Real wages decline ramps up pressure on Government ahead of budget

Organisation for Economic Co-operation and Development (OECD) data showing Irish workers experienced a marked decline in living standards last year as inflation drove down real wages couldn’t come at a worse time for Government.

Coalition parties are already trying to manage budgetary expectations against a backdrop of surging tax revenues; the likelihood of a €10 billion budget surplus this year; and with last year’s €11 billion budget giveaway fresh in the minds of taxpayers.

The summary document for the Government’s Stability Programme Update last week made no mention of the €10 billion budget surplus, emphasising instead the Government was likely to run a deficit of €1.8 billion if windfall corporation tax receipts are removed, a reflection perhaps of this expectations management.

Telling workers to effectively suck up what you hope will be a temporary decline in living standards while simultaneously saving excess corporation tax receipts is what economists would advise. But selling this policy politically is an entirely different matter, particularly with the current squeeze on households from higher energy bills, soaring food prices and rising mortgage payments.

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Public sector unions, who already feel they got a raw deal in the last pay round, will also be clamouring for further compensation. The country’s largest teachers’ union has called for an extra payment to compensate for higher living costs in Dublin and other urban areas.

[ Irish workers experience sharp dip in living standards as inflation erodes pay rises - OECD ]

Inflation will have to come down pretty quickly for Minister for Finance Michael McGrath to justify keeping a tight rein on the purse strings in October’s budget.

And while the headline rate of price growth is falling, so-called core or underlying inflation, which strips out volatile energy and food prices, isn’t. This is the big worry inside the European Central Bank, which was caught out by the initial explosion in prices in 2021 and which can’t afford to be on the wrong side of the inflation equation again.

ECB rate setters fear the second-round effects of inflation – driven by workers demanding higher wages to compensate for falling living standards – will embed inflation in the euro zone economy.

Another factor is fiscal policy, in other words government supports for cash-strapped households.

On a visit to Dublin last week, Dutch central bank chief Klaas Knot warned that fiscal policy was “doing too much at the moment” and would need to be withdrawn before it becomes a driver of inflation itself.

The OECD’s Taxing Wages report for 2022, published on Tuesday, found that while average wages here rose by nearly 5 per cent to €54,649 last year (a positive for workers in normal times), real earnings still fell because of the high rate of inflation.

With inflation averaging 8.4 per cent in 2022, real wages were estimated to have decreased by 3.3 per cent, representing one of the biggest erosion in living standards here since the financial crisis.

With the average amount of income tax paid rising by 0.8 per cent, Irish workers also ended up paying more tax on lower real income in what the OECD described as a “double blow for workers”.

The agency was merely putting into numbers what we’ve all been feeling, a squeeze.