Business Irish

Tuesday 20 February 2018

Richard Curran: Trade union version of the Crash causes don't stack up

Jack O’Connor’s comments highlighted a divide on public sector pay increases. Photo: Gerry Mooney
Jack O’Connor’s comments highlighted a divide on public sector pay increases. Photo: Gerry Mooney
Richard Curran

Richard Curran

The Government is on a collision course with public sector unions on pay. Siptu's Jack O'Connor was on radio during the week with comments which highlighted the enormous gulf between what many people believe the State can afford by way of pay increases and what trade unions believe is affordable.

When asked on RTE Radio One's Morning Ireland about restoring public sector pay to pre-Crash levels which were "unsustainable", O'Connor replied that there wasn't anything unsustainable about public sector pay levels before the crash.

He blamed the Crash on the cost of the banking crisis and the Government's unaffordable SSIA saving scheme. His version of events had nothing to say about the role that enormous public expenditure increases (including pay) played in the Crash.

The trade union version of the 2008 exchequer crash and Troika bailout appears to be that it was all caused by bailing out the banks. This analysis is simply not borne out by the facts.

According to economists Donal Donovan and Antoin Murphy in the book The Fall of the Celtic Tiger, regarded by many as the definitive narrative of what went wrong, the banking crisis was only one part of the story.

Stripping out the cost of the bank bailout, our budget deficit hit 12pc of GDP in 2009 anyway. Back in 2012, economist Pat McArdle attributed three-quarters of the total projected increase in Ireland's net debt between 2008 and 2015 to financing budget deficits and one quarter to banks.

The level of unrestrained increase in government spending ahead of the Crash was astounding. Between 2000 and 2007 the pay bill for education rose by 118pc, while in health it was 79pc. During that period lots of new teachers and medical staff were hired to cater for a rising population and to bring staffing levels closer to international norms. Fair enough.

But pay increases were also a huge factor. Public sector pay (other than health) increased by 32pc between 2003 and 2008, while the cost of living rose by 18pc.

A study by academic Bridget Laffan in 2011 found that even after the Crash, public sector salaries remained at levels significantly above their average EU/OECD counterparts.

The figures are all there to be read. But if government and the public sector unions can't agree on the recent past and the causes of the crash, they will find it extremely difficult to agree about the future and what is affordable.

The public sector pay levels of 2008 came when our national debt was €50bn and we were paying €1.5bn a year in interest on it. Now the debt is around €200bn and the interest bill was €7bn last year.

Expressed another way, back in 2008 3.8pc of all tax revenues went on servicing the national debt. Last year it was 15.3pc.

These two versions of what happened exclude the debate about the value of public sector pensions and the job security enjoyed by large swathes of the public sector.

Private sector pensions are in crisis as more schemes drift into the red while in the public sector they are underwritten.

But we have to ask how this "showdown" between Government and unions will go. In all likelihood the Government will cave in to many but probably not all of the public sector demands.

Failing to do so would trigger strikes and leave the path open for Fianna Fail to pull the plug on this minority government amidst the chaos. Fine Gael will have as close an eye on what Fianna Fail might do, as it will on the exchequer finances when it comes to handling the two conflicting versions of reality.

Expect the Exchequer to lose out.

State subsidies won't help solve housing crisis

House prices look set to rise by more than 14pc in just two years, as new figures put them on track to climb by 7pc this year and by a similar percentage next year. Throw into the mix the fact that rents in parts of Dublin are now 10pc higher than at the peak of the boom.

Public sector wage demands are partially fuelled by genuine concerns about the rising price of houses and rents. If the housing crisis feeds into public sector wage increases, it could prove very expensive indeed for all taxpayers. The Government response since house prices began to increase in Dublin in 2013 has been appalling.

The only entity to have done anything to put a stay on rising house prices has been the Central Bank with its mortgage lending caps. The bank was pilloried for using this, admittedly, blunt instrument back in 2015. It was criticised by politicians, banks, and many other vested interests.

Can you imagine where property prices would be if the lending caps has not been put in place, given that they are likely to rise by 14pc in a two-year period with them in situ?

An early opportunity to curtail rent rises was lost by the last government with a watered-down version of rent controls. It hasn't worked. Rents are at an all-time high and could rise by another 25pc, according to some industry experts. Housing minister Simon Coveney is putting together plans aimed at tackling the supply issue. All of these ideas involve subsidising activity in the market. Developers are to be given cheap sites to develop cheap houses, instead of losing sites they sit on. First-time buyers are to receive free money to help with the deposit which will push up prices further.

Landlords are being incentivised to remain as landlords yet proper rent controls are not in place.

There is speculation that Coveney will shortly announce rent supplement for lower middle class earners in a new plan to tackle the rental crisis.

There hasn't been a single radical proposal in the menu of options being proposed. That is because the Government wants to sort out a crippling housing crisis without upsetting any particular group.

It simply cannot be done.

Kingspan is taking the 'Cavan approach' to debt

So much is written about what happens in the sovereign bond markets, the corporate bond market can sometimes be ignored. Kingspan became the latest company to avail of incredibly low interest rates that can be achieved by the right company.

The building products group completed a €250m private placement loan note in the US during the week with a fixed annual coupon of just 1.48pc for an average of nine years.

The deal enables the Co Cavan-based group to pay down other debt that matures and carried an annual coupon of 4.1pc.

Even heavily indebted companies like Eir have been able to lower their interest bill significantly in the bond market. During the summer it raised €500m at a rate of 4.5pc compared to a similar bond three years ago which cost it 9.25pc per year.

Kingspan has targeted incredibly low levels of debt on its balance sheet. By the end of this year its net debt/Ebitda ratio will be just 1x. It is about a cautious and prudent as you can get.

Leaving all Cavanman jokes about money aside, clearly Gene Murtagh Jnr has learned a lot about taking a cautious approach to borrowing and debt. It has paid off for his father, company chairman Eugene Murtagh, whose shares are now worth €681m.

Sunday Indo Business

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