News Marc Coleman

Thursday 28 August 2014

Pay rise bonanza would hurt us all – even the Labour Party

Spending cuts rather than tax hikes must be the focus of the Budget, warns Marc Coleman

Published 13/10/2013 | 05:00

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COLLABORATION: Alan Dukes and Ray MacSharry drastically cut spending, which in turn increased growth

A budget for jobs, business and growth, or a Budget for Labour? Or, just possibly, a Budget for both? Given what we know, Budget 2014 so far looks more a case of Labour's way than Middle Ireland's. The fact that Jack O'Connor – unelected Marxist Leninist Jack O'Connor – led the call last week for a lower-than-agreed budgetary adjustment (€2.5bn instead of €3.1bn) and got his way is telling. No matter how unpopular with the voters, Labour still allows its powerful allies to call the shots.

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Now Jack made it all sound great by touting the idea of a pay rise for everyone. Sure we could all do with a pay rise, couldn't we? But if we are able to adjust by less than €3.1bn and still hit our deficit target that is because this year's promissory note deal cut our debt payments in the short term. And if it does that, it is only because we have pushed out debt repayment to beyond 2030, ie, on to the shoulders of our children.

Attractive though it sounds, Jack's pay rise is a non-starter. It will benefit only membership of his Siptu union, which is politically dominated by state sector unions. It would also erode a hard-won competitiveness gain and worsen the already huge inequality between the public and private sector; a 47 per cent gap in average public-private pay the likes of which exists only in Greece.

Such a pay rise might shore up Labour's lost vote. But it won't help Ireland or the economy a jot. But would it even help Labour? At 5 per cent, Labour's core vote certainly needs to improve. But should our hard-earned taxes be used for that purpose?

Arguably Labour's policies in other areas are what is really hurting Labour. That Frankfurt's way prevailed over Labour's way on bank debt; Labour's pursuit of a chattering-class agenda on constitutional change; the willingness to cut allowances of those in need while protecting pampered, privileged quangos. All these are more likely to explain Labour's low support than anything else.

A 2010 IPA study found that top pay in our public service is 7.7 times the level of pay at the bottom. Compared with 3.8 in Sweden, this suggests that Labour could best reconnect with its voter base by targeting certain elite groups more robustly. Or perhaps Labour now wants to represent only the elites. If so, that is its prerogative. Whether taxpayers should fund that is another question.

Nor is political evidence from the past any more favourable to giving unions or left-wing think-tanks the whip hand on budgetary policy. Between 1982 and 1987, that is precisely what Fine Gael and Labour did: threatened by unions and browbeaten by a chattering class, Garret FitzGerald's government pursued an agonised, painful and failed attempt to tax Ireland out of recession. And both parties were slaughtered at the polls in 1987.

By contrast Alan Dukes and Ray MacSharry, in the Tallaght Strategy, collaborated to drastically cut spending by 10 per cent of GNP in just three years. Growth and job creation accelerated and tax revenues grew. And both parties did well in the 1989 election.

The irony is Labour also benefited from this strategy, winning a landslide in 1992. A minority Fine Gael government in 2011 would have cut deeper and faster. Our economy would be growing more quickly. And Eamon Gilmore would be riding high in the polls now with a fair chance of becoming Taoiseach by 2016 if not before.

Instead he is reduced to hitting out at "austerity hawks" because they want us to adjust by €3.1bn as we agreed with the Troika. But chattering-class denunciation of "austerity" misses the point: either we pay our debts or we ask our children to. Avoiding "austerity" today only means inflicting it on our children.

Even in the shorter term, the evidence points strongly in favour of spending cuts and away from tax rises. Exchequer data shows that revenues from taxes whose rates were cut or left low (income, corporation tax and Vat on tourism) are flourishing but where taxes were hiked (Vat, excise and capital gains) revenues are either disappointing or disastrous.

There is a possible compromise between Labour's way and Middle Ireland's way. If Labour wants credit for getting its way on a lower overall adjustment figure, fair enough. But "savings" should be used to boost growth. Not the fool's gold growth that comes from state spending projects, but real growth.

The way to do that is to reduce the burden put on families and small business by the huge level of government spending. Where Jack O'Connor's pay rises will only benefit the state sector and worsen inequality and competitiveness, tax cuts targeted at low to middle-income families benefit everyone. And they don't erode cost competitiveness. Initiatives to help hard-pressed home owners crippled with mortgage payments and a small tax relief or credit for childcare are just some initiatives that could help boost consumption, growth, jobs and tax revenues.

And as Chris Horn warned, if the Government wants to strengthen job creation, the Budget must also reverse damaging tax hikes on business such as the rise in Capital Gains Tax and the rise in the effective tax rate for the Business Expansion Scheme. The introduction of PRSI on employee share options and the abolition of interest relief on loans for trading companies should also be reversed.

If this strategy is pursued, then Labour's way could end up benefiting the economy.

And in a win-win situation, a strong economy will give Labour a better chance of recovery at the polls.

Marc Coleman presents 'The Marc Coleman Show' each Sunday from 9pm on Newstalk 106-108fm

Sunday Independent

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