Friday, 12 February 2010

Falling prices and low-income households

"Price deflation for low income families will be experienced at the lower rate of 2.2% and will do little to compensate for the real drop in incomes produced by Budget 2010. Indeed for many families household income will reduce further as a consequence of the increased costs of education, energy, health and transport.

In this context any change to either the Minimum Wage or pay rates agreed through Registered Employment Agreements will have the effect increasing hardship for those individuals and families currently living on or below the Governments income poverty line"

You can read the rest of Eoin O'Broin's post on Politico here.


An Saoi said...


I was in the middle of preparing a post on the most recent CPI figures myself, when I read your piece. I accept many of the core points made by you but would add that the publication of January's inflation figures suggests that there is no sign that the trend of prices falling is close to ending. The lower than previous decline is the working out of extraordinary fall over the three months
November 2008 to January 2009. The CPI declined by 3.8% in those three months alone. Without those three months the decline is much lower.

The CPI has however returned to levels last seen in January 2007 and the HICP measurement is at the level of March 2007. Further falls in energy prices and falls in food will see prices continue to decline into the future.

However we have still not worked out our high inflation of 2000 onwards when compared with the larger core Euro countries such as Germany, France & Italy. Pay plays a much smaller role in Irish costs than many are willing to acccept. Michael Taft & I have pointed out here on mumerous different contexts that commercial rents are a bigger issue and a fall of up to 50% is required to bring them back into a reasonable relationship to the market.

I would also add that gross profit margins in the Irish supermarket multiples are rumoured to be
running at between 25% and 30%, with net margins of perhaps half that. These figures are extraordinary in a European context and show the very high levels of profit made in Ireland by the mostly foreign owners. We cannot be sure of the exact margins as none of these companies publish their accounts.

However margins at this level show there is plenty of room to cut prices further without touching the minimum wage.

Paul Hunt said...

I agree there "is plenty of room to cut prices without touching the minimum wage", but how would you secure these price cuts?

Rory O'Farrell said...

Slashing rents would encourage firm entry (in retail, accountancy, dental practice etc) and boost competition. I would slash rents by:

1) banning upward only rent review clauses
2) local authorities should charge double rates on vacant premises (rather than half like Dublin City Council does). This would force landlords to rent out their unit at whatever rent they can get.

For government controlled prices reductions can come from the government.

Oliver Vandt said...

@An Saoi
That is yet another defect of the government's banking/NAMA policy. For several years now the government has been doing all it can to prop up property prices and has therefore been propping up rents - even though this is the exact opposite of what is needed.

As a result they have ended up cutting the wages of the lowest paid while rigging the property market to save megadevelopers living on Shrewbury road.

If only we had a left wing party with wide appeal that demanded this discredited government hold an election.

An Saoi said...

Paul Hunt - Reducing rents could be done simply by a short piece of legislation allowing all tenants caught up in a long-term lease a temporary break clause. I have covered this point in previous posts. If the landlord felt he could get an equal or similar rent from another tenant, he would not budge and the tenant could walk away. In the current climate however most landlords would cut rents to keep good tenants, particularly with the threat that they would walk away.

In relation to the multiples, forcing them to publish their Irish accounts would be a good enough start. The Competition Authority would be far better off chasing the multiples than "investigating" Dublin City Council's waste strategy. All use unlimited companies or branch type structures to hide their turnover and profit margins. However the Chief of the Competition Authority prefers to spend time grandstanding rather than taking on serious issues.

Paul Hunt said...

@An Saoi,

Many thanks for your response - and also to Rory. I was very pleased to note your focus on the requirement to address the cumulative high inflation here when compared to that in the core Eurozone countries. I suppose my concern is that selective targetting - e.g., property rents and price-gouging by retail multiples - tends to provoke defensiveness and confrontation, may not take account of other interacting factors and impacts and is likely to prove counter-productive and divisive.

Some greater honesty about the inter-locking impact on final prices of costs and service provision in the state, semi-state and private sheltered sectors is likely to generate more coherent policy initiatives that will resonate with citizens - and, crucially, will be in their interests. Rooting out innefficiencies and excessive costs across the board is the most effective means of increasing real pay levels and boosting economic activity. And I don't think it's helpful to attack the seriously underempowered and resourced Competition Authority. It would be better to look at how DG COMP of the European Commission puts the "fear of god" into the biggest international businesses.

But while the Left seeks, at best, to ignore or, at worst, to defend the indefensible in the state and semi-state sectors all this is "saothar in aisce".

Rory O'Farrell said...

I have two main problems with the mandate of the Competition Authority:

1) It focuses only on consumer prices, so does not address monopoly suppliers to businesses

2) They don't address local monopolies. For example if one person owns most of the night clubs in a city, (but are a small player nationally).

I think it would be useful to look at these issues too, but they are more medium term, and would require greater resources for the Competition Authority.

An Saoi said...

@ Paul Hunt The problem in relation to many State/Municipally provided services is a clear lack of a direct link between the cost of the provision of the whole service and the payment for it. This can be seen most directly in relation to water and to a lesser extent waste issues.

The sourcing, treating, transporting and delivering of water is taken for granted as is the disposal of waste water. It happens as if by magic and the public only comment when it does not happen smoothly. Now I am personally in favour of charging for such a service so as the public can see and object if they are not happy with the service.

Waste disposal is another area. The private sector companies want the discussion to be primarily around waste collection and recycling, however keeping an area clean is about far more than simply regular collection of household waste. The charges made by Dublin City Council for example cover a much wider range of services, including street cleaning, special collections etc.

My personal bugbear is education, perhaps because I am a member of a school board again for the fourth time. Eoin in his original post noted that CPI in this area have increased substantially, which is true. One key problem is that schools have been left under resourced because all additional money has gone to the teachers for effectively less work. Secondary teachers earn more on average than those at 3rd Level. Schools have no option but to balance their books with ever increasing charges on parents.

Paul Hunt said...


"useful to look at" and "medium term"! You sound like a Government spokesperson. I realise there is no obligation on you (or on others) to engage, but you ignore the thrust of my comment. Par for the course on this blog. So be it.

paul sweeney said...

On the point on the profits made by the large supermarkets by An Saoi, it is time that the avoidance of publication of annual accounts by "public interest companies" was terminated. They and major companies which get big public contracts eg accountancy firms, law firms and other professional firms or dominant firms should be forced, in this "era of transparency and accountability", to publish accounts. Had the property developers been forced to publish accounts we might have had a longer period of warning on the crash. Some supermarkets did publish and stopped when others ceased. After the crash, we must tighten up the rules of governance. Will we?

Paul Hunt said...

@An Saoi,

Many thanks for your considered response. Your willingness to consider costs of service provision in the state and semi-state sectors is very welcome. But it is clear that the union movement is committed to operate within the status quo and to defend nominal pay levels. Focusing on excesses and non-transparency in the private sheltered sectors is a part of this strategy - as evidenced by Paul Sweeney's subsequent comment. All this is entirely understandable, but, as today's public opinion poll in the Sunday Indo shows, an overwhelming majority of the Irish people are simply fed up with these political, business and union games. Those who exercise some measure of authority and influence in these areas are sitting on a powder keg. It's not a good time to be on the wrong side of history. The people are crying out for honesty and leadership from those exercise authority and influence.

An Saoi said...

@ the two Pauls - Yes, hiding behind various structures or opaqueness is normally a sign of tax haven(the Revenue Commissioners will tell you that Ireland is not a tax haven, but I think we know better), which certain businesses trading in the home economy have also used.

I am surprised that no one has latched on to the margins in the Irish supermarket trade. Even the German discounters must not be able to believe their luck here. The so called discounters have margins that Sainsbury's would kill for.

In relation to State induced costs, it is clear that there are certain areas remain massively in need of restructuring. The particular problems are worst in those areas where there is a heavily State subsidised private sector, namely Health & Education.

The €100M spent on the salaries of teachers in private schools would be far better spent increasing the capitation fees paid to all schools. Private education at 2nd level involves the Protestant schools using religion to hide privilege and the Jesuits hiding behind the Prods. The provision of massive capital grants to the South-side private schools by Mary Hanafin was a scandal and the failure to bring the Charities' Act into force is worse.

However work practices in education, particularly at 2nd level, are unlike anything else in the private & public sector.

Also the Health service carries a massive boulder on its back of a private sector, which drips tax and other subsidies. You have a 20% tax subsidy on private health insurance, capital allowance schemes, sweetheart arrangements over use of facilities and the National Treatment scheme. Allowing employed doctors to have private practices is corrupt. Imagine if Tax Inspectors moonlighted for accountancy firms!!

I have no problems with standalone private sectors, but let them be completely independent.

Paul H what is required in relation to the Indo Group is an economic analysis of the financial rape committed by the O'Reilly family by dumping it full of debt to fund dividends. Before Shane Ross or any other apologist for the O'Reilly family is allowed to speak in the media , they should be challenged for their views on such issues. Mr. Ross' next book should be on how the Independent has been financially destroyed for the short-term benefit of the ego of one family.

Oliver Vandt said...

@Paul Hunt
You said:
"An Saoi
Many thanks for your considered response. Your willingness to consider costs of service provision in the state and semi-state sectors is very welcome."
This is a considerable breakthrough and I wouldn't underrate it. I don't hear IBEC discussing costs in the sheltered Irish private sector.

"But it is clear that the union movement is committed to operate within the status quo and to defend nominal pay levels."
The challenge is to create a new status quo and, as you remarked on other threads, we previously weren't getting any engagement. I think that the unions want to protect real wage levels. It is their JOB! Selling nominal wage cuts will ONLY be possible for them if it is part of a truly radical, fair package that brings down costs and profits right across the economy, private, professional, semi-state and public sectors.

"Focusing on excesses and non-transparency in the private sheltered sectors is a part of this strategy - as evidenced by Paul Sweeney's subsequent comment."
Maybe it is but if we can get the unions to issue a non-negotiable demand for lower costs and normal profits in the Irish sheltered private sector then I think we can rely on the Irish right to demand the same of them. What we want to prevent is what has always previously happened in Ireland: vested interests freeze everything and emigration and unemployment do the adjusting.

" All this is entirely understandable, but, as today's public opinion poll in the Sunday Indo shows, an overwhelming majority of the Irish people are simply fed up with these political, business and union games."

IBEC really has no intention of addressing excessive costs in the sheltered private sector. None. They would happily, I would guess, trade protection for their members for protection for the semi-states and the government. The government are scoundrels and will behave as such.

"Those who exercise some measure of authority and influence in these areas are sitting on a powder keg."
The Irish establishment have gotten away with it many times before. As of now, they're winning easily.

"It's not a good time to be on the wrong side of history."
In Irish history the insiders always win. We need to break the cycle but they will bitterly resist and they'll fight dirty.

"The people are crying out for honesty and leadership from those exercise authority and influence."
I agree. But dishonesty and the protection of vested interests are embedded in the DNA of the Irish establishment.

Labour and the unions must lead civil society in a movement demanding an election followed by radical change.

Paul Hunt said...

@An Saoi,

My reference to the Sindo was to draw attention to the poll results published there today; I think the INM Group's governance and financial engineering are a bit of a distraction in this context - however relevant they might be to the functioning of the Fourth Estate in Ireland.

In relation to your observations on some of the policy changes required, how likely is it that the current Government will address any of these issues in a sensible manner? Are you - and the other principal contributors on this site - content to allow this Government to remain in power for another two years - by which time there is a genuine fear that many Irish people will have lost faith completely in the current process of democratic governance?

Oliver Vandt said...

@Paul Hunt
Ireland is often said to have two conservative parties, FF and FG. In fact it has three. It's just that Labour is conservative AND left-wing. Some people are speculating that a new party may emerge. Suggestions are that it will be reformist, technocratic, policy focused. A party like that Labour could work with, should actually be in fact, with a left of centre emphasis.

However, if FF collapse, and FG aren't performing, I think we might get a new party formed by the right-wing of the establishment to protect the right-wing of the establishment, an Irish Forza Italia. In Italy when the Christian Democrats collapsed Forza Italia emerged and beat the left in the subsequent election. Forza Italia is a football chant so the equivalent would be "Come on Ireland". FG AND Lab have:
- failed to hold the government to account
- cooperated with NAMA and the banking strategy while publicly opposing
- shown no desire to be in government at the moment

It would serve them right if a new party emerged and snatched power away from them, given that they are content to wait another two years to get it. What happened to the deputies of the defunct Christian Democrats? Most of them ended up joining other parties I believe.

Now if only there was an Irish Berlusconi. Wait a minute...