Case for average public sector pay cut of 5% to 7% is compelling


OPINION:The case for cutting public sector pay is almost unanswerable, writes JOHN O'HAGAN

RARELY HAS there been such widespread agreement among independent commentators that the main way for tomorrow’s budget to deal with the fiscal requirement of a €1.3 billion decrease in the pay and pension bill is an across-the-board reduction in pay rates (and hence pensions) graduated according to income, with the higher-paid public servants taking the largest percentage decline.

The public sector unions mobilised their forces to resist cuts in pay rates at all costs, with strikes called not in response to cuts in pay rates but in anticipation of such cuts. Unions, of course, act on behalf of their members, and must attempt to protect as much as possible their interests, including pay rates.

However, the Government is elected to represent all of the electorate, including taxpayers and the 80 per cent of employees not in the public sector.

The latter includes hundreds of thousands of people working in the retail, hospitality and building sectors, most of whom are not members of unions and work for relatively low rates of pay.

The Government must also protect the interests of the 400,000+ unemployed, hundreds of thousands of others on State welfare payments, and the tens of thousands left with no option but to emigrate in recent years.

Public sector workers and their unions seek to protect four things – their pay, pensions, security of employment, and working practices. Let me deal with these in reverse order.

Reform of work practices was required long before the present crisis and has nothing directly to do with the pay issue. What is needed is a detailed, and timely, study of pay rates and work practices in the public sector in Ireland compared to those in the UK (the most relevant country from a competitiveness point of view) and some small EU states.

We know pretty much already that pay rates in many areas of the public sector are some of the highest in the EU. Can it be demonstrated that such high pay rates, even after the planned “radical” reform, can be justified on efficiency grounds? The reform may be needed simply to keep pace with other countries.

Besides, if one thing is clear, pay should be linked not to promised reforms but to outcomes. Reform is long overdue and needs to be verified before being linked to pay.

Public sector workers have extraordinary job security. Jobs have been lost in the public sector but these were contract jobs and non-replacement of retirees. There have been no compulsory redundancies in the public sector linked to the financial situation, in contrast to the tens of thousands of jobs lost outside the public sector. Such security implies a very significant pay premium in kind.

In relation to pensions, the annual cost of purchasing similar pension entitlements in the private sector would be 27 per cent of annual salary in the case of a typical civil servant employed prior to 2004. The pension levy then was intended to address this inequity, not the pay inequity. It is a separate issue.

This leaves pay and by corollary pension rates.

The case for cuts in rates of pay (and public sector pensions) is almost unanswerable on fiscal, competitiveness and equity grounds.

The price for public services is too high, especially compared to those in many other EU countries, hence placing an undue cost on taxpayers.

The equity argument, though, carries most force in my opinion.

When it appeared that public sector pay rates were below those in the private sector, there were calls by public sector unions, on equity grounds, to close the gap. Now that the reverse applies, the equity argument is largely ignored.

We cannot be much more certain in any policy debate of the evidence: public sector wage rates are well above those outside the public sector.

This, allied to the enormous job security and pension benefits listed above, is why I think that the case for an average pay cut of 5 to 7 per cent (with up to 15-20 per cent for high earners, of which, to repeat, I am one, in the public sector) is compelling.

What is more, overall prices have dropped by about 5 per cent, and hence such a reduction implies little if any decline in real average wage rates.

The Government appears not to have capitulated to one of the strongest, and by far the largest, interest groups in the country, at the expense of the taxpayer and tens of thousands of trainee teachers, nurses, gardaí, civil servants, etc, who expect naturally to move in due course into permanent employment in the public sector.

The privileged insiders have not won out. Relatively, very high pay rates and pensions have been fought for, and understandably so from the perspective of public sector unions, but rejected by the Government. Reductions in pay rates, and hence public sector pensions, are the much better option in terms of equity, competitiveness and maintaining services levels. Security of employment remains intact.

Cuts in relative public sector pay and pension rates have to come, eventually, either under our own chosen direction or through the intervention of an outside agency. The Government, and indeed the main Opposition party, deserve credit for facing this reality now.

John O’Hagan is professor of economics at Trinity College Dublin