We have entered the most fractious period in industrial relations in decades. In the private sector, as unemployment falls to more reasonable levels, and sales of all kinds of goods and services pick up, employees are having conversations about pay increases again, fuelled by the rising cost of living, particularly for younger workers who are renting and saving for a deposit for a home, or raising children, or both.
These conversations about wage increases are happening mostly at the individual level, because union density in the private sector is at a historic low. Nonetheless, employers should grant many of these wage increases if the profitability of their business allows it.
Unlike many economists, I don’t see wage growth as a bad thing or something that erodes ‘competitiveness’. I see wage growth as contributing first to increased living standards and increased demand for goods and services — most people will be increasing their consumption; and second, to helping pay down debt. A nice little bump in inflation would be good for highly indebted households as a by-product.
In the public sector, the situation is quite different. The employer’s ‘profitability’ is not assured, as the government has yet to balance its books, let alone generate a surplus of revenue (your taxes) over expenditure (on hospitals, the police force, universities, pensions, etc). It is not clear the state can afford increases in public sector pay when services and capital expenditure are so desperately needed in housing, health and education.
I say all of this as a public sector worker with three children. The state’s finances are too exposed to any kind of macroeconomic shock, either related to Brexit, in Europe, or further afield, to allow any increase in government expenditure beyond the minimal increases required by the minority government to keep the show on the road.
Importantly, the services the state as an employer provides have been damaged by years of austerity. Faced with a choice of (a) more doctors or (b) more money for existing doctors, most people who are not doctors would choose option (a). That is what Minister for Public Expenditure and Reform Paschal Donohoe chose in Budget 2017 as well, increasing funding for teachers, gardaí and other public sector workers.
Public sector pay was reduced as an emergency measure to help stabilise the public finances. Other terms and conditions like the increment structure, security of tenure and very generous pension entitlements were not changed for those already in the system.
The pay bill was managed through wage repression and reductions in the size of the workforce from around 330,000 in 2008 to around 300,000 today. It is not an exaggeration to say public sector workers helped secure the country’s stability at a crucial moment in its history.
The pieces of legislation enacted to reduce public sector pay and increase productivity are called the Financial Emergency Measures in the Public Interest Acts (Fempi).
I suspect many of the commentators having a go at Donohoe and his advisers haven’t actually read the Fempi legislation. The Acts are pieces of emergency legislation. The emergency is not supposed to last forever. Each piece of legislation requires the minister of the day to review it each year and provide a written explanation for why it has to continue for another year to the Dáil. Donohoe did so this year.
Each cut in public sector pay, and each increase in workload as a result of productivity measures, has happened with the explicit consent of public sector unions. They obviously weren’t happy about it, but they and their members agreed to be bound by the terms of a series of agreements on pay and conditions.
Agreements between public sector unions and the government helped smooth this transition for the public sector pay bill, and the measures were as progressive as possible, given the obvious over all regressive nature of the pay cuts. The Haddington Road Agreement, for example, provided for salary reductions for public servants earning more than €65,000, and for pauses or freezes in the payment of increments for all public servants. Similarly the Lansdowne Road Agreement allowed for pay increases for those earning under €65,000 (and for all teachers) and reductions in the Pension-Related Deduction for all public servants. The new Public Sector Pay Commission is charged with advising the government on how to unwind Fempi entirely without breaking the bank. The fiscal space this year was about €1.3 billion in the end. To increase public sector pay to 2008 levels for everyone would cost about that much again.
Simply put, the bill for restoration is too large for one year, so the question facing the Public Sector Pay Commission, set up to advise the minister, is what the time path to pay restoration would look like, hopefully melded with a reform programme and a path for future pay increases as well.
It’s important to note that right now, we aren’t talking about pay increases. We are talking about pay restoration. Fempi states explicitly that every public sector worker is entitled to pay restoration once the emergency has passed, which it has. The only question really is: when will these restorations come, and what conditions will be attached to their restoration?
Unions have moved sequentially in recent weeks to increase pressure on the minority government to accelerate the restoration. As I argued a few weeks ago in this column, semi-state workers in Dublin Bus, through their unions, will get to pass their pay increases directly onto their customers, as will private sector workers in Luas.
Gardaí and primary and secondary teachers and university lecturers are another matter.
Their pay restoration, by definition, comes at the expense of service expansion somewhere else.
We need to explicitly acknowledge this simple fact: the pot of money is finite, and the national budget still in deficit, if only just. In the situation we find ourselves in, in 2016, increasing the public sector pay bill by restoring pay taken away by Fempi means either increasing public debt, increasing taxes, or decreasing services.
Michael Noonan indicated during his budget speech that the only direction public debt is going is down. Taxes are not going up. The only people to get whacked with higher taxes in Budget 2017 were the smokers.
Those who enjoy sugar and particularly sugary drinks are up next. Everyone else’s taxes either stayed the same or fell.
Services will take the hit, but it’s more accurate to say increases in services will take the hit.
It’s easy to caricature the outcome as ‘fewer extra doctors in favour of more money for existing doctors’, but in reality we’ll see less of a planned increase in service provision to pay for public sector wages.
This is important: the public won’t see what’s lost, because the service increase was never there to begin with. The would-be service user will never know what they’ve been deprived of.
Economic activity means there will be a bit more in the kitty next year, but we can’t really expect over a billion of an increase in one category of spending when the entire allocated fiscal space for current spending for 2018 is only €790 million.
I would like the public sector unions currently throwing shapes in the media to be asked, repeatedly, what services would they like to see reduced (or not increased) to fund their pay restoration. None of them have thought about this, or if they have, the argument is that the money will be found from somewhere, which is not an argument but an article of faith.
The only people who have to think about this exact question are the well-paid mandarins of Merrion Street and their boss Paschal Donohoe. In fairness, those arguing to break an agreement early that they signed up to will have to do the running on what service increases they feel should be lost to fund it.
This strikes at the heart of why we have entered the most fractious period in industrial relations in decades: the coalition government of Fine Gael, the Independent Alliance, Katherine Zappone and Fianna Fáil (let’s have no talk that they aren’t in government) does not want to annoy anyone.
If the government allows one set of public sector workers to benefit at the cost of others, then that is unjust. But to fund increases in teachers’, doctors’ and lecturers’ pay when we have a homeless crisis is a worse injustice.