Public sector pay deals may jeopardise tax reform for all

IT'S time to give the PAYE taxpayer a break. But if this is to happen as part of the new national programme, public sector pay must be controlled. Other wise taxpayers will continue to be drip fed reliefs in successive budgets and an opportunity to reform the tax system will have been missed.

Initial talks on the arithmetic of a new programme point clearly to public sector pay as the key factor. That is why the disputes with the nurses and teachers - who together make up not far short of half the overall public pay bill - are so important. Whatever is conceded finally to these groups will have to be paid for in the years of the new agreement.

A general pay round for the public service will also have to be agreed, and there will be less left in the kitty after the special nurses' and teachers' deals. Even before this is done, the knock on impact of the PCW and of decisions taken by the Government this year will increase the public sector pay bill by close to 5 per cent next year.

As pay accounts for half of all day to day spending, this will add 2.5 percent to overall current spending next year, before any new measures are considered. Already any hope of holding the real increase in pending next year for the 2 per cent target set down in the Programme for Government has been abandoned.

There is enough scope to do a deal on a national agreement. But it will mean making choices. A paper written by Mr Michael Tutty, second secretary in the Department of Finance, and reported in The Irish Times yesterday, shows that the economic backdrop remains good. Growth may be set to slow from the record 7 per cent average over the past three years, but is still forecast to be 5 per cent next year and 4.25 per cent on average in the subsequent two years. This should lead to rising employment and sufficient buoyancy in tax revenues to given some scope in the Exchequer arithmetic over the next three years.

In his paper, Mr Tutty says that, provided spending is kept in check, tax reductions could amount to 0.5 per cent of national output per annum, the level recommended in the recent National Economic and Social Council report. This would total about £800 million in reductions over the three years of the programme. And it is a fair bet that if a senior Department official says at this early stage of the talks that £800 million in reductions can be afforded, a higher figure should be affordable.

To put this in context, tax reductions of, say, £250 million in next year's Budget would be enough to afford a reduction in the standard 27 per cent rate to 25 per cent and a significant widening of the standard rate tax band, while still leaving some cash to spare. However, agreeing a significant programme of tax reductions will mean spending must be held in check. After all, the Government's primary aim must be to stay comfortably within the Maastricht criteria for qualification for EMU.

Controlling public pay will be the key. The annual public pay bill is now close to £5 billion. Every 1 per cent increase in overall public pay thus costs around £50 million a year - it would not cost much more than this to reduce the standard 27 per cent income tax rate by one percentage point for all taxpayers.

A 2 per cent rise in public pay would cost also £100 million a year, equivalent to the total amount of income tax relief granted in this year's Budget. Already the existing deals on the table with the teachers and the nurses would cost £120 million.

The only way a new deal can work will be if pay restraint is exchanged for tax reductions, not only in the public sector but also in private industry. This means, however, that employees must accept the concept of a net increase in their after tax earnings, rather than looking to negotiate significant gross increases in pay rates.

Modest wage increases and tax reductions would also, of course, underpin wage competitiveness and cut the cost to business of employing people. The alternative is further drift in spending and tax reductions which nobody will notice.