Upbeat IBEC says wage hikes won't offset cost of oil

Raising wages to offset higher oil prices would be short-sighted and detrimental, employers' organisation IBEC has warned, writes Edward Power.

The rising cost of oil - which reached a 14-year high last month - will inevitably have a detrimental impact on Irish living standards, an effect that cannot be countered by paying workers more, said Mr David Croughan, IBEC chief economist.

He said: "External events such as a change in oil prices should not impact on internal wage developments. A rise in oil prices does reduce our relative living standards in the world as income is transferred from oil consuming countries to oil producing countries.

"The economy is worse off and we have to accept that fact."

But the organisation was broadly upbeat about the economy's prospects in the wake of the 5.5 per cent national pay agreement struck last week, describing it as "at about a level that would stabilise competitiveness".

In its Quarterly Economic Trends bulletin, IBEC urged the Government to ease cost pressures on businesses by indexing tax bands and tax credits to the rate of wage inflation. The decision to abandon the policy two years ago has given rise to "fiscal drag", said IBEC.

Mr Croughan predicted GNP growth in 2004 of 3.5 per cent - and possibly as high as 4 per cent - assuming the global economy remains relatively benign.

He said the number at work will increase by 27,000 for 2004, resulting in a 4.7 per cent jobless rate.

IBEC was anxious that steps be taken to combat increases in local authority charges.

The organisation questioned whether the level of fiscal rigour exerted by multinational companies was being applied by councils.

Mr Brian Geoghegan, IBEC director, said: "In the May consumer price index, there was a 25 per cent hike in the price of water supply, refuse and miscellaneous services.

"The inefficient delivery of local authority services must be tackled and must not simply be offset by easy price hikes, borne mainly by businesses," he said.

Spending on infrastructure should also be raised, as this would boost the Republic's attractiveness to investors, added Mr Geoghegan.

He said: "Government should continue to focus on major priority infrastructure projects carried out cost-effectively and within bounds of capacity constraints."

Further taxing of energy products would be a "total folly" and damaging to the economy, cautioned IBEC.

"The Government has a strong role to play in maintaining a favourable domestic climate," it said.

"We know that the impact of oil price hikes will increase inflation close to 3 per cent by the end of the year before it subsides again in the following year.

"It would be total folly to add any further taxation to energy products in the next budget."