The pay increases in the proposed new public pay deal will use up about one-third of the total room for spending increases and tax cuts in the October budget, as now estimated. However, this is more a reflection of how little room for manoeuvre there is in the budget sums than on the size of the package.
While a full breakdown of costing’s is not available, the estimate is that the pay rises on offer for next year will cost the exchequer about €180 million. The Government has still to formally estimate how much it has available for spending increases and tax cuts on budget day – but Minister for Finance Michael Noonan indicated a few weeks ago that he expects the figure to be about €550 million.
This week the Irish Fiscal Advisory Council, the independent budget watchdog, put the figure at €500 million. So the pay deal would take about one-third of the available additional resources for Budget 2018, on current estimates.
The amount available on budget day can swing as the year goes on – and in recent years more has been found late in the day. But the pay deal will reinforce one message to Leo Varadkar, expected to be appointed Taoiseach next week. It is that there will be very little scope to do anything dramatic on budget day, unless the Government decides to fund new initiatives via savings or tax increases elsewhere.
The room for manoeuvre – the fiscal space – was already narrower than in the last two budgets and public pay will now take an extra bit of this limited pie. The new cabinet will also have to decide, in negotiation with Fianna Fáil and the Independents, how to divide the small amount of cash that is left between spending and taxes.
The deal will cost the Government – and benefit its employees – by greater amounts in 2019 and 2020, with a total cost over the three years of €880 million. This reflects the fact that, on current estimates, there will be more budgetary room for manoeuvre in the subsequent years. The main danger here, in terms of affordability to the public finances, is of a Brexit-related hit to economic growth greater than currently estimated which affects tax revenues.
For public servants, the deal delivers average rises of 6.6 per cent by 2020, or just over 2 per cent a year. This is ahead of existing inflation of just under 1 per cent, though of course those renting or buying houses face greater pressures. The trend of inflation in the years ahead remains uncertain, but the increases should deliver a modest boost on average, particularly when combined for many with existing annual increment payments.
Those hired after 2013 will get larger increases of 7-10 per cent, which will certainly be ahead of inflation, although no special provisions were made to increase pay for those hired on lower levels in areas such as teaching. The Government strategy here is clearly to introduce a lower pay base over time, as existing more established teachers gradually retire.
The debate all along in the talks was on the topic of pay “restoration” and removing the cuts based on emergency legislation introduced during the economic collapse. Under the terms of the deal, 90 per cent will have had the pay cuts reversed by 2020, but only one-quarter will have seen the full impact of the pension levy unwound.
This is because the Government insisted that the pension levy, introduced as part of the emergency measures, would – in effect – be retained at varying levels, with those who get the best pensions paying more. This is an important step in making public pensions more affordable. The recent Public Pay Commission report estimated that public service pensions are worth 12-18 per cent more in terms of salary to public sector workers than their private sector colleagues.
It remains to be seen how the deal will play with the unions, with some of the teachers’ unions already expressing disappointment. The goal of pay restoration has been achieved, but more slowly than the unions had wanted, but additional pension payments will remain. The Government will hope most unions will sign up, to give it some certainty in budget planning.