Analysis: With finances already under pressure, the Government will struggle to find the cash to pay for benchmarking, writes John McManus
From the outset the issue with the benchmarking body was not whether it would recommend increases in public sector pay, but how big would they be.
Two years later the debate that is now getting under way is not whether the increases should be paid, but whether they are big enough and how and when the cash will be handed over. Whether or not the Government can afford the estimated €1 billion a year the recommendations will add to the public sector pay bill is not really an issue. There will be some horse-trading along the way, but everybody seems to accept that the Government will cough up at the end of the day.
So how will it pay the increases and avoid making a bad Exchequer position considerably worse? It will not be easy. A huge shortfall in revenue and massive overspending by the Government has left the national finances teetering on the brink of the abyss. Income-tax receipts are running 16 per cent behind schedule, while day-to-day spending is some 27 per cent ahead of Budget day forecasts.
Exchequer figures due out today for the first half of the year are expected to confirm a continuation of this trend and show the Government finances on track to be substantially in the red by the end of the year. Some economists are talking in terms of a €500 million to €1 billion deficit.
Last week the Central Bank warned that it was possible that the Exchequer deficit could be so large that it might yet become an issue of concern for Brussels. Against this sort of backdrop the €1 billion bill for benchmarking is the last thing the Government needs. It is already committed to paying 25 per cent of the awards, backdated to last December. As a minimum the Exchequer can expect to be hit this year with a bill for €250 million on top of its other problems. But the Minister for Finance, Mr McCreevy, will be lucky if he can limit the impact for this year to €250 million.
There is €150 million built into the Budget arithmetic to cover the first instalment of the benchmarking awards. This will probably prove sufficient as the €250 million that is due for payment will be subject to tax, which will flow back to the Exchequer, leaving the net cost at around €150 million.
The payment of the remaining 75 per cent is subject to negotiations and will be linked to reform of the public sector. The Government can be expected to push these negotiations out over as long a period as possible.
But with private sector wages rising at something like 10 per cent a year, it will be hard for the Government not to concede the bulk of the awards - which average 8.9 per cent - this year.
It is hard to reconcile this unpleasant scenario with the views of the Minister for Finance, who remains confident that the Government finances will end the year in surplus. Although, as Government insiders point out, he is becoming increasingly vague about what he means by a surplus. They suggest he is now talking in terms of the General Government Balance used by Europe rather than the traditional Exchequer position.
Either way it will require some fancy footwork on the part of the Minister to absorb the costs of benchmarking and still balance his books. He has already made it clear that he plans to raid the Social Insurance Fund this year to help his position. He also plans to raise €610 million through the transfer to the Exchequer of the profits made by the Central Bank from the euro changeover.
The most likely source of additional funds for the Minister is the Central Bank's foreign currency reserves, which run to almost €6 billion. The argument for the bank holding such substantial reserves now that it is no longer responsible for managing the exchange rate is questionable.
However, transferring the money to the Exchequer would require the approval of the European Central Bank and probably the support of Mr McCreevy's fellow euro zone finance ministers. There might also be objections at home, and linking the initiative to paying for benchmarking may prove an astute move.
The other source of funds that Mr McCreevy may tap to balance his books is the new National Development Finance Agency. Among other functions this body is supposed to raise money from the private sector to fund infrastructure. However, it is unlikely to be up and running in time to make much of an impact this year.
Given his confidence, it would appear that one way or the other the Minister really believes that he will end the year with a surplus. If he does manage to find a way to pay for benchmarking without running a massive deficit, it will be a significant achievement. However, it will still be only half the battle.
Equally daunting is the challenge to ensure that the Government gets value for money for the additional pay and that the damage to the competitiveness of the economy is minimised.
It is more than a little optimistic to think that an extra €1 billion a year can be pumped into the economy in the form of higher wages without pushing up inflation. It is exactly the sort of thing the Central Bank does not want to see when its says, as it did last week, that fiscal policy should be set on a broadly neutral course. The other danger is that significant wage increases in the public sector will lead to demands for equity in the private sector.
It is also vital that the benchmarking process be used to push through reforms of the public service that contribute to the efficiency of the economy.
Paying for benchmarking could yet prove to be the easiest part.