Rescuing Ireland's social pact

With inflation rising in 2000, Ireland's current national agreement, the Programme for Prosperity and Fairness (PPF), came under substantial pressure from workers and trade unions, who were seeking compensation for increases in the cost of living. Employers eventually conceded that a review of the PPF's pay terms would be necessary to "save" the Irish model of social partnership. Furthermore, the government was under considerable pressure to compensate workers in its 2001 state budget. The contents of the pay review, agreed in early December 2000, and the budget, issued shortly afterwards, will have important implications for issues such as inflation, wealth distribution, industrial conflict and the future of social partnership.

Over the course of 2000, the current national agreement, the Programme for Prosperity and Fairness (PPF) (IE0003149F), became subject to considerable pressure as workers and trade unions pushed for compensation for increases in the cost of living (IE0010159F). Inflation stood at 6.8% as of October 2000, and looks set to average about 5.6% for 2000. There has also been widespread industrial conflict in the public and semi-state sectors (IE0012226N and IE0004149F).

The pressure from workers and unions for compensation for inflation built up to such an extent that the Irish Business and Employers Confederation (IBEC) eventually agreed to a review of the pay terms of the PPF, after initially being opposed. The PPF pay review was concluded on 4 December 2000, just before the contents of the government's budget for 2001 were announced on 6 December (IE0009220N). The trade union movement put substantial pressure on the government to compensate workers in the budget. They sought a combined pay review and budgetary compensation package that would restore the value of improvements in living standards provided for in the PPF. The government was confronted with a difficult balancing act in compensating workers at the same time as being seen to do something to tackle inflation. For many trade unionists, the government was partly responsible for exacerbating this difficulty in the first place.

Contents of the PPF pay review

The main contents of the PPF pay review are outlined below.

Pay increases

The agreed pay increases to compensate for inflation amount to 3% over the remaining lifetime of the PPF. First, workers will receive a 2% wage rise from April 2001, which means that the second-phase pay award of the PPF will increase from 5.5% to 7.5%. Second, workers will receive a 1% lump-sum award in April 2002.

Reinforced industrial peace clause

Employers have gained some concessions in exchange for the additional pay award. They secured a reinforced industrial peace clause that will be monitored by a new National Implementation Body (NIB). The NIB is set to meet on a quarterly basis, and will be comprised of an independent chair and representatives from the government, IBEC, theConstruction Industry Federation (CIF) and the Irish Congress of Trade Unions (ICTU).

Inability to pay clause

Another quid quo pro secured by employers is the reinforcement of the "inability to pay clause" contained in the PPF for firms in "vulnerable" sectors such as clothing and textiles, which are exposed to difficult competitive conditions. Such firms will not automatically be expected to make additional pay awards. At the other end of the competitive spectrum, employers who have already paid over and above the terms of the PPF will not be expected to award another increase. All employers are entitled to seek to secure various productivity concessions from workers in exchange for any additional pay award. Disputes over the application of the terms of the pay review will be referred to the existing dispute resolution bodies, the Labour Relations Commission and the Labour Court.

Fast-tracking the public service benchmarking process

An important concession to public service workers is the "fast-tracking" of the public service "benchmarking" process, which was set up by the PPF to compare public service pay rates with those in the private sector pay. The benchmarking body is now due to report by June 2002, rather than the original deadline of June 2003.

Contents of 2001 budget

The main contents of the government's national budget for 2001 are outlined below.

Tax changes

The standard rate of income tax has been cut by two percentage points from 22% to 20%, while the top tax rate has been cut by two points from 44% to 42%. The standard-rate tax band for individual earners has been widened from IEP 17,000 to IEP 20,000 per year. Personal tax-free allowances have also been increased by IEP 800 for single earners, bringing the total to IEP 5,500 from IEP 4,700. For married couples, personal allowances have been increased by IEP 1,600, bringing the total to IEP 11,000 from IEP 9,400. The "pay-as-you-earn" (PAYE) allowance has also been increased by IEP 1,000 to IEP 2,000. Significantly, earnings below IEP 144 per week are now exempt from income tax. Employees also benefit from a reduction in their PRSI social insurance contribution from 4.5% to 4%. The ceiling for the annual pay on which employer PRSI contribution are levied, which was previously IEP 36,000, has been abolished, although employers benefit from a four-point reduction in corporation tax from 24% to 20%.

Measures to tackle inflation

A number of measures aimed at reducing inflation have been introduced in the budget. There is a cut in VAT by one percentage point to 20%, while fuel duty on unleaded petrol and sulphur-free diesel has been cut by two points and six points respectively. There are, however, few measures to promote saving as a means of reducing inflation.

Family support

Child benefit has been substantially increased. Child benefit for first and second children rises by IEP 25 to IEP 67.50 per month. Child benefit for additional children increases by IEP 30 to IEP 86. There are, however, no provisions for tax relief on childcare costs, which the social partners had been calling for.

Social welfare

Pensioners receive an IEP 10 increase in their weekly pension, bringing pension entitlement to IEP 106. Other social welfare claimants receive a weekly increase of IEP 8.

Deferred compensation measures

The budget did not contain any measures to promote the wider diffusion of flexible forms of deferred pay (IE0007153F), such as profit-sharing, gainsharing, and savings bonds. However, it is likely that this issue will receive some attention in the forthcoming Finance Act in January 2001.

The response of the social partners

There is a general consensus amongst the trade unions and the employers that the combined pay review and budget package will be beneficial for their members, albeit with certain reservations. Some of the members of the so-called "social pillar", such as the Irish National Organisation of the Unemployed (INOU) and the National Women's Council (NWC) have been more critical, however.

Trade unions

On 8 December 2000, the ICTU executive council endorsed the pay review and budget package, accepting that it was sufficient to save the PPF. On balance, many trade unions - including the Services Industrial Professional and Technical Union (SIPTU), which is by far the largest union in Ireland - are satisfied that the pay review and the tax concessions in the budget will provide adequate compensation for inflation and improve the living standards of their members. The combined package means an average 5% increase to take-home pay. The unions have criticised the absence of tax relief on childcare costs, however, as well as the reduction in the top rate of tax, which they feel could have been better spent on redistributive tax reform. The most critical union has been the Amalgamated Transport and General Workers' Union (ATGWU), which believes that not enough has been done to redistribute wealth more fairly.

Employers

IBEC broadly accepted the contents of the pay review and the budget, although it has some reservations. It was initially strongly opposed to any pay review, but eventually relented in order to "save" the PPF. IBEC has stressed that, in return for additional pay, the unions must deliver industrial peace. The main criticism of the budget from IBEC is that the ceiling on employer PRSI contributions has been abolished, which it perceives as a threat to competitiveness in the high-growth sectors of the economy. Indeed, in the immediate aftermath of the budget, IBEC threatened to "walk away from the national agreement and the partnership process" unless the government reversed its position on employers' PRSI. Finally, IBEC was also very critical of the absence of tax relief on childcare costs.

The social pillar

The "social pillar" has also criticised aspects of the budget. The "social pillar" is comprised of eight organisations from the voluntary and community sector - NWC, INOU, the Society of St Vincent de Paul, the Conference of Religious in Ireland (CORI), Protestant Aid, Community Platform, the ICTU Network of Unemployed Centres and the National Youth Council of Ireland. For instance, INOU has suggested that the IEP 8 weekly social welfare increase was the "absolute minimum that could have been made without provoking a crisis in social partnership". Furthermore, organisations such as NWC were strongly critical of the absence of any childcare provisions.

Commentary

In recent months, Ireland's model of social partnership, which to date has contributed significantly to impressive rates of economic growth, employment creation and very low unemployment, has come under significant pressure. This pressure culminated in the delivery of a compensation package for workers contained in a review of the pay terms of the PFF and the national budget. The pay review and the budget will have important implications for issues such as inflation, wealth distribution, industrial conflict, and indeed, the future of the Irish social partnership model. At this juncture, it is only possible to surmise what the implications might be, however.

In terms of the implications for inflation, while the reductions in indirect taxes contained in the budget may help to reduce inflation slightly in the short term, some of the other measures introduced will further fuel domestic inflationary pressures by adding to consumer spending in a booming economy that is moving towards full employment - the unemployment rate has fallen substantially to 3.7% in November 2000. In particular, a further decrease in the top rate of tax looks set to contribute to additional house price inflation. The top tax-rate was cut after sustained pressure from the Progressive Democrat (PD) party, which is a minority coalition partner in the present government. The social partners and numerous commentators had advised against cutting the top rate. Significantly, in a tight labour market, tax cuts - particularly for high earners - no longer serve to moderate wage pressures or encourage more people to enter the labour market. Rather, they serve to increase the demand for labour at a time when there has been a significant slowdown in the supply of labour (IE0006152F).

Whether this fuelling of domestic inflationary pressures will jeopardise the stability of the economy to any marked extent depends, to a significant degree, on external events. The government appears to be taking something of a gamble that is dependent upon a favourable external deflationary scenario consisting of a gradual appreciation of the value of the euro single currency, which will make imports cheaper, and a decrease in oil prices. If these two factors "come good", and there are early signs that this may now be starting to occur, then inflation could fall in 2001. The government's own estimate for inflation in 2001 is 4.4%. It is important to qualify this, however, because even if a favourable external climate of a gradually appreciating euro and a fall in oil prices materialises in 2001, there is still the question of the extent to which inflationary pressures from domestic sources - which will be fuelled further by the budget - will increase in an economy that is overheating.

As to the implications for the distribution of wealth and resources, although the pay review and the budget will undoubtedly contribute to an improvement in the living standards of low-income groups - particularly as a result of the increases in personal allowances and child benefit - it is still the case that the distribution of income still disproportionately favours high-income groups. The government has shown little inclination to close the gap between rich and poor. In particular, the two percentage point cut in the top tax rate has served to exacerbate existing inequalities.

In terms of the potential implications for industrial conflict and the future of the "social partnership" model, it is difficult to assess at this juncture whether the pay review and budget package will help to dampen the burgeoning wage militancy that has recently been occurring, particularly in the public sector. There is a possibility that the raft of measures contained within the overall package - such as the pay increases, tax cuts/reforms, the reinforced "peace clause", and the fast-tracking of the public service benchmarking process - may help to dampen wage demands somewhat and prevent further outbreaks of industrial conflict, at least in the short term. The "peace clause" is still voluntary, however, and it remains to be seen whether the compensation package can prevent industrial unrest amongst workers and unions who decide to press for pay increases outside the confines of the PPF. This has been the case in a number of recent disputes, most notably an ongoing one involving 18,000 members of the Association of Secondary Teachers in Ireland (ASTI), which is still pressing for a 30% pay claim (IE0012226N). There may also be tensions in the future over the application and interpretation of the "inability to pay" clause contained in the pay review. Thus, in the current industrial relations climate, the most optimistic scenario would appear to be "relative industrial peace". Whatever happens in the short term, there are still a number of obstacles and tensions that have not gone away, particularly those issues which have an impact on the quality of people's lives, such as income inequality and lack of affordable childcare provision. (Tony Dobbins, CEROP, UCD)