PAI Annual HR Conference Speech by the Minister for Public Expenditure and Reform, Paschal Donohoe TD
Good morning everyone.
I would like to thank Public Affairs Ireland for inviting me here this morning to talk about public pay.
Before I directly address the subject of this morning’s session I would like to make a few points by way of context.
The public service pay bill is a function of numbers and rates.
Traditionally, Irish pay policy has been strongly pro-cyclical, with large increases in the numbers of public servants and the rates of remuneration during periods of economic growth, followed by difficult retrenchment in recession.
This has been true of each decade since at least the 1970s.
Most recently, in the run up to the crisis, the public service pay bill more than doubled from €8.2 billion in 2000 to €17.2 billion in 2008.
During this period the Government dramatically increased public service numbers by 67,000 or almost a third (31%) at an average rate of 3% per annum.
Despite the scale of this recruitment, my Department estimate that it only accounted for €2.5 billion or a quarter of the increase in the public service pay bill.
By far the dominant impact was the increase in the rates of remuneration that occurred through national wage agreements such as the two rounds of benchmarking and other pay awards.
In total, my Department estimates that pay increases under these agreements cost the exchequer €6.5 billion or 73% of the pay bill increase.
THE WIDER ECONOMY IN THE CELTIC TIGER ERA
Now, it is important to note that not all of these increases were related to benchmarking, or were indeed confined to the public service.
The social partnership agreement – the Programme for Prosperity and Fairness – recommended economy wide increases of 15% in the early 2000s.
The former Governor of the Central Bank, Patrick Honohan provides a neat summary of the period in his cheerily-titled 2009 paper “What went wrong in Ireland”.
The former Governor said ;
“After 2000, wage competitiveness deteriorated. By 2008, hourly wage rates had raced ahead of those in competitor counties, when measured in a common currency, by as much as 36 per cent.
He goes on to say in that paper “sooner or later, this loss of wage competitiveness was sure to affect employment expansion, but this was masked and delayed by the construction boom”.
Unfortunately, with the onset of the crisis and the collapse in tax revenue it became very clear very quickly, that the €9 billion added to the public service pay bill was unsustainable.
As a result painful measures were required to both reduce public service numbers and rates of remuneration.
In total the exchequer pay bill was reduced by €3.7 billion during the crisis period through a moratorium on recruitment, which reduced public service numbers by 32,000 and extraordinary emergency pay legislation – FEMPI to you and I- which generated €2.1 billion in pay savings with additional savings on pensions in payment.
Public servants have contributed much to the stabilisation of the public finances.
But such drastic measures should not have been necessary and are incredibly damaging to morale, workforce planning and people’s lives.
A fundamental lesson from this is that the unaffordable pay increase of today becomes the savage pay cut of tomorrow.
As Minister, I do not intend to repeat the mistakes of the past.
WHERE BENCHMARKING FAILED
So to speak to the issue of this morning directly, is the Commission a new approach or a return to benchmarking?: The answer has to be a new approach.
We can’t afford a return to benchmarking and social partnership style pay awards.
But what does this mean? I believe there are three key learning points that we can take from the benchmarking process and apply to the new approach.
Firstly, there is a benefit from the collective approach and a value to industrial peace which was developed through social partnership and benchmarking.
Unions believe, as I do, that collective agreements deliver mutual benefits to the employer and employee.
That reasonable and affordable pay increases can help drive public service reform and modernisation.
That the old system of pay relativities and leapfrogging, where one set of workers seeks to outdo the others, should not be returned to.
Most importantly, collective agreements deliver industrial peace which has been crucial to the re-establishment of our international reputation and subsequent economic growth.
Secondly, that analytical work from the Pay Commission will be an input into the negotiation process rather than an end to the negotiation process.
Ultimately it is the role of Government, based on a mandate directly conferred by the people, to make choices and allocate scarce resources across competing priorities in a fair and fiscally sustainable manner.
As such we may not always agree with the findings of the Pay Commission but we will engage and negotiate on the basis of their findings.
Thirdly, and finally, the fact that benchmarking has become something of a dirty word in policy circles owes much to the failure of the first report in 2002 to publish its research on the two fundamental questions;
- The existence of a pay gap between the public and private sector at various levels; and
- The extent that this pay gap, if it did exist, was broadened or bridged by public service pensions.
The decision not to publish the research underpinning the pay recommendation of 8.94% fatally undermined public support for the process.
By contrast, the second Report of the Public Service Benchmarking Body published in December 2007 was far more scientific in its research and methodology and took account of the value of public service pensions.
As a result pay recommendations were far more modest and only 15 of the 109 grades examined were recommended for pay increases.
THE PUBLIC SERVICE PAY COMMISSION
Clearly the value of public service pensions is a critical component of the work of the Pay Commission and undoubtedly the value of these pensions has increased in the interim.
Learning from the experience of benchmarking, we have three principles which have informed the establishment and structure of the Public Service Pay Commission. They are that:
- A collective approach which delivers mutual benefits and industrial peace is preferable.
- Analytical work from the Public Service Pay Commission will be treated as an input to the negotiation process rather than an end point.
- Benchmarking was undermined by the first report’s failure to publish its evidence base and explicitly address pensions.
It is these principles that will inform the new approach under the PSPC.
As you are aware, the Programme for Partnership Government, was agreed and published in May. That document committed the Government to create a Public Service Pay Commission to examine pay levels across the public service.
This is always a complex matter, involving, as it does, the State as employer, public service employees and the most important stakeholder – the public, as taxpayers.
The terms of reference of the Commission were not finalised until after an open consultation process had been carried out over the summer months in relation to the role and methodology of the Commission and how it should approach this tri-fold relationship.
These terms of reference provide that the Commission will be advisory in nature and will report initially in the second quarter of 2017.
For its initial report the Commission will be asked to provide inputs on how the unwinding of the Financial Emergency Measures in the Public Interest legislation should proceed having regard to:
- The evolution of pay trends in the public and private sectors based on published data;
- A comparison of pay rates for identifiable groups within the public service with prevailing non-public sector market rates;
- International rates and comparisons where possible; and
- The state of the national finances.
The initial report will also have regard to any particular labour market challenges the Commission identifies and to other conditions of service of public servants, including tenure and pension.
As you will also be aware, I have appointed Kevin Duffy as Chair of the Commission.
Kevin has a deep knowledge of Irish industrial relations after nearly 20 years serving on the Labour Court.
I have also appointed the other Commission members: Marian Corcoran, Ultan Courtney, Ruth Curran, Noel Dowling, Seán Lyons and Peter McLoone who bring a wealth of industrial relations and economic experience.
In keeping with the principal of the Pay Commission providing analysis as an input to the negotiation process, it is important to state that the Commission will not duplicate the work of the State’s existing industrial relations bodies – the Workplace Relations Commission and the Labour Court.
Nor will the Commission, in any sense, displace the work and responsibilities of my own Department.
The Commission’s role will be to provide evidence based analysis on pay matters to assist my officials in discharging their negotiation function on behalf of Government.
The Government must retain the ability to negotiate directly with its employees in respect of pay and therefore the Commission will have no direct role in the current industrial relations disputes.
And on that subject, you will be aware that my Department has invited the parties to the Lansdowne Road Agreement to discussions under Section 6 of the Agreement.
These discussions, which are expected to conclude before the end of January next, will seek to address anomalies arising from the recent recommendations issued by the Labour Court in relation to the industrial relations disputes with members of An Garda Síochána.
Indeed, that is exactly what Section 6 of the Agreement was designed to do.
In this, we are directly responding to the principal of prioritising collective agreements that encompass all public service workers and allow for equitable treatment between different categories of workers.
As a government we need to support collective solidarity amongst workers by ensuring the Lansdowne Road Agreement remains the overarching framework for pay in 2017 and 2018.
To conclude, I am absolutely certain the Commission represents a new approach and not a return to the bad old days.
I believe the work of the Commission, which will be published and which will operate in a transparent fashion, will promote a shared understanding of the issues of public service remuneration in the broader economic and fiscal context.
I look forward to receiving the Report of the Commission next year and to hearing some of your views this morning.