The Irish economy has performed superbly during the last eight years. Unemployment, which previously was perhaps our single biggest economic and social challenge, has been reduced to a very low level.
There are over half a million more people now at work than there were in 1995. Real incomes have risen significantly. The basis for our economic growth and growing prosperity has been the remarkable achievement of simultaneously increasing competitiveness and real incomes.
The successive partnership arrangements, from the Programme for National Recovery in 1987 up to the current Programme for Prosperity and Fairness (PPF), have been the key to this remarkable outcome. Despite the more difficult international economic environment, the Irish economy continues to do very well. However, it is clear that in addition to the difficulties on the international front there are significant problems and challenges facing us which are of domestic origin.
Some of these, such as the rapid increase in the cost of housing and the increasing congestion on our roads, are in part the results of economic success. The increased level of industrial unrest is putting pressure on the partnership approach which has been at the centre of our economic performance.
Much of this unrest springs from feelings among groups of employees that others have benefited disproportionately from their pay restraint and increased productivity. In other words they do not think that the fruits of economic growth have been shared fairly. So what is to be done about this?
No matter what form they take, future pay arrangements will have to meet three essential rules if we are to sustain our economic progress.
The first is that any new arrangements must be seen to be fair. By that we mean that the benefits of economic growth and of our increasing national wealth should be shared fairly between the various groups in the labour force - and, more importantly, that this be seen to be the case.
The second is that the new arrangements should maintain or enhance the competitiveness of our goods and services on international markets. The third is that any new arrangements should be consistent with stable public finances.
None of these tests is new. We have ample experience of periods when these tests were not met - in particular during the 1980s we experienced the consequences (inflation, job losses, emigration and high levels of taxation) of failing to do so.
However, what is different is that any failure to observe these rules will be more immediate and perhaps even more damaging than was the case in the past. This is particularly true in respect of competitiveness.
Any failure to take account of the realities of the fixed exchange rate in EMU will quickly lead to very damaging losses of competitiveness. These in turn will cause significant employment losses, a sharp economic slowdown and a deteriorating Exchequer position.
We have suggested a mechanism in the most recent (March) edition of the Quarterly Economic Commentary, published by the Economic and Social Research Institute (ESRI), which we believe meets these tests. Our approach, which we proposed initially for the public sector, is modelled on the private sector profit-sharing schemes.
Under the private sector schemes, employees are given a non-pensionable lump-sum award in cash or shares based on the profits earned in the previous year. Thus employees get an award in 2001 which is based on profits earned in 2000 and is provided for in the 2000 accounts. This model could be extended to pay across the economy, to social welfare payments and public sector pensioners.
We propose that future national understandings and pay arrangements should have two key elements:
provision for a "platform" or basic pay increase; an annual lump-sum element related to the growth of the economy.
THE basic increase should be relatively low. We suggest it should be pitched at the expected rate of inflation in the euro zone.
The growth element parallels private sector profit-sharing schemes except that we have to choose a different measure to company profits as a reference when we are dealing with the economy as a whole. Our proposal is that the basic pay of each employee would each year be increased by a factor related to the percentage growth in GNP per person at work during the previous 12 months. We call this the "growth dividend".
We considered a number of reference points other than the increase in GNP per person at work. However, we choose this measure because:
it provides a good measure of national economic performance;
it is more widely understood than other possible measures and it is a key driver of net tax revenues, i.e. tax revenues depend on the value of goods and services produced in the economy.
Our model for a growth dividend parallels that of the existing private sector profit-sharing schemes.
By analogy with the private sector schemes, we propose that if the participants agree to invest the dividend in approved investment funds, the proceeds should be free of income tax. The effect of this approach would be significant.
Our calculations indicate that, if this model were adopted and if the economy were to perform as forecast by the ESRI, it would be possible for somebody with earnings of £18,400 in 1999 to accumulate a tax-free lump sum of about £12,000 by 2004. A person with annual earnings of £35,000 could accumulate a sum of £24,000.
Much attention has been devoted in recent months to benchmarking. How does our approach fit into the benchmarking process?
The answer is not at all, as both are designed for different purposes and indeed can coexist. In our view benchmarking is a mechanism to secure a relative adjustment for a particular group of workers.
It is not one for securing large general increases for all. It should be used sparingly and selectively. If everyone secures substantial increases under the benchmarking process, relativities will not change and there is the danger that the effect will be to increase unsustainably the cost base of the economy and damage competitiveness.
It is clear that social partnership has brought great benefits. However, the process requires to be developed to deal with the very different situation in which we now find ourselves. We think our proposal has a contribution to make in this regard.
Dr Donal de Buitleir works in the private sector and was formerly secretary to the Commission on Taxation.
Dr Don Thornhill is chairman of the Higher Education Authority and was formerly secretary-general of the Department of Education and Science.
The authors write this article in their personal capacities.