Wednesday 13 December 2017

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

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

Bills continue to rise
Bills continue to rise
Marc Coleman

Marc Coleman

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?

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.

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