Shaking off 'fetish' of cuts critical - Honohan

THE GOVERNOR of the Central Bank has said it is important to shake off the “fetish” of opposing wage cuts.

In his first public comments since being appointed to his new role, Patrick Honohan said that if Irish wage rates are not returned to competitive levels, the high numbers unemployed would only be reduced through emigration.

“Retaining wage competitiveness to ensure maximum employment in these difficult times is surely a key priority, even if it means cuts in nominal wage rates,” he said.

He was opening a conference on the forthcoming budget organised by the Economic and Social Research Institute (ESRI) and the Foundation for Fiscal Studies, during which ESRI economists also supported wage cuts.

With prices falling, it was “important to shake off the fetish of no nominal cuts” to wages, Mr Honohan said.

The Irish Congress of Trade Unions (Ictu), in a subsequent press release, said wage cuts “would be deflationary and would simply make matters worse”.

“In the crisis, we must work constructively together to protect jobs, the low paid, middle-income and vulnerable workers and citizens. That the ESRI singles out only wage-earners for cuts is telling,” said Ictu economist Paul Sweeney. “Where are their recommendations in relation to the wealthy paying their share?”

Mr Honohan said that, when real wages move ahead of those of our competitors, the result is unemployment.

“There’s no point in getting distracted in this discussion by pointing out inequities in the current structure of wages and salaries or remuneration generally. Attempts to fix such inequities and anomalies do not need to get in the way of ensuring that the average real wage structure does not move out of line with that of the indirect competitors of workers in Ireland, namely workers abroad.”

He said that falling prices meant that real wages, and the real value of transfer payments, such as welfare payments, were increasing.

On public spending he said there was a need for cutbacks to reverse the expansion in spending that occurred during the mid-2000s. Falling consumer prices meant the real value of transfer payments have increased, worsening the budget deficit and giving an “uncovenanted bonus to some”.

He said the Government had embarked on a credible path for reducing its borrowing requirement, “the commitment to which I am glad to see is reconfirmed in the newly-agreed Programme for Government”.

The unexpectedly deep recession would cause a significant increase in net public debt, even before making allowance for the recapitalisation of the banks.

However, a large debt would have to be serviced. Moreover, the higher the debt, the greater would be the economic drag. “That’s an important reason for minimising the accumulated debt, for example by sticking to the announced convergence path.”

He said it would not be wise to “skimp on the restructuring” of the banks as they needed adequate capital if the economy was to grow.

Public spending and taxation needed to be restored to the shares of gross national product (GNP) that prevailed in the years running up to the turn of the millennium “when the economy was growing along a sustainable path”.

“When external observers ask me whether the Irish economy needs to be reinvented, this therefore is my answer: not reinvented, merely restored to where it was just a short while ago.”

Recent tax increases represented no more than a return to the rates that prevailed within the past decade when the economy was growing strongly.