Tuesday 17 September 2019

'Boom envy': 3pc pay rise on way next year - for some

Even reductions in corporation tax 'need not derail economy'

economist and former Department of Finance adviser Dr Alan Ahearne. Photo: Andrew Downes
economist and former Department of Finance adviser Dr Alan Ahearne. Photo: Andrew Downes
Niamh Horan

Niamh Horan

Ordinary families are predicted to feel the benefit of the surging economy in 2019 as full employment and labour shortages across several sectors force employers to increase wages, according to economist and former Department of Finance adviser Dr Alan Ahearne.

Dr Ahearne, one of the first economists to predict Ireland's property crash in 2007, believes a 3pc hourly wage increase could be reached in the next 12 months as the labour market tightens and employers start a bidding war to attract and retain staff.

A 3pc increase in the average industrial wage of €36,500 would amount to a pay increase of just over €1,000 a year.

He said: "Given the way the economy is going, I think you will expect to see more than the [current] 2.5pc hourly wage increases next year - 3pc is probably a good guess."

That view was echoed by Owen McFeely, director of PwC Ireland Retail and Consumer Practice, who said: "As we head to full employment there is naturally going to be pressure on pay, as it's a supply-and-demand issue. I think there is a risk in certain industries of potential labour shortages."

However, Dr Ahearne, who is now Director of the Whitaker Institute at NUIG, also gave a stern warning that, while the boom is solid and sustainable and should be felt in people's pockets in the year ahead, there remained outside threats which could derail the economy, including the potential of a hard Brexit or a global economic shock.

Despite near record employment and pay rises in some sectors, many people feel they are being excluded from the benefits of the economic recovery - the phenomenon of ''boom envy''.

But the former economic adviser to Brian Lenihan when he was finance minister believes we are now on the cusp of more widespread increases in wages, with labour shortages across construction, hospitality, IT and financial services.

The public sector will also see a wage increase as ''FEMPI'', the financial emergency legislation which allowed the State to reduce the pay of public servants, is unwound.

It comes as the average value of mortgages drawn down this year also approaches the Celtic Tiger peak.

Figures compiled by Banking and Payments Federation Ireland (BPFI) from its member financial institutions put the average value at €217,857 as of the end of September.

That compares to the start of 2008, where the average mortgage was €219,809, just under €2,000 more.

The average is across mortgages of all types, from those extended to first-time buyers to loans for investment properties and top-up mortgages to cover expenditure such as renovations. The BPFI has also noticed a significant rise in the incomes of those taking out mortgages now.

Dr Ahearne did add another warning to his optimistic assessment centred on potential changes in corporation tax, saying that Ireland "could lose €1bn at the stroke of a pen".

Last month, the European Commission raised concerns about the sustainability of the State's corporation-tax base.

They warned that uncertainty "of some sources of Government revenue (notably corporate income taxes)" poses a major risk to the Government's fiscal outlook.

Receipts from corporation tax have more than doubled to €8bn since 2015.

Dr Ahearne suggests that even if there are changes to corporation tax, which would reduce the Exchequer's take, these changes will not cause multinationals to "up sticks and move abroad".

He said "the boots will stay on the ground" because the total package Ireland offers includes important factors such as a highly-skilled workforce.

"In the same way that there is a lot of talent in Silicon Valley and also in the financial services in Wall Street, you can see that when you create these clusters and then the talent arrives, those people act like a magnet to bring in yet more talent and expand."

And although he said Ireland is at risk of losing some corporation-tax profits, he added: "It's a chunk of change. It would not be like the collapse of the property bubble and the impact that had on public finances."

He added that the Government therefore "needs to treat some of the extra corporation-tax revenue as temporary" and "put it in a rainy-day fund rather than committing it to permanent increases in current expenditure".

He added: "In fairness, that's what the minister said he would do."

The Government was heavily criticised in recent days after the Irish Fiscal Advisory Council (IFAC) said in its latest report that there were "echoes of policy mistakes of the past" and Budget 2019 was not "conducive to prudent economic and budgetary management".

Fianna Fail has made a stinging attack on Taoiseach Leo Varadkar's promise of five years of tax cuts if Fine Gael is re-elected.

Fianna Fail finance spokesman Michael McGrath claimed the pledge is "irresponsible" at a time when the country is "potentially staring down the barrel of a no-deal Brexit".

Sunday Independent

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