Frontline and Hunting For Mice. The Recession Diaries – May 19th

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Monday night’s Frontline discussion was an object lesson in how to miss the point – a really big point in a really big way. In discussing spending cuts we were treated to all sorts of suggestions – from getting rid of Minister’s drivers to shaving departmental estimates; all with a view to saving a few bob. Thankfully, almost all participants were agreed that old age pensions should be exempt from cutbacks (though the Government representative did leave open the possibility of cutting back on ‘millionaire pensioners’ however few they may be and how little would be saved after the administration of a means-test). In essence, we were treated to the spectacle of great white fiscal hunters chasing down mice, while the elephant stood beside them – unnoticed, unremarked upon, unharmed.

No one mentioned the cost of unemployment. No one mentioned anything about reducing the cost of unemployment.

This is a substantial cost, spilling over into adjacent line-items and throughout the balance sheet. It imposes all manner of economic costs which can be measured, and social costs which we are not so amenable to the slide-rule, but costly nonetheless. Let’s take a road trip through the valley of the unemployment elephants.

First stop is the actual cost of unemployment supports. The 2010 estimates show that Jobseekers’ Benefit and Allowance will cost nearly €4.5 billion, more than doubling since the onset of recession. But this is only the start.

Many unemployed take social welfare payments through other categories – Lone Parents, for instance. One Family showed that over 60 percent of those on Lone Parents Allowance wanted to work but couldn’t find a job. When many recipients exhaust their Jobseekers’ Benefit they go on to or return to the Lone Parent scheme. We will also find unemployed on Pre-Retirement Allowance – essentially a scheme for over-55s who have little hope of finding work. In addition, those who have only been marginally attached to the labour force or waiting for their payments to come through might find themselves on Supplementary Welfare Allowance. And then there’s the cost of redundancy payments – which have doubled over the last three years.

Second, there are a range of secondary supports for the unemployed: rent supplement, mortgage interest supplements, exceptional and urgent needs payments, back-to-school allowances, fuel allowances, etc. There are supports from other departments, most notably medical cards; others include school books grant scheme.

Third, there is a range employment supports – programmes designed to get the growing number of people back into work: back-to-work allowances, back-to-education allowances, etc. We might include here community supports – funding groups trying to deal with the fall-out of growing unemployment (though, to be fair, the Government is desperately cutting back on these pesky mice).

Fourth, is the growing demand on public services, in particular the health sector: unemployment creates higher susceptibility to malnutrition, illness, mental stress, and loss of self-esteem, leading to depression; poor health outcomes stretch into later life such as heart attacks, etc. Alongside this are costs associated to the relationship between unemployment and social degradation – crime, vandalism, environmental damage. All these drive up costs.

Fifth, let’s not forget the administration of this growing ‘client’ sector – the public sector workers who pay out, ensure compliance, etc. More unemployed mean more workers servicing them.

So when we factor all these in, we will find the direct costs of unemployment well above the headline line-items. But we haven’t yet reached the bottom of the valley.

Taxation: unemployment leads to loss of tax, constituting a fiscal double-whammy. Given that the deficit has been driven by a collapse in taxation, this is of particular importance. It’s not just income tax; there’s income levies, Health Contribution levies, VAT and Excise. And it’s not just taxation: there’s social insurance – employees’, employers’ and self-employed PRSI. With the Social Insurance Fund in deficit, this imposes a new cost on the Exchequer – subsidising the Fund.

Loss of Demand: Unemployment reduces demand in the economy. Less money spent means less profit means less business taxes. This has a number of knock-on effects. If a business closes down from loss of demand, it means loss of rates for the local authority. If a business stays open, it may have to cut back on its employees’ wages or hours: less tax and PRSI revenue, less VAT/excise because the employee can’t spend as much. In turn, the business struggling to survive cuts back on purchases (destocking, etc.). This in turn reduces the output of suppliers. The cycle turns further downwards as suppliers cut back on their employees’ wages or hours. Further loss of demand comes from those not ‘officially’ regarded as unemployed – those whose Benefit has run out but fail the means-test for assistance. Emigration has the same effect.

Wages and Incomes: Unemployment keeps wages low. Low wage growth results in sluggish tax and social insurance receipts. This keeps pressure on demand. At the extremes, employers play hard-ball – especially in the hospitality sector, demanding that workers take pay cuts below the JLC rates, work overtime and holidays for free, etc. All this contributes to further demand loss and costs. In addition, a study carried out in Britain found that a spell of unemployment carries a wage penalty of 6 percent on re-entry and after three years, earnings were 14 percent less compared to what they would have received absent unemployment. Slides in income will feed back into rising welfare costs as people may find themselves eligible for Family Income Supplement.

Investment and Job Creation: All this will impact on investment – businesses won’t invest in a sluggish climate with little hope of recouping their outlay. All this will delay job creation which in turns keeps unemployment costs high with all the negative impact on tax, demand and income going forward.

Take all these together – the direct, social and wider economic costs – and the outlay on unemployment is in the billions squared.

But did any of this make it into the discussion on Frontline? The biggest public expenditure item? The biggest revenue loss item? The biggest economic cost item? Did we get any bold, imaginative (or in the words of the orthodoxy – ‘tough’, ‘courageous’) proposals for creating jobs, creating investment, creating growth and, so, reduce the biggest cost item on the Government’s balance sheet?

No. All we got were great white fiscal hunters bringing home trophy mice. All the while, the elephants of unemployment are running amok in our national china shop, smashing up the place, leaving us with nothing to buy or sell.

Our great hunters don’t want to know.

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2 Responses

  1. Liz

    May 19, 2010 6:59 pm

    Not much hope in this Government pulling us out of the fire – remember what Einstein said ‘you cant’ solve the problems of society at the same level of thinking at which they were created’

    nuf said

  2. Pope Epopt

    May 21, 2010 1:41 pm

    Michael,

    I admire your fortitude, in continuing to rail against the madness. I would have given up long ago.