The economy is strong but pay demands are stronger
Signs of weakness have receded but as pay talks loom, there is a strong case for decentralised deals, writes Dan O’Brien
THE Minister for Finance Michael Noonan spoke recently about what is sometimes called “the lucky country”. He noted in a speech a couple of weeks ago that Australia has enjoyed 25 years of uninterrupted economic growth. But he didn’t merely muse that this resource-rich country on the other side of the world has not experienced a recession in more than a quarter of a century. Its success, he suggested, means that other economies need not be condemned to suffer inevitable cycles of growth followed by recession.
When politicians begin contemplating never-ending economic expansion, it can be worrisome. Elected representatives everywhere tend to have a largesse-dispensing gene absent in the DNA of normal people. The prospect of permanent economic growth is nirvana for politicians because it allows them to think of ways of doling out goodies without end.
In fairness to Michael Noonan, he did not suggest that Ireland could only get “boomier”, to borrow an ill-fated phrase coined by one of his predecessors. Nor did he brush aside those who keep a weather eye on the risks to the economy, as was the wont of politicians a decade ago. Indeed, he discussed some of those risks in the same speech.
But for all the mounting risks, Noonan has good reason to feel a little bullish about the state of the economy right now.
In the final months of last year there were some signs emerging that the four-year-long recovery was running out of steam. The signs were not ominous, but they were certainly concerning.
Consumer confidence was falling. Spending in shops, pubs, restaurants and other retail outlets was stagnating. Companies shipping goods to Britain were getting clobbered by a collapsing sterling.
Perhaps most concerning of all was a sharp downward trend in the amounts of money the government was taking in. From the middle of last year, monthly tax revenues weakened markedly. In some months they shrank.
Neither the tax trends nor the other negative indicators amounted to proof that the recovery was over, but they were the economic equivalent of flashing amber lights.
Thankfully, most of those lights have now stopped flashing, for now at least. In January, consumers returned to the shops in droves. After a lacklustre Christmas season, retail spending bounced back strongly in the first month of the year. That was reflected in the ESRI/ KBC consumer confidence index, which also surged in January.
For exporters to the UK struggling with squeezed margins, the Brexit–related collapse in sterling has not been reversed, but there has been broad stability in recent months.
Returning to the indicator that is relevant both economically and politically — government revenues — recent news has also been relatively good. In January and February, revenues were up on the same months last year. That suggests that the weakening trend in the economy, and in the amount of tax being generated, has been halted.
Although Ireland’s GDP numbers are notoriously unreliable, owing to the unusually open nature of the economy, the more reliable components of the figures point to continued growth momentum.
One of those more reliable components is the measure of government spending. After falling for half a decade, “public consumption” has been on the rise since 2013. Last year it grew more rapidly than the overall economy.
In part, this reflects the considerable spending pressures that exist. The most obvious of these is a rapidly growing population, which requires more expenditure just to maintain existing levels of services. But the most politically important spending pressure comes from the hundreds of thousands of people who are in the employ of the State.
Michael Noonan’s colleague in the Merrion Street edifice which houses the Exchequer is Paschal Donohoe. He has the difficult job of deciding where to allocate available resources. The Minister for Public Expenditure and Reform is at the frontline of talks on public sector pay.
While recent developments in the public finances means that a crisis in pay talks is not inevitable, Paschal Donohoe suggested that a growing economy brings its own challenges. These come in the form of “heightened expectations”. His speech to a conference on industrial relations last Thursday argued that a successor agreement to the Lansdowne Road pay deal is the best way to manage those expectations.
Before looking at that substantive matter, it is worth noting that the minister spoke a lot about fairness for public sector workers. However, he never mentioned the private sector, which pays for most of the public pay bill. Nor was there mention that 40pc of the increase in general government spending this year is budgeted to go on an increased pay bill, which suggests that the public sector is already getting more than its fair share of the growing pie.
But even if matters of fairness are left to one side, the notion that collective agreements, such as Lansdowne Road, deliver the best results is questionable. Collective agreements only work well if all relevant parties sign up and adhere to what has been agreed. That clearly is not how things have played out in recent years.
If the practice of such agreements has been mixed, there is perhaps even greater reason to question the theory of allocating resources collectively, rather than targeting them by having talks with different groups separately. In other words, there is a strong case for more decentralised negotiations, with bigger additional resource allocations for areas of the public sector where they are most needed.
If, for instance, nurses cannot be recruited at existing pay levels and if there is hard evidence that significant numbers are leaving to work abroad or in other professions, then there is a case for increasing their pay by more than in sectors where recruitment and retention is unproblematic.
Politicians have a preference for centralised deals because they allow what is always a major challenge — the setting of public sector pay — to be dealt with in one fell swoop. Decentralised bargaining is usually trickier and always more time consuming. What should determine how these talks are structured is what will give the best deal for the taxpayer and for users of public services, not what makes life easier for politicians.
Within weeks, the newly established Public Pay Commission will issue its first report. It has been tasked with producing rigorously researched evidence of pay patterns, comparisons and trends. It has not had a great deal of time to do its work and those appointed to it, with the exception of one economist, do not have research expertise.
If it does its job properly, it will highlight some of the anomalies in the system and representatives of those who do particularly well will howl. If it finds significant anomalies, the case for more decentralised pay talks may well be strengthened. There is a lot riding on the commission’s findings.