After the one-day public service strike this week, the Government, trade unions and the public need to reflect on a painful lesson from the recent past: excessive public sector pay awards in the early years of this century played a central role in triggering the 2008 financial crash.
The popular narrative of that episode is that the crash, the subsequent austerity and the EU/IMF bailout were all the fault of the banks. While there was no excuse for the reckless behaviour of the banks, the focus on their sins has allowed a convenient shifting of responsibility from other players – the government and the public sector unions.
One key element of the public finance crisis that engulfed the country in 2008 was the runaway cost of the public service pay and pensions bill, which fuelled unsustainable growth in government spending from 2000 onwards.
This process was partly driven by a rapid expansion of personnel, with the number of public servants rising by 35 per cent between 2000 and 2008, but it was compounded by a rise in pay of 32 per cent between 2003 and 2008. The cumulative increase in inflation over the same period was 18 per cent.
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The dramatic increase in pay was the result of a flawed benchmarking process that developed out of a preordained agreement between government and the trade unions to grant substantial pay increases to public servants regardless of the economic rationale or the long-term implications for public finances.
“The end result was that average public sector salaries were raised to completely unsustainable levels,” according to economists Donal Donovan and Antoin Murphy, who wrote the definitive account of the crash, The Fall of the Celtic Tiger: Ireland and the Euro Debt Crisis.
By 2006, senior public servants were earning 8 per cent more than their private sector counterparts while middle- and lower-ranking grades were being paid between 22 per cent and 31 per cent more than equivalent workers in the private sector.
While social partnership played an important role in helping the country out of the economic depression of the 1980s, it had developed into an out-of-control juggernaut by the early 2000s.
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“Social partnership appears to have placed an exceptionally high premium on avoiding social tension or any outbreak of industrial strife. However, the price was excessive and the consequences far-reaching. Apart from contributing to a loss in external competitiveness, the massive expansion in the public sector payroll bill contributed in a major way to the subsequent financial collapse,” wrote Donovan and Murphy.
Even after the crash, which led to temporary reductions in public service pay, salaries for Irish public servants remained significantly higher than in most other developed countries.
Data from the then 34-member Organisation for Economic Co-Operation and Development (OECD), the grouping of the world’s most advanced economies, in 2011, measured eight categories of public service salaries and put Ireland near the top of the table. We had the highest-paid medical consultants, the fourth-highest-paid nurses, the fifth-highest-paid teachers and the sixth-highest-paid senior and middle-ranking managers. What was really striking was that Ireland was the only country to appear in the top eight in all categories.
A senior British diplomat told me of his amazement shortly after the EU/IMF bailout, to which the UK contributed £3.2 billion, when he learned that the Irish ambassador in London was still paid considerably more than his British counterpart in Dublin, despite the wreckage in the public finances here.
The lesson from the financial crash hardly needs spelling out. The Government simply cannot concede unsustainable pay increases to the public sector without putting the country’s finances at risk once more. This is particularly so given the rapid rise in public service numbers in recent years, which has eerie echoes of the early 2000s.
Replying to a Dáil question from Micheál Carrigy earlier this year, Minister for Public Expenditure Jack Chambers conceded that over the past decade the number of civil servants had risen from 35,032 to 53,161, a rise of 52 per cent, while numbers in the wider public service had increased from 301,589 to 417,464, a rise of 38 per cent.
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While some increase was certainly required in light of the rising population, questions have to be asked about the sustainability of the expansion. This is particularly so given that many civil servants now work from home and rarely appear in their offices.
On the issue of pay, it is perfectly reasonable for the unions to seek increases that match inflation, but it is also reasonable for the Government to try to hold the line against excessive demands that are not accompanied by changes in work practices, including a return to the office where needed.
Given the way the unions have begun staging one-day national strikes before talks have even begun, strong nerves will be needed on the Government side to resist pressure for a deal that could blow up national finances yet again when the next downturn strikes.
