Good afternoon, I would like to thank the Business Committee of the Oireachtas for arranging this opportunity to make a statement on FEMPI.
As the House is aware I am obliged under legislation to:
a) review the operation and effectiveness of the FEMPI legislation, having regard to the overall economic conditions in the State and national competitiveness; and
b) consider whether the relevant Acts continue to be necessary, having regard to amongst other things the revenues of the State.
A written report of my findings is in the process of being laid before the Oireachtas today and I would like 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 the FEMPI legislation as repeal in one budget year is unaffordable.
Thankfully the recent negotiations on an extension of the Lansdowne Road Agreement have provided us with a negotiated approach to the exiting of the FEMPI legislation which I believe is balanced, fair and sustainable.
Crucially, the establishment of the Public Service Pay Commission by the Government and the tasking of that Commission with providing inputs to the parties on a roadmap out of FEMPI greatly assisted those negotiations.
The terms of the proposed Agreement, which has been commended by the Workplace Relations Commission to both parties, will substantially achieve the ambition of exiting FEMPI over the period 2018-2020.
If these proposals are accepted by public servants - and I am conscious that they are being balloted on at the moment so I don’t want to say too much – then they will form the basis by 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 deal with each of these points – the effectiveness, continued necessity and proposed extension to the LRA – in turn.
OPERATION AND EFFECTIVENESS
The Financial Emergency Measures in the Public Interest Acts have been a cornerstone of our fiscal consolidation. Over the period 2008 – 2014 FEMPI paymeasures were responsible for a €2.2 billion reduction in the public service pay and pension bill.
More than this, reductions in public service wages assisted in the painful process of internal devaluation that occurred in the period 2008-2014.
As members of a currency union it was impossible to use one of the traditional policy tools– currency devaluation – to achieve improvements in our external competitiveness and net exports.
Prices and wages, while starting from a high base, have risen at rates slower than in trading partners.
Actual and nominal adjustments in wages seen over the past few years also contributed to the improvement in competitiveness.
As a result, Ireland’s real harmonised competitiveness index has improved by approximately 20 per cent between 2008 and 2017.
In turn this has greatly assisted our export led recovery.
Pay restraint has also allowed the Government to prioritise recruitment to public services.
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 teachers, 2,360 Special Needs Assistants, 3,073 health and social care professionals, 2,267 nurses and 1,426 consultants/doctors/dentists.
Given the constrained resources available during this period this level of recruitment would simply have been impossible in the absence of the FEMPI legislation.
CONTINUED NECESSITY
Our economic recovery is progressing well but considerable vulnerabilities remain.
Domestically, notwithstanding recent improvements, levels of private debt remain high.
Ireland’s highly concentrated industrial base represents another recurring risk facing the economy.
As a result, output and employment are exposed to firm and sector-specific shocks. Loss of competitiveness is another recurring risk for the Irish economy which is amplified by the supply constraints in the housing sector.
Deputies will be aware that while recent economic data and forecasts are positive significant risks remain.
The IMF, in their recent review of our economy, found that “the outlook remains positive, but with substantial, mainly externally-driven downside risks”.
Closer to home the Irish Fiscal Advisory Council, the independent body established as part of our reformed Budgetary architecture, was more explicit.
In their Fiscal Assessment Report published this month they conclude 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 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 in relation to corporation tax, could also negatively impact on Foreign Direct Investment (FDI) flows into Ireland.”
The Department of Finance forecasts now assume a hard Brexit is the most likely outcome of negotiations.
Work carried out by the Department of Finance and the ESRI shows the impact of Brexit on Ireland will be significant.
Over the long run, in the worst case scenario, i.e. in the absence of a trade deal with the UK, after 10 years, Irish GDP could be almost 4 per cent below what it otherwise would have been in a no-Brexit scenario.
Of concern in the context of these external risks is the high level of Government debt at almost €201 billion.
Carrying such a high level of debt limits the ability of the public finances to cope with possible external stocks to the economy.
Looking further ahead, the Irish Fiscal Advisory Council recommend that: ‘fiscal policy should be cautious reflecting still high debt levels and risks to long-term revenue and growth’.
It goes on to say that: ‘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 feel a continued need for continuation of the legislation exists.
NEW PUBLIC SERVICE STABILITY AGREEMENT 2018-2020
I believe that in the new Public Service Stability Agreement 2018-2020 we have achieved a balanced approach to public service pay that is compatible with the economic conditions of the State, national competitiveness and available revenues.
Let me explain why.
While International risks and domestic vulnerability remain, it would be disingenuous of me to stand up and say no progress has been made.
The truth is that the State’s finances are considerably improved from when the first FEMPI Act was introduced in 2009.
Indeed even since 2015 the growth in the economy has been greater than anticipated and for this reason it was appropriate to revisit the terms of the Lansdowne Road Agreement to reflect these improvements and provide for industrial peace for 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, implying higher real interest rates, higher real public and private debt levels, and lower domestic demand.
Wage growth is also good for society.
People need to see that progress is being achieved and incomes are improving.
For example, a public servant currently earning €37,500 will benefit by over €2,700 per annum- or almost 7.5%- through this deal.
As well as providing for affordable increases in pay for public servants, the proposed Agreement provides for an additional pension contribution by public servants in lieu of the Pension Related Deduction (PRD), which will be key in terms of placing the public service pension bill on a more sustainable long-term footing.
I believe that terms of the proposals represent a package of measures that is balanced, fair and affordable. They represent a significant milestone in the unwinding of the emergency legislation which was introduced during the crisis years.
Perhaps most importantly in the context of the current discussion, the proposed Agreement provides 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 public servants over the period to 2020. As such this provides a clear and realistic route out of FEMPI.
CONCLUSION
In conclusion, Ceann Comhairle, the financial emergency legislation we are debating today was necessary in terms of restoring order to the public finances and supporting recovery from what was an unprecedented economic crisis.
That said, this Government is committed to the orderly unwinding of that legislation.
We have begun that process under the collective agreement framework of the Lansdowne Road Agreement and it is our intention to continue this work in the context of the proposed extension to that Agreement negotiated in recent weeks and which is subject to ratification by the unions and associations concerned over the coming weeks and months.