Revisiting the Croke Park Agreement on Public Sector Pay

This is an extended version of a column published in the Irish Examiner 7 July 2012.

It’s the silly season, when the politicians are if not quite dusting down their buckets and spades at least leafing idly through brochures and considering where to spend the break. There is little to concern some politicians, apart from banking scandals, banking meltdowns, dail expense scandals, rising unemployment, the lack of Irish membership of CERN, climate change induced extreme weather and the chances of getting a deal from the EU on our debt. So, not unnaturally, some commentators and politicians have begun murmuring that we should “Revisit Croke Park”. As a Kerry man that something I wholeheartedly agree with but as a commentator and analyst there is something dark and dense in the undergrowth of the statement. Warning : this post contains facts, which can cause nervousness, spluttering and in extreme cases change of mind. If you are allergic to facts, please step away from the screen with your mind closed.

Lets recap: the croke park agreement of early 2010 (which has saved nigh on 1.5b in costs to date) in effect represented the final flowering of social partnership. Social partnership, which had massive benefits in its early stages, was started in a time of massive economic crisis so its not surprising that its apogee would be reached in similar times. It guaranteed no further wage cuts for public sector employees in exchange for not just industrial peace but an impressive sounding set of changes to work practices and approaches with the aim of not just saving money but improving service. This , lets not forget, came after the 2009 pay cuts which averaged 7%.

The FF led governments having run up massive spending (and being reelected time and again, by one assumes private and public sector workers alike, despite the more crackebrained mutterings that the public sector vote en bloc for Labour) , the state has for the last while been retrenching. A large part of this has been on the capital side , which may or may not be a problem – see the presentations by Colm McCarthy and Seamus Coffey on this issue. In addition, public sector pay has been hit. It is astonishing when one asks people what percentage of government spending is accounted for by the pay bill – estimates range usually from 50% to 90%. The true figure is considerably less than that. So what about pay?

An all too tiresome mantra repeated in the “debate” is that while private sector wages have fallen public sector wages have not This is simply incorrect, as for the most part the phenomena of “downward nominal wage rigidity” operates in the private sector- adjustments there have been mainly by reduction in headcount (unemployment) rather than wages or even hours worked. This is the case, substantively, even in areas such as construction, hardest hit by the crash. The latest (q3 2011) CSO data show that across most sectors nominal wages in q3 2011 were higher than q1 2008. A notable exception? Public administration, down 3%. Note also that this data excludes the public sector pension levy, a further reduction if not in gross pay then for sure in take home pay. The issue of unfunded pension liabilities is also often trotted out as being “over 100b”, a figure which arises from a C&AG 2009 report. It is regrettable, although not surprising given the volume of work of the C&AG that there has not been a revisiting of this although this has not stopped some from asserting that the unfunded liability is “over 200b“.

We never however hear much of the other unfunded pension liability, that for the old age non contributory pension. When a private sector employee or other person doesnt make any or enough contributions to the Social Insurance Fund (which is zeroed out) they still get a pension. This has been a cornerstone of modern western social provision since 1908. It is apparently however beyond the pale to critique these unfunded pensions while the unfunded (but employment related) pensions of state employees are fair game. Of course, the grey lobby used their spare time and threat of vote power to show muscle in 2008. Some commentators believe that public sector workers gain both their non contributory and their employment pensions, rather than in fact the lower being offset against the higher. There has undoubtedly been a deferment of rational public sector pension planning over the years but that element at least has been addressed now with enhanced contributions and extended time to pension entitlement. The issue of whether or not a government can cut a pension to which someone is legally entitled is a whole other ball of wax. Some sensible steps have been taken but it will be decades before the state finances see these flowing through. Of course, there was a nicely growing pension pot there for the provision of state employee pensions but this was flushed down the Anglo drain (Anglo, lets recall, was a private company).

Also of note are hours worked; a not uncommon meme of the “debate” is the laziness of public sector workers. Again the same CSO data suggest that this is not quite the case (no doubt some now will point to the fact that the data are available only through Q3 2011 as evidence of that very laziness). Again only two sectors show a meaningful increase in average weekly hours worked in Q3 2011 v Q1 2008, Electricity, water supply and waste management (up 3%) and Public Administration (up 5%). But then facts have never stood in the way of a good argument in Ireland where policy based evidence is sought rather than evidence based policy being made. The evidence, as of late 2011 is that PS workers are working longer hours for lower pay than in 2008. No doubt many will say “bully for them” but facts are facts, and while a debate on the effectiveness or efficiency of the service is one thing to ignore basic structural elements is quite another.

This is not to deny that there is an issue. As a country we are broke. Not only is income falling but we are not really wealthy. A short trip to the continent shows the difference between wealth and income. Comparing public transport or services in Amsterdam to Dublin is not chalk and cheese, its a flashlight to a h-bomb. The public sector wage (as opposed to wage and pension) bill in total is something of the order of €14b. This is a very large amount of money and is coincidentally almost the same size as the borrowing requirement. In classic style what is called the fallacy of conjugation is applied to then suggest that “we are borrowing to pay the wages of (overpaid, lazy) public servants”, with the implied solution of not paying and thus not borrowing left dangling like an unwanted participle at the end of a sentence, like. “borrowing to keep the streets safe and the sick healed” doesn’t have quite the same emotive punch and may suggest worrying Keynesian or even social (or socialist?) tendencies.

We can and almost certainly must cut the wage bill, as we must cut all costs, including those in the sheltered private sectors from whence hail many of those crying for cuts in the public side. At the heart of the debate on public sector wages is a confusion about how to cut the bill. We can do this in one of three ways : we can reduce headcount, we can reduce (again) the nominal wages of those employed or we can do both. In fact headcount is being reduced. Since 2008 numbers have fallen by nearly 10%, with some public expenditure vote groups cut by nearly 1/3. The largest single number of employees is in the health area, down by nearly 10% from 2008. Interestingly one of the largest increase in staff numbers has been in the Transport vote, whose minister has been one of the most prominent in calling for a reconsideration of Croke Park. Presumably the increased staff numbers in transport will any day now be reflected in increased public transport quality and services.

Cutting wage levels (again) will fall disproportionally on the lower paid, as that is where the larger numbers are. The data in the chart are from an answer to a question asked of the Minister for Public Expenditure and Reform in January 2012 . Cutting the nominal wage level seems to be the preferred option of those advocating a revisiting although it would be refreshingly honest if they simply came out and said “cut public wage levels”. But where? 60% of wages are paid to those earning less than 55k, 25% to those earning less than 35k.

To make meaningful cuts (say gross 3b per annum) cannot realistically be done if we wish to exclude the lower paid from same. And this ignores the evidence that in fact any wedge between public and private sector is greater at the lower level than at the top. In addition, there are problems that are never mentioned as even existing when the advocates of “revisiting croke park”. The most glaring omission is the knock-on effects. Lets leave aside that many seem to misunderstand that the wage bill is measured in gross terms and that cutting wages in gross terms by X leads to a reduction in the net government expenditure by X(1-T) where T is the marginal tax take. There are other issues that never seem to be aired

Cutting wages reduces spending power. That this is hard to understand is hard to understand. The largest single contribution to Irish national income is consumption, and massive shocks in wages to 300k consumers will almost certainly reduce consumption further, thereby weakening more the economy. This will not be accepted by the kind of commentator who suggested to me, in all seriousness, that cutting public sector workers wages would merely result in less shopping trips to New York but for most sentient commentators it should be self evident.

In addition, it is reasonable to assume that public sector workers are as likely as private to have mortgages, and as we know the mortgage torpedoes are slamming into the hulks of the (nationalized) Irish banks. Increasing the losses there will result in further losses for the taxpayer. And by reducing the overall tax take from the public sector the losses will shift further to the private sector.

A further issue which rarely is raised is one of equity and quality. Lets leave aside that the only way the government found in the past to cut nominal wage levels and not get into constitutional hot water was to pass legislation, which is vanishing unlikely to happen in a government coalition involving a labour party which is in any case going to get hammered at the next election. Cutting contracts in mid contract is not good policy. Its commonly stated that as tax revenue is back to 2003/2004 levels so too should public sector wages be rebated to the same level (which would amount to a cut of approximately 20% on a per capita basis, gross, with all the consequences noted above). This would perhaps be feasible if all other costs were reduced by the approximatly 25% they have risen since 2003-4 but such is not possible. The only way to do that would be for the state to impose price controls, something that will not happen. Beyond that again one has to wonder if interfering in contracts is a good idea. While contracts are never inviolable, they should only be altered by government fiat under extreme circumstances. And, we are told by government and Troika that the bailout and related plans are on track, so there would seem to be little prima facia case for same. If the state can, for fiscal convenience, alter contracts for one group then why not for another? This sort of action would open a route which would cast doubt on the efficacy of the rule of law. Contract law is really important to economic development, but its effect is highly non linear – in other words small changes have big effects.

Will we have to reduce the overall public sector pay bill? We will. Will this best be achieved by cutting nominal wage levels? Highly unlikely. Will the dreary codeworded dance continue absent a rational debate? Certainly. Will this contribution to the debate be seen by some as mere special pleading and regardless of any facts indeed be dismissed as inherently wrong merely because it’s author works in the public sector? Equally certain. Will there be an acknowledgement from the commentatoriat that we have fewer public sectors getting paid less working longer hours while delivering essentially the same level of service? The words of James Gogarty on receipts come to mind..