Monday, 12 April 2010

A platform for more cuts

Michael Taft: While the public sector pay agreement is presented as a platform for negotiating a reversal of the pension levy and wage cuts, the unfortunate reality is that it will likely lead to further pay cuts. Over at Notes on the Front, I investigate whether the agreement is likely to collapse under the weight of ‘unforeseen budgetary deterioration’. While this is not likely (though not impossible, things could start to get out of hand again by mid-year), such are the current trends that attempts to reverse the pay cuts under the pay review clause in 2011 will not succeed owing to budgetary slippage. In these circumstances, the pay deal will, therefore, lead to further pay cuts – potentially quite substantial ones.

Let’s assume that pay cuts are not reversed but that the agreement stays in place until 2014 – in particular, the clause:

‘There will be no further reductions in the pay rates of serving public servants for the lifetime of this Agreement.’

This clause, of course, refers to nominal pay rates – not pay rates in the real world. In the real world, what would happen to pay rates?

The Government is projecting an inflation rate of 8 percent between 2010 and 2014. Therefore, if the agreement is strictly adhered to (‘no further reductions’), public sector workers will face substantial real (i.e. after inflation) pay cuts.

Those on low pay could face up to €2,800 in real pay cuts between 2010 and 2014 (or €700 per year) while those on average pay would experience pay cuts of €3,600 (or €900 per year).

These numbers depend on the level of inflation. The Government projects it will be approximately 2 percent per year starting in 2011. The Central Bank, however, projects inflation in 2011 at 1.1 percent. The lower the inflation rate, the smaller the real pay cut. But cuts there will be.

That only tells part of the story. Some workers will face more cuts than others. Already, workers with mortgages (in particular, younger workers, many with families) are experiencing rising interest rates with more increases on the way. This will not affect older workers as much.

Nor does any of this count any extra taxation or further spending cuts. Again, in an inflationary context, some of this could take the form of freezing tax credits and tax bands. It won’t look like a tax hike, but in real terms it will be.

If pay were to say constant in real terms – using the Government’s projections – then it would have to rise by 8 percent over the next four years. If there is to be a negotiated reversal of pay cuts, this would be additional to the 8 percent. None of this is likely.

Public sector workers are not only being asked to sign up to real pay cuts, they are being asked to lock themselves into a long-term agreement. I am open to correction, but this four-year deal is one of the longest, if not the longest, agreement negotiated since 1987. That only the Government has an opt-out clause only reinforces this lock-in.

Public sector workers will face a difficult choice when it comes to voting on this agreement. However, for there to be an informed choice, all the facts should come out. And one of them is that, on current trends, acceptance of the pay agreement could lead to substantial real pay cuts.


Proposition Joe said...

The Government is projecting an inflation rate of 8 percent between 2010 and 2014. Therefore, if the agreement is strictly adhered to (‘no further reductions’), public sector workers will face substantial real (i.e. after inflation) pay cuts.

Surely this future inflation would be all but cancelled out by the deflation experienced in 2009 and 2010?

Michael Taft said...

Proposition Joe – the CPI is expected to fall by – 5.2 percent in 2009/10 as opposed to an inflation increase of 8 percent between 2010-2014. The HICP is expected to fall by -2.9 percent with a follow on increase of 6.5 percent. A low-paid workers has experienced a gross cut of 10.4 percent while an average paid worker has received a gross cut of 12.2 percent.

Therefore, using the CPI measurement, if there are no pay increases up to 2014, a low-paid worker will receive a real pay cut of 13.2 percent ( 14 percent using HICP) while an average paid worker will suffer a real pay cut of 15 percent ( 15.8 percent using HICP).

All in all, pretty vicious.

Anonymous said...

It seems there is a direct correlation between the establishment stuffing money into the banks and then vilifying public sector workers:

“Am I alone in feeling puzzled as to why revelations about the scale of our banking crisis seem to be followed so swiftly by outpourings of rancour towards the public service? (The chart shows how interest in the public sector, measured by number of web searches from Ireland, surged after the first anouncement of the bank guarantee scheme in September 2008, and again after the publication of the NAMA legislation in September 2009. The current surge, following the fallout from Minister Lenihan’s speech and the conclusion of talks on the proposed public sector agreement on March 30th is too recent to appear clearly on the chart).”

Mack said...

@Anonymous -

There is also a direct correlation between the number of ice creams purchased and drownings.

Anonymous said...

The bank guarantee in Sept 2008signalled that the major banks had gone bust, ALL OF THEM. The economy, the banks and the public finances had ALL been wrecked by the government. They ought to have been tossed out of office right then. Surely there was no way they could possibly divert public outrage completely away from themselves? They needed a scapegoat and they found and used it - public servants.

Thanks to the media (eg., "public servants don't live in the real world" but politicians, bankers, senior civil servants and editors with huge property supplements do, Geraldine Kennedy), and the failure of the union leadership to defend their members honour, the government's strategy succeeded beyond all their expectations. Because of the action and inaction of the above, the government which destroyed the country are now safe until 2012. That didn't happen by accident.

Mack said...

@Anon -

Well, like ice cream sales and drownings there is a common cause - in one case it's the nice weather encouraging people to swim and cool down with an ice cream, in the other it was the end of banking credit binge. The Irish banks borrowing vast amounts of cash on the European wholesale market.

Once the banks stopped introducing huge amounts of money into the economy - it became apparent pretty quickly that tax revenues generated from the economic activity sustained by the banks borrowing were illusory.

Tax revenues had increased even as the government reduced tax rates because revenues were being driven by external borrowing, when that borrowing stoped - tax revenues plummetted even as the government raised rates.

You could make the same point about spending - and yes - spending on public servants salaries. But either way the only way to afford the continuation of the bubble era levels of spending was for the government to take up the slack and borrow more (and they did borrow more).

Some economists (like Michael above) argue that they should borrow even more again - and this would have the effect of reducing the deficit (but increasing the total debt, but with a higher GDP). The counter argument being that a Keynesian stimulus might leak out and that continuing to borrow and spend would erode the competitiveness of Ireland's labour force within a hard currency union.

You could make strong arguments for either approach - but it's not a conspiracy - there's a very real problem there.

Take a look at this blog from Ronan Lyons - the cost of the fiscal deificit will likely dwarf the banking bailout (whether or not you feel this has been excerbated by the governments policies).