Neil McDonnell: Big pay hikes would push many small businesses to cliff edge

We could yet see energy rationing this winter, which will prioritise households over businesses. This would in turn temporarily close businesses, and undermine their viability and recovery. 

Back in February, Isme had predicted that the European Central Bank would increase interest rates by 0.2% later this year to combat rising prices, but those were the innocent days before Russia invaded Ukraine.

Six months later, we have just seen the ECB increase their base rate by 0.5%, with the strong likelihood of more to come to control surging inflation. Hopefully, Isme’s prediction of a 1.5% ECB rate by the middle of 2024 does not prove similarly optimistic.

Globally, business is seeing soaring input costs, particularly in energy, food, and labour. The announcements by Unilever, Coca-Cola, and McDonald’s of higher US consumer prices in the near future will mean more pain for US workers. 

Small businesses here are experiencing a cost-revenue squeeze on three fronts.

First, input costs continue to inflate, although we may have seen peak prices on steel and gas. We could yet see energy rationing this winter, which will prioritise households over businesses. This would in turn temporarily close businesses, and undermine their viability and recovery. 

On the labour side, the public sector unions have set out pay expectations demanding that the State meets the overall inflation rate in terms of pay rises. Pay increases of this order would drive many small businesses under. 

Don’t forget that average public sector earnings are already 22% higher than average private sector earnings and are also 46% higher than average small business wages. 

There will not be a lot of sympathy among the public for workers who already enjoy large pay premiums. 

Neil McDonnell, chief executive, Isme

The second emerging front is that of Government-imposed cost increases via statutory sick pay, pensions auto-enrolment, and social issues such as working from home. Small business owners have every sympathy with workers who aspire to better terms in employment, but they cost money. 

It is interesting that benefits which the Government does not now confer on workers may in future be forced onto employers to pay for. For many firms, this will be unaffordable, which in turn will drive more inflation. Small business owners believe that the social fund, paid for by employer’s PRSI, must do more of the heavy lifting in this regard. 

The third front involves wary customers, who lacking confidence, have not returned to their pre-pandemic spending levels, and leaving many small businesses with a revenue shortfall. 

A Department of Enterprise consultation on the living wage suggests that Government interference in business affairs will continue. Isme has no issue with a living wage from a policy point of view, but benchmarking it against 50% of the average wage in Ireland is very unfair. That's because the presence of a large number of well-paid multinationals, as well as public service, pushes up the averages here.

The Government will have to play its part by moderating the expectations of the public sector, and by bridging some of the new social chapter obligations being imposed on employers. Property prices are now stretching beyond the peaks of the Great Recession and rental prices are through the roof. 

We have all the essential elements of a recession in place. That means the Government must face up to the vested interests.

The overwhelming issue driving pay demands, aside from current inflation, is the cost and availability of accommodation. Unfortunately, pushing wages up to meet a dwindling supply of accommodation will not work. It is Government tax policy that has caused a flight of stock from the rental market; the budget next month would be an opportunity to address this.

There is then finally the big question of whether there be a recession. 

The Great Recession was a high-speed motorway blowout of three tyres, involving an exchequer crash, a property crash, and a banking crash. This year looks more like a slow puncture. We probably won’t crash, but we will have to stop and fix the hole. 

All eyes will be on ministers Paschal Donohoe and Michael McGrath as they exit the car and take out the jack next month. 

• Neil McDonnell is CEO of business group Isme.