The benchmarking agreement will impose a heavy cost on the Exchequer and the economy unless it results in much -improved public services, writes Cliff Taylor, Economics Editor.
The new partnership programme agreed in outline over the weekend tries - like its predecessors - to provide something for everyone in the audience. However the impact of the economic slowdown means it has been a much more difficult task this time, as demonstrated by the walk-out of the farmers and the reservations being expressed by some trade unions.
The difficult outlook for the Exchequer finances has meant only one significant financial commitment has been made in the latest deal - the €1.1 billion benchmarking deal for public servants in payments to be phased in over the next two-and-a-half years.
Unless economic growth and tax buoyancy lift unexpectedly, this cost will leave little room in the Exchequer arithmetic for tax reductions or welfare increases over the next couple of budgets. If the international economy does not recover towards the end of this year, then the cost of benchmarking could yet prove very difficult for the Exchequer - and the economy - to meet.
Not surprisingly, therefore, the new agrement makes no commitment to lower taxes. It merely says that if resources are available they will go towards the Programme for Government commitments of reducing the number of people paying at the higher tax rate and trying to exempt those on the minimum wage from paying any tax.
The document is based on economic growth averaging 3 per cent over the next three years and on a commitment to keep the Exchequer position at or close to balance.
Given the other financial costs facing the Government, it thus looks as if the tax-cutting days of the Fianna Fáil/PD coalition are over and instead an upward creep in the tax burden is likely.
So what of the wider economic impact of the agreement? In themselves, the 7 per cent pay increases granted in the private sector for the next 18 months would, if sustained, represent some slowdown in wage growth. However, the difficulty for much of exporting industry is that the increases come at a time of an unprecedented squeeze on competitiveness - a squeeze that has intensified significantly as the talks have gone on.
The euro is rising sharply, hitting those exporting to the US and Britain, and a range of domestic costs are rising. This comes as the prices that our exporters can achieve in overseas markets - in local currency terms - are generally static or falling. For the deal to work, therefore, there are likely to be a significant number of firms who will have to avail of the procedures that allow those in trouble to opt out of paying.
If the competitive difficulties for industry deepen in the months ahead, it is likely to lead to renewed questions about the appropriateness of such "one size fits all" pay deals.
The non-pay elements of the deal attempt to address some of the key difficulties facing the economy, which have added to inflationary forces and are damaging competitiveness. There is a commitment to maintain infrastructural investment and review the priorities and implementation of the National Development Programme.
However, the Exchequer finance constraints mean that the arguments made by some that we should borrow more to fund such investment does not appear to have been taken on board. There is a commitment to examine new funding joint ventures with the private sector to help bridge the infrastructure gap, but progress in this area to date has been slow.
A new initiative on housing is specifically aimed at using State-owned land for houses aimed at lower-wage employees who currently find it impossible to get a foot on the housing ladder.
A range of other initiatives is promised, most already signalled in other Government programmes.
There will be some measures to try to increase competition and bring down inflation, partly by encouraging the Director of Consumer Affairs and the Competition Authority to focus on non-competitive sectors. A study by the latter on some areas of the professions is already well under way.
A determined follow-through on the measures to reduce motor insurance costs is promised, as well as a study of other areas of the non-life insurance market. Potentially important initiatives on e-business and e-government are also promised to boost Ireland's position in the technology area.
Many of these initiatives could prove beneficial to the economy. However, in terms of costs and competitiveness, by far the most important factor will be whether the cost of benchmarking can lead to an improvement in public services or whether it will just knock on to higher taxes and rising costs for a range of Government services.
The details of the benchmarking agreement commit to a wide-ranging programme for modernisation and flexibility. However, it must be said that progress in this area has been slow and patchy in recent years. Much will thus depend on whether the verification mechanism in the report, which is designed to ensure that the benchmarking payments are only made if the requisite improvements are coming on stream, can work.
Much remains to be negotiated in this area. To take just one example, teachers, who will receive a 13 per cent increase under benchmarking, are only committed initially to meeting the terms of previous agreements on parent/ teacher meetings outside school hours. Talks on extending this and on other issues such as making in-service training less disruptive are to continue in the months ahead.
The public service management has still to prove that the benchmarking agreement is more than the ATM machine to which Senator Joe O'Toole once likened it. Given that benchmarking is the major cost of this deal, achieving better public services in return will be central to its success or failure. And, as ever in the Irish economy, much will depend on whether an international economic recovery can help to boost growth in the latter years of the three-year deal.