Monday 26 June 2017

Semi-state workers the privileged of the privileged in ailing economy

The bond market was the saviour of Ireland before

SEMI-STATE workers are the privileged of the privileged. It is hard to take the Government even modestly seriously on the issue of competitiveness when it fails to instruct the companies under its own supervision to reduce their chief cost, staff wages.

Inexplicably, the Government decided in February 2009 not to extend the pension levy to staff working in the commercial semi-states. The Government abandoned any attempt to extend the measure to staff at the ESB, Bord Gais, An Post, Coillte, RTE and CIE, which meant Brian Lenihan was bizarrely depriving himself of €160m in additional revenue.

This decision deprived the economy of at least the chance of cheaper energy, cheaper postal services and a cheaper transport services, not to mention the chance to drag down pay costs across the whole economy. Private sector salaries continue to be closely linked to those in the public sector, commercial parts and non-commercial parts.

In a deflationary environment, the Government actually handed staff at these key semi-states a pay rise in terms of raw purchasing power, even as other sectors were enduring sizeable pay reductions. Now new figures expose the legacy of such lazy policymaking.

The average weekly earnings now of a private sector worker is €678, the public sector worker is receiving €792, while a semi-state staff member is receiving €809 a week (National Workplace Survey 2009, Volume 2).

The standard narrative of recent years has been about private sector workers enviously eyeing up the gross pay of public sector workers. But the exalted pay and conditions in the semi-state sector is what should be causing envy among both public and private sector worker alike. Pay in the semi-state remains in a gilded age and it has a wider economic effect in terms of energy prices, transport prices and postal prices.

But is there a sting in the tail? The Colm McCarthy group is now sitting down with all of these companies and assessing their futures and potential for sale into the private sector.

High payroll costs sometimes put off potential purchasers, but of course in many cases they only attract them. High embedded costs, particularly in terms of salary, is simply a form of low-hanging fruit there to be picked off by acquirers looking to recoup their investment over a medium-term horizon.

The McCarthy group will have a simple message to potential buyers -- look at the potential returns on offer if you can bring pay under control in ways never previously achieved by the Government.

AS those dastardly and indifferent 'bond vigilantes' relentlessly bid up our borrowing costs, there is a tendency to blame anonymous bond purchasers in London, Frankfurt and Paris for our predicament.

In fact, the bond market has played a more than honourable role in Ireland's financial history by forcing governments here to face up to the consequences of their own financial mismanagement. They are performing such a role again and are being no more callous or discriminating than they were as investors in the mid-1980s.

The 'spread' between Irish and German borrowing costs in 1986, it's worth remembering, stood at an eye-watering 690 basis points, far higher than the 448 basis points recorded earlier this week for the same type of money. The 'spread' over US 10-year bonds was actually a ruinous 7pc in the last quarter of 1986 for Ireland, albeit in a different interest rate environment.

It was these unstainable bond yields that forced the Fianna Fail government in 1987 to finally tackle the budget deficit (then at 10.6pc of GDP) in a way that made the bond market sit up and take notice. Soon, Finance Minister Ray McSharry was rewarded with a virtuous circle of falling unemployment, lower borrowing costs and break-neck growth which soon averaged 5.5pc per annum.

But the crucial lesson was that the bond market made the government see fiscal sense, not the voters, not the media, not the domestic financial community and not the civil service.

Unfortunately the Fine Gael/Labour government earlier in that decade took the scenic route and tried to get the budget right and the bond market onside by heaping tax rises on a sullen population. This failed to bring down the deficit and failed to convince the bond market it was the right strategy. Now the bond market is dictating events again and the Government is having decisions forced upon it. But things are different in one crucial respect.

The difficulty is, the $18 trillion bond market isn't speaking with a single voice anymore. Some say the Irish government should default on some bank debt, throw some banks overboard and save the national economy that way.

Others disagree and say such a course could bring sovereign borrowing to a complete halt and stymie any hope of economic recovery for years. In other words, the Government should still listen to the bond market, like it did in the 1980s -- but which bond market?

Irish Independent

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