February 20 Lunchtime: The Recession Diaries

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Cathal O’Loghlin has done the readers of my Notes on the Front blog a favour by putting up his Irish Independent article in the comment section yesterday (I’m assuming the poster ‘Honest Cathal is the author). Whichever Cathal it is, he is certainly in feisty form. He manages to call ICTU and CORI liars – or at least attributes three ‘big lies’ to them. He claims that they are manipulating the data in pursuit of ‘sectional interests’.

These are serious charges. They deserve a considered response.

Government Expenditure – Now it’s High, Now it’s Not

Cathal doesn’t like ICTU’s claim that Irish Government expenditure is amongst the lowest in the OECD. He doesn’t like their use of GDP as the benchmark measurement. I’ll get into that below. Regardless, Cathal suggests there is a better measurement.

‘There’s a very simple measure available to compare public spending across countries. How many Euros does each country’s public sector spend per head of population? The Commission’s figures indicate that public expenditure per capita here last year was 5th highest among the pre-enlargement EU15 – a full 25 percent higher than the public spend-per-head of the average Euro-area member. Public expenditure here would have been about €12bn lower, last year, if our Euro -per-capita spend were at the EU15 average.’

Well, I’m all for simplicity but we have to be careful when using cross country comparisons. Let’s use the EU’s Government Finance Statistics for 2007. On first glance it seems that Cathal might have a point: Irish Government expenditure was €15,667 per head. That certainly is higher than the average EU-15 spend – nearly 15 percent higher. But that’s at first glance. Let’s take a couple of more glances.

First, I’m guessing Cathal would exclude capital expenditure from any proposed cuts to bring us back into line with Europe. Commentators across the ideological spectrum are agreed on this point. Ireland has the highest level of capital expenditure for very good reason: for years we slashed capital expenditure as part of a very short-sighted strategy to keep public expenditure low. This has cost us dearly – to the point that we have one of the poorest infrastructure in the industrialised world, ranking 64th in the world. What we are having to do now is catch-up (in 1995 our capital expenditure spend was one of the lowest in the EU-15).

Cathal 1

So let’s focus on current or day-to-day public expenditure. If we do the numbers start to turn a bit. Ireland is still high but no so much. Our average current spend per capita drops to €13,856; still above the EU-15 average but only 7 percent so. However, even this doesn’t tell the full story.

When comparing money between countries its wise to use Purchasing Power Parities (PPPs). A Euro goes a lot of further in Germany or Spain than it does here. For instance, €98 German Euros equals €111 Irish Euros. So for every 100 school desks the German government buys for x amount, the Irish government can only buy 88 school desks for the same x amount. That’s the price we pay for living in a high-cost country, runnng hard just to keep up (as to why our prices are so high is another story).

So, applying PPPs, how does the picture look? We spend €12,482 per person. The other EU-15 countries average €13,948. We rank 10th. To reach the EU15 average we would have to spend over 11 percent more. Rather than cutting €2 billion this year, we would have to increase current public expenditure by over €5 billion. And even then, we’d only be average.

But let’s turn this screw one more time. We fancy ourselves as part of the rich club. On the basis of wealth per capita we are in the top 10 EU economies. So how do we compare with them? Rock bottom. We’d have to increase our current spending by 24 percent – or more than €11 billion – just to be at the average. That’s a long ways away from arguing that we are somehow spending above the average.

[I won’t even get into the argument of the extra spend arising from low population density – Ireland has one of the lowest densities in the EU-15; this creates extra costs for the equivalent services and infrastructure delivered].

Making Sense of the GDP and GNP Argument – or how CORI is Right

To resolve the fiscal crisis, CORI put forward a simple proposition. Just raise taxation to the average EU level – to 41 percent of GDP. Cathal is not impressed.

‘Unlike other countries, a very large slice of Irish GDP is owned by overseas investors. This “slice” – from which we can’t collect VAT, excises, income tax or the like – is estimated to reach 18pc in 2013. Our public revenues can only come from the remaining 82pc of Irish GDP. Calls for a revenue ratio of 41.4pc of Irish GDP are calls for public fees, charges and taxes of . . . over 50pc of GDP which we Irish actually own. How much do other EU members pay in public taxes/charges out of their GDP? At present, they average 45pc. Only three have a tax burden of 50pc or more – Denmark, Sweden and Finland. The CORI proposition, if acted upon, would push Ireland’s tax burden to 4th highest among all the EU member-states.’

This is the famous GDP or GNP argument. A number of commentators insist we use the GNP as this records what actually remains in the country after the multi-nationals take their profits out. For the record, multi-nationals took approximately 14 percent of the total GDP out of the economy in 2006. It is on this basis that Cathal claims that both ICTU (in respect of public expenditure) and CORI are distorting the data – because they use GDP. Are they?  Let’s see how these measurements can distort the picture.

EXAMPLE: Take two economies that are identical in absolutely every detail. Call them Ireland A and Ireland B with equal GDP of €200 billion. Further, let’s say it is established that to have proper public services and infrastructure both economies must raise (and spend) €80 billion. That’s 40 percent.

  • Ireland A produces its wealth through indigenous businesses. All the profits are retained in the country. So the Government’s tax take is 40 percent of GDP, or €80 billion. They get good services and infrastructure.
  • Ireland B is like us today: 14 percent of its GDP is taken out of the country. Therefore, its GNP is not €200 billion but rather €172 billion.

Now, according to Cathal, if Ireland B’s tax take is 40 percent of GNP that means it’s the same as Ireland A. There’s one big difference, though. Ireland A’s government has raised €80 billion for public services and infrastructure. Ireland’s B government has only raised €69. For the same number of people with the same needs, Ireland B is spending nearly 14 percent less – on education, health, motorways, seaports, housing, etc.

At that level, Ireland B cannot reach the benchmark for a modern European economy. That’s the problem with mixing up GDP and GNP. You can make the percentages look the same. But the result in money spent on each man, woman and child is very different. And if you rely on GNP, it’s worse.

That’s why CORI is right to use GDP. If we want to have the equivalent investment in our public services and infrastructure, we need the equivalent tax revenue. If we distort the picture by using GNP, we might feel good because the percentages look okay. But the reality is that we are taxing less and, therefore, spending less – with all the social consequences that flow from that.

Wages: How High and How Low

ICTU claimed, using OECD data, that Irish wages are relatively low compared to other European and industrialised countries.  Cathal disputes this:

‘Eurostat data gives the lie to this — placing Irish labour costs 4th highest (and 30pc above the EU15 average).  . . .One is left with the conclusion that the ICTU submission intended to mislead – to protect their sectional interests.’

Cathal is justified in pointing out the Eurostat numbers on wages. Eurostat is a reputable data agency. However, on wages, they are in conflict with just about every measurement one can find (here’s a list). The problem with all these measurements is that they don’t measure the same thing. Some exclude different sectors, some exclude enterprises with less than 10 employees, etc. Even within Euostat, different pulications, show different outcomes.  So we have to tread carefully.

I have always been careful about Eurostat’s dataset numbers (one of many databases Eurostat keeps). Here’s an example. In the utilities sector, Eurostat claims that average Irish labour costs (wages, PRSI, Employers’ social security contributions, pension payments, etc.) were over €93,000 per employee in 2006.

However, CSO data states that utilities labour costs were substantially lower – at €76,000. That’s a huge difference – especially given that Eurostat relies on national data agencies like the CSO.

In the manufacturing sector, Eurostat and CSO data is very close. And what does this show? It shows that Ireland ranks 9th out of the EU-15 – in the lower half of the table.

Now let’s take the OECD data for 2006. It shows that average Irish private sector wages (not labour costs) was approximately €30,000.  This is well below the EU-15 average. The CSO tells us that average private sector earnings were €31,200. This is fairly close.

We can go round and round using different but Cathal should have at least acknowledged that most data agencies – public and private – show Ireland to be below the EU-15 average and that even Eurostat has some anomalies that need to be explained. That would have helped the debate.

* * *

I appreciate that Cathal took the time to drop into my blog and put up his article. That’s why I took the time to respond. The debate is better for it.

But at the end of the day, Cathal’s arguments don’t stand up. A sustained analysis of the issues – wages, taxation, expenditure, and the use of GDP and GNP – all point to the fact that we are a relatively low-waged economy that for too long has relied on an unsustainable low-tax, low-spend model. Our infrastructural rankings, our rankings in public services all confirm this.

We need a national effort based on a consensus that accepts harsh realities. And one of those realities is that if we retreat into failed models and flawed analysis, we will be in more trouble than we can imagine.

[NOTE:  If anyone has trouble accessing these databases or tables – please let me know and I will help out. After all, you needn’t take Cathal or my word for it].

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