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Reality Check Badly Needed on Public Sector Savings

Jan 28, 2013

When the Croke Park agreement was reached in 2010, its continuance was always on the proviso that things wouldn’t get any worse. So, three years on, where do we stand?

At home, unemployment has increased by 8.2% since the agreement was signed and would be even higher if it wasn’t for the emigration levels we are seeing at present.

The EU recession seems more severe than ever, coupled with the threat of a referendum on membership in the UK.  The US may have avoided dropping off the ‘fiscal cliff’ but resolution of their crisis has only been delayed.

Although we have made significant progress in Ireland - much of it making us better prepared to take advantage of a future upturn in Europe and globally - things are undoubtedly worse than they were in 2010.

The Government is set to borrow €15bn this year, even after all the changes made. That is nearly €3,500 for every citizen in the State. The question has got to be asked whether the ‘shocking’ Government demand from Public Service Unions of an additional €300m this year in savings is ambitious enough. From a private sector view point it is not. The private sector is a spectator in the Croke Park 2 talks, even though the problems being addressed and decisions taken will impact on everyone.

And it is everyone who is feeling the pain. For example, 46% of families across the State are grappling with private health insurance bills that are increasing at an extraordinary rate. Many can’t afford it any longer and are reverting to the public health system. This places even more pressure on the system, resulting in poorer outcomes for all patients. With health spending spiralling and already accounting for 9.2% of GDP, an agreement that contains labour costs is a vital ingredient for future sustainability.

The Government has also attacked the deficit via significant tax increases. They cannot keep going to that well: marginal taxes are now over 50pc; the top 20pc of earners fund more than 70pc of PAYE, PRSI and USC contributions; and the Government was €200m behind target on tax receipts from the self employed in 2012 indicating diminishing returns as a result of tax increases. This underlines the need for even more ardent cost control rather than hoping that taxes will close the budget deficit.

So, if the private sector’s voice could be heard in these talks, then its first statement to the Government would be, ‘you must be more ambitious’.

Where can savings be made? Areas such as these need to be considered:

• Shift allowances: the private sector has already had significant reform in this area. For instance, many jobs and businesses in the hospitality sector have been saved precisely because workers have been prepared to be more flexible around Sunday payments. This is the type of flexibility needed consistently across the public service.

• Incremental pay increases: 63pc of all civil servants qualify for annual incremental pay increases. In such barren times, with finances as they are, it makes no sense to continue making these payments which should be paused until the State gets its finances under control.

• Extending working hours and more flexible working time; the resulting increases in productivity and efficiency will help to create a leaner and stronger public sector and improve services.          

• Business Process Outsourcing: to make this opportunity credible, Government needs to account for VAT on these services separately. Otherwise we will not have a level playing field in pricing for these services between public and private sector service providers.

Yes, we have recently managed to borrow at relatively reasonable rates, partially  helped by the huge amount of global liquidity made available by quantitative easing programs in other countries, but this ability to borrow could be lost very rapidly if there is a change of sentiment on either Ireland or the Euro in the months ahead. To be assured of our ability to borrow, we need to continually assure lenders that we are in control of our spending.

And to the unions we would say: ‘you must be realistic on your members’ behalf’. The boom years are gone. Your employer is bust and pay and conditions must evolve to reflect that reality. In addition certain costs such as housing have dropped dramatically.

Between 2000 and 2008, pay levels increased across the public sector by 61pc on average.

Times change.

For private sector workers certainty and security have become things of the past.

Contemporary life is increasingly characterised by risk. That’s true for everyone, whether they are in the public or private sector, whether they are an employer or an employee.

However, while many people have adapted to these changes, public sector unions have yet to consistently embrace the necessary flexibility to produce sustainable outcomes.

The unions must show leadership and develop a similar attitude to compromise and actually protect their own staff by helping them to understand the realities of the situation we are still in.

If, as has been stated, compulsory redundancies are off the table, then other options must be considered seriously. Don’t fight the Government on increments or a wide array of allowances; many of them are simply not justified. Accept that pay increases are unrealistic at this time; calling them increments is a game of semantics. Very few in the private sector, particularly the vitally important SME domestic sector, have been receiving or are expecting  raises, and yet they have had to suffer tax and other cost increases to pay the State’s bills.

And recognise that accepting longer working hours and flexible time will actually secure the jobs and pensions of their members and colleagues.

The scale of the challenges, but also the clarity of the solutions, is no better illustrated than in the Health sector. Yes, it seems scary that €300m must be saved this year with savings totalling €1bn by 2015; however, a closer look at where some of the HSE’s spending goes and the fright is eased considerably.

In 2012, the HSE spent €161m in allowances, €257m in overtime and €242m in premium payments. A concerted effort to reduce these figures would go much of the way to achieving the targets set. Furthermore, figures released at the end of 2011 showed that the HSE sick pay bill was €284m. If that figure was halved, very few additional savings would be necessary, assuming that the target is the ‘ambitious’ €300m per annum that Government appears to have aimed for.

The next few months are going to be vitally important for the financial security and sustainability of the State. We need a confluence of positive developments to enhance our move to a more balanced economy. Some of these required changes are within our control, such as Croke Park 2, and it is up to the Government and public sector unions to rapidly find solutions which not only reflect their own interests but which contribute to getting Ireland’s finances back on track; something that will ultimately benefit everyone.

It is important that the debate doesn’t descend into a shouting match between the public and private sector and to recognise the sacrifices and achievements by all in the last few years. Changes such as Garda rostering have been very significant and are to be respected and welcomed but we need more examples of this type of success.

Croke Park 1 had some solid achievements but the Government and Unions need to be bold in their actions to solve this crisis for the long term, not just to defer the problem for another short period.

This Op-ed, by Chambers Ireland CEO Ian Talbot, appeared in the Sunday Business Post on the 27th January, 2013.

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