The Wake Up Call

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wakeupcallOne of the more frustrating aspects about the budget season is that everyone is focused on the detail, the particulars; even more so when an election is looming.  The whole thing is backwards.  One should first start with a long-term programme.  Then we can see how the details of any particular budget serves that programme (or doesn’t).  No one is doing that.

Except the Nevin Economic Research Institute.  In their recent Quarterly Economic Observer, Dr. Tom McDonnell has produced an outline of such a long-term term framework and vision – a sustainable, prosperous and increasingly productive economy capable of raising incomes and reducing poverty.  It is rigorously argued and evidence-based and probably one of the best economic frameworks to emerge from the debate for some time.

This is not sexy stuff.  But it is the stuff of economic and social prosperity.

Most of it all, it should serve as a wake-up call – not only to the Government but to progressives and trade unionists as well.  The programme is set out in Section 4 of theQuarterly Economic Outlook.  It is still in skeletal form; I understand that Dr. McDonnell will be producing a more comprehensive paper in late October.  But let’s go through some of the the headline proposals NERI is making.

Infrastructure

  • Increase public investment
  • A new infrastructure bank to provide stable, long-term finance
  • Expert evaluation of infrastructural needs and specific projects (cos-benefit analysis)

This is a crucial area.  Think social housing, advanced-speed broadband, renewable energy generation, water & waste.  The Government’s capital programme released this week is a complete flop.  Investment will rise by €600 million over the next three years while tax cuts will cost €750 million next year.

The emphasis on an infrastructural bank is intended to allow access to low-cost loans over the long-term, which works with the nature of infrastructural projects which have a long return horizon.  And we desperately need independent analysis of our infrastructural needs combined with publicly available and scrutinised cost-benefit analysis to ensure that we are getting value-for-money and that projects are economically viable, not politically expedient.

Investing in People

  • Increase education budget for early years learning
  • Reduce economic inequality (income and wealth) and promote social and economic inclusion
  • Promote family and housing supports and healthcare services to eliminate child poverty
  • Increase teacher autonomy and accountability and reduce classroom sizes
  • Annually review the efficacy of activation programmes and training schemes and reallocate resources to well-performing programmes

Education, children, families and an evidence-based approach to activation measures – it is hard to argue with these proposals.  Provocatively, NERI’s call for increased teach autonomy (a key ingredient to the successful Finnish model) is part of a rolling out of employee-driven innovation and more democratic control over work practices by employees.  Similarly, NERI’s Dr Tom Healy refers to this employee-centred approach in regards to health spending.  So add to this – greater democracy.  And let’s get the real story about JobBridge and other schemes – if they are not working, repair them or abolish them and redirect their resources to more productive purposes (e.g. a real jobs guarantee or employer-of-last-resort programme).

Barriers to taking up Work

  • Substantial state subsidies for childcare
  • Reform of housing and welfare supports so that they are gradually reduced with income rather than with taking up a job
  • Removal of barriers to immigration and migrants working legally in the economy

These reforms would make the transition to work far easier.  High childcare costs, the loss of income supports when taking up work and inefficient obstacles to filling vacancies (as is happening in high-tech and IT sectors) creates unnecessary burdens on both people and businesses.

Income supports should not be withdrawn when someone takes up work but, rather, would be tapered out as income rises – as in the case of the new Housing Action Payment.    Be under no illusion – this will require a substantial expenditure increase but would constitute a major redistribution of resources to low and middle income earners.

Innovation

  • Spend more on basic and applied research as % of GDP as well as on seed funding for high potential start-ups
  • Incentivise (subsidise) take-up of science, technology, engineering and mathematics courses at undergraduate and postgraduate levels
  • Establish a state investment bank to raise affordable funding for innovating enterprises
  • Provide grants to SMEs for adoption of new technology
  • Increase support for horizontal links between the state, higher level institutes and enterprise

Innovation – the generation of new ideas and the improvement of existing ones – is the key to long-term growth.  In short, if an economy does not innovate, it falls back.  But where are progressives in this debate?  At least now, we can say NERI.

When you look at some groups’ proposals for promoting innovation, all you get is a buffet of tax breaks or the misleading assumption that it all revolves around R&D.  Innovation is a society wide phenomenon – thus NERI’s emphasis on people’s education and skills, the need to ‘democratise’ knowledge through public sector-funded research and linkages, an investment bank to raise the funding for enterprises to innovate, and a grant-based rather than tax-break approach to adopting new technology or processes.

This puts people and the state at the heart of an innovating economy, rather than abstract calls for ‘freeing up markets’ and tax-based corporate welfare.

Efficiencies

  • Phase out the system of tax expenditures and ensure horizontal equity of tax treatment across all asset classes to the greatest extent possible
  • Phase out most subsidies for home ownership, business and agriculture
  • Establish independent regulators with enforcement powers for all professional bodies
  • Rebalance the tax system with increased taxes on land, property, wealth, inheritances, passive income and gifts.

Now it starts getting heavy.  According to NERI, stop the tax cuts and subsidies that distort the market (with exceptions such as childcare, direct grants to businesses for technology transfer, etc.).  A better way of putting this obvious proposal is that a tax cut and/or subsidy should be judged guilty until proven innocent (‘inefficient’ until proven ‘effectual’) and should have time-limits to ensure continual reviews.

NERI’s rebalanced tax proposals runs against the agenda-grain of most political parties.  Increasing, rather than cutting, taxes on inheritances and passive income; increasing, not abolishing, property taxes.  If we are to generate the revenue needed for investment, innovation and modernisation, we will need to put more taxation on capital and wealth, rather than labour or consumption, the latter being particularly regressive.

Rather than the bloated diet of tax-cutting promises, we need an open and honest debate over how we are going to fund an innovating, growing and more equal society.

* * *

This is a programme for the long-term.  With such a strategy we can then return to election promises and manifestos and judge how best they fit.  Does abolishing the USC advance an investment agenda?  Does rolling out a minimalist broadband network advance an innovation agenda (the National Broadband Plan is rolling out 30 mbps speed compared to the ESB/Vodaphone’s 1000 mbsp and then the Government cuts this minimalist progrgamme by €200 million in the capital plan)?  Does cutting inheritance tax advance an anti-poverty agenda?

NERI has gifted progressives with a golden opportunity – to capture a modernising agenda in order to critique the Right’s determination to return us to boom-and-bust policies prior to the crash.  It can be captured in a simple formulation:

Investment, Innovation and Incomes

That’s a slogan that can capture the imagination.

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