Time to face bubble-era public sector pay anomalies

The focus last week in this column on the inherent unfairness of the new agreement on public sector pay and conditions, which is grossly discriminatory towards young people (the hiring freeze underpinning the deal amounts to a pulling up of the ladder of advancement by those already on the inside to the detriment of the younger generation on the outside), has clearly proved provocative.

It argued that the fairest way to cut the public sector pay bill was not by reducing headcount (the numbers employed are not large by the standards of peer countries) but by clawing back more of the very large bubble-era pay increases which were funded from now disappeared bubble-era tax revenues.

The mailbag in response was larger than usual. Of the public sector workers who got in touch, the following question was broadly representative: “Could you please tell me how it is more equitable that we should suffer more pay cuts while hundreds of thousands in the private sector who have not lost their jobs are not asked to pay their fair share through equitable income tax?”

It gives me no pleasure to argue that anyone’s income should be cut. I have family and friends in the public sector and know of the difficulties they have had to deal with as a result of cuts in pay combined with the income reduction effect of the pension levy.

Moreover, I have no truck with commentary on the issue that is based on an ideological prejudice against the public sector – an efficient state sector provides services that the market will not provide (or will underprovide) and can enhance overall economic performance.

But the amount of public spending must be linked to the amount of tax raised. Ireland still has the largest budget deficit in the euro zone, mostly because tax revenues collapsed when the property bubble burst. And even with many tax hikes (and spending cuts) since the collapse, the gap is far from filled.

Fairness

Fairness is widely recognised as being crucial to how the enormous hole in the Government’s finances should be closed. One dimension of this issue is that those who did best out of the boom should pay more than those who gained least.

Although many in the public sector acknowledge that they enjoyed annual increases, benchmarking increases and other increments, for many others, including the letter writer above, it is a case of eaten bread is soon forgotten.

The degree to which public sector workers benefited from the unsustainable inflow of tax revenues during the property bubble years should not be in question. Not only did the public sector pay bill rise faster than any other public sector in the EU after the turn of the century, but inflation-adjusted average earnings increases were hugely greater than those in the private sector.

Not only were average weekly nominal earnings in the private sector already well below those in the public sector when the bubble began to inflate, the gap widened over the course of the bubble years, as the chart below shows.

The gains public sector workers made when compared with their private sector counterparts are much more stark when inflation is taken into account. While average weekly wages in the private sector rose by less than 15 per cent in the period between 2003 and 2009, those in the public sector enjoyed an average increase of 38 per cent.

Given that the consumer price index over that six-year period rose by 13.4 per cent, in real terms, average private earnings were effectively stagnant in the six years to 2009, while those in the public sector grew by more than one quarter.

Since 2009, public sector workers have suffered a larger decline in earnings than those in the private sector, but their real incomes are still well ahead of a decade ago.

On the other hand, in real terms, average private sector earnings are now lower than 10 years ago.

Should people who earn less on average and who have experienced falling real incomes really pay more tax to fund the incomes of those who are richer and retain most of their bubble-era gains?