Cliff Taylor: Payback time for the public sector? Not quite

Pay talks between the Government and the public-sector unions are due to start next week and the only question seems to be how much public servants will get. With a general election approaching, the temptation for the Government will be to do a quick deal. But is this the right thing to do?

Part of the argument of the public- sector unions is that they have suffered more than most in the crisis. The public sector has indeed suffered heavy pay cuts averaging 14 -15 per cent and has lost staff, meaning those who remain generally work harder. However, public servants held on to their jobs and have retained their valuable pensions.

They also started the crisis earning more on average than their private sector counterparts. Economist John FitzGerald, writing this week, estimated that much of this pay premium has now been eroded. However, most public sector employees retain generous pensions, well ahead of their private sector counterparts.

Pay increases have slowly started to re-emerge in the private sector, but only in companies making money. Given that public servants’ employer – the State – is still heavily in debt and continues to borrow, the Haddington Road agreement should have been let run its course until the middle of next year, with consideration given to public pay increases thereafter. Modest budget tax concessions could have boosted public and private pay alike in the meantime. However, politics has dictated otherwise.

The Government should not go into the talks on the back foot. Remember that many public servants continue to get annual “increment” increases which were delayed but not stopped by the Haddington Road agreement for all but the highest earners. Remember, too, that the Haddington Road cuts are due to be restored for anyone earning up to about €100,000 in two payments, the first of which is due in April 2017. So an element of automatic “restoration” is already in place.

The public-sector unions will plead that at least some of the cuts were introduced under “financial emergency” legislation and the cuts should be reversed now the emergency is over. There may even be a legal point here. This is a hook the Coalition will have to get off for a simple reason: the old way didn’t work and was racking up extra cost at an unsustainable rate.

Disastrous trajectory

A study undertaken by Brendan Howlin’s Department of Public Expenditure and Reform tells the story. It shows that had pay and personnel cuts not taken place after 2008 and previous agreements been adhered to, the public pay bill would have continued to rise rapidly. The total pay bill would have been €21 billion by 2013, compared with the actual figure of €14.2 billion – almost 50 per cent higher. Small increases each year quickly add up to big numbers.We simply cannot go back on that kind of disastrous trajectory.

The Government needs to frame the talks on its terms. The annual increment increases – pay rises up seniority scales – should be closely tied to the delivery of an agreed reform programme, as well as individual performance.

Public-sector pensions should also be addressed. The pension scheme has been reformed for new entrants – the main change is that their pension is based on average career salary and not final salary. But the old, very generous scheme remains in place for the vast bulk of established public servants. The OECD, in a study of Irish pensions, suggested the pension rules applying to new entrants should also be phased in for existing staff. In practice this would mean established public servants holding on to what they have already paid for, but agreeing that future accrued entitlements would be based on the new rules.

Given the huge value of a defined- benefit deal, such a reform seems entirely reasonable and would still leave public servants with pension entitlements of which most in the private sector could only dream. However, the signals are that the pension levy, introduced during the crisis, is going to be cut as a way of boosting take-home pay, with no talk of pension reform in return.

Red lines

There should also be some red lines. The productivity increases agreed during the crisis cannot be rowed back on. In fact, as the department’s secretary general, Robert Watt, pointed out this week, continued improvements in productivity and performance are essential in an environment where total spending increases will be small. Politically, the Government will also be acutely aware that the rest of society is looking on and that the more money is spent on public pay rises the less is left for tax cuts. Don’t underestimate the row this might create, given the scramble for scarce resources.

Of course public servants deserve to share in any upturn. But the Government cannot negotiate on the basis that all is now well. The outlook for growth and the public finances looks fine for the next year or so. After that, who knows? Our tight budget position – and the European Union rules – also mean total spending is capped. As Minister for Health Leo Varadkar has pointed out, paying more to existing public servants means fewer new entrants. These trade-offs needs to be faced, not fudged.

Part of the background is that no one is quite sure how public sector pay should be determined for the future. The public service cannot and should not be run like a business, but the principle of delivering the best possible service needs to be central. There is going to be a clash here between what the unions want and what the Government can afford. The Coalition needs to represent the interests of the “customer” – the public who pay for and avail of the services. Pay increases need to be based on reform, not restoration.