Paschal Donohoe (Dublin Central, Fine Gael) | Oireachtas source

I thank the Business Committee for arranging this opportunity to make a statement on FEMPI. As the House is aware, I am obliged under legislation to review the operation and effectiveness of the FEMPI legislation, having regard to the overall economic conditions in the State and our national competitiveness, and then to consider whether the relevant Acts continue to be necessary, having regard to, among other matters, the revenues of the State. A written report of my findings is in the process of being laid before the Oireachtas today and I want to take this opportunity to share the main findings with Deputies.

Overall, my conclusion is that the FEMPI legislation has been highly effective at temporarily reducing the public service pay bill. Upon full implementation of the Lansdowne Road agreement, there will be an outstanding €1.4 billion in FEMPI savings still dependent on the operation of FEMPI pay and pension measures. Unfortunately, the corollary of this is that there is a continued necessity for that legislation, as repeal in a single year is unaffordable. Thankfully, the recent negotiations on an extension of the Lansdowne Road agreement, or Lansdowne Road II, have provided us with a negotiated approach to exiting the FEMPI legislation that is balanced, fair and sustainable. Crucially, the Government's establishment of the Public Service Pay Commission and the tasking of that commission with providing inputs to the parties on a roadmap out of FEMPI assisted in the negotiations.

The terms of the proposed agreement, which have been commended by the Workplace Relations Commission, WRC, to both parties, will substantially achieve the ambition of exiting FEMPI over the period 2018 to 2020. If these proposals are accepted by public servants - I am conscious that they are being balloted on at the moment, so I do not want to say too much - they will form the basis on which the remaining FEMPI measures will be dismantled over the coming years. Importantly, these proposals have been fully costed and are compatible with our overall fiscal policy.

I will address each of the points - the effectiveness, continued necessity and proposed extension of the Lansdowne Road agreement - in turn. The Financial Emergency Measures in the Public Interest Acts have been a cornerstone of budgetary consolidation. Over the period 2008 to 2014, these pay measures were responsible for a €2.2 billion reduction in the public service pay bill.

More than that, these reductions assisted in the terribly difficult and painful process of correcting our finances between 2008 and 2014.

As a member of a currency union, it was impossible for Ireland to use one of the traditional policy tools, namely, currency devaluation, to achieve improvements in our external competitiveness and the price of our exports. Prices and wages, while starting from a high base, have risen at rates slower than those with whom we trade. Actual and overall, or nominal, adjustments in wages in the past few years also contributed to improvements in our competitiveness. As a result, our competitiveness index improved by a fifth between 2008 and 2017. In turn, this hugely assisted with our export-led recovery.

Additionally and crucially, the changes in public pay allowed the Government to prioritise recruitment to our public service at a time of huge difficulty. Since the beginning of 2014, an additional 20,850 public servants have been recruited to meet demands for enhanced public service delivery. These include 5,243 more teachers, 2,360 more special needs assistants, 3,073 health and social care professionals, 2,267 nurses and 1,426 consultants, doctors and dentists. Given the constrained resources available during the period, this level of recruitment would have been impossible in the absence of the FEMPI legislation.

Our economic recovery is progressing but vulnerabilities remain. Levels of private and public debt are high. Our highly concentrated industrial base represents another recurring and continuing risk facing the economy. As a result, output and employment continue to be exposed to particular risks and shocks. Loss of competitiveness is another potential risk for our economy and it is amplified by the current constraints in the housing sector. Deputies will be aware that, while recent economic data and forecasts are positive, risks remain.

The International Monetary Fund's recent review of our economy, found that “outlook remains positive, but with substantial, mainly externally-driven downside risks”. Closer to home, the Irish Fiscal Advisory Council, an independent body established as part of our reformed budgetary architecture, was more explicit when it concluded that:

In the medium term, more persistent downside risks are visible. Principal among these is the possibility that the outcome of negotiations on the UK’s departure from the EU could lead to a more sustained negative impact on Irish economic growth than is currently estimated.

Additional risks are posed by the appropriateness of the wider euro area monetary policy for Ireland over the medium term, as well as by a variety of potential external demand and exchange rate shocks. Changes in US and EU policies, particularly around corporation tax, could also negatively impact on foreign direct investment, FDI, flows into Ireland. The Department of Finance forecasts now assume a hard Brexit. Work carried out by my Department and the ESRI shows that the impact of Brexit on Ireland will be significant. In the long run, the worst-case scenario - that is to say, in the absence of a trade deal with the UK - is that after ten years our national income could be 4% below what it otherwise would have been in a no-Brexit situation.

Of concern in all of this is the continued high level of Irish Government debt, €201 billion, which continues to place limits on the ability of our finances to cope with potential risks abroad. Looking further ahead, the Irish Fiscal Advisory Council recommends that “fiscal policy should be cautious reflecting still high debt levels and risks to long-term revenue and growth.” It goes on to say, “Strong adherence to the new framework is essential to avoid repeats of the policy mistakes that contributed to multiple economic crises in recent decades.” It is for these reasons that I judge there to be a continued need for the continuation of the existing legislation.

Turning to the draft public service stability agreement for the period 2018 to 2020, I contend that we have a balanced approach to public service pay in this agreement which is compatible with the economic conditions of the State, national competitiveness and available revenues. I will explain why. While international risks and domestic vulnerability remain it would be disingenuous of me to stand up and say that no progress has been made. The truth is that the State’s finances have considerably improved from when the first Act was introduced in 2009. Even since 2015, the growth in the economy has been greater than we then anticipated. For that reason, it was appropriate to revisit the terms of the then Lansdowne Road agreement to reflect these improvements and provide for conditions for potential industrial peace over the next three years.

It is also important to allow wages to increase in a controlled and sustainable manner. Lower wage growth can add to disinflation pressures which, in turn, imply higher real interest rates and greater difficulties in managing public and private debt and generating sustainable domestic demand. As I have said on many occasions, wage growth is good for how our society will evolve. People need to see that progress is being made and that incomes are improving. For example, a public servant currently earning €37,500 will benefit by over €2,700 per annum, or almost 7.5%, across the lifetime of this agreement. As well as providing for affordable increases in pay for public servants, the proposed agreement also provides for an additional pension contribution by public servants in lieu of the pension-related deduction, which will be crucial in terms of putting our public service pension bill on a more sustainable long-term footing in the future.

These proposals represent a package of measures that is balanced, fair and affordable. They represent a significant milestone in the unwinding of the emergency legislation that was introduced across the crisis period - an unwinding which has been called for in this House. Perhaps most importantly in the context of the current discussion, the proposed agreement provides for a series of pay increases which will unwind FEMPI pay reductions for all public servants earning up to €70,000, which is equal to almost 90% of all our public servants, over the period to 2020. As such, this provides a clear and realistic route out of the FEMPI legislation.

The legislation that is the subject of this debate was necessary to restore order to the public finances at a time of unprecedented economic crisis. That said, the Government is committed to the affordable and orderly unwinding of the legislation. We have now begun the process of doing so. Under the collective agreement framework of the Lansdowne Road agreement, it is our intention to continue this work in the context of a proposed extension to that agreement, which was negotiated in recent weeks and which is now subject to ratification by the unions and associations concerned over the coming weeks and months.

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