Just to Let You Know, Shane
Shane Coleman writes:
‘ . . . the reality is that if there was a general election tomorrow and Fine Gael and Labour became the new government, there is probably no decision of the past nine months that they would reverse.’
I fear he might be correct. Of course, there would be changes at the edges. We should expect the educational special needs allocation to be restored, we would probably get some extra spending in job-intensive infrastructural projects, there would be fresh faces with their fresh-looking expressions, even competence. Broadly speaking, however, there wouldn’t be much of a change - certainly not with Fine ‘George Lee’ Gael in the ascendant.
RTE: In terms of squaring up to the difficulties in the public finances, is there any avoiding tax increases and major cutbacks in public spending?
Richard Bruton: No there isn’t. I think the issue is the balance you strike between those.’
Thus spake Fine Gael’s Finance spokesperson on This Week[1]. Even Labour, against its better instincts (and against what it was prescribing for the economy only a few months ago) has accepted the need for fiscal contraction - at the same time as the economy is contracting even further. Of course, it will probably be a ‘fairer’ set of deflationary policies but deflationary nonetheless.
So, given what is on offer today, Shane is probably, unfortunately, spot on. But its one thing to prognosticate a wrong set of policies, it’s quite another to cheerlead on those same policies. That’s what Shane does:
‘Any responsible new government would have to take the same course of action (as Fianna Fail) . . . Regardless of who is in government, the tax net has to be broadened and public expenditure has to come down so that at some point over the next five to seven years, the exchequer returns to a balanced budget . . . let’s not kid ourselves that there is any alternative to the kind of policies currently being implemented.’
Apparently, Shane is not keeping up with the news. The ESRI[2] has predicted that under current policy - tax increases and spending cuts - we won’t get a balanced budget; not anytime soon. The EU Commission[3] reinforced this with a vengeance - stating that under current policies the fiscal deficit will rocket out of control. John McManus[4] quotes Jaakko Kiander of the Labour Institute for Economic Research speaking about the Finnish strategies when their economy collapsed in the early 1990s (which, Mark helpfully pointed out):
‘ “In response to the crisis, fiscal policy (in Finland) was tightened in 1992-95: public-sector expenditure and employment were cut, social benefits were frozen or reduced, and taxes on employment were increased. But in spite of these measures there were large government deficits in 1992-1994, and the cutbacks and increased taxes further reduced demand and employment,” says Kiander.’
McManus summed it up nicely:
‘ . . what jumps out from Kiander’s paper is that the Finnish government initially adopted the same policy response as we have and it didn’t work.’
Shane is flogging that ol’ dead horse[5] and dressing it up in some kind of Dr. Rambo economics (‘The only cure for the disease currently crippling the Irish economy is some particularly tough medicine.’). Fair enough - there’s a lot of it going around. But then he says
‘ . . . no one - political commentators, economists, dissident government TDs, opposition TDs - has come up with a credible course of action that is markedly different from what the government has been doing since October.’
Okay, so Shane doesn’t drop into Notes on the Front. Again, fair enough - there’s a lot of that going around, too. But a number of commentators over at Progressive-Economy[6] have been arguing for a different course of action for some time. So have some trade unions. So have some individual politicians.
Maybe it’s that Shane only reads those who affirm his world-view. Or maybe he feels that those of us who think differently from him - and Fianna Fail - are so marginal to the debate that we deserve no mention, no acknowledgement. Maybe he was partying all week and had to pull an all-nighter to write this particular column, which didn’t give him enough time to study alternative perspectives.
Whichever, I will come to Shane’s assistance and provide him with an alternative - one that he’s free to rubbish. But at least he can’t say there are ‘no’ alternative courses of action. Here’s a set- abridged and limited - but Shane can contact me anytime and I can fill him on the details.
What a Progressive Government Would Do in the First 100 Days
(or Start to Do)
1. Introduce a mini-budget and reverse most of the levy increases on low and average income earners. You really need a reality check to think - during a massive economic contraction, when enterprises dependent on domestic demand are collapsing because of falling consumer spending, with wages being frozen or even cut while workers are being laid-off or short-timed - that reducing the disposable incomes of those with a high propensity to spend is a good idea. It isn’t. It’s daft. Return the money to those who are likely to spend it.
2. Ramp up capital expenditure - ramp it up high. Do it through the Exchequer, do it through ICTU’s State Holding company, just do it. Fine Gael claims that ICTU’s programme (which they refined) would create 100,000 jobs over four years - in energy, telecommunications, insulation, water and waste treatment. Given that Ireland’s infrastructure is one of the worst in the industrialised world, there is no shortage of projects to modernise our economic base. But get people like Edgar Morgenroth[7] to oversee the capital budgets - we need efficiency and transparency. More people at work, more tax revenue, less social welfare spending - and a better infrastructure to boot. How’s that for a winner.
3. Introduce a German-type payroll subsidy programme, which would top-up the wages of those who are short-timed as an alternative to redundancy. In Germany, over 350,000 jobs have been saved in this way. This is a lot cheaper than letting people go on the dole. Payroll subsidies would have the benefit of keeping people in the labour force, maintain their living standards, and help the fight against falling demand.
4. Set up an Enterprise Credit Bank. However the banking crisis is solved (and the best way would be to bring the banks into public ownership - that’s another article) if banks, whether public or privately owned, are to be run on commercial criteria, they are not likely to loan out much money during a recession. So set up a Credit bank for small and medium-sized companies. Accept that it will probably lose money. But get credit flowing - whether directly or through state-backed loans and credit; just do it. We can work out the solvency and repayment issues after we are out of the recession.
5. Expand and enhance public services. Yes, expand services, don’t retrench. Two areas should be prioritised:
(a) Early childhood education. Boy, do we fall down on this. Forfas[8] stated that less than two percent of Irish three year olds were in early education in 2005 (EU-14 average - 82 percent) while our pre-primary system is almost entirely privately funded, unlike the typical OECD system which is 80 percent public sector funded. Let’s cop ourselves on; if all that knowledge capital stuff is more than just rhetoric, then we need early education and we need it now - through the public sector, not a patchwork quilt of private subsidies. The social equity benefits will mean reduced costs down the line, while the economic benefits will result in higher performance.
(b) Primary Care Teams. Dust off Fianna Fail’s shelved primary healthcare strategy[9] and establish a network of primary care teams throughout the country to ensure that everyone has access to free GP and related services. This, like early education, is a necessity, not a luxury. This will not only create a healthier society (keep those ol’ production inputs - people - functioning at adequate levels); it will reduce costs in other areas - in particular, expensive hospital and tertiary care. This is the first step in rationalising our health care system and budget.
The great advantage of these two approaches is that (a) they will save money in other areas; (b) increase demand, as it will lower educational and health costs to people, and (c) create jobs in our critical, but wholly under-resourced, social wealth-generating sectors.
6. Increase Social Welfare. Oh, yes. President Obama’s stimulus programme gives pride of place to social welfare increases. Why? Because this investment has the best multiplier effects. Those on low-incomes don’t save, they spend - and in Ireland we have a lot of poverty; they purchase goods and services with less import-content than the population at large. So increase Family Income Supplement and make it available to those on incomes up to €50,000; reintroduce the pay-related element to Jobseekers’ Benefit (if we can’t keep people in work, at least keep them out of poverty); and increase Carers’ payments - a critical cash-strapped group subsidising our healthcare system.
7. Flat-rate Wage Increases. Hammer IBEC and ISME, force through a new wage agreement based on flat-rate pay rises that would disproportionately benefit low to average income groups - those same groups that spend more than they save. Can employers afford it? Many can. The Industrial Relations News[10] has compiled a lengthy list of major companies - in manufacturing and services - who have already paid the current wage agreement; that same wage agreement that IBEC walked away from because they said no company could afford them. What about those employers who legitimately can’t afford it? As always, there is the ‘inability to pay’ clause that ensures that those who can’t to pay, don’t pay. So what’s the problem? Wages, along with employment, are the anchor of fiscal stability.
8. Save Key Enterprises. When companies - with key skill sets, worldwide brands or vital regional presence - are under pressure due to the recession, don’t let them fall apart or be asset stripped by private equity vultures. Bail them out - BOI and AIB style: provide public equity, go into public-private partnership, even take them into public enterprise. Yes, public enterprise - those same companies that make considerable profits (ESB, Bord na Mona, Coilte, Bord Gais combined made over €600 million in their last year of reporting). For if these key enterprises go down the tubes, there is a good chance we’ll never get them back and lose those key skill-sets. Tell me, how does this help our future competitiveness?
These are just some of the many growth strategies that progressive government would initiate in the first 100 days. There are many others - such as a comprehensive back-to-education programme for the unemployed - which would also be prioritised. You could go on and on - and each proposal is worthy of an article on its own.
Oh, but I hear the chorus of deflationists - what about fiscal responsibility (wailing, teeth gnashing, rending of garments? Well, putting people back to work, generating tax revenue, reducing social welfare costs, maintaining domestic demand, modernising our infrastructure and social wealth sectors - that’s how you reduce the deficit. In other words - grow the economy, not slash it, not deflate it, not kick it when it is down. But:
Harsh Medicine: we progressives can dish out that ‘harsh medicine’, too. How’s this for a prescription:
- Introduce a capital asset tax (i.e. wealth tax) - a 5% levy on all assets over €1 million, including private residences. That’ll rake it in and ensure that those who got rich through the Celtic Tiger boom contribute their fair share during the bust.
- Withdraw all tax reliefs, credits and allowances (save for productive reliefs) from all individuals earning more than €100,000. That’s another source of revenue.
- Go through every expenditure line-item and stress test it for social equity and economic efficiency. If any fail the tests, reform or abolish the expenditure. First stop: subsidies to private, fee-paying schools. There are many stops on this long boulevard.
That’s just a start. The list goes on - targeting those revenue sources with the least deflationary effect (phasing out tax relief for landlords could eventually save over half a billion Euros). Of course, taxes in the medium term will have to increase. But unless one wants to risk delaying recovery, general tax increases will have to wait until recovery sets in.
* * *
Shane now has an alternative. He may not agree with it. But he can’t say it doesn’t exist. There are other courses of action besides the one that the Government is pursuing - the one that ESRI and EU Commission projections show to be an utter and absolute failure.
And if Shane protests - claiming we would have to borrow too much - just point out to him that we are already borrowing at an excessive level and, if the EU Commission projection comes true, our borrowing levels are set to explode (and this doesn’t count the NAMA debt).
So if we can borrow to maintain people on the dole, if we can borrow to buy out toxic assets, why can’t we borrow to put people back to work, why can’t we borrow to invest in productive assets?
The latter course can get us out of the recession - and in far better shape than we are in now. The former will lead us to bankruptcy.
For me, anyway, it’s a no-brainer.
[1] http://www.rte.ie/news/2009/0503/thisweek_av.html?2536726,null,209
[2] http://www.esri.ie/UserFiles/publications/20090429104918/QEC2009Spr_ES.pdf
[3] http://ec.europa.eu/economy_finance/publications/publication15048_en.pdf
[4] http://www.irishtimes.com/newspaper/finance/2009/0504/1224245890044.html
[5] http://notesonthefront.typepad.com/politicaleconomy/2009/05/ive-been-trying-to-get-away-from-this-topic-the-whole-deflation-thing-and-its-impact-on-the-economy-and-the-budget.html
[6] http://www.progressive-economy.ie
[7] http://www.esri.ie/about_us/staff/view_all_staff/view/index.xml?id=32
[8] http://www.forfas.ie/media/ncc090309_statement_on_education.pdf
[9] http://www.dohc.ie/publications/pdf/primcare.pdf?direct=1
Discussion
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Comment by: Hugh Green
May 7th 2009 at 13:05
Great stuff, as usual.
Why do I get the impression that quite a few journalists are reciting from the same cheat sheet?
Comment by: Michael Taft
May 7th 2009 at 13:05
Hugh - because the voices are after you? Don’t worry - I have some self-help pamphlets I can send you. ‘Release Your Inner Market’, ‘Surrender to Capital and Be Free’, ‘Live Like the High Princes of Fianna Gael Even if You are a Lowly Vassal’. And the always popular ‘Own Your Unemployment’.
Comment by: Hugh Green
May 7th 2009 at 14:05
Thanks for the offer Michael but I’m still on the second paragraph of Become What You Are For Your Boss.
Comment by: WorldbyStorm
May 7th 2009 at 20:05
Great to see some strong constructive proposals…
Comment by: Proposition Joe
May 9th 2009 at 22:05
Have you done your sums on this proposal at all?
How many accidental millionaires do we still have, living in houses worth €1 million plus, bought yonks ago for a song or inherited. So you want to hit Granny with a 50k per year levy? How about just stopping her OAP and letting her owe ya the other 38K per year.
There are families mortgaged to the hilt after buying gaffs at the height of the boom for €1 million plus. Despite them having paid the guts of 100k in stamp duty, you’d coming looking for another 50k per year?
How many farmers own land notionally worth millions, that they could never sell for family reasons? Maybe you could deduct the 5% levy from their CAP payments.
Owing an asset worth €1 million does not imply the strong revenue stream required to pay a 50 grand levy.
Oh and BTW, the average Garda retires with a pension pot worth in excess of €1 million. Would that be subject to your asset levy also? No? I thought not.
Comment by: Michael Taft
May 10th 2009 at 14:05
Proposition Joe - the basis of my proposal comes from the Bank of Ireland Private Banking’s ‘Wealth of the Nation’. In 2007, it is estimated that the top 5% of households (approximately 75,000) own 40% of all Irish wealth. Even if we allow a write-down of about a third for our wealthy (in line with Bloomberg’s estimate) that means that the top 5% of households own on average €2.8 million in capital assets. And that’s only the 5%. The gross tax base would be considerably larger and one of the great advantages of such a tax would be to supply a new audit base for the Revenue Commissioners - which could have benefit in ensuring other tax compliance.
Of course, one would introduce a number of measures that would further reduce the tax base (exemptions for productive assets, etc.). The issue of principal residences is more tricky but this could be facilitated by exempting such housing altogether and capturing them through an annual property tax that would hit all house values above €1 million.
I don’t understand the reference to a €50,000 levy on someone with an ‘accidental’ €1 million in assets as I specifically stated that such a tax would attach itself to assets ‘over’ a €1 million threshold.
I certainly have no problem exempting ‘pension pots’ as long as that was part of an overall reform of the pension system that included withdrawing the relief McCreevey gave to large pots in the 2000 Finance Bill (it essentialy removed the top tax rate on disposal) and to end the massive public subsidies to the top 10 percent income decile. In any event, pensions make up only a small proportion of overall wealth - less than 10% overall (though this proportion would be higher at the top end).
I’m sure you would agree, Proposition Joe, that taxing those cohorts with a high propensity to save is a far better course than taxing those groups that have a high propensity to spend - such as low/average income groups. The latter does considerable deflationary damage to a contracting economy and the loss of spending hits businesses that are reliant on domestic demand
Comment by: Proposition Joe
May 12th 2009 at 08:05
Thanks for the response Michael.
Obviously I misinterpreted your proposal to impose “a 5% levy on all assets over €1 million, including private residences”. I assumed it would work in a fashion similar to the old stamp duty regime, i.e. once the asset valuation went a penny over the threshold, the levy would apply to the entire amount. Whereas of course you were thinking of applying the levy only to the excess value over and above the threshold. Apologies for the confusion.
However, I still have some concerns about applying taxation to non-productive assets. In effect, an income stream independent of the asset is required to cover the tax burden on the asset. This would require all manner of exclusions, for example to avoid beggaring older people of modest means who just happen to have ended up living in very valuable houses (the “accidental millionaires”). I’d worry that the property tax would end up being applied only to those with easily established income levels (i.e. PAYE workers, albeit at the medium to higher levels). In effect we’d get yet another income tax, masquerading as a property tax. The tax base wouldn’t so much be widened as deepened.
Now I have no problem hitting the residents of Shrewsbury Road with a hefty property tax. No doubt this is what the class warriors have in mind when they talk of taxing “trophy houses”. However there simply aren’t enough residents of Shrewsbury Road to raise significant revenues, unless the tax is set at astronomical levels. So sheer weight of numbers would dictate that middle-earners are also caught in the asset tax net. The same middle earners that are already being bled dry with levies, and are also likely to suffer worst under the coming welfare cuts (in terms of child allowance) and in the re-imposition of college fees.
I do agree that tax policy in these extra-ordinary times should be moulded to shelter those who tend to spend, at the expense of those who tend to save. However I worry that a confiscatory tax on those who have saved would only postpone the harsh medicine, in form of deep cuts in public expenditure. IIRC the Social Workers’ Party talk of 30 billion in accumulated wealth just waiting to be taxed. So say we confiscate half of this? All well and good, but the 15 billion raised would only cover the exchequer burn rate for a bare 6 months. Then do we go back and grab the other 15 billion? Well, unless the wealthy are extraordinarily naive, they’ll have skidaddled offshore with their remaining liquid wealth straight after the first raid.
In summary, while the optics are certainly appealing, I’d worry that the sort of asset taxes advocated by the left (for the best of reasons, I hasten to add) would end up actually being counter-productive and have distortionate and intended consequences.
Comment by: Proposition Joe
May 12th 2009 at 08:05
Of course, I meant unintended consequences.