Popularity can’t be government’s top priority
A key priority for those in power will be to seek to turn the seven-year high in consumer confidence readings into a sense of feelgood amongst the electorate.
There are currently many dilemmas in the economy that are difficult to understand. Consumer confidence is at a seven-year high, yet the retail sector in general is still finding the going very tough. However, one part of the retail sector, the motor trade, is in the midst of the most upbeat sales scenario since 2008. The purchase of a new car is a big item of expenditure, so the strong growth in sales does come as a bit of a surprise in what is still a very challenging environment for the consumer.
Perhaps it has a lot to do with the fact that car finance conditions have improved a lot, unlike credit conditions in most of the rest of the economy. Whatever the reason, it is inconsistent with the rest of personal sector behaviour at the moment.
Another dilemma is the lack of popularity of the Government. In May, it got a serious kick in the teeth despite the fact that the economy is very definitely starting to improve; employment creation is back on the agenda and many businesses are reporting stronger levels of activity.
The general feedback is that while many believe that the economic environment is getting gradually better, people are not feeling it in their pockets and are still reluctant to spend.
The Government is trying to react to these challenges. The decision to set up a commission on low pay is interesting, but looks like a political stunt that is doomed to failure. The reality is that many of the businesses, who pay minimum or low wages, operate on very tight margins in parts of the economy that are heavily exposed to the chill winds of competition. Imposing a higher minimum wage, which would feed through to wages up the line, might just force many such employers to shed labour or cut hours and other fringe benefits.
I do fully recognise that living on the minimum wage or even higher wages is extremely difficult, however, forcing employers to pay higher wages is a very blunt instrument that could prove counter-productive.
Perhaps it would be more appropriate to focus on reducing the other costs of doing business. It is clear to me from my dealings with small business owners that commercial rates are a major cost burden. A reduction in rates to match any increase in the minimum wage, might be a policy approach worth exploring. Employers’ PRSI could also be looked at.
Another reality is that even for low-paid workers, the pressure on take-home pay has exacerbated the problems since 2008. Hence, some members of government have been talking about cutting taxes as early as this October.
While I am ideologically pre-disposed towards lower taxes, the reality is that we are still borrowing too much to run the country, and it is far from certain that lower taxes would be self-financing. We should wait until borrowing is eliminated before a tax-cutting approach is pursued. Even then it would have to happen in a well-targeted manner. The Government should have more concerns than political popularity at the moment.
We have seen in the past how much damage populist policies can cause. It is also worth bearing in mind the recent warning in a Central Bank research paper about the problems with interest-only mortgages; and the warning from the National Competitiveness Council that competitiveness is deteriorating again.
Let’s hope Government is sensible about these and other issues.
