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Letter from R B Yates to Tim Pallas

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Mr Tim Pallas - Assistant Secretary Australian Council of Trade Unions 393-397 Swanston St


Dear Tim

This letter provides details of the salary-related funding being provided to agencies through the Budget and adding to the appropriations within which agreement making at the agency level will occur.

You will recall that my letter to you of S April 1997 addressed the Government's wages policy and its application to the APS. In particular, it stated that:

“The draft parameters envisage improvements in pay and conditions under agency- level agreements being generally offset by productivity gains achieved by each agency in the context of its own circumstances. That result is best secured

through agencies meeting the cost of agreements from within their running costs appropriations, as generally determined in the Budget context (including any adjustment to salary running costs).

In our subsequent discussions on this issue during the APS negotiations, I have reiterated that the details of the Government's position would be provided in due course, following the conclusion of Budget deliberations. The Government has also received the ACTU’s submission of 17 April 1997 on the matter. The recent decision by the Australian Industrial

Relations Commission in the Living Wage Case is also relevant, for reasons which I outline below.

You may be aware that the 1995-96 Federal Budget introduced reforms to the annual indexation arrangements applying to various funding provided by the Government (Specific Purpose Payments and Commonwealth Own Purpose Outlays). This reform reflected the shifts occurring in the wage system toward enterprise bargaining linked to productivity. It involved

the application of a set of standard indexes which effectively index salary costs by the AJRC's

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Safety Net Adjustments, calculated as a proportion of Average Weekly Ordinary Time Earnings (AWOTE, as released by the Australian Statistician). It has worked to ensure that organisations would receive additional funding, but would need to offset through productivity improvements any pay increases settled for their employees that exceeded the

Safety Net Adjustments.

The Government has now decided to extend the same indecation arrangements to running costs for Budget funded agencies in the 1997-98 Budget. Aside from its consistency with the shift in the wider wage system and the administrative simplicity achieved, this reform will provide agencies with more certainty about how their running costs are to be adjusted,

compared to the case-by-case approach of the past.

The import of the change is that salary-related running costs of Budget funded agencies will generally be adjusted by the recent AIRC Safety Net Adjustment ($10), expressed as a percentage o f AWOTE. This means that, in 1997-98, such agencies will effectively have their salary-related costs supplemented by a factor of I Vi per cent through the standard indexation

mechanism. The Government will be indexing funding under a similar approach in the future. This provides the context in which APS agreement making will be occurring.

I would also take this opportunity to add to the comments I made in my letter of 8 April relating to funding/gainsharing arrangements applying to future agency agreements. Referring to the Government's approach that agencies would fund improvements in pay and conditions from within their appropriations, I pointed out there that:

“This is in line with previous financial arrangements for agency bargaining, except there will be no requirement for any share of the savings from agreements to be placed in a pool to subsidise pay increases in other agencies”

As the ACTLTs submission to the Government of 17 April 1997 on funding issues demonstrates, there were complex gainsharing arrangements applied to the operation of agency pay bargaining from 1992-95. These were subsequently evaluated as presenting an impediment and disincentive to effective agency bargaining (see the October 1994 Report by the Industrial Democracy and Workplace Reform Subcommittee of the Joint Council of the

APS, Joint Review o f the APS Agreement, to which the ACTU and APS unions contributed as members of the Subcommittee; and the September 1994 Interim Evaluation o f the APS Agreement by the Departments of Industrial Relations and Finance).

While acknowledging that agency pay bargaining was then occurring in conjunction with supplemented Service-wide increases (of about lVi% p.a.), the financial arrangements applying to such bargaining involved:

• no funding to agencies to support any improvements in their pay and conditions : in other words, such improvements had to be entirely self-funded from within an agency's existing running costs appropriation (few agencies relied on a

share of program savings or revenue increases); and

• approximately one-third of each agency's productivity savings under agency bargaining being 'taxed' and redirected into a foldback pool to fund pay increases in those agencies that did not complete agreements, or did so with


oo o r only small pay increases involved : agencies were required to yield half of their savings to the foldback pool, but this was reduced to approximately one-third after allowing for a (deferred) offset against their efficiency dividend obligation.

By way of contrast, the Government's proposed arrangements for future agreement making at the agency level in the APS would:

• oot involve any taxing of an agency's productivity gains for the purposes of subsidising pay increases for staff in other agencies — thereby leaving them some 50% better off in terms of retained efficiency savings compared with the 1992-95 gainsharing arrangements; and

• y provide a reasonable level of supplementation to agency appropriations to assist in funding improved pay and conditions under agency agreements. Together with productivity-linked pay increases, this funding will mean real wages can continue to improve under agency agreements.

The Government has also reviewed the level of the efficiency dividend (ED) applying in the APS, to ensure consistency with the new agreement making arrangements. Accordingly, from 1997-98, the ED will be reduced from 3 per cent to 1 per cent p.a. for the bulk of the APS.

I trust that this information assists you and the public sector unions to appreciate the significance of the support which the Government's proposed financial arrangements will provide to the process of agreement making in the APS, particularly when contrasted with previous arrangements for agency pay bargaining and given the low inflation environment now prevailing.

Finally, my previous correspondence also reiterated the Government's assurances relating to the impact on the APS of award simplification and the move away from paid rates awards under the Workplace Relations Act. You have now raised concerns that the shift to agency level agreement making would, or could, involve a loss of pay for APS employees. The

Government has no intention to reduce the salaries of public servants as a result of this shift. Indeed, as the Minister for Industrial Relations, Mr Reith, made clear from the outset, in announcing the approach to agreement making favoured by the Government on 5 March 1997:

“the outcomes sought from improving workplace relations in the APS are similar to those sought in the wider community - namely, better pay for better work or (put another way) improved remuneration and working arrangements for APS staff, linked to achieved improvements in the productive performance of each


Yours sincerely

R B Yates First Assistant Secretary Australian Government Employment Group ( O M/h t'W f