Wage growth is good for society, Paschal Donohoe says

Minister also warns about significant economic risks ahead

 Minister for Finance and Public Expenditure and Reform, Paschal Donohoe  says ‘people need to see that progress is being achieved and incomes are improving’. Photograph: Gareth Chaney Collins

Minister for Finance and Public Expenditure and Reform, Paschal Donohoe says ‘people need to see that progress is being achieved and incomes are improving’. Photograph: Gareth Chaney Collins

 

Wages should increase in “a controlled and sustainable’’ manner, Minister for Finance and Public Expenditure and Reform Paschal Donohoe has said.

He said lower wage growth could add to disinflation pressures, implying higher real interest rates, higher public and private debt levels, and lower domestic demand.

“Wage growth is good for society,’’ Mr Donohoe added. “People need to see that progress is being achieved and incomes are improving.’’

The Minister was speaking in the Dáil on Thursday about the annual review of the Financial Emergency Measures in the Public Interest (FEMPI) underpinning reductions in public service pay and pensions since 2009.

Mr Donohoe warned that while recent economic data and forecasts were positive, significant risks remained.

He said the IMF had found that the “outlook remains positive, but with substantial, mainly externally driven, downside risks”.

Closer to home, he said, the Fiscal Advisory Council, the independent body established as part of the reformed budgetary architecture, was more explicit. It concluded more persistent downward risks were visible in the medium term, he added.

Principal among those was the possibility that the Brexit outcome could lead to a more sustained negative impact on Irish economic growth than was currently estimated, he said.

Additional risks were posed by the appropriateness of wider euro area monetary policy for Ireland over the medium term, as well as by a variety of potential external demand and exchange rate shocks, said Mr Donohoe.

He said changes in US and EU policies, particularly relating to corporation tax, could also negatively impact foreign direct investment flowing into Ireland.

Mr Donohoe said the department’s forecasts now assumed a hard Brexit was the most likely outcome of negotiations.

Over the long run, in the worst case scenario, Irish GDP could be almost 4 per cent below what it otherwise would have been in a no-Brexit scenario, he added.