THE pay negotiations face a make or break time today but all signs are that the beginning of a deal will be hammered out. The pressure is on as chief negotiator Mr Paddy Teahon is going on holidays for a week on Sunday. All parties are now under pressure to agree a headline rate of wage increase which would include local bargaining.

As things stand, the employers now have an offer of just over 7 per cent on the table while the unions are seeking just under 10 per cent.

The idea is that, after the headline figure has been worked out, the various parties will work backwards to produce the deal.

The most controversial element is certain to be public sector pay and there seems to be little doubt that public sector employees will have to accept some watering down of their original demands.

As the ESRI study reported on today pointed out, the gap between public and private sector pay has been widening over recent years - in favour of the former.

The Minister for Finance, Mr Quinn has already warned that public sector pay is going to increase by 5 per cent next year, even without any deal on a new rise. This is a result of the knock on impact of the PCW and of decisions taken by the Government this year.

His call for a public sector pay "freeze" came after threats of industrial action from the nurses and demands for significant rises from the teachers. These two groups together make up almost half of the public sector pay bill.

Already the deals on the table would cost £120 million. At the same time, a 2 per cent rise in public sector pay would cost £100 million, or the same amount as the income tax relief for all workers granted in this year's budget.

As the ESRI study points out, a bigger than average slice of the money going into primary education already goes on salaries. While expenditure on facilities for the children is only half that of the OECD average.

Talk of the freeze also came in the wake of an announcement by the CSO that average earnings of public sector workers had increased by just over 50 per cent from March 1988 to June 1996. Private sector workers, in contrast, averaged increases around 40 per cent.

In any case, as Davy's chief economist Mr Jim O'Leary argued this week, there is no basis in equity or economic logic in awarding the same pay increases to the generality of public sector workers as to their private sector counterparts.

The differences in their terms and conditions of employment are simply too wide to justify that. Most public workers are in permanent posts with non contributory pensions and automatic incrementation of salaries.

And, perhaps more importantly, it is extremely difficult to be dismissed, except where "gross moral turpitude" applies.

As a result, the Government would like to postpone any further public sector pay rises, above the 5 per cent coming anyway, to 1998. It is also unwilling to concede any local bargaining element.

The Government believes it has been pooffy serviced by the inclusion of public sector workers in local bargaining in the past. The local bargaining part of the deals has been seen as a "peace clause" where the workers involved would desist from taking industrial action if they received the rise.

However, there would appear to be room for manoeuvre. The authorities may be prepared to concede the local bargaining element if a change was delivered in work practices.

In any case, it may make more sense for the bulk of any increase for both public and private sectors to come from tax reductions. That, at least, would underpin wage competitiveness and cut the cost to business of employing people.

The alternative is another Budget of modest tax reductions which will make little real difference to anyone's take home pay and leave everybody feeling let down following the upbeat forecasts of recent months.