Wage increases in an unreformed public sector will destroy the social contract

The issue of raising the pay of top civil servants and whether or not we can afford it has occupied a significant amount of columns lately.

Am a Former Public Official and have the pleasure and privilege of working with public officials on a regular basis and know of their hard work and dedication and how it can be under-rewarded and unrecognized.

Teachers, airport staff and nurses face similar challenges to low-income earners in the private sector in terms of cost of living and housing shortages. It is important to say this as the coming effects of inflation and the government’s response to them, if not handled sensitively, could be deeply socially and politically divisive.

In reality, however, deep economic and political divisions exist between a powerful unionized public sector that can negotiate and a domestic private sector that largely cannot.

As my April 2020 book An economic response to Covid-19 explained, the private sector itself is divided between a powerful multinational sector – including institutional investment funds – which has the government’s ear, and a far more vulnerable indigenous sector struggling to be heard.

This book analyzed how the latter sector endured a prolonged U-shaped recession in the previous global financial crisis compared to the rapid recovery of the multinational sector and the relative stability of the public sector.

Months earlier, the government had organized an event addressing the then existing financing crisis for small businesses. Of the 13 speakers, only one representative was for small businesses.

At the time I was afraid that a lack of balance in the political discussion would lead to the wrong response to Covid-19. Fortunately, although this balance has been partially restored, it has returned in the inflation debate, in which private sector taxpayers and SMEs have largely lost a voice.

Inflation is not a walk in the park for anyone. However, according to published headline figures, total public compensation is on average a third higher than private sector levels. As the feared Mick Lynch – general secretary of Britain’s rail, shipping and transport union, which is currently embroiled in a major nationwide industrial action – said there are public sector workers who are suffering real hardships.


If not handled sensitively, the coming impact of inflation and the government’s response to it could be deeply socially and politically divisive. Pictured: Government Spending and Secretary of Reform Michael McGrath

But compared to private sector workers, who often have low incomes, they have secure jobs and pensions.

Some argue that wage differentials between sectors are in fact much smaller, citing factors such as higher skills, longer tenure, larger public service organizations and the pension levy to justify their actions.

But as we have seen at HSE, higher qualifications do not guarantee achievement.

Larger organizational sizes and longer tenures also reflect relatively higher job security and immunity to downsizing compared to the private sector.

So citing these as factors is arguably invalid (unless you’re rubbing salt in taxpayers’ wounds). And while this is galling, the pension levy is a fraction of what a private sector worker – if they could afford it – would have to pay to get a public sector pension.

In reality, the pay gap between the private and public sectors is real, significant and the result not of legitimate factors but also of greater political and lobbying power.

in the An economic response to Covid-19 I have explained how this imbalance has distorted fiscal policy.

Compared to a broadly balanced “austerity” policy from 2008 and 2014, when around 12 billion each, heavily biased towards taxpayers.

Spending grew by €16 billion a year between 2015 and 2019, but the net tax cuts were just €0.7 billion. The failure to bring private sector after-tax wages back to pre-2008 levels is one of the main causes of a cost-of-living crisis that was already severe before the recent inflation.

The drastic cuts in mortgage rate support, especially now, are brutally and unfairly exposing homeowners to ECB rate hikes that begin in two weeks.

So perhaps the question is not whether we can afford public sector wage increases, but whether, if we can, can we also afford to restore private sector after-tax earnings to 2008 levels?

In answering this question, it’s only fair to note that those who dominate the so-called National Economic Dialogue mostly benefit from higher taxes and spending as it supports their wages and pensions (and its process is reported on by the national broadcaster itself). more government funding).

The salaries and pensions of politicians and civil servants are tied, and research institutions such as ESRI and universities benefit from government subsidies of generous salaries and pensions. Additionally, from a private sector perspective, top-level recruitment in the public sector appears to lack diversity, with data from the Institute of Public Administration suggesting that fewer than 10 percent of these positions are filled from outside the public sector.

Speaking of pensions, in 2020 an actuarial review calculated that removing one (very generous) feature of public sector pensions – the fact that they rise as public salaries rise – could save €23 billion over the next 50 years, which offsets the need for the Taoiseach’s proposed PRSI increase. On the other hand, further wage increases will increase this burden.

In summary – and given the aforementioned dominance of those who benefit from wage increases in shaping policy, it is hard to imagine an already fragile social contract surviving wage increases unaccompanied by radical, unprecedented reforms.

Marc Coleman is Managing Director of Octavian Economics and a former European Central Bank and Treasury Economist

https://www.independent.ie/business/irish/pay-rises-in-an-unreformed-public-sector-will-destroy-the-social-contract-41827446.html Wage increases in an unreformed public sector will destroy the social contract

Fry Electronics Team

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