Public sector pay deal: did the Government capitulate or did unions settle for too little?

There was always going to be a deal. The question was where both sides would settle. We got the answer in the early hours of Wednesday morning.

A 10.75 per cent pay hike spread out over 33 months (to March 2029) at a cost of €5.2 billion to the exchequer.

The latest round of public sector pay negotiations was unusually fraught by Irish standards but not by European standards, where industrial relations have been souring for months on the back of persistent inflation.

A fierce standoff over cost of living and pension reform has paralysed France.

If you believe one side of the commentariat, the Government capitulated at the last minute to avoid the mayhem of another one-day national strike coinciding with Ireland’s hosting of the EU summit.

But to evaluate the true merits of the deal, you need to go back to the starting point for negotiations.

Government and unions held exploratory talks in early July, but the real discussions didn’t start until October under the auspices of the Workplace Relations Commission.

On the table was the Central Bank’s latest quarterly bulletin, published the previous month, containing the bank’s inflation forecasts for 2026, 2027 and 2028 (3.4 per cent; 3.1 per cent; 2 per cent).

The forecast for 2027 had been upgraded by nearly half a percentage point since the summer, reflecting the deteriorating economic backdrop.

[ Public sector pay deal: What’s in it for me?Opens in new window ]

Inflation-proofing wages was the primary objective of unions.

As the negotiations progressed, the Central Bank’s inflation forecasts began to look shaky.

Oil prices were on the march again. Speculation was rife that the US and Israel were about to attack Iran again.

Unions began coming up with their own estimates of future price growth based on the latest readouts. The fear was that they would sign up to pay rises that would later be crushed by inflation.

The Government’s initial offer of a cumulative 7.75 per cent pay hike didn’t even cover the conservative inflation forecasts, hence the deadlock.

The deal eventually struck gives public sector workers in higher-income brackets a pay bump of 4.6 per cent next year (when the backdated element is included), followed by 3.1 per cent in 2028 and 3.2 per cent in 2029. Lower-paid workers, those earning less than €50,000, will get bigger pay increases.

Based on the current inflationary outlook, which has improved since the US midterm elections, this will give public sector workers modest but real wage increases.

Another benchmark for both sides to consider was the expected rise in wages in the private sector.

The Government’s recent economic and fiscal outlook, published alongside last month’s budget, forecasts that wages across the economy – which is mainly private sector – would rise by 4.1 per cent in 2027 and by 3.7 per cent in 2028 and 2029. The public sector deal is roughly comparable.

The deal includes a review clause that can be triggered by either side if economic conditions or inflation rates change “significantly”, reflecting the fact that both unions and Government are unsure about the economic outlook. Not an unreasonable position given the last five years.

[ Jack Chambers warns public sector pay deal could be reviewed if economy contractsOpens in new window ]

The Government typically defends pay deals as a means of preventing industrial unrest, ensuring continuity of service and pay predictability.

There is, however, a big unknown for Government.

The Department of Finance’s latest expenditure outlook report says Budget 2027 includes “the costs associated with the recruitment of circa 7,000 additional [public sector] staff”.

But public sector employment has grown by 85,000 since 2019, which equates to an average of 12,000 a year.

There is also nothing in the report or other reports about the additional staff (nurses, teachers, gardaí) needed or expected after 2027.

The Government’s €5.2 billion costing is therefore something of a shot in the dark.

In its back pocket, however, is the promise of more corporation tax, the exchequer’s golden goose. Receipts from the business tax are expected to climb to €45 billion by 2030.

But weaving more day-to-day spending around risky tax receipts is a gamble the Government has been repeatedly advised against.

[ The Irish Times view on the public pay deal: the Government pays up for peaceOpens in new window ]

The draft deal (it still has to be ratified by unions) will cost the Government an estimated €2 billion next year, which means Budget 2027, which allocates €1.2 billion for the deal, is already out of date. €800 million out of date.

They say the definition of a good deal is when both sides walk away thinking they could have done better. That’s probably not the case here.

Both sides will sell it as a good deal in the context of the economic backdrop. But there are big unknowns to do with inflation and cost.