Report calls for public sector pay rises to be abandoned

The Government was warned to abandon its €1.2 billion public service pay deal yesterday, as a report showed economic growth at its lowest level in a decade.

In its summer review published yesterday, Goodbody Stockbrokers cuts its forecast for gross domestic product (GDP) growth to 2.9 per cent from 3.6 per cent.

"This would represent the weakest GDP outturn since the pre-Celtic Tiger days of 1993 and would also be the first year of below-trend growth in a decade," the report says.

The review, written by Goodbody chief economist Mr Colin Hunt, says relentless pressure on Government spending could give way to an acceptance that taxes should be increased. But it warns that domestic policy makers should "keep their fiscal powder dry" in current conditions.

Mr Hunt states that the Government should not implement the benchmarking report, which recommends pay increases of €1.2 billion for the public service.

"If the Government wanted to do something truly radical in order to relax the fiscal corset for justifiable spending purposes, it should halt the implementation of the benchmarking report," the report says.

"Earlier this year, we published a study which proved that the pay increases recommended were unjust," Mr Hunt says. "The deterioration in the public finances means that they are now both unjust and unaffordable. The goals of fiscal stability, supply-side efficiency and Ireland's long-term prosperity should supersede the self-interest of the public sector."

The report sparked Fine Gael's finance spokesman, Mr Richard Bruton TD, to call for a freeze on benchmarking awards until the Government put a clear value on the savings it is expecting in return from the public service.

"This [the benchmarking\] report is going to cost the taxpayer €1.2 billion," Mr Bruton said. "Ministers must now show what efficiency savings they intend to secure. These savings must be properly valued and audited before we can be confident that the benchmarking process is working.

"The Government's mismanagement of the public finances leaves us with a growing Exchequer deficit and we have just encountered the single largest growth in 16 years in unemployment in one month. In this environment, it is simply untenable and unaffordable to have a benchmarking process of large increases in public service pay without a proper reform agenda in place."

The Government is due to pay 50 per cent of the award under the national agreement, Sustaining Progress, on January 1st, 2004. Agreeing to implement the recommendations was central to getting the public service to back the national pay deal.

A number of factors prompted Goodbody to revise its growth forecasts. The delayed recovery in the global economy and the realignment of the currency markets, which saw the euro overtake the dollar, will dampen Irish output, the report says.

But Mr Hunt left the forecast for gross national product (GNP), which excludes profits repatriated by multinationals, unchanged at 3.5 per cent.

The report predicts a sustained slowdown in domestic demand. It forecasts overall growth of 2.3 per cent, with investment and consumption staying constant, while Government spending slows.

The one bright spot in the report is its forecast that the inflation rate will come down. It says inflation will average 3.5 per cent this year, which will be its best performance since 1999.

"Cheaper imports due to a stronger euro, falling oil prices, cheaper mortgages and rents are all set to act in favour of lower inflation for the remainder of the year," it says.