Posts By Michael Taft

At the Bottom of the Table

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The election enters the last few days. So many issues that were barely mentioned. How much time was given over to the fact that over one million suffer multiple deprivation experiences? How much debate was devoted to the 100,000 households in arrears and the many more in negative equity? Remember that bank debt that we absorbed? But no mention of a Financial Transaction Tax to start clawing back a little of that socialised private debt.

And there was absolutely no time devoted to benefits for people in work (apart from tax cuts which workers will end up subsidising through reduced public services and income supports). There was no mention even after a report published last week from Glassdoor, an international recruitment, company. The Journal ran the headline:

Ireland is bottom of the EU pile for social benefits’

This accurately described the report. Still no debate.

Glassdoor compared a range of social benefits for people in work and Ireland did not fare well. Take for instance what happens if you become sick at work. In Ireland you have to wait six working days before you can draw down the benefit and you get a flat rate of €188 from the Department of Social Protection. That’s about 27 percent of your wage. What do workers get in other countries?

  • In the Netherlands, employers are required to pay 70 percent of pay for up to two years
  • In Germany, employers are required to 100 percent of the wage for the first six weeks. After that, the state pays 70 percent of the salary for up to 78 weeks.
  • In Austria, workers receive up to 50 percent of wage for up to a year.

The main benefit other European workers get (apart from the UK and ourselves) is sick-pay that is income linked (though in most there is an income ceiling; these ceilings are above the average wage). This cushions the fall in living standards for those who fall ill and maintains consumer spending in the economy.

What about family benefits for those in work? Ireland has a very high level of maternity leave at 42 works, considerably than most other countries. However, only 26 of those weeks are paid at a maximum flat-rate of €230 per week. This is 33 percent of the average wage.   What about other countries?

In Austria, Denmark, France, Germany, the Netherlands, and Spain new mothers get 100 percent of previous earnings for the whole period of leave. Italy pays 80 percent of earnings while Belgium starts out at 82 percent, falling to 75 percent over time. Again, there are income ceilings above the average wage which, therefore, progressively benefits those on low-average pay.

In addition, many countries have paid paternity leave; not Ireland (though this has been promised in the general election campaign).

Another category where Ireland features at the bottom is unemployment benefit. It should be remembered that benefit is time limited in EU countries and is intended to bridge the gap between employment (what’s called frictional unemployment). In Ireland, you get €188 per week (27 percent of average wage) for 26 to 39 weeks. Other countries are much more generous:

Austria provides 55 percent of wage for up to 52 weeks. In Germany you get 60 percent of wage for up to two years. In Denmark, if you pay into an unemployment insurance fund (most do) you get 90 percent for up two years. The rules in many of these countries can be quite complicated but Ireland has the weakest set of benefits for people between jobs, apart from the UK.

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A Different Starting Point: Work, Enterprise and Homes

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In a previous post I suggested that the debate was getting out of hand. In actual fact, we have almost no fiscal space (not after inflation, demographic pressures and the sleight-of-hand regarding Irish Water investment). Then there are those external events: low-growth, volatility in the equity markets, asset bubbles which rarely end up other than a bust (and still no one talking about Brexit).

Yet we have a promise-land political debate: tax cuts, more public spending, more investment – honey and manna and wine flowing;  detached from domestic and global reality. Eerily enough, the debate is even detached from the economy (as if throwing about small bits of money at this or that will change the fundamentals).

But one should be slow to criticise unless there is some alternative at hand. So here’s my go. However, mine has a different starting point than tax cuts or divvying up a tiny fiscal space. I will address three issues– and none of them cost money (that is, impacts on our new friend, the fiscal space). But if pursued, they would make life a lot better for a lot of people.

1.    Quality Workplaces

In a recent report the OECD claimed that earnings quality, labour market security and a quality work environment go hand-in-hand with higher employment. Of course; you can’t build a modern sustainable economy on low-pay, job insecurity and poor working conditions.

Therefore, let’s have a Decent Work Act which can help build quality jobs, based on ICTU’s Charter for Fair Conditions at Work:

  • Start the process to a Living Wage
  • End precariousness – through certainty of hours at work
  • Give part-time workers the right to extra hours in the workplace when they become available (this is actually a EU Directive that has yet to be transposed into Irish law)
  • A progressive public procurement programme – so that we don’t get images like these from Government Ministers, parading the vests and names of race-to-the-bottom employers
  • Statutory Sunday premium and over-time pay
  • The right to collective bargaining and a significant extension of Joint Labour Committees to all low-paid sectors and occupations.

This will start to give certainty in the workplace, promote quality jobs, increase domestic demand and investment – and the great thing is that it would actually be a revenue raiser for the government, not a cost.

Lesson: change the power relationship between labour and capital to start favouring the former.

2.    Develop New Enterprise models

The debate assumes that we can build a modern market economy through tax cuts and eliminating red tape. If that was the key to success, we should have the largest indigenous enterprise sector in Europe. Instead, we have one of the smallest. So let’s get real.

I previously highlighted Davy Stockbrokers’ assessment of investment in productive activity prior to the crash – that the overwhelming majority of it came from public investment and public enterprise companies. So let’s learn and apply this lesson.

First, create new – and expand current – public enterprises; in such areas as advanced broadband, green technologies and alternative energy (e.g. ocean, etc.), public transport, etc. This can be through stand-alone activity, partnerships with private companies, whatever works.

From this we should enable local government (or create new regional institutions) to establish municipal enterprises – a standard feature in continental Europe and North America. These are essentially local public enterprises but they can be formed in partnership with local and private capital. This would facilitate areas where there are low-levels of enterprise activity (whether urban ghettoes, cities/towns outside Dublin, or depressed rural areas).

But we can go further, supporting alternative business models: community and neighbourhood enterprises, labour managed enterprises, new company models based on commercial non-profit activities (some may find this exposition of alternative business models – from the Democracy Collaborative).  And this could be funded – through equity – by the Ireland Strategic Investment Fund, with little impact on the Exchequer.

Lesson: once we get over the idea that jobs can only be created through private capital (and private capital alone) a number of alternatives can arise.

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Time for an Honest Conversation

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Before this election gets out of control it’s time to have an honest conversation.

You know all that stuff about the ‘fiscal space’? Is it €8 billion or €10 billion or €3 billion? Here’s the bottom line. There is effectively no fiscal space. We’re having a surreal debate over what is the equivalent to pennies (or 20 cent pieces) behind the sofa – though it was amusing seeing Fine Gael caught out on double-counting part of their estimate.

We’re going to be spending €350 billion over the next five years. There will be nearly €400 billion revenue. The fiscal space of €8.6 billion (that’s the base-line number) represents less than 2.5 percent of total expenditure and even less of total revenue. We’re having a 2 percent debate.

But it’s even less than that. There’s this little thing called inflation.   You may have heard of it though apparently some political parties haven’t. The Government estimates general economic inflation (GDP deflator) to be over six percent over the next five years. For current spending just to keep pace with inflation would mean an increase of nearly €4 billion. So that’s about half of the fiscal space gone.

But it’s even less than that again. The Government has assumed demographic pressures costing the state €2 billion (this means it’s not part of the fiscal space). These are demand pressures that occur without any policy change – rising number of pensioners, more demand on hospital services, rising number pupils numbers, etc. However, that €2 billion represents only ‘certain’ demographic pressures, not all. How much more? The Government’s not saying. But subtract more.

Taking all this into account, the Irish Fiscal Advisory Council estimated the fiscal space to be €3 billion and change. Even if it turns out be a little more, it’s not much.

But here’s something else to contemplate. The Government’s public investment programme is already factored into the base-line projections. So the increase in capital expenditure from the current €4.2 billion to €5.8 billion in 2021 is not part of the fiscal space (but this level of investment will still keep us at the bottom of the EU tables and well below our historical average).

However, the Government pulled a fast one in the capital programme. They claimed that over the next five years, there would be €3.2 billion in water investment – investment that would not be on the Government books since it will be carried out by a public enterprise company: our old friend Irish Water. However, the Government is in denial. Irish Water is on the books, thanks to the Eurostat ruling. Unless the government introduces charges based on use (fat chance), Irish Water will remain on the books. If there is to be any investment water and waste it will have to be on the books – about €3.2 billion between 2017 and 2021. That will come out of the fiscal space.

Let’s summarise: we have €8.6 billion in fiscal space

  • Subtract about half due to inflation
  • Subtract more (don’t know how much) for the full cost of demographic pressures
  • Subtract water/waste investment if we’re to have any

How much is left? Have a look behind the sofa cushions. (Note:  there is a little matter of an additional €1.5 billion from future recalculations of the fiscal space; good, we’ll need it).

Now let’s throw into this mix all manner of proposed tax cuts: USC, property, income, corporate, capital, whatever you’re having yourself (interesting that no one mentions cutting the most regressive tax – VAT).   And then there’s the other side of the fiscal coin expanding capacity in the health service, increasing resources for education, building tens of thousands of social housing, increasing investment, bringing people out of poverty.

Let’s be clear: the politics doesn’t work, the math doesn’t work.

And none of this counts the external environment.   The irony is that as Europe moves back to normalcy – higher interest rates, higher oil prices, higher exchange rate – Ireland will suffer. We’re benefiting from a situation that is risking another round of asset bubbles and busts.

Take one example: the Department of Finance projects the budgetary impact of higher interest rates. A one percent increase in interest rates will, over a five year period, lead to a fall of GDP of over two percent, a fall in tax revenue of nearly 2 percent, higher public spending due to increased unemployment benefits and an increase in the debt/GDP ratio of over seven percentage points. Now add on oil prices and a strengthening Euro; never mind the profound implications of Brexit.

Anyone talking about this? No.

Rory Hearne suggests that progressive parties and independents come together to present an alternative:

‘Imagine a press conference with Mary Lou McDonald, Gerry Adams, Stephen Donnelly, Catherine Murphy, Paul Murphy, Richard Boyd Barrett, Finian McGrath and Clare Daly – where they state that they have put aside their differences and have come together to offer the people of Ireland a real alternative government.’

It certainly is worth imagining. And the first thing they should do (and it would make an excellent photo-op) is to gather together all the party manifestos and policy documents and stick them in a bin. This would be the first step in having an honest conversation.  We could then talk about the real world and the difficult reality we are facing into.

Would that gather much support? I suspect it would. Poll after poll shows the majority of people don’t want tax cuts but, rather, investment and public services. There is a strong under-current of suspicion and even cynicism towards those who promise tax cuts and quality public services and fiscal stability, all to be delivered through numbers that don’t add up.

Is there an alternative? Yes. Is there a progressive fiscal space, combined with a spending policy, that forensically targets need and social repair? Yes. Are there policies that go beyond the fiscal space that can impact on people’s lives that do not require redistribution through Exchequer resources? Yes. My next blog will outline this.

But it all starts with an honest conversation.

I would imagine that people would welcome this – straight-talking from honest political forces. It certainly would mark a qualitative change from the usual election rhetoric. So let’s start that chat.

We have two weeks left.

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The Investment Deficit

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Continuing the recovery? Starting the recovery (for those who haven’t started feeling it yet)?   Protecting the recovery from outside events? What should we be doing? Voices from the fiscal orthodoxy insist we should use the additional resources to pay down debt – as if a few percentage points are going to protect us from external events. There are others that call for tax cuts but that’s a poor economic response whatever about its political appeal (which, if the Millward Brown poll is anything to go by, looks to have little popular appeal).

So how do we start, continue and protect recovery? One word: investment. Investment is the driving force behind enterprise success, economic growth and social prosperity. Investment drives growth, increases productivity, enhances skills, reduces costs and puts business and the economy in a stronger competitive position. You want to be competitive? Invest.

The problem is that Ireland has a poor investment record. And no one is talking about this in the election campaign; therefore, no one is talking about how to address it (if you’re not aware there is a problem, it is more difficult to solve it). The fundamental driving force behind economic growth and its nowhere on the agenda.

Historically, Irish investment has been below the EU average – even during the boom times. The following looks at Irish investment excluding dwellings and intellectual property/R&D. The latter – a new category under Eurostat’s recently introduced ESA 2010 – is excluded simply because it inflates investment numbers without necessarily contributing to growth. For instance, multi-nationals are re-locating IP activity into Ireland from tax haven locations. But to what extent this is making any real contribution to growth-generating activity is open to question. In 2013 70 percent of industrial R&D investment came from just three companies.

investment1

As seen, Ireland has been a consistent under-performer.

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A Costly Health Service?

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There are assertions that Ireland has a very costly health service; that we spend a lot but get little to show for it. This post will look at claims that we are high spenders when it comes to health. The fact is that we are not extremely high spenders but that shouldn’t be interpreted as meaning that our problems are automatically due to lack of resources.

The CSO has adopted a new methodology for categorising health expenditure: the System of Health Accounts. Since it was published in December of last year, a number of commentators have used the data to claim that we are one of the highest spenders in the OECD. In yesterday’s Sunday Business Post it was claimed:

‘We are spending considerably more than the vast majority of OECD countries and the wealthy European countries.’

Depending on the number used this is either true or not so true. That’s the problem with such statistics – it can tell you a whole number of different things at the same time.

We spend considerably more if we take the total level of spend – both public and private expenditure. The latter includes out-of-pocket expenses (GP visits, prescription medicine) and health insurance payments.

health1

The above measures spending on a per capita basis using PPPs (to better compare for living standards and currency movements). It does appear, using total public and private expenditure, that we spend a lot – the fourth highest in the EU-15, well above the average; nearly 20 percent higher.

However, when we isolate public spending, the situation looks a bit different.

health2

Ireland falls to mid-table, still above the EU-15 average. However, we are now 8.7 percent above average. Of course, if you squeeze public spending – especially in the context of an increasing population and a rising elderly demographic – you will get a rise in private spending. This is all the more the case with the rising costs of health insurance.

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So How’s the ol’ 1 Percent Getting On?

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The 1-percenters are back in the news with the Oxfam study showing that the world’s richest 1 percent owns more wealth than all the rest of the planet put together. So what about our own 1 percent? How are they doing? Let’s have a look at how that 1 percent and other top earners have been getting along in the crisis.

What follows is based on the EU’s Survey of Income and Living Conditions measurement of income (there may be trouble with the link – go to Eurostat Database/Population and Social Conditions/Living Conditions and welfare/Income and living conditions/income distribution and monetary poverty/distribution of income/the first table). It is a different concept from what Oxfam used: wealth. Wealth ownership refers to assets – real estate (buildings, land) and financial property (shares, bonds, cash, equities, pension pots, etc.). Income refers to the annual flow, whether it is employee or self-employed earnings, investment income, pensions, etc.

Income is only one measure of economic power and influence in the economy. Profits levels, the relative strength of labour and capital, degree of financialisation, place in the production process, social status, ownership of assets – it could be argued that income is the result, not the cause, of unequal power relationships in the economy. But it’s an informative measurement and can reveal something of what is happening around us or, in this case, above us.

top1_1

Prior to the crash the top 1 percent held nearly six percent of the share of national income, above the EU-15 average. This fell to 2011 – primarily due to losses in capital and self-employment income arising from property and speculative losses in the crash. However, since 2011 (and the current government), things are on the mend with the 1 percent trending upwards. Still a ways to go to pre-crash levels but with a little time and a few tax cuts, normal business should be be resumed.

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Lower Your Expectations – the Recovery is Settling In

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Remember at the beginning of the recession when we had all those letters to represent the likely course of the economy. There was the V-shape to represent severe decline followed by an immediate bounce-back; a U-shape to represent severe decline, a bit of lingering at the bottom and then a bounce-back; and the L-shape with severe decline followed by flat-lining as the economy stagnated. Between 2008 and 2013 this best fit the economy.

Now the economy is back in recovery mode but under the Government projections we are not going to bounce back to pre-recession levels of living standards. Lower your expectations, sisters and brothers, the recovery is setting in.

Let’s take a historical look at two indicators of living standards. First, consumer spending:

  • Between 1970 and 1995, a period covering two slump periods punctuated with growth, real consumer spending averaged 2.7 percent annually per capita.
  • Between 1995 and 2000 (the good phase of the Celtic Tiger, based on investment, manufacturing and exports), real consumer spending averaged 8.5 percent annually per capita. That was a strong performance, with employment rising, increasing wages and the ongoing shift to a modern enterprise base.
  • Between 2000 and 2007 (the bad speculative phase) real consumer spending averaged 3.4 percent per capita.. A little better than the pre-Celtic Tiger period but as we know, unsustainable.

Then the recession hit and consumer spending fell by over 10 percent. However, as always happens, the economy recovered. In the textbook alphabet, there would be a burst coming out of the recession, representing pent-up demand, and then things would settle back down to past trends. If the Government projections come true, this will not be the case.

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“Wants” A US-style Taxation System?

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The Taoiseach says he wants a US-style tax system. What does he think we have already? Here’s what the EU Ameco database tells us. Ireland data from 2015 comes from the Government’s own budgetary projections.

US Taxation

Ireland already has a US-style taxation system – if we use general government revenue as the benchmark. Before the crash Ireland was awash with revenue from the speculative boom; revenue that quickly evaporated. Since then, Irish government revenue has been steadily falling. By 2017:

  • The Government projects revenue will be below 32 percent of GDP. When we factor in multi-national accountancy practices, this figure rises to 34.5 percent
  • Ameco projects that US revenue will be 34 percent
  • Ameco also projects that Eurozone revenue will be over 46 percent.

A few things stand out in this. First, we are already at low US low-levels of taxation. Second, we are certainly not at European norms. We’d have to raise taxation by a mind-boggling €26 billion to reach the Eurozone average. Even with the demographic benefit of having fewer elderly (which is substantially negated by a higher level of young people) we’d have to increase taxation massively.

Third, the Government projections foresee revenue falling even further out to 2021 when it will be below 34 percent.

And here’s the kicker: this doesn’t factor in tax cuts that a future government may introduce. For instance, Fine Gael wants to abolish USC. That will drive tax revenue down further, potentially falling behind US levels.

When measured as a percentage of GDP, Ireland is at the bottom of EU tables – fighting it out with Romania and Latvia for the rock bottom prize. Nods towards quality health and education services, childcare and eldercare, public transport, pensions and incomes supports are made, but these are little more than nods; perfunctory gestures in a debate that effectively excludes the social.

What the Taoiseach really wants is for Ireland to be a basement-without-a-bargain economy where public resources are squeezed, investment is starved, and the energy bulb frequently cuts out without any window to let in the light.

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What Can Happen When We All Pitch In

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Oireachtas committee reports aren’t usually very exciting or overtly progressive. This one is different: the Report on Low Pay, Decent Work and the Living Wage produced by the Joint Oireachtas Committee on Jobs, Enterprise and Innovation should be read by everyone concerned with these issues. This should feature highly in the upcoming election debate. It should also be a template for progressives; what can happen when we all pitch in.

Here are just a few of the 28 recommendations:

  • The Low Pay Commission consider the findings of the Irish Living Wage Technical Group to make the minimum wage a Living Wage by increases in the minimum wage and investment in public services.
  • The Low Pay Commission should include the living wage as a key target and explore how it can be reached when making its recommendation of an appropriate minimum wage.
  • The state should become a living wage employer and that payment of the living wage should be stipulated as mandatory in government procurement contracts.
  • The Government should set a goal for the elimination of low pay and set a target for halving the number of workers affected by in-work poverty within their term of government.

The Committee makes a number of other recommendations; if you don’t have time to read the full report, at least look at the recommendations on page 13 of the text. They go beyond just the Living Wage – they address low pay and working conditions. Just to recap:

  • The Living Wage is €11.50 per hour – it is estimated that 345,000, or 26 percent, of all employees earn below this amount.
  • The low pay threshold is €12.20 per hour – it is estimated that over 400,000, or 30 percent of all employees earn below this amount. The low pay threshold is two-thirds of the median wage which, in turn, is the wage at which 50 percent earn above and 50 percent earn below.

The Committee has gone further than just calling for the Living Wage (though it has done that), it has called for the end of low-pay itself. This is truly a far-reach recommendation.

How did we get to this point that a parliamentary committee made these proposals? Let’s go through the elements of the campaign.

  1. Early in 2014, the Living Wage Technical Group began work on estimating the Living Wage. This was led by the Vincentian Partnership for Social Justice, based on their work on the Minimum Essential Standard of Living which they had been researching since the 1990s. They were joined by the Nevin Economic Research Institute, Social Justice Ireland, TASC, SIPTU and UNITE. They produced the Living Wage for 2014 – at €11.45 per hour. A key element of this estimate was the detail and robustness of the methodology. Though opponents tried to undermine the concept and the method, they were unable to find any fault.
  2. Several sections of the media immediately took this up because the Living Wage seemed so darned fair. What could be more common sense than that people who work full-time should be paid a wage that ensures they don’t live in poverty. This should remind us that the media in its entirety is not some right-wing conspiracy against the people; there are many journalists, presenters and producers who are progressive and many more who are concerned that issues are thoroughly explored and all sides presented fairly.
  3. Civil society groups immediately took up this issue – those working on poverty, migrants’ issues, and community concerns. In particular, the trade union movement got involved with many unions producing policies in pursuit of the Living Wage. ICTU, in particular, played a strong role. The theme of its 2015 Biannual Conference was ‘Living Wage, Strong Economy’; they further produced a Workers Charter incorporating the Living Wage and which they asked general election candidates to sign up to.
  4. Political parties which straddled the Government / Opposition divide contributed to the growing support, creating a broad progressive front in political society. The opposition parties – Sinn Fein, PBP-AAA, including independents – were joined by the Labour Party in supporting the Living Wage. Parties outside the Dail (e.g. the Workers Party) also joined in support. A particular intervention was made by the Minister of State for Business and Employment, Ged Nash.
  5. He sponsored a Forum on the Living Wage which brought together trade unions, employers and civil society groups to listen to the arguments. The Forum featured UK employers who supported the Living Wage and which made our own employer representatives uncomfortable. This shows that while you may oppose a particular government, this doesn’t mean you can’t work with supportive elements in that government.
  6. Individuals and groups contributed through social media – with websites, Facebook pages and Twitter being used to promote the Living Wage and various proposals to further its implementation. Many used official channels to put forward the case – for example, submissions to the Low Pay Commission.
  7. Such was the robustness of the method, the fairness of the proposal and the broad support it received, opponents were put on the defensive. Business representatives, in particular, have never been comfortable arguing against it; ‘we don’t have enough money’ is becoming less credible as the economy experiences a tsunami of growth, profits and spending (and the notion that profits grow while the employees who help create those profits live in poverty seems particular miserly). Even Fine Gael, who wouldn’t usually support overt interventions in the labour market (at least, not on behalf of labour) has had to respond; though its proposals to subsidise employers from public funds is poorly thought-out, potentially very expensive and ultimately unworkable. All this led to the Committee report. That it was supported by all members – including Fine Gael and Fianna Fail members – again should remind us to avoid the trap of seeing political opponents as some impenetrable hegemonic force. With a robust, fair and common-sense proposal, unified opposition can be undermined and support gathered across a broad spectrum. This helps us to isolate the opposition.

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Everyone on Board for the Great Hamster Wheel

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Feel like your pay rise, if you get one, is barely covering the cost of living?  That the tax cut you’re going to get next year will only bring you back to where you were this year?  Feel like you’re running just to stand still (if you’re lucky)?  Welcome to the great Hamster Wheel where you can run and run and go absolutely nowhere.

Christmas is coming and Santa is bringing a big bag of price increases.

Health Insurance:  Now is a busy time for health insurance renewals and Charlie Weston reports a series of price increases.  Aviva is to increase prices by 5.1 percent in January. 

‘The Aviva price adjustments come just months after similar hikes. At the start of the year, the insurer announced a rise of 3.5pc. And in the summer, it announced rises of 5.1pc, effective from the start of last July.’

Other insurers have also announced prices increases. 

The health insurance market is getting more complicated.  72 Aviva health plans (yes, 72) will experience increases, many won’t while 47 plans will be withdrawn.  These will entail increases of €150 to €200 per year for many policy holders.  Weston quotes one independent broker as saying that most plans only have a life-span of 12 months.  Sign up if you will but realise that your plan may not exist after 12 months. 

Hands up all those who would just rather pay for their health through social insurance – one plan to cover all contingencies – and share that cost with employers.

Public Transport Fares:  urban bus, Luas, rail and Bus Eireann fares are going up, though some travellers will experience a decrease with a number of zones being merged.  Some of the increases will reach 15 percent meaning an additional €70 per year.  But while there will be winners and losers in these price increases and changes, over the last four years public transport has experienced considerable inflation:

  • Rail fares:  17.3 percent
  • Bus fares:  21.4 percent
  • Overall inflation:  1.6 percent

That’s a substantial gap.

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Championing the Self-Employed

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The Left and trade union movement should champion the self-employed.   While the Right gives promises of tax breaks, the self-employed need so much more:  a stronger welfare state and public sector intervention to empower self-employed workers in the market place.  Indeed, what the self-employed need is what PAYE employees need: social security and market strength.

 Let’s do some background numbers.  In Ireland, there are approximately 320,000 self-employed or 17 percent of total employment.  Of these, 69 percent are own-account workers – that is, they don’t have employees.   Throughout the EU-15, the self-employed make up 14 percent with the same proportion of own-account workers.  In Ireland, nearly one-in-six in the workforce are self-employed.

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Unsurprisingly, self-employed in the agriculture and fishing sectors make up a quarter of all self-employed.  This is followed by construction and retail, with professional and technical self-employed making up 10 percent.  There are smaller numbers spread throughout all economic sectors.

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Begruding the Recovery

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Cliff Taylor asks why President Michael D. Higgins is not celebrating the recovery we are experiencing. 

‘The President is not comfortable saying anything positive about the Irish economic recovery.’

Apparently, the President is a bit of begrudger; indeed, all of us who opposed austerity are.

‘But if you are in the anti-austerity camp then the fact that the Irish economy is now growing strongly is an inconvenient truth.

Not only is reality inconvenient, we are guilty of being fantasists.

‘The anti-austerity brigade seems to assume there was some way for Ireland to magically escape cutbacks when a huge gap had emerged between annual spending and revenue even before the bank bailout costs.’

But then Cliff bemoans the lack of ‘measured discussion’.   Does labelling people begrudger, reality-deniers and fantasists constitute measured discussion?  At the risk of further labelling, let’s try to engage in some of that – measured discussion, that is.

A good starting point is the Central Bank’s recently published Economic Letter which summarises a major study on fiscal consolidation in the Eurozone between 2011 and 2013. The study used two models to measure the impact of austerity – the EU and the ECB model.  They further utilised three scenarios:  a baseline, one where business debt was factored in and, thirdly, credit-constrained households.  In short, the study found:

  • The impact of austerity measures were much more severe than previously estimated – so much so that for €1 billion of austerity, the economy fell by €1 billion and more
  • That spending cuts had a more severe impact than tax increases
  • That debt rose in the years after the austerity measures were introduced – only falling some five or six years (and possibly longer)
  • That the austerity measures were the primary reason behind the Eurozone’s slugging growth performance

They concluded by saying it was a mistake to pursue austerity measures while the economy was in a slump; addressing the debt should have been postponed until after the economy recovered.  If this were done, the debt would fall more quickly and the economic damage (unemployment, falling wages, business bankruptcy) would have been less.   While this was a study of the Eurozone as a whole, there is no doubt that Ireland experienced this – especially as our level of austerity was nearly double that undertaken in the Eurozone as a whole.

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This Wealth is Your Wealth, This Wealth is My Wealth

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Recently, RTE aired ‘Ireland’s Great Wealth Divide’.  Though there were some problems with the analysis (ignoring the wealth of data published by the CSO, the confusing conflation of income and wealth, the unsubstantiated assumption that Ireland was ‘good’ at wealth generation) and the prescriptions (there wasn’t any) it at least gave an airing to a subject that doesn’t get much airing: inequality. 

A major gap in the programme, however, was a failure to acknowledge one of the biggest wealth divides – that between public and private wealth. First, let’s define wealth.  It is the value of all assets, whether those assets are held by households, businesses or states.  It can comprise physical assets such as buildings, land, machinery; liquid assets such as cash; and intangible assets – assets are not physical and are hard to value (e.g. a brand’s goodwill).  It is on the basis of this wealth that we generate income.

Private wealth is owned privately – by individuals or businesses.  Wealth indexes – likethe Credit Suisse report featured in the RTE programme – measure the wealth that is held by households.  Public wealth, on the other hand, is held by a public agency:  Government Departments, public agencies, local authorities and commercial enterprises.  These, too, generate income, create economic and business activity and are used for individual and social need (e.g. a local authority house). 

The amount of public capital is vast and under-appreciated.  Let’s run through a list that is far from exhaustive:

  • Land
  • Commercial, residential and heritage buildings – in use and derelict
  • Hospitals, schools, prisons, clinics, galleries, museums, libraries
  • Waterways – rivers, lake, canals, on-shore and off-shore
  • Roads, bridges, rails, airports, docks and seaports
  • Assets of commercial public enterprises
  • Financial assets:  Strategic Investment Bank, cash balances, Central Bank, retail banks

This is a vast portfolio of assets that generate income, business activity and living standards.  Much of it difficult to value – how do you measure, in Euros and cents, Lough Ray or the off-shore seas (though this can be done if the property can be privatised; anyone want to buy the Shannon?). 

How did this wealth come into being?  Apart from natural resources, these came about because of investment.  Public decisions in the past to invest in infrastructure, businesses, public services and capital assets form the basis of our public wealth today.

In fact, there is so much public wealth around us that sometimes we take it for granted without understanding how absolutely important it is – and what role it can play in future wealth and income generation for all of our benefit.

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A Return to Boom-and-Bust

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Never mind the details.  If we are to believe even half of the media leaks, the Government is preparing to return us to the kind of boom and bust fiscal policy that dominated the pre-crash period.

The context is different but the character is the same.  Between 1997 and 2007 corporate tax was slashed, capital gains and inheritance taxes were halved while the effective personal tax rate fell by 25 percent.    During that period budgets rode the wave of property tax revenue but when the crash hit our hollowed-out tax base was exposed. Revenue fell by over 22 percent or €16 billion in the first three years of the crash, resulting in a massive deficit.   The economy was built on the quicksand of unsustainable tax revenue.

Fast-forward to the 2016 budget to be presented tomorrow and a whole number of tax-cut goodies are being dangled in front of us:

  • USC
  • Self-employed
  • Landlords
  • Inheritances
  • Capital gains
  • Corporate tax (knowledge-box) and other business taxes

The Taoiseach has made it clear this is the first of a series of tax-cutting budgets.   We are hurtling back to the future.

Some may argue that increased tax revenue can more than make up for this.  But budget management now determines that excess revenue will have to be used to pay down debt – paying for tax cuts and/or spending increases will require equivalent tax raising and expenditure reduction measures (beyond the fiscal space of €1.5 billion).  The EU fiscal rules put us in a whole different game.

However, this game doesn’t prevent fiscal irresponsibility any more than they wouldhave prevented the pro-cyclical polices prior to the crash.  And this is where the problems arise.

Today, tax cuts will be subsidised, not by property boom revenue but by depressing badly needed public spending increases.  The Government has set aside €750 million for spending increases.  But:

  • A minimal €200 million has already been assigned to capital investment.
  • The Government’s Spring Statement and the Irish Fiscal Advisory Council state that €300 million is needed just to keep pace with changing demographics.
  • And a further €200 million is needed just to inflation-proof non-pay expenditure on public services. 

That’s €700 million before we even get out of the starting gates.  And this doesn’t include the Lansdowne Road Agreement or increases in social protection (somewhat offset by declining unemployment payments).  More importantly, this doesn’t factor in the considerable social repair that needs to be undertaken in the wake of austerity.  And as for expanding public services to European norms – that’s not even on the agenda.

While expenditure may exceed this €750 million, it will have to come from somewhere – including cutbacks in other areas of expenditure.  This is not as ominous as it sounds; savings from reducing the prescription medicine bill can be redirected into other areas.  But there is a limit to these savings.

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