Saturday, June 16, 2012

16/6/2012: IMF Report on Ireland: Public Sector Pay Reforms

Continuing with analysis of the IMF Article IV report on Ireland, the first post dealt with headline assessments of economic performance and risks, the second post dealt with mortgages distress. In the present post, I am focusing on the IMF analysis of our public sector pay and pensions.

Box 5 on page 25 of the report [ as usual - emphasis and comments are mine]:

"Ireland’s compensation for public employees rose by 3.5 percentage points of GDP (and GNP) in the pre-crisis boom." [In other words, public sector compensation costs rose faster than GDP and GNP growth during the boom.]

"During 2000–08, the gross exchequer pay bill rose 118 percent in nominal terms, driven by staff numbers rising 35 percent and average pay increases of 61 percent. In ESA95 terms, by end-2008, compensation had risen to 11.2 (13) percent of GDP (GNP) and one-third of primary current spending, above European levels, especially the original 11 Euro Area economies." [Not only our public sector remuneration rose above that of the EA11 average, but it has done so during the period when public services delivered to the population actually contracted due to previous privatizations and the expansion of private services substitutes (e.g in education and health, as well as transport etc). The cost of maintaining diminished public services provision also rose despite the fact that we had progressively lower proportion of old age population that requires more extensive and more expensive public services.]

"The authorities’ immediate crisis response included pay cuts and a hiring moratorium, followed by a multi-year agreement with unions on staffing reductions and efficiency-enhancing reforms. After a breakdown of the tripartite Social Partnership Agreement in early 2009, public wages were cut by 13.5 percent, on average, over two years." [The IMF does not distinguish between cuts and pensions levy, although, as I pointed out on a number of occasions before, pensions levy is in effect a cut as well, since it is not ring-fenced.]

"The cuts were progressive, with those earning over €100,000 facing net pay reductions of up to 30 percent. In March 2010, the government struck a new multi-year deal (Croke Park Agreement (CPA)) with public sector unions, protecting workers against layoffs and further wage cuts, in exchange for a validation of the 2009–10 pay cuts and cooperation on voluntary retirements, redeployments and other efficiency measures (such as reform of non-core-pay entitlements) to help achieve targeted pay bill savings. Other measures since adopted or in progress include: for new entrants, a 10 percent additional reduction in salaries and a unified (less generous) public service pension scheme; for public service pensioners, a 4 percent average levy; and a €200,000 salary cap." [IMF fails to point out that the salary cap does not hold. However, IMF is correct in pointing out the progressivity of pay cuts. IMF also fails to note that at least some of the reductions have been achieved by effectively undercutting new staff and temporary staff pay and employment.]

"By end-2011, these measures had delivered net annual savings of €1.7 billion. Lower pay rates and staffing levels have helped reduce the net exchequer pay bill by €2.5 billion, but there has been a €0.8 billion increase [emphasis is from IMF] in the net pensions bill, the latter driven by a 53 percent rise in pensioner numbers since 2008 (mostly reflecting demographic trends, but also the
impact of early retirements). With additional net pay and pensions savings of €0.2 billion projected for
2012 and €0.6 billion over 2013–15, the ultimate annual savings by 2015 are €2.5 billion (or 0.7
percentage points of GDP). Nonetheless, as a share of GNP, the net exchequer pay and pensions outlay in 2015 is projected to be 0.4 percentage points below the 2008 level, representing a relatively modest decline." [It is clear that the IMF is not impressed by the dynamics in either pay or pensions savings. I would like to see a more detailed assessment of the 'demographics' trend that could have resulted in a 53% increase in the number of pensioners since 2008, but my suspicion is that it is completely imaginary.]

On the positive side: "The authorities’ approach, thus far, has helped keep industrial peace, protect frontline services, raise public sector productivity, and deliver agreed savings in a durable way. The cuts in employment have been strategic rather than across-the-board, focusing on the health sector while protecting teacher numbers given the rising number of school-going children. A similar targeted approach is being adopted on the pay side: by reining in hospital and police overtime costs (through smarter rostering) and sick pay. The authorities are also currently reviewing options in relation to out-of date allowances." [The focus on healthcare cuts relative to education is also consistent with IMF-favored, and I must agree with them here, adjustment path that stresses the need for skills retainment and investment during structural adjustments. It is also reflective of our younger demographics. Alas, the real issue, ignored by the IMF, is the currently inadequate healthcare system in Ireland, as well as the fact that majority of health costs cuts took shape via increases in involuntary private health substitution and costs. Shifting burden of healthcare onto those who cannot pay it (the middle class) while pretending that they are the 'wealthy who can afford private insurance' is a false 'saving' as it simply reduces the overall private spending and investment in the economy already starved of both, while faking non-tax 'revenues' increases and health sector balancesheet improvements.]

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