Belfast Telegraph

Back to future for a lesson in economic sense

By Brendan Keenan

The past three columns in this series looked at the start of each decade since 1970, with the benefit of knowing what actually happened.

This one really was written in July 2000. The old problems are again to the fore, as irreconcilable as ever. There was no hint at all — quite the reverse — that the country was about to embark on the credit and spending splurge of all time. The economy seemed over-stretched already. Let's hope current predictions for the coming decade prove equally wide of the mark.

There are few words more irritating than ‘I told you so' and few that are harder to resist saying. Well, we told you so. This columnist, and others, warned that the current national wage agreement was unsuited to the conditions of Ireland in 2000. What few of us expected was that we would be proved right almost before the ink had dried.

We concluded that the Programme for Prosperity and Fairness (PPF) was virtually the exact opposite of what was required. It repeated the old formula of moderate (sort of) wage rises paid across the board at national level, along with tax cuts that enhanced take-home pay.

It was a formula that worked with some success in making the traded sector more competitive and bringing unemployment down from peaks of 15% in the 1980s. No one explained how the same formula was supposed to be relevant when the economy was at full employment and rapidly running short of labour and public services.

It may turn out to be a bit of a blessing in the end that inflation has provoked a crisis so soon in the life of the PPF. That was by no means inevitable. Most of the inflation is still due to external factors (mainly the price of oil) and to Mr McCreevy's tobacco taxes, based on his usual sunny optimism that this time inflation would remain subdued over the course of the year but inflation seems certain to peak above 6.5%, maybe 7% before falling back.

Mr McCreevy, in his Budget speech, happily conceded that his tobacco duties would add 0.75% to the rate but sure, that was only going to be 2.25%, so that was all right. Now we will be doing well to come in much below 5%.

The Budget and the PPF were two sides of the same coin. Estimates at the time were that the Budget measures would add as much as 4.5% to household disposable income. It was also bound to give another kick to the housing market. Davy Stockbrokers reckons that every 1% rise in disposable income adds more than 1.5% to house prices.

If it was the wrong Budget, it must have been the wrong deal. A Programme for Full Employment deal would have had a more modest basic pay rise (although not that much more modest), but more generous additions based on profits, productivity, flexibility and, crucially, the value of the currency — to be negotiated by individual firms. Inflation should never count in the reckoning.

Most of the private sector is paying above the terms anyway, with estimates of at least 8% growth in earnings. However, 80% of the workers covered by the deal are in the public sector, which is where most of the trouble lies.

The terms of the deal for them are closer to 8% than 5.5%, when increments and special deals are included. But it might have been possible to build in more in the way of gain-sharing, where real savings are made through cost and staff reductions.

Tax cuts, however, would have had to be deferred. It is an abiding mystery why the trade unions are so keen on a system that transfers labour costs from employers to taxpayers (their members).

One can see why they do not want the PPF to unravel, but another round of tax cuts (this time indirect) and public subsidies is only compounding the error.

The policy seems to be to try to hold off the hordes until external inflation comes down, and the overall figure with it.

If that means they will then plough on with the same formula in the next Budget, perhaps we should start cheering for OPEC.

The PPF is a huge interference in the labour market at a time when full employment makes it vital that the market should work by bringing demand for workers and their supply into better balance. Previous deals also interfered with the market, of course, but with a clearly defined purpose on which everyone agreed. No one seems to know what was the purpose of the PPF.

There was a lot of guff this week about moving to the new economy, and the old economy being priced out. All very well, but it leaves out the single biggest factor in the over-stretching of the actual economy. That was not the Budget, nor the PPF, nor oil, but the 12% fall in the currency's real value over the past three years. Only if that reverses will we be able to assess how much trouble we are in.

Belfast Telegraph