Further wage increases for public sector workers under a new national pay deal will have to be delayed if the €1.2 billion benchmarking bill is to be paid, the Government insisted last night.
The Government's strategy could significantly heighten tensions at the social partnership talks next week, particularly if private employees win increases ahead of their State-employed colleagues.
Government negotiators also face the difficult task of finding common ground between union and employer representatives, who are each determined to ensure their members will not shoulder the costs of a new deal to succeed the Programme for Prosperity and Fairness.
The difficult backdrop to the talks was made clear by the Minister for Finance, Mr McCreevy, yesterday when he told a meeting of social partners that "the boom is over".
Although he did not mention the words "pay pause", Mr McCreevy indicated that public sector workers would have to postpone a pay increase next year if the Government was to deliver on benchmarking.
The cost of paying the backdated element of benchmarking alone would be €565 million by next year, he said.
Economic growth had slowed markedly, the Minister said, and signs of recovery were "not easy to find".
"The relationship between a new general round and benchmarking must be considered in the context of the budgetary pressures facing us", Mr McCreevy said.
"We have to be willing to contemplate all options, including the commencement date of any new general pay round".
IBEC, the employers' representative body, made clear at the meeting it would be seeking a six-month pay pause for all workers as part of any deal. The Irish Congress of Trade Unions responded that IBEC needed to "get real".
The Minister for Finance enters tough negotiations with Cabinet colleagues next week in advance of the publication of the Estimates in mid-November against a background of falling tax revenues.
The situation could get even worse for the Government, which has ruled out raising direct tax rates, in the last quarter of the year if tax revenues continue to fall.
IBEC welcomed Mr McCreevy's emphasis on the fact that wages in the Republic increased by 42 per cent over the past five years, compared to an EU average of 16 per cent.
Unions, however, argue that gross pay in Ireland is still below the EU average, so employers can afford significant pay increases while remaining competitive vis-a-vis European competitors.
Any attempt to impose a pay pause on the public service will be strongly resisted by unions, who argue that benchmarking was a "catch-up" process and cannot be traded for pay rises due next year.
The Irish Farmers' Association expressed anger at the focus on pay and benchmarking.
Its president, Mr John Dillon, said farmers remained a very important pillar of the social partnership process and he was "strongly determined" to ensure declining farm incomes would be at the top of the agenda.
The talks are to begin next week with a round of bilateral meetings between the Government and the social partners, at which it will attempt to find common ground.
Meanwhile, Fine Gael's finance spokesman, Mr Richard Bruton, warned that social partnership might have outlived its usefulness because it put employers and unions in "the first division".
A new deal would have to deliver genuine reform of public services, better accountability and value for money and changes in work practices without extra pay, he declared.
Mr McCreevy's warning that "the boom is over" would serve to confirm the views of "five out of six voters" who believed Fianna Fáil and the Progressive Democrats misled them before the election, he said.
The newly elected leader of the Labour Party, Mr Pat Rabbitte, was pessimistic that a successor to the Programme for Prosperity and Fairness could be agreed.