An illustration of out-of-control public spending is provided by the State body, the National Consumer Agency, which was established to ensure consumers get value for money but it could well begin with itself -  a chief executive who was recruited from a small insurance industry body, presumably got a huge salary hike to the current level of over €182,000 plus pension benefits. A board of 14 sets policy and after more than 3 years of operation, there isn't even a basic online price comparison service available - that of course would require a multi-million euro investment as who among the Insiders, would trust a value-for-money start-up with such a mighty task? So much for the knowledge economy and blather on innovation, when services like Facebook could be launched from a university dorm!

As for public pay, less than two years into his job, the current Dublin City Manager got a 36% hike in 2007 and his retired predecessors also got windfall pension increases of 36%. Also in October 2007, the Secretary-General of the Department of the Taoiseach, Dermot McCarthy, got a 25% hike as did his retired predecessors. McCarthy currently has the task of selling a public sector pay cut to the trade unions  - - Michael Hennigan, Finfacts.

Joseph McGrath

Joseph McGrath is a project manager and lean expert. He writes occasionally on public policy matters.

Ireland recorded a budget deficit of €12.7 billion for 2008 and the situation is expected to deteriorate further in 2009. The root cause of the deficit is that we have far too many overpaid public servants. The good news is that there is a way out of this crisis that will simultaneously wipe out the deficit and improve the quality of public services.

For years, the public sector has been run like a giant social welfare scheme whose beneficiaries enjoy excellent pay, pensions and working conditions. The current wasteful public sector must be dismantled and replaced with a public sector that is focused solely on providing value to its customers and the taxpayer. Here is how to do it:

Lean is a process improvement methodology developed in Japan that has a proven track record of identifying and removing waste from processes. Waste is defined as any activity that does not, in the opinion of the customer, add value. In a typical private sector company of the sort that periodically goes through cost cutting and efficiency improvement exercises, it is not unusual to find that 30-50% of the activities being undertaken are wasteful and can be eliminated. In the public sector, which has not undergone a major overhaul in its history, it is likely that 70-80% of the activities undertaken add no value. However, a conservative assumption would be that 40% of public sector activity adds no value. Eliminating this 40% can lead to a 40% headcount reduction. Thus, the annual public service pay bill of €17.1 billion can be reduced by €6.84 billion to €10.26. It is important that this exercise is lead by outside consultants. Otherwise, public servants and their unions will be able to frustrate change.

The second step is to examine the value-adding areas of the public sector and to address the issue of overstaffing. Much of the value-adding work being done by the public sector involves front line personnel such as doctors and gardai. There is no scope for large staff cuts here. However, through the application of lean principles and modern work practices, these areas can significantly improve the quality of the services they provide. In addition, the non-front line, value-adding areas could probably take a large staff cut without diminishing the quality of the services they provide. Overall, it is hardly unreasonable to assume that there is overstaffing of 10%. Eliminating this overstaffing will reduce the pay bill by a further €1.026 billion to €9.23 billion.

The third step is to bring public sector pay into line with private sector pay. The CSO recently released figures showing that annual salaries for roles in the public sector are 18% higher than salaries for equivalent roles in the private sector. The easiest way of achieving equality is to reduce the salary of every public servant by 18%. However, a fairer alternative would be an immediate 10% pay cut for all, followed by a benchmarking exercise to determine the exact amount of salary cut for each role – with some receiving cuts of more than 18% and some less. Whichever solution is adopted, the public sector pay bill will see an 18% overall reduction. Thus, the annual pay bill of €9.23 billion will be reduced by €1.66 billion to €7.57 billion.

The fourth step is to divide the remaining, value-adding activities into core and non-core. For example, it might be decided that doctors, nurses, gardai, the army, the courts, policy makers etc. are core parts of the public sector. The remainder of the roles (support staff, back office people) should be outsourced. There is no reason why functions such as accounts payable, finance, human resources, IT etc. should be done in-house by the public sector when specialist expertise and economies of scale dictate that the private sector can do them better and cheaper. Ireland is a world leader in shared services and already provides these types of services to many US multinationals. There should be no shortage of Irish companies willing to tender for this work. A conservative assumption would be that economies of scale would bring about a 10% cost saving. However, in order not to risk exaggerating the benefit of these measures, no saving has been assumed here.

Finally, the issue of public sector pensions must be dealt with. When the true annual cost of funding these pensions is taken into consideration, it becomes clear that the budget deficit is actually closer to €15 billion than €12.7 billion. This is because the State is currently under funding future public sector pension requirements by around €2.2 billion annually. Unless contributions to the National Pension Reserve Fund are increased by €2.2 billion, future generations will end up funding the retirements of the public servants whose salaries the current generation is now funding. To compound the unfairness, public sector workers will receive defined benefit pensions of up to 60% of final salary plus a tax free lump sum of 1.5 times final salary. Worst of all, unlike private sector workers, they only need to contribute a small percentage of their salaries (between 1.5% and 6.5%) to fund their pensions. The solution is for public sector workers to be treated the same as private sector workers. Their employer (the State) should provide them with a defined contribution pension and match the first 5% of their contributions. As it will be a defined contribution scheme, the State’s responsibility will end there. Assuming that uptake of the pension scheme mirrors that in the private sector, around 50% of public sector employees will take it up. Even assuming that all of these contribute 5% or more of salary, the State’s annual contribution will be €189 million. Thus, the real budget deficit is reduced by a further €2 billion.

Greatly reducing the number of public servants will have other non-salary benefits. For example, electricity, heating, and phone bills will be lower, computers and other equipment will not need to be purchased, fewer buildings will need to be rented, subsidised meals will no longer have to be provided etc. Conservatively, another €3 billion of annual cost should be eliminated through non-salary savings. One-off savings will also be made, as surplus buildings and car parking spaces can be sold off. In addition, many of the surplus public servants will be educated and capable and their entry into the private sector will provide a major boost to the economy.

In total, bringing public sector pay, pensions and working conditions into line with the private sector will, conservatively, result in annual savings of around €14.5 billion.

The budget deficit will be eliminated, the taxpayer will receive value for money and the customer will receive better public services.