Minister for Finance Paschal Donohoe will face the defining test of his political career in the months ahead as he struggles to reconcile the political pressure for substantial increases in public spending with the requirements of a prudent budgetary strategy.
One of the most difficult issues he will have to confront is the demand by public service trade unions that new staff hired on lower pay scales since 2011 should have their salaries increased to the rates that apply to those in employment before the crisis. This issue was not supposed to be on the agenda until after the current pay deal runs out in 2020 but the unions want it dealt with now. The likelihood of an election later in the year or early next year has given the unions the kind of leverage they may not have in two years’ time.
The immediate cost of putting all public servants back on the old rates is estimated at €200 million but there are also serious implications for future pay costs. That in turn will have consequences for the number of public servants that can be hired to provide badly needed services.
Donohoe pointed out last week that already overall day to day public spending is set to rise by €1.1 billion next year, of which €400 million was higher public pay under existing agreements.
Putting all public servants back on pre-crisis pay rates will drive this bill substantially higher next year and the following years. It seems as if almost everybody has forgotten that the unsustainable rise in public service pay in the first decade of the 21st century was the prime cause of the crisis in the public finances that led to austerity.
There are a number of huge risks, particularly from Brexit, that could derail the recovery quite rapidly
The challenge facing the Minister is how to square the already agreed pay increases with the new ones being sought and the pressures from other interest groups for tax reductions and extra spending on a wide range of socially desirable measures. All of those clamouring for the Minister’s attention have taken note of the economic forecasts suggesting that he has significant scope for higher spending in the next few budgets.
However, the Government has been warned by economists about the dangers of overheating the economy and generating another boom-and-bust cycle. As well as that, there are a number of huge risks, particularly from Brexit, that could derail the recovery quite rapidly.
Amidst all of the demands for extra spending it is usually overlooked that the national debt is still dangerously high with annual public spending continuing to exceed tax revenues.
Donohoe has tried to rein in expectations but he will not find it easy to convince his cabinet colleagues to hold the line. With the Opposition parties lining up to support those demanding extra spending of one kind or another it will take serious resolve and a lot of political skill to avoid repeating the mistakes of the past.