Lose competitiveness and we run the risk of blowing our recovery
A friend of mine got an email the other day from a hotel in Dublin he stays in fairly regularly. The hotel was reviewing its corporate rates and the email recommended he have a chat with them.
This means his rate is going up. The question is why? There could be any number of reasons regarding the specifics of that hotel business and perhaps his rate was very low to begin with.
Some costs in the economy are going up, like electricity, gas, local charges etc. But the overall rate of inflation in the year to January was just 0.2pc. Perhaps the hotel employees want a pay rise. Perhaps the shareholders, who bought the hotel during the downturn, want to ratchet up profits before flogging it off in a couple of years.
Should the small businessman pass on the higher hotel rate he will be charged to those he charges for his product? If he does, and everybody else does the same thing, prices in the economy will go up and competitiveness could suffer.
Just when something seems to be going right in the economy after years of recession, we run the risk of blowing the recovery. Expectations are growing around two key things – wage rates and income tax. More and more people are beginning to expect one of them to go up and the other go down.
There is no doubt that for hundreds of thousands of workers both went the wrong way during the crash. For others, even if they were paying the dreaded universal social charge, at least they were working in sectors where the wages held firm or they even received pay increases.
Central Statistics Office figures suggest the crash cut disposable income by up to €17,000 between 2009 and 2010. Households where the primary earner had a diploma saw disposable income fall from €65,000 in 2009 to €47,855 in 2010.
Disposable income takes account of the tax hikes and doesn't deal with earnings alone.
Enterprise Minister Richard Bruton spoke recently about controlling wage inflation expectations. As an economist, he has his eye on Ireland's overall competitiveness. As a politician, he is expected to enact policies that will begin to improve people's lot. This can be a tricky square to circle.
So a lot of the Coalition's focus now appears to be on the tax side. Cutting the total income tax take by tweaking things like the tax bands now seems more likely.
As much as everybody would like to pay a little less tax, I hope the exchequer can afford it.
Keeping a lid on business costs may be simply impossible. The Government has been particularly poor at controlling the costs charged by the public sector for services, local authority charges etc.
Many of the 60,000 jobs created in the economy in the last 12 months fall into two categories.
Some of them are in well-paid foreign multinational companies investing in Ireland. Others are in relatively low-paid services.
Having done incredibly well during the downturn to keep growing IDA Ireland-supported jobs, Bruton will listen to the concerns of that sector very closely. One issue coming through is that very high effective tax rates of 52pc on earnings over €32,800 is becoming problematic.
Computer programmers working for global tech giants in Dublin are not screaming for a pay rise. They want to pay less tax.
Bruton is adamant there shouldn't be widespread wage hikes.
In the private sector, there is already evidence that some businesses are poised to increase the prices they charge – if not the wages they pay. This seems to apply more in the services sector than in manufacturing.
Hotels in Dublin are just one example. The annual Crowe Horwath hotel sector survey found that sales in Dublin hotels in 2012 were at 76pc of levels seen before the downturn. Occupancy rates continued to rise at 63.8pc nationally in 2012, with the average room rate up €2.05 to €74.72.
In Dublin, hotels were making over €10,000 per room before tax in 2012 compared to €7,690 the year before. Economy hotels grew profitability by attracting more people in, rather than increasing room rates.
In fact, there were no discernable room rate increases in 2011 and 2012. Higher end hotels, however, saw increases of 5.6pc in 2011 and 8.7pc in 2012.
Fair winds behind the Irish recovery story have gathered a lot more quickly than many would have believed just two years ago. But the Government needs to target income tax measures very carefully. Confidence in some sectors could result in an overly bullish approach to pricing.
This would have knock-on effects in the economy and could undermine the improvements made in competitiveness in recent years.