Shaky Foundations: Neil McDonnell Warns of Economic Stability at Risk

“Finance Minister Michael McGrath Faces Challenges in Managing Departmental Expectations Amidst Plentiful Budget Resources”

Finance Minister Michael McGrath is facing the challenge of managing departmental expectations as he prepares for the budget. While it may be difficult to sympathize with a minister dealing with an abundance of riches, the reality is that it is more challenging to make decisions when there is plenty of money available. Isme, in its pre-budget submission, called for significant tax and social welfare reform, as well as proposing additional income for the Exchequer through PRSI and USC simplification measures. However, based on the papers published by the Tax Strategy Group and leaks from Merrion Street, it seems that major reforms may not be implemented this year.

Warren Buffett once said, “be fearful when others are greedy, and greedy when others are fearful.” This quote highlights the importance of seizing the opportunity for tax and social protection system reforms when the economy is not under pressure. If we are not willing or able to make bold changes in 2023, when will we be ready?

One characteristic of the Irish economy is its abundance of cash, although economists agree that this is not sustainable. Additionally, the economy is at full employment, with 2.6 million people employed and an unemployment rate of 3.8%. This is the lowest unemployment rate since 2001, during the Celtic Tiger era. However, despite this positive situation, there are structural problems such as the lack of housing, infrastructure, and stubborn inflation.

Around 2.5% of the labor force in Ireland is unable, unfit, or unwilling to enter employment. With such a low unemployment rate, employers are competing for talent from a pool that represents just above one percent of the total workforce. This situation has led to wage inflation and high job turnover. One solution to this problem is to import labor from other countries, but this comes with political and social costs.

In this context, the Low Pay Commission is recommending a 12.4% increase in the national minimum wage (NMW), raising it to €12.70. Isme has been criticized for its stance on the NMW setting mechanism, but the organization believes it does not adequately address the needs of workers or the cost of living issue. The belief that an additional €54.60 per week for NMW workers will solve their housing or living expenses is a fundamental misunderstanding of the purpose of a national minimum wage. The NMW is intended to establish a minimum rate of pay that employers cannot go below, not to ensure recipients can afford mortgages, cars, or holidays. To truly assist workers with their cost of living, we need to address our domestic cost base.

Increasing the NMW does not only affect those earning at that level. Most workers earning below €30,000 per annum have their income benchmarked against the NMW. When the NMW is raised by statute, it does not mean that workers’ earnings will increase by the same amount. If employers are unable to pass on the increase to customers, they will have to find other ways to economize. In sectors like services and retail, this often means reducing workers’ hours or increasing productivity. We are already witnessing the replacement of workers with self-scan checkouts in the retail sector.

A report published by the Economic and Social Research Institute (ESRI) last year examined the impact of a 10% increase in the NMW from 2016 to 2018. It found that workers in the accommodation, food, and manufacturing sectors experienced a reduction in worked hours of 2.5 to 3 hours per week. Therefore, a 12.4% increase in one year will have an even more significant impact on workers.