Steady as we go, but pay gap is toxic - Setting budget expectations

The annual exercise of setting the mood and, most importantly, of limiting expectations around October’s budget is gathering pace. The steady-as-we-go mantra will be set long before the Dáil breaks up for summer.

Steady as we go, but pay gap is toxic - Setting budget expectations

The annual exercise of setting the mood and, most importantly, of limiting expectations around October’s budget is gathering pace. The steady-as-we-go mantra will be set long before the Dáil breaks up for summer.

Yesterday afternoon, Finance Minister Paschal Donohoe published his summer economic statement, a day after the Economic and Social Research Institute made its predictable contribution.

Mr Donohoe, as is entirely appropriate for a finance minister in a country still paying for the last government-driven jamboree, gave no hostages to fortune and encouraged sober expectations — as did the ESRI on Monday.

The State’s economic panjandrums warned there is “little or no scope” for cutting income taxes. They came to this conclusion after their considerations suggested a growth rate of 4.7% for 2018, and of 3.9% for 2019. How much more cautious they might have been had their figures been closer to the less-optimistic OECD predictions is a moot point.

The OECD’s international collaboration of panjandrums has predicted growth of just 4% this year and a significantly lower rate, of 2.9%, for next year.

Wise election strategists, whose work must be gathering momentum, despite all the not-just-yet soothing, will plan around an average of those figures. The OECD’s more conservative forecast is based on its belief that Ireland could be “more severely affected” by a hard Brexit. That differentiation is confirmed by the prediction of “robust” economic growth of slightly above 2% for the EU, this year and next.

The ESRI said we should be “wary of stimulating the economy” by cutting personal taxes, arguing that delivering

elements of the National Development Plan would be a better long-term option. Anyone who recalls Charlie McCreevy’s disastrous if-I-have-it-I’ll-spend-it knees-up would concur.

Taoiseach Leo Varadkar was not ambiguous, either, and he left little room for wishful thinking. Speaking on Monday, he strongly ruled out an expansionist or election budget, saying he wanted to cut debt and restrict borrowing.

“More borrowing means a bigger deficit and higher debt does not make sense. We don’t want to repeat the mistakes of the past.”

One area, however, this society’s permanent battleground, has not accepted the hard lessons of the past. Speaking about the fiscal space, that phrase beloved of panjandrums of all persuasions, Mr Varadkar suggested it would be around €3bn, though some €2.6bn of that is committed to public service pay increases and Irish Water.

This seems a spectacular slice of the cake and raises questions around the fact that public sector wage growth is almost twice that of the private sector. Private sector weekly earnings growth is running at around 2%, year-on-year, but the public sector graph is very different.

Since 2016, average weekly earnings for state workers have accelerated rapidly. By the first quarter of 2018, they were up 3.5% on the same period of 2017. For a full year, public pay growth has outstripped the private sector by a distance. Mr Varadkar might be surprised by the level of support for a prudent budget, but unless the pay inequity is resolved, an opportunity will have been missed.

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