Chasing inflation with a huge pay rise for the public sector is understandable but insane

At 3am on Friday, the half-time whistle blew on public pay talks. This is how the State negotiates with itself, without wrestling with its conscience. I admire the leadership of our public-sector unions. They deliver better value for their members than most sectors do for their shareholders.

Having crested the wave of the Celtic Tiger, they survived the subsequent crash intact. In a world that fell apart, no one in the public sector lost their job. The business this week is not a new pay deal, it is a reopening of Building Momentum, the current two-year deal which ends on December 31st. That provided for a review “where the underlying assumptions of the agreement need to be revisited”. There was a thought bubble on inflation, and more. Government, unions and most economists bet it wouldn’t be too bad, or last too long. They were wrong. They have 2 per cent in hand from the current deal, but more for the lower paid who got flat-sum increases instead.

The direction of travel in these talks is clear. It is to get from 2 per cent to 8 per cent, which is the rate of inflation. That embeds inflation, instead of tackling it. It underlines an inbuilt public-sector premium of job security and better pensions instead of discounting it.

There is indeed a cost-of-living crisis and stark evidence of it was seen in lengthy queues at Dublin Airport recently. Try getting a reservation at the more expensive sort of restaurant and you will get a sense of it, too. This is a country of increased savings and pent-up demand as well as people trying to make ends meet. Household savings earlier this year were twice their pre-Covid rate. We saved nearly €1 for every €4 spent in the first quarter. That’s before every household got €200 towards its energy costs, needed or not.

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Ireland is now a country of private prudence and public squander. Largesse depends on tax revenues that are highly uncertain, especially corporation tax. The governor of the Central Bank, Gabriel Makhlouf, believes it is “unlikely” we will dip into recession. I hope so, because we have an unparalleled knack of being especially exposed when recession arrives.

Even if Irish economic numbers don’t dip into recession, there is hardship for those who didn’t get into the queue at the airport and feel the sensation of going backwards. The Government is looking at the odds, considering the politics and placing a bet with our money on public sector pay regardless. A 1 per cent pay increase for the public service is €250 million baked into the cost base forever. Pensions will cost another €30 million on top of that. On health alone, an additional 1% in 2023 is €94 million more in pay and that is before a Band Aid is bought. People have to be paid, but there is a trade-off between public servants and public services.

High inflation is here to stay, even if oil production increases and prices fall back, allowing inflation to peak this year. That still leaves inflation and interest rates far higher than expected or have been experienced for years. Chasing that with wage inflation is understandable but insane. It is possible for the State to do in the short term, because it can borrow. Multinational companies have deep pockets. But it normalises pay increases the indigenous SME sector can’t afford and acts as a further pull of talent away from it.

Budgetary discipline

The Government set a target to deliver a budgetary surplus in 2023. Budgeting that neglects that objective puts special interests in advance of the public interest. It puts short-term politics in advance of long-term sustainability. With little more than a billion to play with on budget day for additional spending, it will have to be explained how a pay increase fits into the strategy to deliver a surplus. In a country that can’t print currency or set interest rates, budgetary discipline is not just the last line of defence, it is virtually the only one.

There is a disconnect now, as there was during the Celtic Tiger, between too-low interest rates and an economy that is too hot. There is a recurring disconnect between our political culture and where we are in the economic cycle. Listening to prescriptions for the old magic formula of tax cuts and spending increase is genuinely funny, but it ends in tears.

Politics as usual has the atmosphere and likely aftermath of last orders in the VIP room of an expensive nightclub. There are only competing versions of more, more, more. There is no centre-right to speak of and the centre is listless and bereft of ambition. Received wisdom is that the state can endlessly provide. Everyone is at the party in the expectation that someone else will pick up the tab.

There is a new groupthink in economic forecasting. Always influenced by the recent past and nearly always confounded by extreme events, it is less reliable than it is apparently authoritative. Public servants who bet on the consensus of low inflation now want to rerun their wager. They will likely have their way and we will pay. Hurrah!