Fair is fair - public pay cuts of up to 20% justified

 

ANALYSIS:The simple truth is that the cost of providing public services is too high. There must be benchmarking in reverse; the case for pay cuts is compelling

MUCH OF the emphasis on the need to cut the pay of public sector workers has taken place in the context of having to reduce the fiscal deficit. This is the imperative that informs the debate, and rightly so. There are, though, other reasons for reducing the pay rates of public servants, which give added legitimacy and moral force to the fiscal rationale.

The fiscal deficit argument has been dealt with convincingly by Philip Lane and many others. The message is clear: delay cannot be used as an escape route from our fiscal responsibilities. Thus it is reasonable to assume that the Government will make savings on the expenditure side of about €4 billion in the December budget and that about one-third of this will come about through cuts in the public sector pay and pension bill.

The choice in relation to the pay bill is, in effect, between cutting the number employed in the public sector, reducing pay, and/or a combination of these. Improved efficiency measures, including reduced overtime, are, in my opinion, a separate matter as these are needed anyway on an ongoing basis in every organisation, including the public sector.

The falls in employment will not come from any compulsory redundancies but from retirements and/or voluntary redundancies: in other words, people will not be replaced. The losers in this scenario are not existing workers, the insiders, but the outsiders, namely the thousands of people who might have expected to get jobs as teachers, nurses, civil servants, gardaí, and so on.

The losers also are the people who use the services, because reduced numbers means a diminution of services. Reduced pay rates, on the other hand, allow the maintenance of existing employment and service levels.

But it might be argued that services and employment could be maintained at present levels through increased taxes to pay for existing services. The taxpayer, however, is already paying too much for existing services.

Evidence from the Economic and Social Research Institute provides as conclusive a body of evidence as one can find in policy debates that public sector pay rates are well above comparable rates in the private sector. This is true in all categories of employment and more so at lower levels of pay.

While someone on a low income in the public sector might bemoan the fact that they are paid much less than someone else in his/her unit, this is a different issue. The benchmark, widely supported by the unions under benchmarking, is the comparable salary for that person in the private sector.

The ESRI researchers are at pains to point out that, if anything, their work understates the gap, for two main reasons. First, they make no estimate of the benefit of job security, which ensures guaranteed employment and pensions. This, especially in the present climate, is a hugely valuable aspect of working in the public sector.

Second, they took no account of the much more generous level of pensions in the public sector, something that the pension levies would have only partly addressed. One should consult the McCarthy report to realise the scale of this pension benefit.

This pay gap raises a competitiveness issue in that the tax price, or the unit cost, of providing public services is too high. And in conjunction with the job security and pensions benefits, it raises serious equity issues.

One of the motivations for benchmarking was to address a perceived serious inequity. Public sector workers then must, on the same grounds, accept that significant reductions in basic pay rates are now required.

How much they would need to be cut is unclear, as further falls in private sector pay rates have probably already occurred. Substantial cuts, 15-20 per cent in some cases, could be justified, especially for the more highly paid public servants (of which I am one). Certainly, a drop in pay rates across the board of 5-7 per cent could be seen as a cautious and conservative move, with little if any reduction in real wages resulting (given that prices overall have fallen).

Yes, of course the so-called fat cats in the banking and building sectors must also be made pay their fair share, but this is a different issue, even if the anger and rage is wholly understandable. The numbers involved are tiny compared to the 300,000 public sector workers, as the vast majority of workers in the banking and building sectors had nothing to do with the housing and banking crises.

Besides, and regrettably perhaps, many high-wealth individuals are highly mobile and can leave the country. This is the reality of tax competition, something that Ireland is happy to embrace in the corporate tax area.

There is further considerable evidence that the Irish public sector is not competitive, at least in terms of pay rates (which is a valid place to start unless one assumes much higher productivity levels in Ireland). The recent report by the Organisation for Economic Co-operation and Development gives striking illustrations in relation to the health sector, with pay rates for doctors and specialists in Ireland near the top in the OECD and well above the levels in some similarly wealthy countries.

The evidence in relation to the education sector is equally convincing, and this is supported by substantial anecdotal evidence that salaries are too high compared to the UK in particular but many other European countries also. There are two knock-on effects from reducing public sector pay rates. The first is on public sector pensions, which are very generous, as outlined so clearly in the McCarthy report. Pensions are linked to existing pay rates and hence will fall with these. It is noteworthy that they were not subject to any pension levy and as a result have in fact risen significantly relative to after-tax pay of public servants still at work.

Second, and for similar reasons, social welfare payments would need to be reduced, in line with wages, although again in real terms there would in fact be no decline.

All of this has the advantage of consistency and fairness, especially if the pay cuts were to be highest, in percentage terms, at the higher-income levels and some of the savings on the welfare side were obtained through better targeting of, and stricter enforcement of, entitlement conditions to benefits. Wages, pensions and social welfare payments form part of an integrated package, and must be treated as such both on grounds of fairness and avoiding perverse employment-incentive effects.

All of this makes a compelling case for cutting public sector pay rates. These arguments are based on fiscal and competitiveness grounds, but more importantly on equity concerns.

The evidence is almost as strong as it could be that public sector pay rates are much too high compared to the private sector, and indeed compared to those in other comparable countries. Add this to the comparatively enormous security surrounding public sector employment and pensions and the case for cuts in pay rates becomes in my opinion unanswerable.


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