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Sunday 15 December 2019

Surging recovery is only doing a little for government's popularity

With concerns of a property bubble and little hope of pay increases, the public is wary

Bubble: People queuing to purchase new homes in the Millers Glen estate in Swords Co Dublin earlier this month. But, while the credit famine continues, there simply cannot be another property bubble. Photo: Gerry Mooney.
Bubble: People queuing to purchase new homes in the Millers Glen estate in Swords Co Dublin earlier this month. But, while the credit famine continues, there simply cannot be another property bubble. Photo: Gerry Mooney.
Dan O'Brien

Dan O'Brien

Is the political centre of gravity in Ireland on the right or on the left? Despite the small size of the Labour Party historically, this is not as straightforward a question to answer as it might seem.

When asked by pollsters to locate themselves on the political spectrum in Europe-wide surveys, Irish respondents typically place themselves more to the right than most other countries. That would appear to make it an open-and-shut case. Yet it is not.

Small-government parties have not flourished traditionally - the Progressive Democrats burnt somewhat brightly for a while before disappearing - and civil society organisations which take a position of economic issues are mostly on the left. There is no think tank on the right of the spectrum to match left-wing bodies Neri and Tasc, and Ireland is in a minority of European countries which does not have a taxpayers' alliance, bodies which are by their nature right-leaning.

This curious case of Ireland's schizophrenic politics has also been seen more recently. Today's Sunday Independent/Millward Brown poll on Budget choices points to a right-of-centre mood in the country. It finds that 56pc of people favour either a cut in the USC rate or measures to ensure fewer people are hit with the top rate of income tax, while just 32pc favour maintaining or increasing government spending.

But back in April, another Sunday Independent/Millward Brown poll pointed to a more left-of-centre mood. Although the question five months ago was predicated on the expectation of another austerity budget, 37pc said the adjustment should be less focused on spending cuts, while just 26pc favoured tax cuts.

The shift towards tax cuts over maintaining/increasing spending is likely to be explained by the quickening pace of the recovery over the past five months and the growing expectation that the forthcoming budget will not only be austerity free, but could possibly be stimulatory (it should be noted that the news last Thursday's of the economy surging ahead, as measured by GDP and its component parts, came on the final day of the survey, which was taken over a 10-day period).

Interpreting the mood of the nation so that the budgetary arithmetic can be structured in order to maximise political advantage will keep the government parties and their advisers very busy in the days and weeks up to October 14.

But as they toil on that complex enterprise, they will hardly be cheered by today's poll. Fine Gael's support hasn't budged, and remains well below its level at the last general election, while Labour's two-point increase is within the margin of error and still augurs disaster for the party at the next election.

The statistically-significant four percentage point increase in satisfaction in government performance is all they have to show for their efforts, but even this is small and from a very low base. These findings make it clear that voters are still not giving much credit to the coalition for the accelerating pace of recovery.

No doubt, the main reason for that is the limited degree to which incomes have grown - one of the few still-flat indicators in the economy is wage growth. And our poll has some fascinating findings on pay issues.

Despite average disposable incomes still stuck well below levels of six years ago and despite the much-talked about pick up in the economy, a surprisingly large percentage of those questioned did not believe pay hikes were yet affordable. When asked if the economy was strong enough to warrant private sector pay rises, more people replied No than Yes. This suggests that many people are not yet convinced that the recovery is durable, a caution that is warranted given the inherent uncertainty around predicting future economic outcomes and the threats to recovery which exist.

All the same, the findings are curious. In reality, wage-setting in the private sector varies greatly across sectors. In the parts of the economy that are strong, growing fast and where skills shortages exist, there is scope for pay increases. But there is little scope in sectors where recovery is less strong and where there are more unemployed workers than vacancies.

All this is reflected in the data. In the booming tech sector, for instance, average salaries rose by 10pc in the four years to 2013. By contrast, over the same period, wage rates in the hospitality sector declined by almost as much.

Views were also sought on the eternally-fraught issue of public sector pay. Unsurprisingly, the split in opinion on the affordability of increases for those on the public payroll was bigger. More than half of those polled said the economy was not strong enough to warrant a salary increase for public sector workers, compared to fewer than one in three who said "Yes".

As public sector pay is not set by the market, the issue of the strength of the economy is only one factor in assessing whether there should be an increase, and that is particularly so when the state is massively indebted and - on existing plans - will get even more indebted next year when the government will spend a planned €5bn more than it earns in revenue.

This underscores the need for a real benchmarking exercise, and one very different from the stitch-up of the bubble era, when benchmarking was manipulated to buy off public sector trade unions with unsustainable pay increases. A rigorous, transparent pay-setting mechanism would look at all the available evidence so that both affordability and fairness are considered.

(And, for what it's worth, if any rigorous, transparent body were to pull together all the available evidence, it would find that public sector pay on average - and even after the cuts endured - remains on the high end of the spectrum in Europe.)

If the setting of the price of labour in the public sector is perennially controversial, the Irish fascination with house prices is never-ending. Amazingly, and despite house prices even in Dublin (where the market is tightest) being still nearly half bubble-era peaks, as many people think there is a new bubble as don't.

It is understandable that there is no little paranoia about this issue given the damage caused by the property collapse, but on this occasion the bubble believers are mistaken. There are many reasons that is the case, but the most important is this: all asset price bubbles are closely linked to excessive credit growth. As the great Irish credit famine continues, there simply cannot be a bubble.

There are still plenty of things to fret about when it comes to the economy, but a property bubble is not one of them.

* * *

In last week's column I wrote that the Government's most recent forecast for nominal GDP in 2015 was just over €180bn. That is the figure for 2016. The correct figure for 2015 is just under €175bn. Sorry.

Sunday Independent

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