The government has done another U-turn on a policy it was implacably wedded to before Christmas. Yesterday Paschal Donohoe, the minister for public expenditure, awarded a €1,000 pay increase to public servants ahead of what was scheduled in the Lansdowne Road agreement.
The total cost of this act of largesse is €128 million. The government’s rationale is obvious: it is trying to buy industrial relations peace.
There are many unfortunate parallels between what happened yesterday and a number of disastrous social partnership agreements in the Noughties.
The Fianna Fail-PD coalition put unsustainable pressure on the public finances through generous pay increases in return for industrial peace. There were never any conditions attached,such as reforms to work practices or any other initiatives, that could have led to greater efficiencies.
The policy had catastrophic consequences when the economy crashed in 2008. Indeed, it was a significant part of the reason the economy crashed.
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The popular narrative is that the housing bubble and the subsequent bank crash were solely responsible for the loss of economic sovereignty in 2010. That is not correct. The national debt went from 25 per cent of GDP to 120 per cent of GDP between 2008 and 2012, which was roughly equivalent to €200 billion.
Only €50 billion of this related to bailing out the banking sector — the remaining €150 billion was needed to cover day-to-day spending. A big part of this was the public sector pay bill.
From 2008 onwards, the government had to introduce a number of emergency budgets, which included freezes for public sector pay in order to stabilise the nation’s finances.
Those pay freezes lasted between 2008 and 2014, so it was inevitable that there would be a clamour for restorations once the economy was on a more solid footing. This government, however, will have learnt nothing from the biggest crisis in the history of the state if it agrees to pay increases any time that unions threaten industrial unrest.
The €1,000 pay increase will cost the state €128 million this year, yet threats to the country’s financial stability are growing.
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Yesterday Theresa May, the British prime minister, said that the UK would be leaving the single market and customs union. If in two years’ time Britain and the EU fail to agree an exit deal, then there will be a rupture in trade, which will have significant economic costs for this country.
This is just one of a number of potential economic shocks facing the country. Donald Trump’s protectionist trade policies and tax proposals could have equally profound consequences for Ireland. If that were to happen, the government could once again find itself desperately scrambling to restore fiscal rectitude.
The best way that the economy can meet looming challenges is to be as competitive as possible, so that it can take advantage of any opportunities that may arise from Brexit, such as increased flows of foreign direct investment.
As it stands, the main barrier to competitiveness is a chronic underinvestment in broadband and physical infrastructure. If the €128 million that will be spent on public sector pay had instead been invested in improving the productive capacity of the economy, it would have increased tax revenues in the future.
These pay increases were once again awarded without any conditions that could increase productivity.
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Buying industrial peace may be in the best interests of a fragile minority government, but it is most certainly not in the interests of an open economy facing a number of potentially bruising challenges.