Posts By Michael Taft

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A Really Really Special Case Requires a Really Really Special Solution

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With considerable speculation about an impending deal on bank debt, with the Taoiseach and the German Chancellor jointly stating that Ireland is a ‘special case’, it is helpful to remind ourselves just how special a case we are.

Eurostat, the EU Commission’s data agency has calculated the cost of the banking crisis in each EU country. The following focuses on the cost to general government budgets. Ireland has really taken one for Team EU.

Yes, there’s wee Ireland up at the top, just edging out Germany for the dubious title of spending the most on the banking crisis. €41 billion to date according to the Eurostat accounting data (this doesn’t count the billions ploughed into the covered banks from our National Pension Reserve Fund as this was not counted as a ‘cost’ to the General Government budget).

Of course, this doesn’t give the best picture. What happens when we look at the cost as a percentage of GDP?

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Let’s Remind Ourselves that Downsizing the Public Sector is Economically Daft

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With negotiations over an extension of the Croke Park Agreement starting today, it is helpful to remind ourselves how daft it is to downsize the public sector payroll in the hopes it will reduce the deficit.

There are two ways to downsize the public sector payroll: cut public sector employment and/or cut public sector pay. Since the crisis began, we have been doing both. Public sector pay has been cut twice through the pension levy and the wage cuts of Budget 2010. Public sector employment has been cut by approximately 29,700 since late 2008, or 9.3 percent.

Yet, the Government finds that it must cut more than it had already planned. It needs €1 billion more in austerity measures to achieve their targets. It’s like running in quicksand – cut, sink, cut some more.

Yet, downsizing the public sector produces little benefit in stabilising public finances. Why? Because it is so darned deflationary – it bleeds the economy of employment, consumer spending and growth. When you factor in the economic consequences of the cuts, you find the Exchequer hasn’t saved as much as it hoped.

Let’s look at the estimates from the ESRI.

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Be Glad You’re Not Living in One of the Those Terrible High-Tax Countries

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The Government seems to have done a U-turn on the issue of tax exiles.  Despite the Programme for Government’s commitment on the issue, the Sunday Business Post reports that following an avalanche of submissions from the likes of the American Chamber of Commerce, etc. the Minister for Finance looks to do nothing.  Why?  Because it would undermine investment.

Minister Brian Hayes was also at it – claiming that tax increases were effectively over. Minister Lucinda Creighton backed up her party colleague.  And Minister Richard Bruton also warned against further tax increases on high-income groups; again, because of that ol’ investment problem.

Do we see a pattern?  If we increase taxes on high-income groups or the business sector we will lose out on investment.  How valid is this argument?

Let’s bottom-line this:  if maintaining a low-tax regime, whether on high-income earners or the business sector, is the key to ensuring high levels of investment in the economy, then that policy has already been judged to be an utter and absolute failure.

Okay, now let’s work through some arguments.

First, Irish high-income earners pay a lower tax rate than equivalent earners in most other EU-15 countries.  The following is from the OECD Tax and Benefits Calculator, using a two-income household example where one person is earning twice the average wage and another person earns 1.67 the average wage.  In Ireland, this equals €118,750.

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In Search of Labour’s Half Billion

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In defending Budget 2013 Labour has argued that it contained €500 million in a ‘wealth tax package’ or revenue from taxation on high income groups. This, goes the argument, is evidence of Labour’s influence on the budget – revenue that would be missing were Labour not in Government.  So what are the measures that add up to €500 million?  And is this sum robust?

First, we have a problem with labelling.  While some Labour TDs have called this a ‘wealth’ package, the only tax on wealth (defined as an asset) is the property tax.  However, they do not refer to this and with good reason – the property tax will attract revenue from high income groups.  So Labour is not referring to tax on wealth but rather on personal or capital income.

The list that Labour has been putting forth includes:  a mansion tax on properties worth over €1 million (this is a small tax on wealth), an increase in the USC on high-income pensions, extending PRSI to trade and unearned income, reducing tax reliefs for large pension pots, an increase in Capital Gains tax, Capital Acquisitions tax and Deposit Interest Retention Tax (DIRT), etc.  So does all this add up to €500 million?

Let’s look at the measures that will be introduced in Budget 2013.

In the above measures we find that €114 million will be raised in 2013 with a full year yield of €174 million – though this latter figure is slightly inflated by an extension of the PRSI base on to unearned income that won’t be introduced until 2014.

This seems a long ways away from the €500 million package Labour has referred to.  What else could there be, that is not captured by the table above?

Deposit Interest Retention Tax:  This has been referred to as a tax on high incomes and clearly high income groups are more likely to hold more cash than the rest of us.  However, low and modest income groups also have deposits.  And the tax rate is somewhat quirky.  If interest on deposits were included in the income tax regime, low-modest income groups would pay only 20 percent while those on the top rate would pay 41 percent.  As it is, low-average income groups pay more under DIRT and high-income groups pay less.  Nonetheless, let’s allow this a tax on high-income groups, knowing that others will be caught.

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Why Some People Will Get Hit Very Hard

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Whatever about the leaks, the underlying thinking in much commentary and policy analysis shows why some people will get hit very hard.  Yes, those on social protection should look out –especially around secondary benefits and eligibility.  And pensioners – many of their programmes will be sliced if not totally jettisoned.  If you’re unemployed, don’t expect much help from the budget (it will end up destroying jobs – especially through investment cuts).

What struck me most is the proposition that Child Benefit should be taxed.  This featured on RTE’s This Week (the weblink to the programme is unfortunately not available).  The Minister for Social Protection claimed her preferred position was to tax Child Benefit since this would protect the most vulnerable.  The ESRI’s Professor John Fitzgerald made a similar statement – that those on high incomes would be taxed while the vulnerable would be spared.   This view shows a lack of appreciation of what can happen to hundreds of thousands of households struggling on modest incomes.

Of course, Child Benefit will not be taxed in this budget; apparently, the computers in Revenue and the Department of Social Protection still can’t ‘talk’ to each other.  And here’s another thing:  taxing universal benefits does not undermine the principle of universality.  Taxation can introduce a progressive feature in payments that are granted to all, regardless of income or employment.

But the emphasis on ‘protecting the vulnerable’ ignores the fact that people at work are also vulnerable.  Yet it is this crucial group that would be hit in the ‘preferred option’.   It underlines a view that social protection is for the poor, rather than for protecting the social.

What would happen if Child Benefit were taxed?  How would some income groups be hit?  Those on social protection would be protected – but low and average paid should watch out.

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U-Turning Our Way to Somewhere Else

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The Independent has published leaked budget proposals (but, as always, check against delivery).  There are three issues covered:  cuts in Child Benefit and medical card prescription charges, and the imminent property tax.  Here is what the parties and the Government said about these issues in the recent past.

Property Tax

There are so many U-turns on this issue, I’m surprised Government Ministers haven’t fallen down from dizziness.  The fact is that both Government parties actually campaigned against the  property tax they are now going to introduce.

Fine Gael actually opposed the introduction of an annual household property tax.  This is from their election manifesto:

Fianna Fail’s proposal, now endorsed by the Labour Party, to introduce by 2014 an annual, recurring residential property tax on the family home is unfair. But as we tackle the fiscal crisis, we will have to cut central exchequer funding for local authorities, and we recognise that local authorities will have to find more sustainable sources of revenue appropriate to local circumstances. What will be viewed as fair in South Dublin might be viewed as unworkable in rural Clare.

In this context, we will empower local authorities to put in place, following the 2014 local elections, fairer alternatives to Fianna Fail’s and Labour’s recurring annual tax on the family home. The options would include:

  • No extra local taxes, forcing local authorities to close non-priority services and / or to deliver increased efficiencies;
  • Increased local user charges for waste etc.; or
  • The option of a local “site sale profits tax”. Such a tax would be levied on the profit made from the site value on the sale of a residence (sales proceeds, less cost indexed by inflation, less stamp duty paid and less home improvements)

The final measure might be considered as both fairer and more economically sensible than an annual recurring property tax.

There is no question – Fine Gael campaigned against a property tax.  It called for alternatives (the site sale profits tax could be a positive measure) but committed that those alternatives would not be introduced until after the 2014 local election.

Yet now they are introducing a property tax.  This is similar to their opposition to a Household Charge and their u-turn on the issue when they introduced . . the Household Charge.

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Means-Test Central

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The Troika is at it again – putting pressure on the Government to do something.  This time the ‘something‘ is to introduce more means-testing.

 ‘The Irish Times understands that the Government is under pressure from the EU-IMF-ECB troika to reduce the duration for which the means-tested jobseeker’s benefit is paid.  At present the payment – worth up to €188 a week – is paid for up to 12 months to people who are out of work and covered by social insurance. However, this would be reduced to nine months under proposals to be considered by the Cabinet.  As a result, those on the benefit would face moving on to means-tested jobseeker’s payments much earlier. This would see thousands of people receiving lower rates. The move is aimed at encouraging people to seek work, or what policymakers call a “labour activation measure”'

The report above is somewhat confused – Jobseekers’ Benefit is not means-tested (this could be a typo).  But you get the point:  increase means-testing.

This is being presented as a ‘work incentive’ measure but in truth it is cost-cutting measure – for many households, once their Benefit runs out they will either be excluded from Assistance (e.g. if their partner is working) or have the payment cut because they have savings, etc.

Or it is an attempt to drive people back into the labour market at lower wages; more people competing for fewer jobs has that effect.  Whichever, It will represent one more step in degrading an already enfeebled social insurance system.

But let’s take a step back and look at the wider picture.  To what extent does Ireland means-test its social protection payments compared to other EU countries?  There is a powerful lobby calling for more means-testing in order to ‘direct money to those who most need it’.  How do we compare now?

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The Unemployment Crisis: A Modest 0.7% Response

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Even the Government admits their policies are having little effect on job creation.  They expect unemployment to remain at 13 percent by 2015, a fall of only one percentage point since they took office.  The number of people at work will only grow by 12,000 over the lifetime of this Government. Truly, we are into a period of medium-term stagnation.

A number of analysts have rightly called for a sustained and substantial programme of investment.  This would boost growth in the medium-term while putting people back to work in the short-term.  But it cannot, alone, fill the jobs gap – especially for those seeking to participate in the service sectors of the economy.  There needs to be complementary strategies.

David Begg, General Secretary of ICTU, recently provided one of them. Speaking at the TEEU annual conference he said:

‘I would say that ultimately the State must be willing to contemplate being an employer of last resort through local authorities or social employment. The lessons of the Great Depression may have been lost but they are as valid in social terms now as they were in the 1930s. No country, no society can afford to regard so many of its unemployed citizens as expendable.’

The state as Employer of Last Resort (ELR) – that’s a considerable intervention.  The concept is simple:  during periods of enforced unemployment, where the private markets cannot employ people who want to work, the state should employ people until sufficient job creation commences.

An ELR programme would employ people through the mainstream public sector, local authorities, or community, voluntary and non-profit organisations on socially beneficial projects.  There are a number of questions over how this would work.  I will focus on two and, in so doing, start the work of outlining an ELR programme.

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I Want to be an Agent of Economic Recovery But They Won’t Let me Play!!!

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One of the keys to an alternative budgetary strategy is to stop cutting current public spending.  This would provide an opportunity to re-direct or re-invest productivity gains and spending efficiencies into expanding growth and employment.  This would be more effective at repairing public finances than the current austerity strategy.

Let’s take an example.  The Government reduces the drugs bill by €400 million.  This is a good cut.  There is likely to be little if any deflationary impact; jobs will not be lost, income will not fall, and growth will not be cut.  This is one of the few examples where a cut actually equals a savings of the same magnitude.

What do we do with that cut?  Do we just remove it from public spending?  If so, the deficit falls by €400 million but not much else happens in the economy.

So, why don’t we do something creative with it – address a social need, increase growth and employment, and reduce household costs?  Why don’t we roll out an affordable childcare programme?

Childcare in Ireland is one of the most expensive in the OECD and has been identified as a substantial cost to households in work, or attempting to return to work.  What would be the economic and fiscal impact of rolling out an affordable childcare network?

Let’s first examine the cost of rolling out such a network.  Deloitte, on behalf of the National Children’s Nurseries Association, prepared a detailed study – Review of the Cost of a Full-Day Childcare Placement (it no longer seems to be available on-line). They calculated the cost providing childcare places – wages, rent, insurance, materials, food, etc.  In 2007 they found that the average weekly cost of providing a full-time childcare place was €227.

I updated costs – by increasing non-staff costs by 10 percent and staff costs by 17 percent (employing childcare assistants at €19,300 is far too low for this important function).  When I do this, the cost of providing a place in a childcare centre comes to €260 per week.

Therefore, the €400 million drug bill saving would, if re-directed, finance 30,000 affordable childcare places.  Does this mean there is no deficit reduction?  Let’s see.

Employment:  The €400 million investment in childcare places would directly create 7,700 jobs – based on the ratios used by Deloitte. Of course, a portion of this would be a transfer of staff from existing private and voluntary crèches so that job creation would not be net.  Still, there would be considerable job creation from this.  This doesn’t count the jobs created/retained due to non-wage expenditure – purchasing materials to run the childcare centres from private sector (purchase of food, materials, etc.).

Impact on GDP:  Being job dense, this investment would increase in GDP by €350 million.  This only counts the wage element of the expenditure.  There would be additional growth from the non-wage investment.

Impact on Deficit:  Using the Department of Finance’s Debt Sensitivity Analysis, this growth would reduce the deficit by €175 million – but this would be slightly higher when the non-wage impact is included.

Fees Income:  If we assume an average weekly fee of €60 per week at 45 weeks, the potential income would be €80 million.  This would reduce the gross cost and, so, feed into deficit reduction.

There’s more. 

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Claiming the Alternative

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How many times do we hear from those who criticise the critics of austerity – ‘well, what’s your alternative.’  That the alternative has been outlined and measured by a number of groups for years is rarely acknowledged.  This time, however, it will be difficult to ignore given the recent work by Claiming our Future.

They have compiled a menu of tax measures which would largely impact on high income groups, capital, property and corporate income taken from a range of civil society groups. It shows that not only are spending cuts unnecessary, tax increases on low-average income groups are also unnecessary.  The key message in the CoF document is that if the Government wants to hit low-average income groups, it is a political decision – not one based on economic or budgetary necessity.

CoF takes proposals from TASC, UNITE, Social Justice Ireland, Nevin Economic Research Instiute (NERI) and ICTU which supplied the revenue estimates – most of which has been taken from the Department of Finance (the proposals and estimates supplied by UNITE have not yet been published).

The full list can be accessed at the link above.  Here is a broad breakdown.

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It’s Official. Government Employment Policy is Failing (so says the Government)

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It’s official.  The Government’s employment policy is failing.  This finding comes from the Government itself, in the form of projections contained in yesterday’s Medium Term Fiscal Framework.  The projections are chilling and depressing.  Let’s first turn to employment.

In April last year, the Government was somewhat bullish about employment growth; projecting that the numbers at work would grow by 102,000 by 2015.  After the launch of the Jobs Initiative and the Action Plan for Jobs, the Government lowered their forecast to 67,000.  Yesterday, they lowered their forecast again – to 18,000.

In 2011, there were 1,810,000 people working (this includes full-time and part-time).  By 2015, the Government expects this to rise to 1,828,000.  After all the Government’s initiatives, IDA job announcements, protestations that jobs remains at the core of public policy – the Government itself admits that net job creation will only be 18,000 by 2015.

Let’s look at the annual projections.

In April last year, the Government expected employment growth to start this year, increasing by 37,000 in 2015 alone.   Now, the Government accepts that employment will fall this year (by 22,000) and won’t start growing until 2014.  In 2015 alone net job creation will only be 24,000.

This is grim.  During the life-time of this government, employment will rise only marginally.

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Treasure Ireland

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We are constantly assured (warned) that ‘everything is on the table’.  All manner of tax increases and spending cuts are being considered, and none are ruled out in principle.  So, goes the script. There is one issue, however, that is not on the table.  It is not even in the room.  It is not even in the house or lurking around the grounds.  And that issue is the corporate tax rate.  Why?

If we increased the corporate tax rate, this would undermine our ability to attract foreign direct investment.  This, in turn, would result in fewer jobs being created and put current jobs at risk; further, it would lower exports which would skewer our balance of payments.  All that value-added and economic activity would be jeopardised.

Before we confront this argument, let’s first look at how successful multi-nationals (MNCs) are in racking up profits in Ireland (also, this analysis from Michael Burke is also worth a read).  From this, we might get a sense of how sensitive they would be to an increase in the corporate tax rate. For, in truth, they are really really racking up the profits.

Ireland is not just a league-leader, it is off the chart.  MNCs here make more than four times the profit per employees than the average of the other EU-15 countries reporting (no data for Belgium or Greece). No wonder more and more multi-nationals are making Ireland their home.  It should be noted that this Eurostat data does not include the financial sector so the massive profits being made in the IFSC are not included.  Nor does the above include taxation – we’ll come to this later.

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Just When You Thought It Couldn’t Get Any Worse

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Just when you though it couldn’t get any worse, along comes the EU Commission with their projections for the Irish economy.  It will make grim reading for the Government.  All their projections are being undermined.  Of course, the EU could turn out to be wrong and the Government right – so we are just dealing with projections.  However, with media leaks that the Government will be revising growth downwards in a couple of weeks, even they are heading in the direction of the EU projections.  Let’s compare some indicators.

GDP Growth

The Government is hoping for a quick return to robust growth.  The EU is not so hopeful.  The Government is hoping for an average annual growth rate of 2 percent up to 2014.  The EU expects it be 1.2 percent.  At that level, the economy is stagnating.

Employment

To bring down unemployment, there has to be job creation.  To absorb new entrants into the market and reduce the dole queues.  But the EU suggests that job creation will be sluggish over the medium term.

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Smart Fiscal Consolidation: Why A House-Property Tax Shouldn’t Be Introduced Next Year

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Let’s assume the Government comes up with the best house-property tax ever devised – truly progressive, taking into account all the social factors such as unemployment, low-income, arrears, and mortgage equity (or lack of).  Yes, it’s a big assumption but let’s try it anyway.  If this occurred there is still a strong argument that the Government should not introduce such a tax next year or even the following.  And that is because the economy and hundreds of thousands of households cannot absorb it.  Let’s run through some of the arguments.

First, the domestic-demand recession is expected to continue next year – the sixth year in a row.

As seen, both the EU and the IMF expect domestic demand (consumer spending, government spending on public services, and investment) to fall again next year.  They both estimate that consumer spending will fall, as more people wilt under the combination of austerity measures, falling incomes and unemployment.  Even by 2014, domestic demand will start rising but only marginally.

While under normal growth conditions, a house property tax would be an efficient tax – limited impact on the domestic economy and more efficient at reducing the deficit; relative to spending cuts.  Even so, the impact on consumer spending would be high:  for every €100 raised in a house-property tax, there is a resulting reduction of approximately €75 in consumer spending.  In normal growth situations, the economy would absorb this.  But as we know, these are not normal times.  So what would be the impact of introducing such a tax while the economy is still in a domestic-demand recession?

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