Last night's deal to save the Programme for Prosperity and Fairness should be welcomed. After difficult negotiations, the Government, the employers and the trade unions have come up with what appears to be a reasonable compromise in the circumstances, involving a 2 per cent additional pay rise next year and a further once off payment of 1 per cent in 2002. This will not be enough to fix all the problems of industrial unrest. But it should help ease the pressures building in many parts of the economy. It will also act as clear signal to those public sector groups seeking higher pay - including the ASTI - that the best way forward may be through the established partnership arena.
The trade unions have quite rightly pointed out that soaring inflation meant that employees have seen the value of pay rises under the PPF eroded. While many in the private sector have already received higher payments, now those who have been restricted to the PPF terms will receive an increase of 7.5 per cent next year, well ahead of inflation, plus further gains from the Budget. The Government must remember that social welfare recipients have also lost out through higher inflation. This group should thus get particularly generous increases in the Budget.
It is important that the draft agreement hammered out by the social partners takes account of those firms which are in difficulty by including an inability to pay clause. But further work remains to be done if partnership is to retain its relevance in the years ahead. New ways to ensure flexibility are essential - wider use of profit and gain-sharing for example - and mechanisms are also needed that allow public sector employees to benefit when they become more productive and efficient.
The trade unions stress that the final deal is dependent on tomorrow's Budget. All the indications are that it will deliver substantial tax relief - indeed there is a risk that the Government may actually add to inflationary pressures by pumping too much cash into the economy.
If Mr McCreevy does as he is expected to do and cuts the standard rate by 2 percentage points, widens the standard rate band and increases allowances, the commitments made under the PPF will be easily achieved. However given the state of the economy and the high inflation rate, he must not go too far. For example, he should not cut the top income tax rate as this would be a particularly inflationary measure, giving large gains to the better off and another boost to an overheated housing market. There is also a case for some selective reductions in indirect taxes, with measures to ensure that these are passed on to consumers.
The Government has done its best to head off criticism that the pay package itself is inflationary. The 1 per cent lump sum payable in April 2002 will not be added to basic salaries and should thus have less long term inflationary implications. Much now depends on people's expectations. If Mr McCreevy can do enough in the Budget to convince people that inflation has indeed peaked, this in itself will help to reduce the pressure on wages and prices moving into next year. However there is a delicate balance to be struck; if he goes too far in cutting taxes this would add to inflationary pressures and increase the vulnerability of the economy to any international difficulties.