PUBLIC SECTOR PAY:PUBLIC SECTOR pay cuts are not the panacea to our economy's woes, but the ripple effect could be significant, an economic conference in Dublin heard yesterday.

"Public sector pay cuts are widely cited as necessary for solving the fiscal crisis, but dealing with public sector pay alone will not come close to solving the fiscal crisis," said UCD professor Karl Whelan yesterday, addressing 200 economists at the UCD school of economics conference on Responding to the Crisis.

Even if a 10 per cent cut in the public wage bill can be negotiated this year, this will only achieve a saving of €2 billion, which would still leave a €17 billion hole in public finances in 2009, he said.

Many commentators have focused on the “bloated public sector”, and while there is good evidence that workers in that sector are paid a premium, the average public sector worker is a Garda, a nurse or a teacher, and not the “overpaid paper pusher of popular imagination”, he said.

However, TCD economist Philip Lane argued that public sector pay cuts would have a “spillover effect” into the wider economy and would benefit the private sector, boost economic activity and increase Ireland’s competitiveness.

One argument against the introduction of pay cuts is the potential damage that it could cause to morale amongst public sector workers. However, this damage could be minimised if cuts were widespread and implemented on a broad basis, Prof Lane said. This would requires a “co-ordinated approach to pay cuts”, he added.

Prof Lane also said that the Government strategy of investing in capital projects is to be supported as long as those projects are high quality, as this would boost the economy and improve competitiveness.

Prof Whelan stressed that if economic stability was to be achieved, adjustments were necessary in a number of other areas in addition to public sector pay.

These include raising taxes and cutting transfer payments (eg, social welfare payments to individuals) and other expenditure. The Civil Service is “woefully short” of technically trained economists, he added, and suggested that the Department of Finance needs a team of PhD-level economists, and also that an independent fiscal assessment agency should be established along the lines of the Swedish Fiscal Policy Council.

According to Prof Lane, a multi-year Government strategy that is credible and sustainable is required as soon as possible. High budget deficits are acceptable in the short-term as long as we can be sure that in the long-term a sufficient tax take can be generated to sustain public spending, he said.

The future of income tax needs to be debated, he added. With the UK and US planning on raising income tax rates for top earners, it may be possible for Ireland to follow suit, without losing out in the competition for highly-skilled workers.

The tax treatment of workers on lower wages must also be reconsidered. The income tax system may be “socially very progressive”, but the Government must consider whether it raises enough revenue, he said.