The government doesn’t have the cash, so why are we talking pay

The government is trying to hold the line on public sector pay. It is currently politically convenient for Fianna Fáil to support the government on opposing full restoration of public sector pay in a shorter timeframe than the terms of the Lansdowne and Haddington Road agreements allow. This political convenience may change, of course.

Behind the scenes, and out of the glare of the media, things are lining up for a series of talks between the government and some unions.

The government doesn’t have the cash to meet union demands. To restore public sector pay to pre-bust levels would eat the entirety of 2017’s – and a bit of 2018’s – fiscal space. The fiscal space is a forecast. You figure out the likely fiscal space by extrapolating annual government revenue and expenditure figures into the future and checking what’s left over for additional tax cuts and spending increases.

Forecasts are reliant on the assumptions they make. Many of the assumptions underpinning Budget 2017 are already looking ropey. For example, it assumes an exchange rate between the euro and sterling of 0.85. That’s now drifting towards 0.90. In the event of a hard Brexit, that goes higher, not lower, making the forecasts more and more incorrect.

The depreciation of sterling since the Brexit referendum makes Ireland relatively more expensive for British visitors to travel to, stay in, and purchase goods and services in. Ireland’s tourism sector, which accounts for over 150,000 jobs in Ireland, is highly dependent on the British market, with 3.5 million overseas trips to Ireland. British visitors spent around €1 billion here last year.

The Central Statistics Office has registered falls in our trade data this week. Seasonally adjusted goods exports decreased by about 4 per cent overall. To put the drop in cold, hard cash, in September 2015 we exported goods and services worth €1.5 billion. In September 2016 we exported goods and services worth €1.14 billion. The notion that the hard Brexit mooted both in Westminster and Brussels isn’t going to cause sterling to fall further is a bit hard to believe.

Then we have the lying, misogynist nativist who boasts about assaulting women and paying no taxes for decades who is about to become president of the United States. One of the things this lying misogynist has built his campaign on is the re-nationalisation of US manufacturing and goods and services. This is already having an effect. There are initial reports that Apple is considering moving its iPhone production plants back from China to the US to appease President-elect Trump and his supporters.

We are one of the most open economies in the world. A re-nationalisation of world trade is, putting it mildly, bad for us. One in five private sector workers are employed directly or indirectly by multinationals in this country.

Going back to the department’s forecasts and the fiscal space for a moment: I’m not knocking forecasts, or the people who make them. You have to make forecasts to run a country. But given increased uncertainty about the US, Britain, our tax system, and the trend of globalisation, is now really the time to place an increased burden on the taxpayers in abeyance of an agreement all parties signed up to in the immediate past?

We need to say it every time the public sector pay issue comes up: an increase in public sector pay is money that won’t get spent on increasing services – what people really voted for during the 2016 election – or increasing capital spending on houses, hospitals, roads, and other infrastructure, which could reduce the cost of living. Prices in Ireland are static for pretty much everything except housing. Given how hard it is to measure public sector productivity, it is clear we’re talking about deals where what the government will get in exchange for increased pay is not increased productivity but industrial calm. That’s no way to run a country.

We know, because we’ve tried that: it was called benchmarking and social partnership, and it was a disaster. Wages and terms and conditions ballooned during the benchmarking and social partnership era – far in excess of any measure of productivity, poor as they are – and when these pay levels proved unsustainable during the crisis they had to be reduced, harming many of the 330,000 public sector workers and their families. I know: my family was one of those hurt by the salary decreases and tax increases.

There are now around 300,000 public sector workers after the recent downsizing. Each struggles in an under-resourced service. I work in higher education. Given the choice of increased income for the Kinsella family and providing a better level of service to my students by hiring more teaching assistants, I chose the latter. I suspect many public servants feel the same way.

Something I’m not sure everyone understands is that when public sector pay goes up, it has to be paid for using taxes, and this is true forever. You have to find the money to pay for 2016’s increases in 2017, 2018, 2019, 2020, and so on into the future, using taxes you collect in 2017, 2018, 2019 and 2020, and so on. Increases in current spending are, paradoxically, permanent. Unless, because of a crisis, taxes fall to unsustainably low levels, and you have to reduce pay and terms and conditions again.

Which brings me to the weird circularity of Irish fiscal policy. We have gone bust as a country three times since Independence. Each time we have followed the same, extremely stupid, process. Populist governments overpromise on government spending, weaken our tax base by doling out tax decreases to all and sundry, and then some shock happens, there’s a gap that needs to be filled in the finances using borrowing, and that borrowing quickly reaches a limit. All of a sudden it’s belt-tightening time. Those who depend on the state most get hurt the most. The external shocks haven’t gone away – if anything they’ve intensified. We haven’t been terribly successful at expanding the tax base since 2008. And yet government spending continues to rise.

Public expenditure minister Paschal Donohoe has one of the hardest jobs in government. He’s the guy who has to say ‘No’ a lot. Donohoe has set his face against tearing up the pay and productivity agreements the previous government signed with the unions. His cabinet colleagues are backing him up for the moment, but that might well change. Ironically the previous budgetary process might have given the unions their best negotiating card. On the Friday before Budget 2017, a fiscal space of €1.2 billion was found thanks to a technicality, instead of the €1 billion everyone was working to. If you can magic up €200 million for USC cuts on a Friday before heading to the pub, the union argument goes, why can’t you do the same for unions?

This is an incredibly challenging time for industrial relations in the state. Look at the sequence of demands Minister Donohoe has had to cope with. Semi-state workers from Bus Éireann, then the gardaí, then the non-consultant medical doctors, then the nurses, then private sector unions, then Siptu, then the ASTI and the teachers, and now train drivers. Expect more demands in the new year. This is not the first time wage increases have followed house price increases. You all know how the last cycle went.

And from above, the European Commission has allowed a small increase of 0.5 per cent of GDP in spending, signalling an end to austerity across Europe. This will allow the government a little more room for spending increases into the future, but not much as it still needs to fulfil the fiscal rules which are now part of our legal framework. Those strictures will still apply.

As ever, good economics is our bellwether. The institutional economist Mancur Olson wrote brilliantly in The Logic of Collective Action about how small groups with similar incentives bend large, diffuse groups to their will.

By getting what they want, these small groups harm economic growth by instilling essentially protectionist policies to benefit themselves and diffuse the costs throughout society. These protectionist policies will hurt economic growth; but because the benefits of such policies are concentrated, and their costs are diffused throughout the whole population, there will be little public resistance to them.

The end of this process is inevitable: national decline.

We already have a case study in the logic of collective action. Dublin Bus workers won increased terms and conditions earlier this autumn. Where did their increased wages come from? Increases in fares for the average punter riding buses, driven by the third-highest-paid bus drivers in the EU.

The situation is so fragile. A minority government barely balancing its books, leading a tiny, highly open economy in conditions of great economic uncertainty. Now is not the time to let a small group force through measures aimed to help the few at the expense of the many.