The rise in inflation made it inevitable that sooner rather than later the Government and public sector unions would sit down to discuss pay. As it turns out, this is to happen following the unions’ decision to trigger a review clause in the existing agreement, in the light of the sharp inflation surge and a response from Minister for Public Expenditure Michael McGrath.
It is a difficult backdrop for negotiations. The cost of living is rising rapidly, driven by energy prices but also increasingly by other products and services. What is less predictable – and will be heavily influenced by the course of the war in Ukraine – is when the inflation rate might peak, or what the outlook will be heading into next year. Are we looking at a once-off jump in prices, or a longer-lasting rise in inflation?
Higher energy prices leave Ireland worse off – and the State cannot fully compensate everyone for this. If inflation is reflected in higher wages then the price spiral may continue and a higher inflation rate could become embedded. Yet neither is it reasonable to expect public sector employees, particularly lower-paid ones, to receive no compensation for higher prices, particularly as average private sector earnings will rise. The question is trying to reach an appropriate balance and not to entrench a big jump in costs into the economy.
The Government’s desire to have a deal which lasts for a shortish period – perhaps a year – achieved possibly via an extension of the current agreement, seems sensible given the uncertain outlook. The situation could then be reassessed in 2023. Nor will the State be able to compensate public servants for the full impact of higher prices on their cost of living – doing so would indeed threaten to entrench a wage-price spiral. Finding a middle ground will not be easy and may require some inventiveness, including a better deal for the lower-paid and perhaps some once-off elements.
Pay rises across the private sector are likely to vary greatly – and are also being driven by labour shortages. For public sector staff retention, some level of pay increases are also justified.
Negotiating an appropriate public pay policy is complicated by the deeply uncertain economic outlook. The State finances are strong – for now – and tax revenues were well ahead of expectations in the first quarter. But the knock-on costs of the Ukraine war are substantial and the impact on growth right across Europe is not at all clear – and in turn this is vital for the outlook for taxes. Nor is it wise to base spending plans on a continuing surge in corporate tax revenues.
A public sector deal is worth negotiating to avoid yet more uncertainty heading into 2023, but whether one can be reached is far from certain.