Colm’s columns

By Colm Rapple
Irish Mail on Sunday, May 27, 2007

Garda pay has soared by almost a third over the past three years. Average earnings jumped from €975 a week in December 2003 to €1,286 a week last December according to figures released this week by the Central Statistics Office. Overall, they showed some slowdown in the rate of increase in public sector pay but the gardaí, who managed to increase their weekly earnings by 12.4% during the year, were an exception.

But a one-year view masks the impact of the benchmarking increases. Over the past three years public sector workers have, in general, fared far better than their private sector counterparts. The accompanying table summarises the trends.

While industrial workers managed an increase of only 11% over the three years, the pay of administrative civil servants rose by 25% and so too did the pay of local authority workers.

We don’t know what’s happening in the health services. The internal administration is so bad that the HSE can’t provide figures to the Central Statistics Office. So although the health services account for almost one out of every three public servants, we know nothing about the size or trend of average pay in the sector.

These latest pay figures are of more than curiosity value. The divergence between public and private sector pay and the growing realisation that pay increases in many areas have been falling short of inflation is bound to put the pay deal under pressure. It’s coming at a time when the international indicators suggest a need to curb rather than bolster inflationary pressures.

Leave aside fears of a U.S. attack on Iran, growing instability in the Middle East or the prospects of soaring oil prices and the outlook for the world economy is quite rosy. In its latest economic review issued on Thursday the OECD, an international think-tank of some repute, paints an optimistic picture.

As the U.S. economy slows down to a soft landing, Europe is expected to provide a replacement engine for growth, with Germany, France and even Italy contributing to the upturn. The booming Chinese economy which grew by over 10% last year is helping to support an export led recovery in Japan.

But there are problems. Inflation is a worry in Europe, not our 5% but rather the potential breaching of the 2% target for the eurozone as a whole. The OECD predicts that interest rates will need to rise a further half point from the current 3.75% to 4.25% while the euro could appreciate further against the U.S. dollar.

That’s all bad news for us. An appreciating euro erodes the competitiveness of Irish producers on both home and export markets while interest rate hikes will fuel a continuing high rate of inflation. There is bound to be mounting pressure for a renegotiation of the national pay deal.

Workers will be looking not only at the future prospects but also at past trends. The deal provides for pay increases of well below the 5% rate at which consumer prices are currently rising and the official pay figures reveal that the pay of many workers have failed to keep pace with inflation over the past year. Some have barely kept pace with inflation over the past three years and very few have managed a real pay increase in the past year.

The figures in the accompanying table tell the story. While Gardaí managed an increase of 12.4% in average earnings last year, skilled building workers only got a 1.1% increase while at the very bottom end of the earnings scale the average pay of those in the catering and hotel sector rose by less than 1% to €436 a week.

Given that consumer prices rose by 4.9% during the calendar year 2006, it’s now clear that the pay of most workers failed to keep pace. Women industrial workers were one of the exceptions are they continued to catch up on their male counterparts but they are still far behind averaging only €12.65 an hour compared with the €16.30 an hour earned by men.

After two very good years many public sector workers fared less well in 2006. The exceptions were the gardaí and local authority workers.

Overall, it’s clear that many workers suffered a real drop in income last year, a fact that must come back to haunt the new government. On the industrial relations front, the honeymoon is already over.

The pay stakes – winners and losers
Gross average weekly earnings* Increase in 2006 Increase over 3 years
CONSTRUCTION
Skilled workers €907 1.1% 11.3%
Unskilled workers €781 4.7% 18.5%
Foremen €1,051 3.4% 14.1%

INDUSTRY
Male industrial workers €679 4.6% 10.8%
Female industrial workers €469 6.3% 17.3%
Managers €1,064 0.2% 9.5%
Clerical workers €747 2.9% 11.5%

PUBLIC SECTOR
Prison officers €1,153 1.3% 4.2%
Administrative civil servants €837 4.1% 25.3%
Gardaí €1,286 12.4% 31.9%
Secondary teachers €1,005 2.0% 18.9%
Local authorities €781 5.5% 24.8%

Banking, insurance €858 6.3% 20.7%

Retail trades €719 4.8% 14.9%

Hotels, catering €436 0.7% 16.9%

Inflation (to December 2006) 4.9% 10.2%
Inflation (to April 2007) 5.1% 11.5%
* December 2006 Source: CSO

By Colm Rapple
Irish Mail on Sunday May 20, 2007

The politicians have made some peculiar choices in framing their manifestos. Fianna Fáil, Fine Gael, Labour and the PDs all expect a surfeit of riches in the exchequer over the years ahead but are willing to use the bulk of it in buying votes with tax cuts rather than improving state services.

Just one example will prove the point.

The Fianna Fáil manifesto proposes to install 2,000 extra consultants by 2012. At that stage they’ll be costing €442 million a year. It also proposes to cut the top rate of income tax from 41 to 40% at an annual cost of €319 million. If it dispensed with that tax cut it could fund not 2,000 but rather 3,400 extra consultants.

The PD’s promised cut to 38% in the top tax rate could alternatively fund a combination of 2,000 consultants, 500 new hospital beds, and an extra 4,000 teachers according to the Fianna Fáil costings.

The tax cuts don’t take up much space in the manifestos but they account for the bulk of the financial commitment highlighting the politicians’ cynical view that the electorate are likely to respond more favourably to extra money in their pockets than to promises of better services.

By 2012 the Fianna Fáil tax and spending measures are expected to be costing €7.1 billion a year. Almost €4.2 billion of that relates to the tax cuts while only €2.8 billion is extra spending. The Fine Gael/Labour measures are expected to be costing €8.3 billion of which €3.4 billion relates to tax cuts.

So the good news is that if we are willing to dispense with those tax cuts then we can still have the promised spending even if there is an economic downturn.

Mind you if the politicians are right we can look forward to another five years of rapid economic growth. No-one is expecting a return to Celtic tiger growth rates but there is an expectation that the economy can continue to grow at close to its optimal growth rate for a further five years.

Fianna Fáil expects an annual growth rate of 4.5% while the Fine Gael/Labour projections are based on an average rate of 4.2%. Such growth rates are, of course, achievable and wouldn’t particularly stretch our economic capacity. But at some stage the Irish economic growth rates must converge with those of our closest trading partners.

The British economy is expected to grow by only about 2.5%this year while the eurozone is expected to grow at a slower 2.2%. We will do a lot better than that but for how long can we continue to outperform our neighbours? There are plenty of external factors that could upset the forecasts and there are a number of worrying developments at home.

The slowdown in the property market is already having an impact on building activity. It’s not a particular worry yet since the Government’s capital programme is picking up the slack. But it could become so.

With inflation remaining stubbornly above 5% there are bound to be increasing demands for a re-negotiation of the national pay agreement which the trade union establishment may find hard to resist. The deal provides for pay increases of less than 5% a year. Last year many workers suffered a real drop in incomes. In December the average industrial wage was €679 a week – up 4.5% on the year in which consumer prices rose 4.9%.

The offer to the nursing unions, whether accepted or rejected, has already prompted demands from other public and private sector unions. An upsurge in industrial unrest won’t of itself push the economy into recession but it could dent confidence.

So what if the economic assumptions on which the manifestos are based prove wrong?

Budgetary choices are not hard to make when there is plenty of money. Giving to one group doesn’t obviously or even necessarily mean taking from another. All interests can seem to be accommodated. But when money gets short, the old peasant notion of the limited good comes to the fore. If one person gains, it will always seem to be at the expense of another.

So what happens if the manifesto forecasts don’t live up to expectations?

Before the last election when money was tighter, the Labour Party proposed a temporary cut back on the annual contribution to the Pension Reserve Fund as a way of balancing the books. Fianna Fáil indicated a willingness to borrow proposing the development agency whose borrowings might not be included in the EU calculation of the budget deficit.

It mightn’t have worked but in any case it wasn’t needed. We stayed well within the rules of the eurozone Stability and Growth Pact which allows the annual budget deficit to go above 3% of GDP in any one year. Indeed, it’s over a decade since we ran a budget deficit of more than 3% and we’ve been running substantial surpluses in recent years. Both the Fianna Fáil and the Fine Gael/Labour manifestos project a continuing surplus in the years ahead.

So there is enough flexibility built in to cover some downturn in economic performance. Provided, of course, that whatever government is in power doesn’t get hung-up by an unwarranted desire to prove a commitment to fiscal rectitude. A major or prolonged economic downturn would be a different matter, of course.

That’s when the differences between alternative governments would definitely become more obvious. But the good news is that even a marked slowdown in our economic fortunes might require nothing more than a row-back of the tax cuts promised in the manifestos with no need to cut-back on the spending plans.

Colm Rapple
Irish Mail on Sunday May 13, 2007

Back in December 1993 the then Minister for Finance, Bertie Ahern was doing more than getting a “dig-out” from his friends and concluding his marriage separation. He was also finalising his third and, what was to be his last budget . A year later, following the collapse of the Fianna Fáil/Labour coalition, he replaced Albert Reynolds as leader of his party but in opposition.

The Taoiseach’s promised response to the probing questions of recent weeks will undoubtedly provide an insight into his efforts to balance his personal finances at a time of marital and political change. But the content of the January 1994 budget can help explain Mr Ahern’s appeal to the business community.

It contained a package of tax reliefs aimed particularly at small and medium sized businesses. Some of them had been suggested by a Task Force on Small Business but no doubt others had been lobbied for by individual businesses and business organisations. It’s impossible to say that any measure was aimed at helping any particular business or individual. Indeed they were all broadly based and undoubtedly reduced the tax and administrative burdens of very many businesses.

But it’s clear that many businessmen, entrepreneurs and developers had plenty of reason to be thankful for the policies pursued by Mr Ahern at that time.

So what was in that 1994 budget?

There were the usual improvements in tax allowances and bands although some of the benefits were to be clawed back by restricting mortgage interest and medical insurance relief to the standard rate. Those latter measures were phased in over a few years. The bulk of social welfare recipients only got a 3% increase and it wasn’t paid out until late July. Consumer prices rose 2.4% that year.

The bulk of the budget statement was given over to what were described as enterprise and employment initiatives. There were a lot of them.

Of particular interest to property developers was an extension of the urban renewal scheme, the introduction of a new “living above the shop” scheme and a marked improvement in the tax incentives available for hotel construction.

The urban renewal scheme had been around since 1985 and was due to end in July 1994. It was extended and although there was a reduction in the area covered, there were extra reliefs for owner occupied developments.

Two years later a study commissioned by the Department of the Environment concluded that while the scheme had been successful in attracting private investment to the designated areas, it hadn’t increased the overall level of economic activity nationally.

It also faulted the scheme, as have subsequent reports, for not adequately promoting good architecture and urban design and for the fact that, particularly in Dublin, the locals benefitted little from the regeneration of their areas.

The net cost in tax foregone was between €47 and €58 million a year. What’s what the scheme was worth in saved tax to the high earning individuals who made use of it.

A more recent Indecon report concluded that the hotel tax concession was widely used by high income earners to reduce their tax liability while fewer than one-in-three hotel operators believed that it had helped increase the flow of tourists from abroad. The net cost in tax foregone is estimated at €125 million.

But there was more to Mr Ahern’s final budget than property based tax incentives. He also introduced a number of significant capital tax concessions. He started the process of reducing the inheritance and gift tax on business assets. For tax purposes the actual value of the asset was reduced by up to 50%. Farmers also got a benefit with the value of their assets reduced by up to 80% when calculating Capital Acquisitions Tax.

Another relief that would have been of particular interest to property developers was a reduction from the then 40% to 27% in the Capital Gains Tax payable on gains from the sale of unquoted shares up to a maximum value of €32 million.

There were also some smaller tax changes of particular benefit to business. The rate of employer PRSI was reduced by about a quarter in respect of lower paid employees while the restriction on the children of business owners claiming the PAYE tax allowance was removed.

It was such a pro-business budget that there must have been many in the country, and not only his immediate associates, who regretted Mr Ahern’s move to the opposition benches in December 1994 and who would have wished to support his return to power without expecting any specific favours.

At that time there was a perception of greater differences between the alternative governments than currently seems justified. So we shouldn’t be surprised that Mr Ahern had his benefactors.

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THE RELEASE of our latest inflation figures must have send a chill up the spines of the European central bankers who were visiting Dublin on Thursday for one of their regular meetings. An inflation rate of 5% is almost off the scale for these guardians of the euro. Thankfully the eurozone inflation rate is still stuck just below 2%. If it were much higher we wouldn’t have got away without a further interest rate hike this week.

Mind you on a strictly comparable basis our own inflation rate is only about 3% since the eurozone calculations exclude the impact of mortgage interest. But it’s still true that consumer prices here have risen by 5.1% over the past year and almost half of that rise occurred in the past three months. The effective rate has been higher for those with big mortgages.

With another interest rate hike expected next month it’s not going to get any better in the near future.