Turmoil has characterised international bond markets across September. As a reminder, governments borrow money mainly by issuing bonds. Investors lend money to governments, receiving interest in return, with the original sum repaid later. Bonds are bought by typically large financial institutions: banks, pension funds, insurance companies and investment funds. They are often traded after they have been issued on secondary markets. Suppose, for simplicity, a government bond costs £100 and pays £2 a year in interest. If bondholders start selling and its price falls to £80, the new buyer still receives the same £2 a year (a now higher return). Falling bond prices mean rising bond yields. If existing government bonds offer higher returns, governments must offer similar returns when they next go to the market to borrow. Otherwise, investors will just buy the older bonds. Falling bond prices therefore make new government borrowing more expensive. Hence the dynamic of September.
Investors are less willing to hold government debt at previous rates of return because of persistent inflation, higher interest rates, large government borrowing requirements and uncertainty about public finances. We have seen a broad sell-off in government debt, with yields rising across the US, UK, Europe and Japan. US ten-year government bond yields have moved to levels seen at the start of the last Great Financial Crisis. UK borrowing costs have reached multi-decade highs.
The consequences eventually reach into working people’s lives. If governments have to pay more interest to bondholders, a larger share of tax revenue goes to servicing debt. Governments may respond by slowing public spending, delaying infrastructure projects, restraining public sector pay or raising taxes and charges. Working people experience the effects through weaker public services, higher costs or lower disposable income.
Ireland is somewhat sheltered: the National Treasury Management Agency borrowed heavily when rates were low, locking in much of this debt in for long periods. However, debt servicing costs are expected to approximately double by 2030 as cheap debt matures and is replaced by more expensive Irish government borrowing.
If the State underwrites the financial system, as it very obviously does during financial crises, then why should socially necessary investment depend so heavily on the willingness of private wealth holders to finance it at a return acceptable to them? A State not captured by the needs of private capital accumulation but orientated towards socially useful investment could build a larger sphere of socialised credit through public development banks, investment funds, State savings systems and publicly controlled housing and infrastructure finance. This is not pie in the sky. Sweden and France used variants of these mechanisms during the post-war period. China operates a similar mixed economy system today. However, a full move towards nationally controlled credit and capital flows would conflict with the euro and EU framework, which prohibits direct central bank financing of governments and limits controls on capital movements. Any progressive economic policy must tackle the question of the EU.
Back Public Service Craft Workers
3,000 public service craft workers are currently in dispute with the State in pursuit of a claim over their relative pay. The dispute involves five unions: Connect, Unite, OPATSI, BATU and SIPTU. The issue is the old craft analogue system: public service craft wages were historically compared with rates paid to similarly skilled workers in major private and semi-State employers. The system was dropped during the financial crisis and never restored. Now an independent review has found public service craft workers are earning around €4.40 per hour less than comparable private sector workers. No wonder public employers are struggling to recruit and keep skilled workers while becoming increasingly reliant on private contractors, who Connect report cost more than €60 per hour.
The State will resist improving the wages of directly employed skilled workers, while paying considerably more to purchase those same skills through private contractors. Electricians, plumbers, fitters, carpenters and other trades maintain infrastructure across health, local government and other public services. Their skills cannot easily be replaced in an already tight skilled labour market.
Full use of that leverage will allow the best possible route of closing a €4.40 hourly gap. Full disclosure of expenditure on outsourced craft and maintenance work across the public service too would be worthwhile and show how much the State spends on contractors while refusing to pay competitive wages to directly employed workers. While the current threat of industrial action has been suspended following conciliation talks, the workers might remember that their best leverage is derived from the power of their skilled labour.
