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Wednesday, 22nd September 2021
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Editorial: Traditional Social Partnership would be a far better option than Benchmarking    
Social partnership is generally seen as a key positive process within the context of the general equilibrium model that, led by individuals such as Bertie Ahern and Bill Attlee, gave rise to the Celtic Tiger(1). The result was a Laffer Curve(2) effect, whereby everyone gained public sector workers, private sector workers, the Exchequer and the economy.
Social partnershipis generally seen as a key positive process within the context of the general equilibrium model that, led by individuals such as Bertie Ahern and Bill Attlee, gave rise to the Celtic Tiger(1). The result was a Laffer Curve(2) effect, whereby everyone gained public sector workers, private sector workers, the Exchequer and the economy.

Today, however, Social Partnership is no longer a benign virtuous cycle working at the core of the Irish economy; it has the imminent potential to become seriously malign.

The reason for the change from benign to malign is that (income) tax cuts are no longer on the agenda. Since the present Coalition Government decided to draw a line below which income tax rates should not fall (20-42p.c. of the gross wage, with the marginal top rate at 48p.c. including employee PRSI, and 58.75p.c. including total PRSI), public expenditure has again begun to drift upwards as a percentage of Irish GDP, reversing the trend of the Celtic Tiger years.

This is because wage increases for public sector workers now must be financed by tax increases. This means that the win-win effect of lower tax rates resulting in higher total tax revenues from continuing to move towards the optimal position on the Laffer curve is no longer available. Unions, long conditioned to understand that gross wage increases are illusory now seek further supplements to the gross wage deal such as equity stakes in state companies, and horror of horrors, the imminent repeat of the economically dysfunctional Benchmarking I, this time looming as the nightmare Benchmarking II.

Benchmarking I was economically dysfunctional because it instituted the benchmarking of private and public sector wages without taking any account of the different risk profiles of employment in the two sectors, neither during the working years of employees nor in their retirement. A fundamental principle of portfolio theory is that all economic decisions are based on a risk/reward calculation (not just on a reward calculation alone, as the Irish benchmarking model would have it). Accordingly the decision to take a job in the private or the public sector is based not just on the gross wage, but on the security of employment in each, and on the security of income (if any) in retirement. (For more on pensions concerns ahead of the forthcoming Budget read John Bradleys article on Page 13).

A move back to a form of Social Partnership that demonstrably worked in the 1980s and 1990s would take the Government out of the policy cul de sac in which it finds itself, and could save the Celtic Tiger from degenerating truly into a Rip Off Republic.

(1)Here‚€ôs what Paul Sweeney, economic advisor to the ICTU says in his book The Celtic Tiger, Ireland‚€ôs Economic Miracle Explained‚€¶the national agreements allowed the social partners to have a say on take-home pay that is, on the level of income tax. This shifted the emphasis from the illusory gross wage to take-home pay and, if there were tax reductions, a lower gross could therefore be acceptable. This actually happened gross pay increases were moderate but tax cuts ensured that take home pay of workers increased in real terms.

(2)For more on the Laffer curve, check the following website : ttp://en.wikipedia.org/wiki/Laffer_curve

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