David McWilliams: How Ireland became the most expensive economy in Europe

Incontinence is rarely the subject of economic columns, but let’s make an exception today. As the latest RTÉ scandal rumbled on this week, the concept of fiscal incontinence, otherwise known as pissing money away, sprang to mind.

This type of financial incontinence afflicts public bodies spending other people’s money. Time and again, public institutions find it impossible to control their finances, leaking all over the place. While middle-aged men might be inclined to suffer urinary tract disorders, middle-aged institutions suffer from what we might term a pecuniary tract disorder. RTÉ is one such middle-aged institution, but it’s far from the only one.

The consequences of this fiscal incontinence are manifested in general price increases because the Government is such a huge buyer in the economy that it is in effect setting the floor on domestic inflation. If the Government can’t control its costs, these increases in costs spill over into the rest of the economy, driving up inflation, resulting in Ireland being the most expensive country in the EU. When a country’s cost base goes out of control, we arrive at a bizarre place where a country can look rich but its people feel poor, where wages are objectively high but people feel subjectively strapped.

Before we examine how Ireland became the most expensive economy in Europe and why this is profoundly damaging to our prospects as a small open trading country, let’s take a small detour into economic theory to explain how inflation operates in a small economy.

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Typically for trading economies, the most important price is the exchange rate, as it sets the price of imports and exports. When a small economy has its own currency and is growing, demand is surging, driving up inflation. In such conditions, the rate of interest should rise. This increase in the rate of interest should cause the exchange rate to rise. As the exchange rate rises, the prices of imports should fall, bringing down the rate of inflation, as small countries import lots of things. This is how the economy adjusts when the country has its own currency.

When the country abandons its independent currency, as we did when we joined the euro, the key determinant of local inflation is government spending and government policy. Without the discipline of an independent currency, bottlenecks will have an amplified impact on inflation and the cost of living, and government incontinence will leak into all aspects of society. What we are seeing in the RTÉ salary-sphere is an important microcosm that helps explain what is happening in much of the general economy.

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Look at the salaries ’fessed up to this week by presenter after presenter: Ryan Tubridy, €515,000; Joe Duffy, €351,000; Claire Byrne, €280,000; Miriam O’Callaghan, €263,500; Ray D’Arcy, €250,000; Brendan O’Connor, €245,004; and Bryan Dobson, €209,282. Now compare them to salaries in Denmark, also an expensive country and one with a similar population. We see a massive gulf between what the Irish and Danish public broadcasters earn. In Denmark, the average salary range is between 511,435 krone and 899,624 krone, or €68,665 to €120,777.

Wherever the Government is involved, inflation and costs have been far greater than areas of the economy where the State has no or little role

We can see this Government-led inflation throughout the economy and, in the absence of an exchange rate, the only way the State can bring down general costs is by keeping its own house in order. In RTÉ that is obviously not the case, but it is not alone.

In trying to understand how Ireland became the most expensive country in Europe, we need to look at the evolution of inflation since 2001, the last year we used the punt, because Ireland’s cost-of-living story is the story of the euro and how the State failed to appreciate that when a country is in a currency union, government cost-control is critical. Any increases in government spending and salaries should at least be linked to productivity or a noticeable improvement in public services provided to the citizen. Has this been the case? Let’s leave that answer to you.

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When we break down inflation over the past 20 years a distinct pattern emerges: wherever the Government is involved, inflation and costs have been far greater than areas of the economy where the State has no or little role. Fiscal incontinence is affecting us all. In the past 20 years, aggregate CPI index has increased by 48.4 per cent, or around 2.2 per cent per annum, but this masks massive cost increases in certain sectors.

The largest upswings in prices has been seen in:

• Housing, water, electricity, gas and other fuels (+159 per cent since Dec 2001, or about +7.2 per cent per annum)
• Education (+121 per cent, +5.5 per cent per annum)
• Alcoholic beverages and tobacco (+100 per cent, +4.5 per cent per annum)
• Health (+78 per cent, +3.5 per cent per annum)

Three of these four categories – housing/energy, health and education – could be fairly seen as core government competencies, while price increases in booze and fags are completely related to taxation. Without tax, booze and fag prices would have fallen over the past two decades.

And while some of the subcomponents of these categories (namely the energy components) have seen sizeable jumps since the onset of the war in Ukraine, it’s worth noting that these categories had still seen the largest price increases over the past few decades, before the war or pandemic. Given that general prices have risen by 48 per cent in 20 years, the price rises in housing and utilities (159 per cent), health (78 per cent) and education (121 per cent) are all in areas in which the Government is the main player or biggest influence.

In contrast, those areas where the State has no involvement – such as clothing, footwear, furniture, household appliances and consumer electronics – show that Irish prices are in line with or slightly lower than EU averages.

The RTÉ salaries are just the celebrity end of the inflation wedge. We have a State sector that can’t control itself

Ireland has the highest housing costs in the EU for the period 2010-2021, according to a recent report from Eurostat. Ireland stands at 94 per cent above the EU average when it comes to housing costs. In certain areas, we are pissing the money up against the wall due to non-existent controls.

Most recently, the HSE announced it was on its way to running a €1.6 billion deficit in the current year, despite receiving €24 billion in the 2023 budget. A quick look at transport fares, controlled by the State, reveals that Ireland is among the most expensive worldwide. On average, Dubliners are paying 5 per cent of their income on transport, only seen in vast cities such as Istanbul, São Paulo and London.

Fiscal incontinence is driving inflation. The RTÉ salaries are just the celebrity end of the inflation wedge. We have a State sector that can’t control itself. This then leaks into the rest of the economy, pushing up costs. Wages must then adjust upwards so that people can live. Price gouging becomes the norm. It is not that the private sector is blameless, but the State must lead by example. All the while, Irish small businesses can’t compete and are under more and more pressure. The only businesses that can expand here are those with huge tax subsidies – the large multinationals.

Like those RTÉ salaries, the situation is not tenable. It’s time for a reset.