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Battered workers need feel-good boost but tax breaks would make more sense

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Jim Power is an economist and commentator

Jim Power is an economist and commentator

Jim Power is an economist and commentator

The typical message we now hear from taxpayers is that while they believe that the economy is getting somewhat better, they are not feeling it in their pockets. From an economic and political perspective this will need to change as quickly as possible.

Over the past 12 months almost all economic data releases have been consistent with an economic recovery story. However, it has been very apparent that the personal sector has been the weakest and most fragile part of the recovery. In the first nine months of last year, total consumer spending expanded by just 0.6pc; and in the first 11 months of the year the retail sales component expanded by just 1.5pc in value terms when car sales are excluded.

There are no real surprises in the fragility of the consumer given what workers have been subjected to in terms of various tax changes, wage cuts and increases in the cost of expenditure items such as education, rents and health insurance.

Apart from the economic and business implications of the fragile consumer, it presents a major political challenge for the government parties who presumably want to get re-elected over the next 14 months.

In the public sector, Minister Brendan Howlin has promised to sit down with public-sector unions over the coming months to begin discussions aimed at reversing the public-sector pay cuts implemented since 2008.

It is certainly possible, however inadvisable it might be, that public-sector workers should start to see some limited wage growth from 2016 onwards. However, by definition it is likely to be limited because the public finances are still in a very bad place and will be for some time to come unless the 'debt-fairy' visits our shores.

In the private sector, the experience is likely to be very mixed.

Employees of most parts of the multinational sector were largely insulated from the wage pain felt in most of the rest of the economy and this will continue, with solid wage growth likely. Outside of that sector the experience has been quite different and quite diverse and that looks set to remain the case.

Inevitably, as the unemployment rate continues to come down, shortages of labour will emerge in parts of the economy and hence wages could rise more strongly.

People with IT skills and many areas of financial service experience should benefit. However, for many workers who work in the still stressed SME sector the potential for wage growth looks very limited. Many small businesses are still struggling to survive and will have very limited ability to increase wages. This obviously includes workers in the retail and hospitality sector.

The Irish economy and many employers are still in a very difficult place and will struggle to deliver wage increases unless they are matched by productivity growth.

From a business survival perspective and from an international competitiveness perspective, excessive wage growth would be very damaging. Rather than increasing wages in the public sector and the many exposed parts of the private sector, it would be much more advisable to put extra money into workers' pockets through a reduction in the tax burden rather than damaging wage increases.

This would have the benefit of helping workers in sectors where there can be no rationale for higher wages at this juncture, which includes many in the SME sector.

Having said all of that, with the economy recovering, most if not all workers should see a gradual improvement in their take-home pay over the next couple of years in whatever guise it comes.

However, this has to be seen in the context of the savage pain inflicted since 2008, but at least it is now starting to move in a better direction for most workers. This is good.

Jim Power is an economist and commentator

Indo Review