Wednesday 26 October 2016

Tax cuts must come first – but we need pay rises too

Marc Coleman proposes a Covenant of Understanding for reform, productivity and income growth

Published 09/02/2014 | 02:30

Bills continue to rise
Bills continue to rise

Last week, Siptu president Jack O'Connor told us that wage increases are needed to get the economy growing again. Is he right? To be sure, incomes have fallen. And raising them back up would help boost consumer demand. But are wage hikes the way to do it, or are we missing a trick here?

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Between 2008 and 2012, personal disposable income fell from €101.5bn to €87.4bn. That staggering €14bn fall, 14 per cent, happened as our population grew by two per cent. So in per capita terms, for every €6 in our pockets in 2008, we have just five now. But were wage trends to blame? Average labour costs fell over the period, but only by 2.5 per cent, hardly enough to explain a 16 per cent fall in per capita incomes. Of the €14bn drop, the bulk, €12bn, was taken in successive tax hikes over seven crisis budgets.

Had we stuck to the "€2 cuts for each €1 tax hike" formula agreed with the Troika, tax hikes would have totalled €8bn. As John FitzGerald of the ESRI made clear, tax hikes have had a wasteful impact on the economy by reducing the pressure to reform. Reversing tax hikes is therefore more important than reversing wage moderation. Wage moderation, unlike tax rises, has a hugely positive side as we learned last week with falling unemployment rates. Partialcredit for this must go to workers for enduring wage moderation over the last six years.

But tax cuts must be a priority – as must the public sector reforms that should fund them. Minister Brian Hayes acknowledged last week that we pay too much tax. Damn right. But there is no rule that says that if designed properly, wage increases cannot be part of this change too.

Between 1987 and 1997, a good phase of partnership kept wage growth in line with productivity and cut taxes. After a neutral period between 1997 and 2002, partnership then degenerated into electoral bribery with disastrous consequences. But while it dared not speak its name, it resurfaced in a form in 2009 and played a crucial role in cutting our public pay bill from €17.5bn in 2009 to €14.5bn. Unions want these cuts reversed. They should be reminded that those cuts came from axing jobs more than cutting pay. But the Haddington Road deal runs out in July 2016. Something should replace it, but what?

A New Covenant of Understanding between government, employers and unions could create a virtuous circle of reform. Where would it start? The part of the economy where equality is most justified has huge income inequality. Compared to 3.8 in Sweden, top pay in our public sector is 7.7 times higher than at the bottom. Jack O'Connor wants to get growth going. Well, it is lower-paid public sector workers who spend the highest share of their incomes in the domestic economy.

Just contrast the Department of Education's recent eagerness to sack primary teachers who work in overcrowded conditions with its velvet-glove approach to academia. With sweetheart deals and pension top-ups on one side and overcrowded classrooms and threats of the sack on the other, Jack can't be happy at how the public sector is run. A deal that targets the bottom for wage growth and the top for reforms is something he can hardly object to. But taxpayers who have no job security and haven't seen a pay rise since 2007 are loathe to see their taxes go to pay rises for workers whose jobs aren't even needed.

And any 2014 equivalent of the 1913 Lock Out that excludes private sector workers and the self-employed would be politically unsustainable. We can't go on forever without pay rises. But we need to see how public sector wage cuts and private sector wage moderation helped turn our economy around.

Of course tax cuts must take priority. But if transparent (no benchmarking shenanigans), decentralised (no centralised bargaining) and productive (wage contingent on reforms), then pay rises for some sectors would create a New Covenant on the economy.

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

Irish Independent

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