Irish Economy

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Stag-covery

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Stag-covery (n): a situation where statistical recovery occurs within a persistent economic stagnation  

The CSO’s new release shows a statistical recovery and a stagnant economy – a state of affairs that can be described as stag-covery.

The headline rates show a GDP quarterly increase of 2.7 percent.  This might seem solid enough but all this is driven by net exports.  The domestic economy remains mired in stagnation.

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The worst of the economic crash ended in 2010.  Since then it’s just a matter of bouncing along the bottom.  In 2013 consumer spending fell, spending on public services bumped up marginally while investment fell marginally.  We can debate the swings and roundabouts (impact of the pharma cliff, aircraft leasing, etc.).  But the narrative remains the same – the ship sunk to the bottom and is struggling to get back to the surface.

The first quarter of 2014 didn’t get off to a hectic start.  On a quarterly basis:

  • Consumer spending fell, though this shouldn’t be too surprising given that it was coming off a quarter that contained Christmas spending.
  • Spending on public service resumed its long-term fall – by over 2 percent.
  • Investment fell by a substantial 8 percent.

It is this inability of the latter to generate any momentum upwards that is particularly worrying.

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This represents is a potential problem for the Government.  In the last quarter investment fell by 8 percent.  Yet the Government has pencilled in investment growth of over 15 percent this year.  Of course, the game isn’t even half over but this is an especially poor start.

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Closer to the Bottom than to the Top

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Irish living standards are now closer to the bottom of the EU-15 countries than to the top; they are closer to Greece than to Germany or Belgium or the UK or most other EU-15 countries.

Eurostat has just released its annual estimates of household living standards. To measure this they use Actual Individual Consumption (AIC).  According to Eurostat:

‘In national accounts, Household Final Consumption Expenditure (HFCE) denotes expenditure on goods and services that are purchased and paid for by households. Actual Individual Consumption (AIC), on the other hand, consists of goods and services actually consumed by individuals, irrespective of whether these goods and services are purchased and paid for by households, by government, or by non-profit organisations. In international volume comparisons, AIC is often seen as the preferable measure, since it is not influenced by the fact that the organisation of certain important services consumed by households, like health and education services differs a lot across countries.

For example, if dental services are paid for by the government in one country, and by households in another, an international comparison based on HFCE would not compare like with like, whereas one based on AIC would. . . Actual Individual Consumption per capita is an alternative indicator better adapted to describe the material welfare of households.’

In short, AIC captures goods and services bought by households and by Governments on behalf of households.

The following table shows the relationship of European countries’ living standards to the EU-15 average, with the EU-15 equalling 100.

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Ireland is approximately 11 percent below the average EU-15 living standards.  We rank 12th in the league table.  What’s noteworthy is that we are closer to Greece than to most other countries.  We are 14 indice points above Greece but 15 points below the UK.  There are eight other countries above the UK.

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Here We Go Again – Blaming Workers Again

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Previously, I discussed the assertions that rising housing costs were caused by over-paid construction workers.  It wasn’t true but that never stops some commentators from trying to find blame – and finding it in workers’ pay packets.  It’s been going on since the start of the crisis.  And it still goes on.

The Irish Times reported that consumer prices in Ireland are still much higher than in most other EU countries:

‘Even after six years of austerity, consumer prices in Ireland are on average 18 per cent higher than the European Union norm, prompting renewed concern about the country’s competitiveness.’

Why should this still be the case?  Costs associated with being an island on the periphery (transport and import costs?).  Oligopolistic price-setting in key sectors?  Alan McQuaid, economist with Merrion Stockbrokers, believes he has part of the answer:

‘The other key issue which these figures highlight is the underlying cost for retailers – eg rents, insurance and wage costs – are higher than elsewhere. You cannot look to have one of the highest minimum wages in Europe, and then not be surprised that prices are more expensive than the rest of the bloc.’

Oh, my, it comes back to those darned over-paid workers, this time in the in the retail sector where workers are undermining our competitiveness by getting an average weekly income of €512 a week (and this includes management salaries; weekly income for shop floor workers are bound to be much lower).

Let’s look at this claim about high wages in the retail sector and see how we compare with other countries, using the National Accounts here and here.  We will use the Wholesale / Retail sector (there is little data at the retail sector only) but this sector as a whole would impact on costs for  consumers.  First up, employee compensation.

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Ireland is below the mean average of other EU-15 countries (no data for Sweden) and well-below most other countries.  We’re only higher than other peripheral countries and low-paid UK.  This shouldn’t be surprising.  Unite the Union examined employee compensation using the Eurostat Labour Cost Survey and found pretty much the same picture.

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Scapegoating During a Time of Crisis

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The following piece is based on a much longer article ‘Scapegoating During a Time of Crisis: A Critique of Post-Celtic Tiger Ireland’, co-written by Micheal Flynn, Lee Monaghan and Martin Power. It is available here.

Austerity and Scapegoating: two sides of the same coin

Class war is in large part a propaganda war; it is in no way confined to formal political life, but  works its way through all the institutions of society. For the most part it is the ruling class that is advancing – most obviously through the commercial media, which so often serves to divide, disempower, demoralise and dis-benefit the working class.

Only a few years ago it was generally accepted that bankers, developers and speculators destroyed Ireland’s economy. In the wake of the collapse, Brian Lenihan’s claim that ‘we all partied’ was rightly understood as an attempt to deflect blame from those actually responsible. Most understood that it was the recklessness of the investing classes, coupled with the political decision to socialise private bank debt that had forced hundreds of thousands on to dole queues and/or through airport departure gates. For a time, the anger of the population was focused squarely of those that had destroyed the economy.

Yet, notions of collective responsibility have been carefully fostered ever since. The idea of a specifically Irish lust for property (or even a ‘property-owning gene’) appears to have become the common-sense of our time. The commercial media, with the help of the trendy economists elevated to celebrity status, such as David McWilliams, reason that everything went askew because of a ‘cult of property’. We Irish gave in to a ‘mass delusion’ – or as Indakinny so eloquently explained ‘we all went a bit mad with borrowing’.

Consequently, and very conveniently, the role of developers, speculators and politicians – their systematic destruction of alternatives to crippling mortgage debt, the role of section 23 tax breaks, the endemic planning corruption revealed by the Mahon tribunal, are all put out of sight as blame is socialised. This makes it far easier to justify the on-going socialisation of debt, which in turn helps to rationalise the ‘tough decisions’ that government insists are unavoidable. The subsequent apportioning of blame to specific targets is likewise done in a manner consistent with the distribution of austerity.

As expected, cuts to the public sector have gone hand-in-hand with attempts to demonize public sector workers. With the public sector now on the chopping block, ‘over-paid’ and ‘under worked’ public sector workers have been identified as unbearable burdens on the public finances. Rather than remain focused on where the billions are actually going, attention is paid to a ‘privileged’ public sector. This cultivation of resentment gives licence to savage cuts and softens the public up for privatisations. Even better, damage done to the highly-unionised public sector also damages the trade union movement, which when weakened makes for more effective attacks on pay and conditions down the line.

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Championing the Affluent

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The affluent are blessed in their champions.  They have a myriad of commentators fighting their corner.  In the Sunday Independent Colm McCarthy, discussing the benefits or otherwise of a third tax rate on high incomes, stated:

‘In order to raise meaningful amounts, it (the threshold to enter the third rate of tax) cannot be pitched at a level much higher than the €100,000 indicated, but that pulls into the high-tax bracket many people who do not consider themselves exceptionally well-off.’

€100,000 not exceptionally well-off?  Ok, maybe, but they certainly are ‘well-off’; very well-off.  In fact, they are in the top 3 percent of income earners in the state.  If these high-earners don’t consider themselves exceptionally well-off, what would they think if they were part of the 50 percent of income taxpayers who earn below €29,000 a year?  Or the 25 percent of the population who live in official deprivation.

These kinds of comments are part of the don’t-tax-high-earners-too-much-because-then-they-will-leave-in-a-tax-huff argument.  Thomas Molly, writing in the same newspaper, puts it this way when discussing the wealth tax:

‘Any other sort of wealth tax is likely to bring in very little money as the cash moves overseas at warp speed but is guaranteed to scare away many of the people who create wealth and jobs in our society.’

Ah, tax flight – the phenomenon whereby high taxation causes people to leave the jurisdiction.  How valid is this?  Not very.  The US is a good place to study.  Individual states can set their own income and wealth taxes in addition to Federal taxes.  And moving from one state to the next is not nearly as challenging as moving from one EU country to the next.  So what happens when states like Maryland or New Jersey or Oregon raised taxes on the highest income groups?  This study – ‘Tax Flight is a Myth’– found:

‘Attacks on sorely-needed increases in state tax revenues often include the unproven claim that tax hikes will drive large numbers of households — particularly the most affluent — to other states. The same claim also is used to justify new tax cuts. Compelling evidence shows that this claim is false. The effects of tax increases on migration are, at most, small — so small that states that raise income taxes on the most affluent households can be assured of a substantial net gain in revenue.’

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Making Work Pay Requires More Social Protection Expenditure

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What are we to make of the two headlines this morning?  First, from the Irish Times:

‘Work pays better than welfare for most unemployed, ESRI finds’

And then there’s this from the Irish Independent:

‘Why families are better off staying on social welfare’

Both stories refer to a study that will be launched today by ESRI researchers, using the institute’s Switch tax-benefit model that allows a detailed examination of households’ financial situation both in work and out of work.  I will be going into more detail once this report is published but in this post I want to address a broader narrative: namely, to ‘make work pay’ requires more social protection spending and more public intervention into key markets.

The Irish Times reports two findings:

  • Nearly six out of seven people would be financially better off in work than on welfare (or nearly 85 percent)
  • Among those people in employment or unemployed facing a situation where work pays less than welfare, more than 70 per cent chose work rather than welfare.  So much for ‘life-style’ choices.

The Irish Times report goes on to state that:

‘The finding appears to debunk the myth that Ireland’s relatively generous social welfare system gives no incentive for people to work.’

Of course, we don’t have a relatively generous social welfare system but that’s another story.

The Irish Independent, however, focuses on the small numbers who would be better off on social protection.  They report that 45,000 workers would not receive any benefit from taking up work, of which 22,000 would actually lose money.  However, even the Indo report admits that most people still take up work, regardless of the financial impact.

So to the degree that people are not better off taking up work, what is the reason?

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The Cost of Our Health

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Do we spend too much on healthcare?  The EU Commission seems to think so.  In their country-specific recommendations for Ireland they state:

‘Even though Ireland has a relatively young population, public healthcare expenditure was among the highest in the EU in 2012 at 8.7% of GNI, significantly above the EU average of 7.3%.’

The implication is that our spending on healthcare is 16 percent above EU average levels.  What more justification does the Government need to continue cutting our health services than to get a recommendation from the EU?

There’s only one problem.  The EU Commission numbers are wholly unreliable and not a proper representation of health spending in the EU.

Before getting into the EU numbers, let’s see if we can discover just how much Ireland and other EU countries spend on health care by referring to the OECD’s Health at a Glance.

There are two measurements that can be used; first, health spending as a proportion of economic output.  The latest year they have data for is 2011.  To compensate for the fact that GDP is not a good measure for Ireland, I have used the Irish Fiscal Advisory Council’s hybrid GDP which measures fiscal capacity.  This hybrid measurement stands between GDP and GNP.

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Ireland is just below the average expenditure of other Advanced European Economies (i.e. EU-15) – but there is a major caveat which I will refer to below.  It should be noted that if we used a straight health spending as a percentage of GDP, Irish spending would be 8.9 percent of GDP.  Of course, benchmarking any expenditure against GDP has its problems, especially when a Government has been pursuing austerity policies that actively reduce the GDP.

For an alternative view, we can turn to the OECD’s measurement of healthcare expenditure per capita, using purchasing power parities to account for differences in currency and living standards.

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Basic Income – An Idea Worth Exploring

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Basic Income is being discussed more and more.  It will be discussed at this weekend’s Basic Income Ireland seminar.  Basic Income is a weekly payment from the state to every resident without any means test or work requirement – a payment sufficient to afford a decent living standard.  It would work like this:  I receive a weekly payment from the state of approximately €200 per week (if that’s considered to afford me a decent living standard) whether I work or not.  Any income I earn above that is taxed.  If I choose not to work I still receive the €200 weekly payment.   In essence, BI breaks the link between work and income.

There have been considerable criticisms.

First, it has been dismissed on grounds of cost.  It certainly would be expensive, requiring very high tax rates on income from work.  Tax rates of 40 to 50 percent on all income have been proposed to pay for the programme.  And given the need to fund public services, additional social protection payments and investment it is hard to see how this could be introduced in the short-term.

Second is the impact on the labour market and work behaviour.  In short, if you give everyone an adequate income would they choose not to work?  This could create labour shortages in key sectors which would hamper growth and undermine the ability to fund BI.

Third is the inflationary impact.  Boosting incomes could put pressure on prices and drive up imports which in turn would require increasing the BI as it struggled to maintain value.  This could result in an inflationary spiral (of course, we could do with a little spiral to get us out of this deflation).

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Dude, Where’s My Anglo-Irish Promissory Note Dividend?

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Remember back to the renegotiation of the debt repayments on the Anglo-Irish promissory note last year?  Amidst the sound of champagne corks popping we were told we would get a budgetary dividend of approximately €1 billion.  Overnight, our deficit was projected to fall from an estimated 3 percent in 2015 to 2.2 percent.  Less tax increases, less spending cuts.  Of course, we had to be quiet about all this – for fear of frightening the monetary-financing horses over at the ECB.  But what it meant was less fiscal pain.

So what happened to the dividend?  In short, it’s disappeared.   Under the latest Government projections, the deficit has quietly but firmly gone back up again.

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After the deal, the deficit in 2015 was projected to fall to €3,955 million (prior to the deal it was projected to be €5,325).  However, in the Government’s latest Stability Programme Update, the deficit has increased – back up to €5,235.  In percentage terms, the projected deficit yo-yoed – falling from to 2.9 percent of GDP to 2.2 percent after the deal, only to bounce back up to 2.9 percent.

So, instead of facing into a budget that needs to find €2 billion in fiscal adjustments, we should have only needed an €800 million adjustment.  And when you factor in the ESRI’s claim that, apart from water charges revenue, we wouldn’t need any more fiscal adjustments, then we should be facing into a budget where the Government could run expansionary policies (increase spending, cut taxes) and still meet the EU budgetary targets.

So what went wrong?

Three things happened.

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What 5 Cents on a Big Mac Would Mean for Hospitality Workers

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Yesterday was International Fast Food Day.  It started in the US where workers in the fast-food industry are staging protests nationwide, seeking a $15 per hour wage (the Federal minimum wage is $7.25 but President Obama is seeking an increase to $10.10 per hour while states and local governments have a higher minimum levels).

The protest has spread internationally and is expected to take place in 80 cities in more than 30 countries, from Dublin to Venice to Casablanca to Seoul to Panama City.

Fast-food workers are some of the lowest paid workers in the Irish economy with poor working conditions.  Average weekly earnings in the Accommodation and Food sector (we don’t have official data for the fast-food sector) were a mere €321 per week in the final quarter of last year.

Unite, using EU data, showed that our hospitality workers are some of the worst paid in the advanced European economies (see Table on Page 18 here).

Their conditions have deteriorated since the start of the recession.  Average weekly earnings in the whole economy fell by 4.6 percent since 2008; in the Accommodation and Food sector, they fell by 7.7 percent.  The low-paid are even more so.

With the minimum wage frozen since 2007, the revamped Joint Labour Committees having less powers than previous (e.g. they can’t negotiate Sunday premiums) and the cost of living, especially rents, rising, hospitality workers are under increasing pressure.

It is often said that since the hospitality sector is so labour-intense, wage increases would have a major impact on costs but this is over-stated.  It is true that wages (and for the purposes of this post I will use Accommodation and Food sector data unless stated otherwise) make up a high proportion of turnover.  They make up approximately a third of total turnover which is high.

However, a wage increase for the lowest paid in this sector would have only a minimal impact on prices but would have a major benefit to the workers, to businesses reliant upon their spending, the economy as a whole and the Exchequer.  Let’s do out some numbers – and this is a very approximate estimation based on one sector.

The CSO data suggests that if every hospitality employee (and this would include managers and professionals in the sector) were to receive a €1 per hour pay increase, it would cost the sector €160 million in personnel costs.  Sounds like a lot but it makes up only 2 percent of turnover.

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By This Time Next Year We Could End Homelessness

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Let’s start with the conclusion: if by this time next year if there are people still homeless, it’s because the Government made a policy choice.  And the policy choice was to tolerate homelessness.

Now, back to the beginning.

The Government will be spending €7.1 billion this year.  It won’t be spent on public services, or social protection or investment.  And there will be no debate on it.  There will be no current affairs programmes, no panel discussions, no commentaries in the print media.  The Government will spend €7 billion this year and very few will know.

This €7 billion is being spent on paying down debt.  It comes from the Government’s considerable cash balances.  At the end of 2013, the Government held €18.5 billion in cash.  This is made up of money that has already been borrowed and revenue from bank investments (e.g. bonds held in Bank of Ireland, etc.).  The Government is taking the €7 billion and paying down Government debt to lower the debt/GDP ratio.  This is how it works:

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As seen, debt at the beginning of the year is estimated to €203 billion.  The Government will be borrowing €8.7 billion.  This results in a debt of €211.5 billion.  Debt is rising – both in absolute terms and as a percentage of GDP.  That’s because economic growth is low and we still have a deficit.

However, the Government will be taking €7 billion from their cash balances to write down debt.  This changes the level of debt.  Let’s continue the table above.

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H2Whoa – What We Don’t Know About Water Charges Could Really Hurt Us

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Keep these people in mind when reading this post:  Mary, a single parent working a part-time minimum wage job as a cleaner in Dublin hotel; John, a long-term unemployed construction worker who manages to get a few days’ work a month; Moira and Barry, she lost her job and Barry lost hours – raising two children and falling further into mortgage arrears.  I’ll come back to them at the end of this post.

The Government has finally announced its plans for water charges.  Minister Hogan was on RTE Prime Time and RTE News and provided the following information:  the average single person consumes 78,000 litres of water a year; they will face an average bill of €138 per year.  By taking water expenditure off the books (i.e. it is no longer considered a Government expenditure, it now belongs to a public enterprise company) the Government will save €700 million per year annually (but not next year, I’m assuming).

Apparently, the Government has done its own surveys – it would be helpful if they released this data so we could get a greater insight into consumption patterns for different household types, ages and income-levels; but don’t hold your breath.  So let’s work with what we’ve got (these calculations are different from what appears in the Irish Times – they use average per capita and family household – but they are close enough; these are all just estimates).

It would appear, from the above information, that a litre of water will cost a little less than a 1/3 of a cent per litre (0.0029).  This is derived from 48,000 litres of water that will be billed (the average single person’s consumption of 78,000 minus the free allowance of 30,000).  This comes to about €2.65 per week.

Now let’s look at some issues.

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Basic Income Ireland 2014 Summer Forum

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Basic Income Ireland invites you to our

2014 Summer Forum

A half-day conversation about Basic Income.

Date: Saturday 7 June 2014

Time: 1:00 to 5:00, with informal discussion afterwards

Venue: Carmelite Community Centre – 56 Aungier Street, Dublin 2

No charge. Donations/membership subs will be accepted on the day.

Registration: Please register in advance at http://www.basicincomeireland.com/basic-income-2014-summer-forum-signup.html

 A Basic Income is a payment from the state to every resident on an individual basis, without any means test or work requirement.

It would be sufficient to live a frugal but decent lifestyle without supplementary income from paid work.

The idea of Basic Income is being advanced world-wide as part of the solution to the issues facing today’s world.

Come join us to discuss the Basic Income solution and to plan activities for the coming 12 months.

 Programme:

1:00-1:45 Welcome and light lunch

1:45-3:10 Recent developments in Basic Income internationally

Keynote speaker: Yannick Vanderborght, one of the leading figures in the new wave of basic income activists. Professor of Political Science at Saint-Louis University, Brussels; Chair of Regional Coordination Committee of Basic Income Earth Network; co-author with Philippe Van Parijs of L’allocation universelle (2005) and co-editor of Basic income: An anthology of contemporary research (2013) and other books on basic income.

Yannick will speak on transnational cooperation in the campaign for basic income and on recent developments in the theory and politics of basic income. Followed by a participatory discussion.

3:10-3:30 Tea and coffee break

3:30-5:00 Advancing Basic Income in Ireland

Brief presentation and participatory discussion

Afterwards: social gathering in The Swan, Aungier Street.

Further information on basic income is available at basicincomeireland.com and on Facebook – Basic Income Ireland and Twitter: @basicincomeirl.

Register now: http://www.basicincomeireland.com/basic-income-2014-summer-forum-signup.html

Further information: Basic.Income@nuim.ie

Please circulate this notice to your friends and contacts.

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Flying Pigs and the End of Austerity

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Do you really believe that 2015 is the last year of austerity?  If you believe that fiscal pigs will fly, then, yes, 2015 will be the last year of austerity.  However, if you are even just a tad sceptical then read on.  For 2015 is not the end – it is just the end of the beginning.  After 2015 we will be into a new phase of real austerity.

The Government has produced a budgetary scenario up to 2019.  They emphasise that this is just a scenario.  They even underline it.

‘Again it must be stressed that this is purely an illustrative scenario.’

So this is one possible future that the Government is considering.  However, given that they have published it twice means that this scenario is being serious considered – especially as they have not produced any other scenario.

The key to understanding why real austerity will continue up to the end of the decade is the premise of this scenario:

‘Expenditure is assumed to increase by 1 per cent per annum.’

Ok.  And how much do they expect inflation (GDP deflator) to increase by?  1.4 percent per annum.  So each year the increase government expenditure will not match the increase in inflation.  Therefore, each year it will be cut in real terms – that is, after inflation.

Let’s run through some basic numbers – focusing on primary expenditure, which excludes interest payments.  This means we’re looking at expenditure on public services, social protection and investment.

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