Restraint is essential at public sector pay talks

Whenever you hear trade union officials ask for the 'restoration' of the 2008 levels of public service pay you should ask what other features of Ireland pre-2008 they would like to restore. Unsustainable government finances, bust banks offering 100pc mortgages, soft landings all round?

The reductions in public service pay have been painful, but they have been imposed as part of a very important and quite unavoidable restoration project. That project, only partly accomplished, is the construction of a sustainable model of economic management for a small country that lost the plot for a full decade. A very visible manifestation was the explosion in public service pay costs up to 2009. Since then, there have been reductions in pay levels as well as voluntary severance arrangements that have reduced the numbers of public servants. The burden of future public service pension costs has also been moderated. These measures were enacted because the revenues of the State were inadequate to meet all commitments, to the extent that the State itself lost its credit-worthiness and had to resort to the humiliation of reliance on official lenders.

The State budget continues in substantial, if declining, deficit. Should the Government agree to increases in any area of public spending, the extra funds will be procured through borrowing. The national debt will continue to rise until the deficit is eliminated. Notwithstanding the evidence of a genuine economic recovery, the revenues of the State remain inadequate to fund expenditure commitments, never mind any expenditure increases. The 'restoration' project by the public service trade unions is seeking a return to unsustainable pay costs financed through extra borrowing.

During the bubble years, there were two exercises designed to align public service pay with remuneration in the rest of the economy, the so-called benchmarking reports. The first study resulted in across-the-board pay awards, the second in only limited increases. Both studies on public/private pay relativities were unpublished, feeding suspicions that they confirmed the widespread perception that pay in the public sector had run ahead of what was on offer elsewhere. Since the bubble burst, there have been two rounds of pay cuts in the public service and it is likely that whatever differential had arisen has, at least, been narrowed. Public service unions would no doubt argue that it has been eliminated, but there is no way of knowing, since no new benchmarking analysis has been undertaken.

The public service pay cuts were across the board, but weighted so as to spare the lower-paid employees. This sounds admirable, but was entirely a shot in the dark, without fresh benchmarking against the private sector. What limited evidence is available suggests that the lower echelons of the public service enjoy a better position vis-a-vis the private sector than do those in higher grades. If there are to be flat-rate increases, as some public service unions desire, any such anomaly will be exacerbated. It would have been wise, before the public service pay cuts were initiated by the late finance minister Brian Lenihan, to have undertaken a proper benchmarking study for public consumption. This study would have compared, to the extent possible, total remuneration in the various public service occupations with corresponding private-sector pay, pensions and conditions. Public servants enjoy a degree of job security unavailable to most private sector workers or to the self-employed. This is a valuable perk: when the Irish bubble burst, around 200,000 private sector jobs disappeared in short order. Tens of thousands faced the dole or emigration without redundancy pay.

Pension coverage in the private sector is patchy and many workers end up relying on the State pension system. The private sector schemes are pre-funded (as is also the case in commercial semi-states) with real money, including employee contributions. Public service pensions are a charge on future taxpayers, a gigantic IOU whose accruing costs are not even shown in the annual budget accounts.

Access to these unfunded pensions is another huge perk of public service employment. Since many private schemes are now underfunded, due to weak investment performance as well as an arbitrary government levy, the value of this public service pension perk has increased. The trade unions are painfully aware of the problem, if understandably shy about drawing attention to it, since some of their own in-house pension schemes are in trouble. It should be recognised though that the terms of public service pensions for new entrants have been modified in a manner which removes some of the gold-plating, but even the modified scheme is better than the typical private-sector version.

Offered employment in a private firm, with no job security and steep pension costs, and the same gross pay in State service with no fear of compulsory redundancy and an unfunded pension, no rational person would choose the private sector. Notwithstanding the pay cuts that public servants have endured, which have been real and substantial, it is still not obvious that the public/private pay gap has been eliminated. In approaching successive public pay decisions without a proper benchmarking exercise, the Government has chosen to blindfold itself, and thereby to blindfold the public. Whatever decisions emerge, nothing has been done to allay the widespread public perception that public employment is getting preferential treatment.

If the trade unions regard this as unfair and inaccurate, in view of the pay reductions, they have nothing to fear from a thorough and transparent benchmarking study.

Whatever the dangers of a new public pay agreement uninformed by such an exercise, there is also the simple question of the Government's ability to pay. Any increase in public spending is a gamble on the continuation of recovery, as is any decision to relieve tax burdens.

The indefinite postponement of a return to budget balance runs the risk that the Government will have no room for manoeuvre should the recovery fizzle out. The Irish economy is permanently exposed to the fortunes of our international trading partners and there have been some worrying signs of slowdown in the most recent data both in Europe and in the USA. Moreover, the three favourable trends that have improved the outlook here - in the weakening euro exchange rate, in lower oil prices and cheaper costs of government borrowing - have all reversed in recent weeks. The euro has recovered, oil prices are firmer and the record lows in government borrowing costs have been and gone. All three indicators are still comfortably ahead of where they were 12 months ago, but some of the benefit has been lost recently. This does not mean that Irish economic recovery is threatened, but it is a reminder that nothing can be taken for granted.

The public service pay talks are due to resume next week and the indications are that concessions will be made ahead of the October Budget. That Budget will also include reductions in the Universal Social Charge and possibly in some other taxation headings. Not coincidentally, a general election will follow some months later. The temptation to buy the election should be resisted vigorously by those ministers most optimistic about the prospects of retaining office. They will be in the hot seats should the time come to regret premature celebrations of recovery.