Notes on the Front

More than 100,000 on the streets in Dublin; if only we had an economic democracy to match our political democracy. Even so, the Sunday Business Post editorial couldn’t help repeating the tired mantra – ‘they just don’t get it’. Fortunately, everyone on that march did ‘get it’. And when Patricia McKeown, ICTU’s President, called for people to use their vote – well, it could well be the first time that ICTU has called on trade unionists to change ‘the partners’, so to speak. Politics is taking an interesting turn.

 Prior to the march, the Labour Party held a well-attended economics seminar. And sure enough, there was the ubiquitous Dr. Alan Ahearne, reciting his ‘real devaluation’stanzas to all in earshot. Mind you, it wasn’t well received at this venue but with the construction employers demanding a 10 percent wage cut, with the Government ripping up its own agreement and implementing, in some cases quite viciously, wage cuts which disproportionately affect lower and average income earners, with Irisheconomy.ie talking up its benefits – well, wage cuts are all the rage.

The real devaluation argument rests on the fact that we can’t reduce our cost base through currency devaluation, whereby our exports would become cheaper. Therefore, we must find some other way to lower our prices and,so, our costs. And, of course, this means lowering our wages.

Of course, lowering general wage levels won’t have much impact on our actual cost base. I’ve gone through the numbers, so has Proinsias Breathnach. And at Labour’s seminar, ICTU’s Paul Sweeney pretty much trashed the argument. So I don’t intend to rehash all this. But it does raise a related issue – one which impacts on the general economic debate.

Economists love modelling. They model everything for good reason. You may propose A to achieve B but it can also impact on C and D which can come up and bite B on the backside. Economies are complex creatures. We can’t be sure that the thing we are proposing will actually achieve the thing we want (at it’s most extreme, we can experience ‘perverse’ results whereby what we want to happen not only does it, but actually does the opposite). So let’s take this across-the-board ‘real devaluation’ a few steps beyond its impact on wages and see what else flows from it.

First, if you cut wages you reduce tax revenue: income tax, social insurance contributions, Health Contribution Levy, Income Levy, and spending taxes (VAT, excise, etc.). It is difficult to estimate the amount of loss – different sets of income earners are exempt from the different set of taxes. For instance, a third of income earners fall below the income tax threshold; cuts below €26,000 would have no impact on the 2 percent Health Contributions Levy, cuts above the €50,000 threshold would have no impact on social insurance (apart from self-employed). Further, we shouldn’t expect a big rush of self-employed and proprietary directors to unilaterally cut their incomes.

Still, the impact on the various taxes would not be insignificant. So the question is: how much would this further widen the fiscal deficit? In all the argument on ‘real devaluation’ I’ve never seen this issue considered. With Goodbody predicting that the General Government Deficit will be 25 percent higher than Government estimates this year, this is surely a valid question. My god, what would the bond markets think of a policy that reduces tax revenue even further.

Second, cutting wages will lead to lower disposable income. This will, without doubt, impact on consumption. This will have three effects:

• Less spending means less indirect tax revenue (VAT, excise), to accompany the drop in other taxes.
• Less spending means less money in the hands of businesses, thus hitting corporate tax revenue.
• Most concerning, less spending, less economic activity, will result in businesses short-timing, cutting jobs, maybe even going out of business.

With Goodbody predicting that private consumption will fall by seven percent (Government estimates put it at less than three percent), how much more would a wage cut add to this downward cycle.

What a wonderful proposal – this real devaluation gig. While its impact on our cost base will be limited, it will cut all categories of tax, drive up social welfare costs, will add to the unemployment rolls, and further depress economic activity. Just what the doctor ordered.

But, of course, most of those who propose across-the-board wage cuts have a ready answer: cut government spending even more, raise even more taxes; never mind this will drive us down further still – we’re on our roller-coaster ride with absolutely no incline.

Proponents of real devaluation manage to add new circles hell (Dante contented himself with nine), taking us even further from the spheres of economic light.

And they ain't even good poets.