ANALYSIS: The report reveals the difficulties in striking a deal, writes Cliff Taylor, Economics Editor
There can be no doubt that the social partnership system, which started in difficult times in 1987, is now facing its greatest test. The first deal was born out of a sense of crisis, leading to agreement on sacrifices all round. More recently, agreements have been based on the "something for everyone in the audience" principle, made possible by buoyant Exchequer finances.
As the social partners enter talks on a further deal, however, the outlook is poor. The trade unions argue that pay increases are overdue, but the Exchequer finances cannot afford big increases for public servants and private-sector business argues that large rises for its employees would hurt competitiveness. Meanwhile, further funds are required for a social inclusion programme aimed at the less well-off. With no possibility of big tax reductions, the danger is that the talks will quickly reach stalemate.
The National Economic and Social Council has traditionally drawn up the blueprint for the agreements. Its economists do the work. The organisation's council, composed of representatives of all the so-called "social partners" - the Government, employers, unions, farmers and organisations supporting social inclusion - argue about the detail and sign off on a document which then forms the basis for talks.
Their latest report sets down the key challenges facing the economy. It says these are: devising an appropriate wage and reward system; finding a way for public policy to address a range of issues involving wealth distribution and improving the economy's growth potential; and boosting productivity and performance in the public and private sectors.
These issues must be faced with or without a partnership agreement, the report points out, arguing strongly that concluding a deal still represents the best way of meeting the diverse challenges.
But what shape would it take? The report argues strongly that the priorities for the coming years must be completing the National Development Programme and targeting public spending to meet key social needs in areas such as welfare, health and education.
This will mean a move to borrowing next year, albeit to fund investment rather than day-to-day spending. And the report strongly supports the move to get current Government spending under control, which, it says, is crucial for long-term stability.
The final draft of the NESC report also says there should be no further cuts in tax; in fact, it says that "the option of a modest increase in the share of taxation in GNP should not be ruled out." Tax shelters should be closed, the report says, and excise duties may rise, though it calls for smaller increases in the 2003 Budget to help bring down inflation. User charges for refuse and waste are also recommended.
A crucial aspect of the report is its emphasis on obtaining value for money in public spending. This is a key issue for the Government, which has presided over massive increases in current spending, without commensurate improvements in service levels to the public. Also, much of the increase in investment spending has been eaten up by higher inflation and plagued by planning delays.
Against this backdrop, perhaps the central economic challenge facing the Government is securing value for money in public spending. The report is strong in this area, calling for much more rigorous decision-making and evaluation and a clear view of what expenditure is meant to achieve.
It has some discussion on how to achieve this and examines a range of public-sector models, but clearly there is no "magic bullet" in this area. For a start the draft report says that the new pay levels recommended in the public-sector benchmarking report can only be justified by significantly increased flexibility and productivity by public service employees. Payment of the benchmarking awards will obviously be a key element in the forthcoming talks.
Reading the report, the key difficulty facing those negotiating a new agreement are clear. What's in it for the employees?
The Government and employers are both talking tough on pay, even though some increases for the public and private sectors can, no doubt, be agreed. But given the state of the public finance, the formula of previous agreements of sweetening moderate pay increases with significant tax cuts will no longer be possible.
The NESC believes some of the ground could be made up by profit- or gain-sharing, where employees get a share of profits in good times but nothing in bad times. However, such schemes have been slow enough to take off.
That said, the trade unions may judge that their long-term interest is best served by staying within the tent and that their members might do even worse - and their influence on wider policy might be lost - if partnership broke down.