Firms under pressure to boost pay and conditions

Chair Seamus Coffey and the Irish Fiscal Advisory Council, the budget watchdog, testified before the Oversight Committee in the Oireachtas earlier this week.

Firms under pressure to boost pay and conditions

Chair Seamus Coffey and the Irish Fiscal Advisory Council, the budget watchdog, testified before the Oversight Committee in the Oireachtas earlier this week. At the same time, the Government issued the November exchequer returns - its latest tax and spend figures for the month.

They showed it had a surplus of €1.9bn in the first 11 months of the year and is now on track to deliver the first budget surplus in over a decade.

However, there should be no accolades: It is wholly appropriate that a budget surplus should be delivered at a time when the economy is approaching full potential.

Running a deficit at this stage of the economic cycle would not represent prudent fiscal management and could be considered reckless.

The challenge, now, is to ensure that a surplus situation is maintained over the next couple of years at least, and longer if the economy continues to deliver growth close to or above potential.

The exchequer returns to the end of November will have made for positive reading for the Minister for Finance, but he should not get carried away.

The improvement in the public finances is due to tax revenue buoyancy rather than any serious efforts to control public expenditure.

The budget in October was a high-spend offering and as per usual, health expenditure in particular continues to exceed expectations. This trend is likely to continue in the context of an economy where an ageing population will put increasing pressure on a health service that is failing to deliver an acceptable level of health service at the moment.

In the year to November, the exchequer collected €51.4bn in taxation, which is €3.6bn, or 7.6%, ahead of the same period last year.

Corporation tax receipts are driving this phenomenally strong tax revenue buoyancy. A total of €9.4bn has been collected from the business sector so far this year and receipts are now running €1.5bn ahead of what had been expected.

The problem is that we cannot be certain about how much of this is sustainable or is resulting from a once-off adjustment reflecting changes to the corporation tax regime.

Prudence should apply and Government should avoid the pressures and temptation to drive public expenditure forward on the basis of such tax revenue buoyancy from the corporate sector.

In the first half of the 2000s we made the mistake of driving expenditure forward on the back of transitory tax revenue buoyancy from construction and related activities.

We should never forget where that ended.

On the income tax front, the exchequer collected €19.5bn, which is €1.2bn ahead of the equivalent period last year and this tax head accounted for almost 38% of total tax revenues.

The burden on tax-paying workers is still very onerous, but unfortunately is unlikely to change very much, given the obsession with spending on public services, regardless of the outcomes.

The other piece of good news, this week, was a further decline in unemployment.

In the year to November, the unemployed total declined by 23,700 to reach 127,600, which is equivalent to 5.3% of the labour force.

Anecdotally it is now becoming increasingly obvious that labour shortages are starting to become a serious constraint on future growth.

Recruitment and retention is likely to be the big challenge for many employers in 2019.

Employers will have to look at improving benefits for workers and will need to become more flexible in how the workforce is managed. Issues such as home working and flexi-work will have to be explored where possible.

A positive that might flow out of this situation is that many employers will be forced to adopt a more open approach to hiring people with disability, and in making sure that the structure of work is sufficiently flexible to accommodate such workers.

Socially and economically, this would be very positive.

The cost and availability of accommodation is obviously a major challenge for employers and employees, and this should be a driver of more flexible working practices.

One way or another, the dynamics of the labour market will be one of the most interesting things to watch during 2019.

We could have worse problems, as we did back in 2009.

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