Why Government must stand up to powerful insider lobbyists

The first budgetary duty is to get value for taxpayers’ money, and the powers that be should pay no more than they have to, writes Dan O’Brien

IF the Government paid millions of euro more than it should have to a construction company for a piece of infrastructure, questions would rightly be asked about its use of taxpayers’ money. If it paid one legal firm more for a job than the lower price offered by another firm, there would be good reason to ask why the higher price was paid.

Now consider a scenario in which a company signs a contract with the State to provide a service and then claims later that, because another firm is getting more on an earlier contract, it should receive the same higher amount. Again, there would be many valid questions asked if the Government agreed to change the contract retrospectively at a cost to the taxpayer.

Just such a scenario has loomed into view over the past week as teachers and their unions demand that more recent recruits have their pay scales retrospectively increased. This would have serious implications for the public finances and should not be acquiesced to.

People who voluntarily joined the public sector since 2011 did so in the full knowledge of the pay and conditions they were signing up to. They have since provided a service to the State and their fellow citizens on the terms they agreed to when they joined. Now, the teachers’ unions are demanding that taxpayers hand over an additional €60m annually to their members in that situation.

If the Government does not give into their demand to retrospectively change their contracts, they will strike.

I discussed the issue in last Thursday’s Irish Independent and set out the lack of hard evidence to support such a costly pay hike — there has been a large increase in the number of teachers employed at the going rate over the past five years and there is no evidence of systemic recruitment or retention problems.

I won’t rehash it here (it can be found on my Twitter feed at @danobrien20) but let me make some additional points and widen the discussion — to include the public sector more generally and pressures from various vested interests as the Department of Finance prepares to publish its first major document in the 2019 budgetary cycle.

The Government’s first budgetary duty is to get value for taxpayers’ money. When it procures goods and services — be it from lawyers, builders, teachers or whoever else — it should pay no more than it has to. To pay more than it must is to transfer wealth from one group of people in society to another for no good reason.

When circumstances change for a business, and it needs to cut costs, it will look at all outlays, including payroll. As long as it does not breach the State’s comprehensive equality legislation, it will pay different employees different rates. That is exactly what happened in the public sector.

When the economy crashed in 2008, it became clear that the near-threefold increase in the public pay bill over the previous decade was unaffordable.

The tax receipts which had funded round after round of pay increases evaporated. Preventing national bankruptcy would have been impossible without addressing all of the biggest items of expenditure, including the public pay and pensions bill which peaked at €21.2bn in 2008 (up from €7.2bn in 1998).

A small part of the earlier large increases in pay were reversed, which certainly caused financial difficulties for many who had expected pay to go only one way. These pay cuts, along with voluntary departures and a hiring freeze, contributed to cutting the pay bill in the years to 2014.

Also relevant was a decision that from 2011, those hired would be earning less than those already employed. And, by the by, if public sector unions really opposed this, as they now claim, they would have done what they do when they really oppose something — strike. They didn’t strike.

This year the public pay and pensions bill, as measured on an EU-harmonised basis, will have risen by €3bn in just four years, with an annual increase of around €700m this year alone. An increase of a similar magnitude has been pencilled in for next year by the Government. But that does not include retrospectively changing the contracts of everyone who has joined since 2011. If teachers were given what they demand, it would be hard to resist pressure to change all post-2011 public servant contracts. That would add an estimated €200m to the pay bill, bringing next year’s increase closer to €1bn.

Over the past week it rarely got a mention that calls for even more taxpayers’ money be given to the public sector workers are being made at a time when the Government is still spending more than it takes in. This year, it has budgeted for a deficit of more than €500m. Next year it plans to overspend by more than €300m, which will make 2019 the 12th consecutive year in the red.

It should be recalled that the economy has been expanding since 2012. Growth has been robust since 2014. The Government’s failure to balance its books even after more than half a decade of growth rates well above the European average, makes a mockery of its claims to prudence. A responsible approach to the public finances would see the Government running surpluses in years of plenty so that growth-killing spending cuts and tax increases are not needed when the economy weakens, as it will eventually. The Government’s stance is all the more imprudent given that years of accumulated deficits have left public debt levels at more than €200bn, a four-fold increase on a decade ago.

It is bordering on the reckless to be running a deficit, which is adding to an already huge stock of debt, at a time of considerable risks to the economy from Donald Trump’s trade policies, which have started a trade war with China and threaten one with Europe, and Britain’s exiting from the EU, and could lead to chaos if the real prospect of the talks breaking down comes to pass.

The US is Ireland’s largest trading partner. The UK is in second place. If trade with either, or both, were to be disrupted significantly, the strong economic growth that Ireland is currently being enjoyed would be stopped in its tracks. A big trade destruction event would cause a recession. If the ship of State were to sail into such a storm with its books already in the red, it would take only a matter of months for the public finances to move into the fiscal danger zone. We learnt very painfully in the recent past how a small economy, dependent on both foreign trade and foreign bond-buyers, can get into serious trouble in a short space of time. It is depressing that the Government, egged on by the opposition, is prepared to take a hope-for-the-best approach to the good times lasting forever. Rather than trumpeting the “fastest growing economy in Europe” line, based on the GDP measure nobody believes in, and inviting expectations to be raised and interest groups to pile in looking for taxpayer-funded handouts of various kinds, the Government should be explaining that the only way it can best protect all the people it serves, is to hold the line.

‘This year the public pay and pensions bill will have risen by €3bn’