Figures boost for Irish Government Coalition amid concern

With just a year to go to a general election, all is going swimmingly well for the Government, at least on the economic front, writes Jim Power.

Every economic data release continues to move in the right direction, which will, in theory, make life more difficult for the opposition over the coming year if they adopt the approach of attacking the Government’s economic competency. Many commentators and opposition politicians have expounded the view over recent years that the economy would never recover and that fiscal austerity would destroy us forever.

This is proving not to be the case and, despite the savage fiscal adjustment since 2008, consumer and business confidence levels are climbing steadily and a more solid and broad-based recovery is taking hold.

This is not to suggest that all is perfect. On the contrary, many of our important public services are creaking at the edges and are, at best, sub-standard. It has to be hoped that, as the economy gets better, the resources devoted to vital public services will increase and the efficiency of public service delivery will be addressed.

It has been proven in the past that merely throwing resources at public services does not necessarily improve their quality. But if people were to see an improvement in the quality of health, education, law and order, and public infrastructure, then the recovery would start to feel more real and the political dividend must just flow to those responsible.

Of all the economic indicators we track, the labour market is by far the most important. For every person who comes off the live register and moves into employment, the State saves €21,000. For individuals struggling with debt, attaining a meaningful job can make a significant difference, both mentally and financially.

In this context, the news continues to get better. In March, the number of people on the live register, which is not a measure of unemployment but is a good indicator of the health of the labour market, fell to 348,700, which means it has declined 42,556 over the past year and by 76,400 over the past two years. The unemployment rate has fallen to 10% of the labour market, down from over 15% three years ago. Despite what the cynics might suggest, this is an impressive labour market performance and does suggest that the economic policy approach is working. For some, that is a bitter pill to swallow.

For Government and other policy-makers, it is essential that efforts continue to be directed at further improving labour market conditions. In this context, recent utterances from the trade union side give cause for concern. The notion that we would start to increase public sector pay in an environment where the Exchequer is taking in over €6bn less than it collects in revenue makes no sense. On the private sector front, allowing wages to creep back up at a time when the recovery is still trying to gain traction would not be advisable but would just undermine competitiveness and further press the already pressed small business sector.

If Government is going to ramp up spending, it should direct it at capital projects rather than public sector pay; and it should also adjust personal taxation to put money back in the pockets of the squeezed private sector. Economically, it would be much more advantageous to help people through a cut in the direct tax burden rather than through wage increases.

The Irish Fiscal Advisory Council (IFAC) is arguing for some leeway from the EU to facilitate higher capital expenditure, which echoes a call last week from the International Monetary Fund. This makes a lot of sense. The IFAC is less enthusiastic about tax cuts, which also echoes recent advice from the ESRI.

As I wrote last week, while such advice makes perfect economic sense, it fails to recognise the political realities facing Government over the coming year. Tax cuts would be far preferable to wage increases. The reality is this is what the choice will be. The hope is that workers will be less anxious to push for wage increases if there is a pledge to gradually reduce the tax burden. Perhaps that is too much to hope for and maybe I think I live in Utopia.

Jim

Power