Mr Donohoe is set to begin talks to deliver a successor deal to the Lansdowne Road Agreement this month, but has warned that Government spending increases must be “prudent”.
Writing in today’s Irish Examiner, Mr Donohoe says any pay increases must be “rooted in reality” and “sustainable”.
There have also been suggestions that pay increases could be delayed by up to 12 months.
Last week’s exchequer returns for April showed that tax revenues had fallen €344m below expectations. The Department of Finance warned that if the trend continued it would impact on the budget.
“The issue of public sector pay and pensions will be centre stage, and will be a key test for our national resolve not to return to the unsustainable spending policies of the past,” Mr Donohoe writes.
Mr Donohoe has insisted that based on the conclusions of the Public Sector Pay Commission which is due to deliver its report shortly, negotiations will have to deliver a deal which will not place the national finances in jeopardy.
“Both sides will meet before the end of this month to begin negotiations on an extension to the Lansdowne Road Agreement; one that is fair, affordable and sustainable. After all, the unfunded spending increase of today is the savage pay cut of tomorrow. Nobody wants to go down that path again,” he says.
Mr Donohoe, while claiming real progress has been achieved in the first 12 months of this minority government, said such progress is undermined by “great threats” from outside most noticeably Brexit.
Mr Donohoe’s warnings come as Fianna Fáil is demanding that there be no tax cuts in the budget.
Fianna Fáil’s public expenditure spokesman Dara Calleary has stressed that promises made in a leadership contest may not be affordable.
Senior Fianna Fáil sources have said the party wanted “no tax cuts” in the budget this October, saying the focus would be on public spending measures, including unfulfilled commitments in the confidence and supply deal with Fine Gael.
The deal commits to a 2:1 split between investment in public spending and tax reductions. But the available fiscal space — extra money the Government has not allocated towards any tax or spending measures — currently stands at just €552m.
Mr Donohoe’s concerns are similar to those within Michael Noonan’s Department of Finance. Officials are said to be deeply concerned about the affordability of any new pay deal.
The department insisted on putting references to the need for prudence in the Government’s Brexit policy paper, as a warning to public sector unions.
The final 68-page policy paper included six separate references to “prudent management” of the economy to keep it competitive in the face of potential future economic challenges.
Remaining competitive in the wake of Brexit is one of Mr Donohoe’s key concerns.
“Nobody wants a repeat of 2008 to 2011. That was brutal. We have to try and contain expectation as it is slipping out of control,” said one senior source.
Talks on a new deal to replace the Lansdowne Road Agreement are expected to begin immediately after the delivery of the Public Sector Pay Commission report.
The deal is likely to cover 2018, 2019 and 2020. There are currently 306,000 public servants employed, at an annual cost of €15.3bn.
Radical reform of public sector pensions, which cost over €3.5bn alone, is a leading priority for Mr Donohoe.