The next public sector pay deal in 2027 could result in a sharp acceleration in costs to the State, representing a key financial risk for the next government, according to a new analysis published by the Oireachtas.
With rising public sector employment and general pressure on wages, the next deal could involve an annual increase in the public pay bill of €1.66 billion, more than three times the annual increase which resulted from the current deal.
In an overview setting out the fiscal context for the new Dáil, the independent Parliamentary Budget Office (PBO) has identified the future public sector pay bill as one of the main six risks facing the Irish economy during the term of the 34th Dáil.
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The paper, which has just been published, sets out forecasts for increases in wages in the Irish economy between 2025 and 2030. It states that wages in the Irish economy are expected to grow strongly over the term of the next government, with annual increases ranging from 3.7 per cent to 4.2 per cent
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Noting that the current pay deal in the public sector will expire in 2026, the analysis says if a future public sector pay deal grew in line with wage increases in the private sector, and the number of workers grew in line with expected population growth, the annual increase in State spending on public pay would rise from €554.7 million in 2026 to €1.66 billion by 2027.
Public sector employment has been rising fast. The report says that between 2008 and 2023 employees in the public sector increased by 22 per cent, more than a fifth. “The increase in public sector employment reflects the growing demand for public services, but it also adds to the fiscal burden.”
The biggest increase was in the education sector, where employee numbers rose by a third. In marked contrast there was a decline of almost 30 per cent in the numbers employed in the defence sector.
Another potential risk identified by the analysis is the State’s reliance on corporation tax, in line with other recent warnings from the Fiscal Advisory Council and the Central Bank of Ireland. The receipts from this sector are “very volatile”, the PBO warns.
“From 2015 to 2023, annual growth rates ranged from a high of 48 per cent in 2022 to a low of 5 per cent in 2019,” it notes. “The top 10 companies’ contribution to net receipts peaked at 57 per cent in 2022 before slightly decreasing to 52 per cent in 2023. In the first 11 months of 2024 Corporation Tax Revenue was 59 per cent higher than the same period last year.”
Another possible risk highlighted by the PBO is Ireland’s tax system’s heavy reliance on high-income earners.
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“Those earning €100,000 or more make up just 11.4 per cent of taxpayers but account for 66 per cent of total income tax and USC.
“While this highlights a very progressive redistributive system, this concentration of tax revenue from a small segment of the population underscores the vulnerability of the tax base to economic shifts affecting high earners,” it notes.
The report warns that, taking into account the volatility of these key revenue sources, there are “structural fiscal challenges that need to be addressed to ensure long-term sustainability”.
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