Benchmark awards may threaten pay deal, ESRI warns

The payment of benchmarking awards to public servants next year could threaten the future of social partnership, the Economic and Social Research Institute (ESRI) has warned.

A new analysis from the institute suggests it will be difficult to secure agreement on wage-bargaining next year because private-sector workers will perceive "a stark divergence" between their pay terms and those in place for the public sector.

An ESRI economist, Mr Danny McCoy, believes this friction will make wage-bargaining difficult.

He sees it as crucial against this backdrop that the productivity gains linked to benchmarking are "verifiable, transparent and real".

Mr McCoy was speaking at the publication of the institute's Quarterly Economic Commentary, which contains downward revisions in economic growth for the second quarter in a row, but outlines "improving prospects" for the Irish economy.

The ESRI is forecasting gross domestic product growth of 2.2 per cent this year and 3.2 per cent in 2004.

Gross national product will expand by 1.9 per cent in 2003 and by 3.1 per cent next year, the institute's economists believe.

They have cut their unemployment forecast from 5 per cent to 4.7 per cent in 2003, and from 5.7 per cent in 2004 to 5.1 per cent.

An ESRI economist, Ms Adele Bergin, suggested that much of the stability seen in unemployment over recent months could be attributable to part-time workers rather than permanent jobs.

Discussions between the social partners to settle pay increases for all workers over the last 18 months of Sustaining Progress are likely to begin in March.

This will come shortly after public-sector employees receive an average 4.45 per cent pay increase under benchmarking, as well as a 3 per cent raise under the first leg of Sustaining Progress. At the same time, private-sector employees will see their wages growing by just 2 per cent.

While all workers will receive the same increases under Sustaining Progress, payments to public-sector workers have been lagged to allow for a six-month pay pause in the second half of this year.

Mr McCoy said observers of benchmarking were hindered by the "veil of ignorance" that has surrounded the pay awards since their very inception. It was now essential that taxpayers know what they are paying for, particularly as other publicly funded areas receive limited resources.

Mr McCoy said benchmarking, which encompasses €1.1 billion in wage increases, was "crowding out" other areas where more spending might be required. "In this context, it is beholden that the improvements would be real," he said.

The coincidence of benchmarking and the new wage negotiations was particularly unfortunate in light of the easing inflationary trend which would in other circumstances, he suggested, help to temper wage expectations.

Inflation fell yesterday to 2.9 per cent, its lowest level in almost four years. Economists said the decline would leave the way open to the Minister for Finance, Mr McCreevy, to generate extra revenue by raising indirect taxes in the forthcoming Budget.

For its part, the ESRI is calling on Mr McCreevy to "try to do no harm" in the Budget, which they say should take a broadly neutral fiscal stance.

Mr McCoy predicted that the Government would need to borrow €1.9 billion this year to fund its spending commitments. This would be consistent with a cyclical downturn in the economy, and he suggested that the extent of the slowdown could merit even more borrowing.

The Minister for Finance said on budget day last year that he would record a €1.9 billion deficit in 2003. This was before his Department predicted a few months ago that there would be a €500 million shortfall in tax receipts.

Mr McCoy anticipates that tax income will in fact be €300 million below target, with this largely offset by "non-tax-revenue surprises".