finances exposed and filling the resulting gap contributed to a massive jump in the national debt during the crisis.

The result: this year the Irish taxpayer will pay €5.3 billion in interest on the State’s debt.

1. What is the big picture on public sector pay and numbers?

Public sector numbers – and particularly pay – ballooned in the run-up to the crisis with the public pay bill doubling between 2000 and 2008.

This was followed by a sharp cut in numbers, pay reductions averaging 6.5 per cent and higher pension contributions during the crisis.

A period of gradual growth subsequently followed, first in numbers and then in pay as well.

Where has this left us as of the start of 2019?

By the middle of last year public sector numbers returned to their 2008 peak of 320,000.

Numbers have now risen to around 330,000. Pay for those hired before the cuts – which started in 2011 – will soon be back to pre-crisis levels.

By the end of the current pay agreement, in the autumn of next year, 90 per cent of public sector employees – all but the highest paid – will have recouped the losses imposed under the Financial Emergency Measures in the Public Interest (Fempi) legislation.

There are exceptions, notably GPs, where talks to unwind the Fempi cuts are tied up in ongoing negotiations.

The increase in numbers and, more lately, in pay will this year put the public pay bill back above its previous 2008 peak. It is due to hit €18.1 billion this year, more than 6 per cent above its previous high.

The pay bill has increased significantly in recent years, after a drop of more than one quarter during the crisis.

There was a once-off cost to the reduction in numbers, via voluntary parting payments, and a higher pension bill.

Since 2014 the public pay bill has risen by 28 per cent compared to a rise of less than 20 per cent in total day-to-day government spending.

The pressure to restore pay has led to significant proportion of any spare resources going in this direction.

This has been combined with some reform and changed working practices, including longer working hours which generally remain after the crisis. However, recent events show pressure will remain firmly on the pay bill as the current agreement approaches its end.

2. What about newer recruits?

A controversial part of the retrenchment during the crisis was that newer public servants were paid less than those already in the same roles.

After January 2011, those hired were put on salary scales which were generally 10 per cent lower. This was changed in 2013, with a revised arrangement including additional points on a single salary scale.

The Parliamentary Budget Office, in a report on the issue, summarised it as follows: “until 2013, this meant that, initially, someone hired after 2011 would be paid 10 per cent less throughout their career . . . while from 2013 onwards those hired would take two years longer to reach the same point on the salary scale.”

Unwinding this has proved difficult not least because in some sectors , notably teaching, two separate scales remain and also different allowances for different groups.

The numbers hired since 2011 and the extent of the gap make this an expensive issue to “fix”.

The Department of Public Expenditure and Reform estimates the cost of moving all 60,000 new entrants the required two points up pay grades would cost €200 million per annum – equating to an average of €3,200 per head.

A deal between the Government and the Ictu last year will gradually unwind the pay disparity by 2026 by allowing newer public servants to skip defined points on the pay scale as they reach them, costing €75 million by the end of the current pay deal and more in subsequent years.

However, the teachers’ unions are pushing for further action from the Government and are studying the nurses’ agreement and pay disparity will disappear only gradually.

3. What about pensions?

A major change involved the introduction of the so-called “ Single Scheme” for new entrants since 2013.

In general, before 2013 there was no unified scheme for the public sector but normal entitlements were for a pension equalling 50 per cent of finishing salary for those with sufficient service, with a generally tax free lump sum of one and a half times salary paid on retirement.

The key change in the single scheme is that entitlements are based on career average income – over 40 years – rather than final income.

The generosity of the pre-2013 scheme is highlighted be calculations in a Parliamentary Budget Officer report which showed that for a public servant joining as an administrative officer and leaving as a principal officer after 40 years, the pension under the old scheme would be €47,629 per annum, with a tax-free lump sum of €142,888.

For someone on the new single scheme the pension would be €36,700 with a lump sum of €109,224. This still offers a level of security and benefit simply not available in most private sector schemes. Public servants will in future make an increased contribution to their pensions, however, which will make the sums a bit more sustainable in the long run.

4. What does this mean for public servants’ living standards?

The issue of who took the most “pain” during the crisis remains controversial – and probably will for years to come.

Public servants took significant pay cuts during the crisis, but benefited from job security, and while now paying more for their pensions, held on to their benefits.

The recovery in pay levels since the crisis has been more rapid in the private sector, where pay rates are up 10.7 per cent since 2013 according to CSO figures, versus 4.8 per cent in the public sector.

Overall, across the economy weekly earnings are now around 5 per cent ahead of where they were in 2008.

With public servants pay approaching pre-crash levels, does this mean living standards are doing the same?

To judge this we need to add three other factors into the equation – what has happened to tax and pension contributions – and thus take-home pay– and what has happened to prices, the other factor affecting purchasing power.

On tax, the picture is clear. Everyone apart from the very lowest earners are paying more now than in 2008.

On average, the extra tax on pay is around 2.5 per cent to 4.5 per cent, despite the tax cuts of recent years.

So, for example, a single employee on €60,000 would have had 27.5 per cent of pay taken in tax and charges in 2008, rising to 33.9 per cent in 2014 and falling now to around 30 per cent.

For a couple on €100,000, the tax take would have risen from 29.2 per cent in 2008 to 36.8 per cent in 2014, easing to 33.6 per cent now. So even when pay is “restored”, higher tax will continue to take a larger bite.

In negotiations on the latest public service pay deal, it was also agreed to reform the pension related deduction introduced during the crisis into an ongoing additional pension contribution. From next year, this will be around 10 per cent to 10.5 per cent of salary for pre-2013 pension scheme members earning over €34,500 and 3.33 per cent to 3.5 per cent for those on the newer scheme.

Taking into account tax relief on pension contributions, the Parliamentary Budget Office calculates that a pre-2013 scheme member would pay €2,550 in the additional contribution in 2020.

So taking account of higher tax and a higher pension contribution, take home pay remains significantly below Celtic Tiger levels, despite the restoration of gross pay levels.

On prices, we are in a level of low inflation and, remarkably, the consumer price index, which measures a basket of goods and services, was at exactly the same level in 2018 as it was in 2008.

There are some important exceptions here. Those renting homes in urban areas, particularly with recent leases, are facing costs well above Celtic Tiger levels.

Remember, too that Ireland is a relatively high cost country, the second highest in the EU for a basket of goods as measured by Eurostat, the EU statistics agency.

This, together with high housing costs, is the reason why many people on average incomes feel financially squeezed.

5. How does pay for Irish public servants compare?

Two comparisons are relevant; with the private sector and internationally. Average public sector salaries here are 40 per cent ahead of the private sector – €958 per week versus €679.

However, public servants are generally older and better educated, factors that have been used to justify higher pay levels.

A CSO study which tried to adjust for this element suggests that at lower to medium levels, public pay is ahead of the private sector, though the position may be reversed at higher levels.

A separate analysis by Davy estimated public pay was well ahead at all levels, by some 40 per cent on average.

A lot depends on the adjustments made to account for different education, age and the size of the employer. The CSO analysis suggested it was appropriate to compare public sector pay with larger private sector employers, as opposed to SMEs, where earnings are lower. Certainly adding the pension factor offers a significant plus versus most private sector jobs, particularly for the pre-2013 cohort, even accounting for the increased contributions.

The public sector continues to remain attractive as an employer, with the Department of Public Expenditure pointing out that even at lower entry pay levels during the crisis, job applications were high.

International comparisons are more complex and vary from sector to sector. In general the percentage of public resources going to pay here is generally at or above the EU norm, though the numbers employed in the public sector here are lower than in many other EU countries.

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The bottom line is that Ireland’s public pay bill is now back to 2008 levels with numbers now above the levels of a decade ago and gross pay approaching its pre-crash level.

To determine if this is dangerous we need to consider two questions.

The first is obvious: how can the Government cope with the pressure on pay, not only in the short term but as the current agreement runs out?

If growth slows – due to Brexit or otherwise – then the choices will become trickier as spending more on pay means less for elsewhere.

This makes it difficult to achieve a counter-cyclical approach to policy – leaving cash spare to invest in the bad times (and there will be bad times). For as long as growth stays strong, there will be a clamour for pay demands. And we have seen how, in take home pay terms, public servants still have less to spend, explaining some of the pay demands.

There are also questions about whether the public finances are vulnerable to a fast, hard downturn, given their reliance on soaring corporation tax.

Restoring 2008 pay and spending means taxes will have to remain at the higher post crash levels, given the clearly unsustainable nature of the public finances at the time.

The other issue is ensuring good management and improved services as pay rises.

Generally budgets are well controlled now, with the exception of health.

But with cash for significant tax cuts not available due to rising spending, driving real improvements in public services like health and education is now the central political challenge.