Irish Economy

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€1 – Because We’re Worth It

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The Low Pay Commission will soon be recommending an increase in the minimum wage.  How much should it recommend?  Let’s start with the conclusion:  the minimum wage should rise by €1 per hour.  Now, let’s go through the arguments.

First, some background:  the minimum wage (NMW) is €8.65 per hour.  This rate was set back in 2007.  In 2011 it was cut to €7.65 but only a few weeks later the current government restored the cut; this would have affected very workers as employers would have been prevented by law from cutting the pay of workers already employed. 

Ireland is the only EU-15 country that has frozen the NMW since 2007 (with the exception of poor Greece where the Institutions demanded a cut).

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The average increase (bar Greece) has been 16 percent in other EU-15 countries with a NMW.  A number of other, poorer EU countries have actually doubled their NMW (Romania, Bulgaria and Latvia) – but these countries were starting off a low-base.

Over that period thee has been an alarming rise in deprivation among those at work. 

  • In 2008, when the recession began, 6.6 percent of people in work suffered deprivation
  • In 2013, this proportion rose to 19.2 percent

Approximately 350,000 in work suffer from multiple deprivation experiences.  This is not necessarily confined to low-paid employees; there will be self-employed in this category while many workers higher up the wage ladder may be suffering from deprivation due to debt issues or rising child costs.  Nonetheless, it is reasonable to assume that a significant proportion are low-paid employees.

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We Are Not a Cost

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If anyone is uncertain about the power relationship between employees and employers, I suggest they look to the Dunnes Stores dispute and the closure of Clerys.  These encapsulate the massive imbalance of power in the workplace. 

I won’t get into the details of these ongoing disputes.  Any rational person hopes the workers succeed – in the case of Dunnes Stores, to win the right to negotiate collectively and reduce the level of precariousness; in the case of the Clerys workers, to be given their fair share of compensation – and dignity – after years of services to the company.

So here, let’s take a step back and look at the presentation of the relationship between employees and employers.  This may seem, at first, abstract but it leads us to something fundamental.

It starts with costs.

Labels are powerful things.  For instance, costs; this is usually not a good thing:  ‘that was a costly venture’, ‘a costly holiday’, a ‘costly day out’.  These are things we usually try to avoid, unless the ‘cost was worth it’

‘Profit’, however, is usually something positive:  that was a ‘profitable experience’, I ‘profited’ from that lecture, we are ‘back in profit’.  Profit equals growth and prosperity.  Further, it is considered a good thing because it’s opposite – loss – is not.  Loss is bad for a household, a company, and a voluntary organisation.  Continued loss may result in bankruptcy or closure or poverty.

So when we discuss labour and capital in the economy or in a business, we are already using labels that colour the debate:  costs and profits.  If costs are something to be avoided or reduced in order to maximise benefit, then we must depress the price of labour (i.e. wages and working conditions), and diminish the agencies that champions this ‘cost’ (e.g. trade unions, the collective bargaining power of workers, legislation that benefits workers). 

Likewise, if profits are an unqualified good – we should support the agencies that maximise profits and gear our legal, labour and tax framework to that end. 

Even before we begin discussing the relationship between wages and profits, the former is considered a cost, a burden while the latter is a sign of prosperity, growth.

The interesting thing about this highly ideological reading, is that it is not vindicated by basic economic accounting (here comes the abstract part).  

An enterprise creates income by creating gross value-added.  We can measure this by the following:

Gross value-added equals sales revenue minus the purchase of goods and services needed to produce the product the enterprise is selling (rent, accountancy services, machinery maintenance, etc.). 

The important point here is that employees’ wages and working conditions is not a cost in the measurement for creating value.

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The EU Fiscal Rules: Not Fit for Purpose

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What would you say about a system for your car that was sold on the basis that it would alert you to an upcoming crash?  A good idea, no?  Except that the system only warns you after the crash.  There you are, in a massive, multi-car pile-up, bleeding all over the M50 – and only then does the system kick in:

‘Warning, warning, you are an imminent danger of having been in a crash – warning, warning.’

You’d be right to sue.

That’s how the EU fiscal rules operate:  it purports to provide an early warning system against economic crash but, in fact, it does no such thing.  We should return it to the manufacturer, unopened, postage due.

Remember the Fiscal Treaty campaign?  It was claimed by the proponents that we needed these rules because it would prevent things like the Great Recession and, in particular, the Irish crash of 2008.  We needed these rules because we Irish are irresponsible – along with the other PIGS states.  If only we had these rules we could have escaped the crash, the debt crisis and the recession – which was, of course, brought on by our fiscal irresponsibility.  That was the narrative. 

But the cold reality is that were these EU fiscal rules in active operation they would not have seen, predicted, never mind warned of the impending crisis.  It would have been as useful as a diviners’ rod.  How can we know this?  Because the EU Commission, the fairground purveyor of these miracle rules, tells us so.

The rules focus on the structural deficit.  This measures the deficit when all the cyclical components are stripped out – that is, all the boom and the bust parts of the economy.  It purports to tell us what the deficit would look like if the economy were on an even keel. 

If so, then the EU rules should have been blaring warning sounds with red lights and sirens in Ireland in the years before the crash.  Everyone knew (if only in private) that during the period of 2000 – 2006 Irish public finances were dangerously over-reliant on revenue from the speculative boom.  Everyone – except the EU Commission and their rules.

 Let’s look at the estimate from the EU Commission itself.  Remember:  if the figure is in plus, that means we were fiscally responsible, our public finances were robust, and we were almost German-like when it came to prudent budgeting. 

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Oh, my:  according the EU rules and methodology we had extremely sound public finances.

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Drawing Lessons from the Public Sector Pay Talks

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With the public sector pay negotiations getting underway, it is timely to step back from the details and look at the broader landscape.  For it is clear:  if the wage structure in the overall economy mirrored the wage structure in the public sector, we would have a more prosperous economy and society; the recession wouldn’t have been so hard, the recovery wouldn’t have been so delayed, and the social deficits arising out of inequality would not be so endemic. 

While there is much focus on the private-public wage differential, there is less attention paid to the distribution of wages from the bottom to the top – which is the key to long-term sustainable growth and better social outcomes.  Let’s have a quick look at the former first.

The CSO has done exceptional and detailed work on comparing private and public sector pay.  The lazy comparison is to compare the headline average private and public sector pay.  However, this comes up against the like-for-like dilemma.  For instance, there are no hospitality workers in the public sector; there are no Gardai in the private sector.  Without a like-for-like comparison you get all sorts of numbers that don’t tell you much.

The CSO has compensated for that – comparing professions, age, duration of employment, size of enterprise, educational qualifications.  When they do that, they come to some interesting conclusions.

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Among this grouping – which makes up the overwhelming majority of public sector workers – the ‘premium’ (i.e. the additional amount public sector workers above private sector workers) is a little more than one percent higher.  On a like-for-like basis, public sector workers earn fractionally more than private sector workers. 

What is more interesting is the gender difference.  Men in the public sector actually earn less than males in the private sector – two percent less.  However, women in the public sector earn five percent more than their private sector counterparts on a like-for-like basis.  And this is a good thing when one considers that women still face pay (and other types of) discrimination in the workplace.   If there was less gender discrimination in the private sector, the overall public sector premium would probably turn negative.

Just one more word:  This data comes from the CSO.  Since 2010 there have been small wage movements.  Between 2010 and 2014 (4th quarter):

  • Increase in private sector weekly earnings:  2.3%
  • Increase in public sector weekly earnings: (-0.7%)

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The Minister’s Problems with the Unemployed and Statistics

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We all know there will be people who will never work. They’re allergic to work.  So we’re not including those in the statistics. But everybody who wants a job will have a job in the next couple of years.’

There were a lot of criticisms of the Finance Minister’s comments, rightly describing them as a slur on people who cannot find a job.  What I also find illuminating is the innovative approach to statistical representation.

Imagine saying ‘We all know people who are allergic to obeying the law.  So we’re not including those in the statistics.’ Or ‘We all know people who are allergic to paying taxes.  So we’re not including those in the statistics.’  See – we just eliminated crime and tax evasion.  There’s no end of progress we can make on the outstanding issues of the day if we just employ the ‘Noonan Manoeuvre.’

But there are some statistics that the Minister is not including as well – statistics that his own government gathers and sends on to the EU.  Like this one:

  • There are 20 unemployed for every job vacancy.

This comes from the Eurostat Vacancy Rate as reported by the Nevin Economic Research Institute.  We’re not as bad as Greece where there are 74.3 unemployed for every job vacancy but we have a long ways to before we reach Belgium (5) never mind Germany (2.1).

To put that 20:1 ratio in perspective, imagine someone dropping five €10 notes from the roof of a building on to 100 people in the street.  There’s a mad scramble and eventually five people walk away with the notes.  But 95 people don’t.  What do we say about those empty-handed 95?  They’re allergic to €10 notes?  The mind reels.

But the Minister’s capacity to not include statistics does not end there.  Take this one.

There are, according to the last Quarterly National Household Survey, 2.153 million people in the labour force.  There are 1.939 million in work.  When you subtract those at work from the labour force you come up with 213,000.  That’s the number of unemployed.  The number of unemployed doesn’t determine the number of jobs in the market.  There are still only so many jobs to go around for a larger number of people looking for them (there are niche exceptions where an employer has a vacancy but can’t find someone with the matching skills necessary – a phenomenon in the ICT sector and foreign language skills; maybe we should teach all the unemployed Dutch?).

Of course, there are ways to manipulate this equation which, also, rarely gets included.

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To Those Who Have Made the Biggest Sacrifice – Nothing

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Government Ministers are fond of saying that they want to repay those who made the biggest sacrifices; hence: tax cuts.  They have also stated that they want to target the ‘squeezed middle’ which they define as the income group between €35,000 and €75,000.  This is an interesting figure.  A household with two people working at the upper end of this ‘middle’ could earn nearly €150,000.  This government wants to reward them because it is obvious that their current income level is a terrible sacrifice.

For me, those who have fallen into deprivation – now that’s a sacrifice.  And there are a lot of people who have been sacrificing.

Social Protection Payments 1

In 2013, there were over 800,000 reliant on social protection payments in these three categories, both recipients and beneficiaries.  Deprivation has increased from 45 percent to 76 percent.

However, in the Government’s discourse of sacrifice, these people never feature.  They have been effectively air-brushed from the social debate.  The standard response of Ministers is that they have ‘protected’ basic social protection payments but they have done nothing of the sort.  They have frozen these payments, which means that the value of the payment has fallen due to inflation.  Since the Government took office:

  • A single person has suffered a real cut of 3 percent, or €5.69 per week
  • For a couple, the real cut has been €9.45 per week

So how much have the unemployed, lone parents and the disabled and sick lost out on since the cuts commenced in 2010?  Let’s look at the nominal (i.e. the actual amount in Euros and cents) and the real cuts (factoring in inflation.  We will take this out to 2016, using the Government’s projected growth in inflation, to get a sense of what would have to be spent to compensate people’s sacrifice.

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mtaftR2W

A Democratic Economy, A Prosperous Society, A Risen People

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This is the speech I delivered at the May Day Conference organised by the five trade unions affiliated to Right2Water

 

When the Left wins the next election and forms the first progressive government in the history of the state, it will be inheriting severe economic and social deficits:

  • After seven years of recession and austerity our social infrastructure, in particular health and education, is in desperate need of repair
  • Nearly 1.5 million people live in deprivation
  • A crisis in low-pay and precarious work conditions
  • An investment crisis
  • One of the weakest indigenous enterprise sectors in Europe with an industrial policy that is mostly based on maintaining Ireland’s role in the global tax avoidance chain
  • And a golden circle of corporate and political interests which will fight like hell to expand their spheres of control

And if these aren’t challenges enough, the range of interests that will line up against us will be daunting.  Fine Gael and Fianna Fail will be the least of it.

IBEC, ISME and the SFA, Chambers Ireland and the American Chambers of Commerce, media outlets and commentators, Independent House, CEOs, EU institutions, the IMF and the OECD – a whole alphabet of hostile forces who will from the first day work to undermine us, destroy people’s confidence, and put up every obstacle possible.  And that’s just for starters.

If you’re in any doubt, just ask Syriza.

The five trade unions affiliated to Right2Water are seeking to bring together all the ideological, historical and community strands that constitute progressive politics to help meet these challenges.  

  • To start a constructive dialogue that will hopefully lead to an agreed set of policy principles that will form the core of a progressive government. 
  • Principles that are radical and deliverable, an alternative economic, social and political architecture based on a new common sense
  • Principles that give people confidence that we have an understanding of their everyday problems which leads inexorably to a collective and shared resolution.

We have started this process in the principles we have produced here today.  We will be adding to them.  They are not in any order of priority – but they are all urgent. We invite everyone here to contribute to this process and to come together on June 13th to debate and decide. 

The Low-Tax, Low-Spend, Low-Service, Low-Investment Economy

One of those urgent tasks is to break from the low-tax, low-spend, low-investment, low-service model the Government is foisting upon us.  This is the trap celebrated in the Spring Statement – a set of budgetary rules that will permanently immobilise national governments and impoverish the European people.  What can you make of this fiscal rule cookbook? 

You-take-heaping-of-a-10-year-rolling-average-of-potential-GDP-which-cannot-be measured-in-the-real-world,-based-on-components-like-Total-Factor-Productivity-which also-cannot-be-measured,-stir-in-a -convergence-margin,-pour into-the-GDP-deflator-and-put-in-the-oven-and-bake-until-the-reference-ratio-minus-the-convergence-margin-divided-by-100-and-multiplied-by-the-%-GDP-price-deflator-determines-the-allowable-nominal-spending-growth-net-of-DRM-or-discretionary-revenue-meausres.

 Take from the oven.  And don’t forget to subtract one. 

There is one word for this – mindless.  This is Father Ted economics.

A progressive government will have to deal with these rules – now in our Constitution, approved by the majority of people even if under duress.  We will need to push them out at every opportunity.   At the same time, we must work with our comrades in Syriza, and Podemos when they form the next government in Spain, to unravel these rules.

For the June 13th conference the Right2Water unions will publish an alternative fiscal framework – to inform the discussion of how we can turn the rules to our advantage.

The Government is launching the second phase of austerity.  In the first phase, Ministers announced actual cuts in public spending.  In the second phase, public spending will be kept below the rate of inflation, thus cutting its value.  This at a time of increased demographic pressures. We are facing into an indefinite period of what can be called ‘real austerity’.

A progressive government will reverse this.  We do not fully appreciate how little we spend.  We would have to spend an extra €10 to €12 billion a year more just to reach the average spending on public services, social protection and investment of other EU countries.  The Government claims they will do more with less.  The reality is that they will do less with less. 

Why?  Because the Government is locking-in a low-tax economy – one that will benefit the interests of capital over people.  The Government is pulling off the same stunt that Fianna Fail did prior to the crash – driving down taxation to unsustainable levels.  Except today we don’t have the windfalls of speculation, today we are bearing the cost.  Therefore, the Government will drive down living standards and privatise and outsource public services to subsidise its tax cuts.

Progressives compete over tax cuts at their peril.   Workers in Ireland are not highly-taxed by EU standards. However, our living standards are highly taxed, highly priced and highly inadequate.  We are driven into the private sector to purchase goods and services that workers elsewhere receive for from the public sector for free or at below-market rates.

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A Statement in Spring, A Society in Winter

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What was the point?  Two documents with over 100 pages between them.  Hours spent in the Dail.  Many more hours of commentary in the media.  And the whole thing boiled down to only one substantive policy statement:  the Government will have between €1.2 and €1.5 billion available for tax cuts and spending increases, which they intend to disperse on a 50/50 split.  That’s it.  Would have taken a Minister a few seconds to stand up and say that.  Instead, we got bells and whistles and the Spring Statement.

While we were led to believe the Government would outline their plans for the next five years, they did no such thing.  Tables feature budgetary projections up to 2020 but after 2016 they are, in policy terms, meaningless.  All they show is what would happen to revenue and expenditure if there were no policy change; in other words, no spending or tax changes.  So we have to take the Government’s intentions in 2016 and extrapolate from that based on Ministerial nods and hinds.  Let’s go through a few points.

Permanent Austerity

We are now entering Phase Two of austerity.  The first phase involved Ministers announcing actual cuts in government spending.  The second phase will see public spending cut in real terms; that is, after inflation.  Public spending will struggle to maintain pace with inflation.  And this at a time when we have (a) a massive social repair job after the damage of years of recession and austerity; and (b) growing demographic pressures.  And none of this considers trying to move to a modern European social state.

In 2016, we can see this pattern starting.

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Primary spending (which excludes interest payments) will rise by approximately €400 million in net terms.   This no doubt includes €200 million in reductions in unemployment-related payments.  However, using the GDP deflator as a proxy for inflation, we see an actual cut in spending – because spending would have to double just to keep pace with inflation.

Austerity is dead.  Long live austerity.

 

 

Playing the Fianna Fail Card

Prior to the crash, Fianna Fail slashed all manner of taxes.  They got away with this because the coffers were filling up with revenue from the speculative boom.  When boom turned to bust, the weakened revenue base was exposed and public finances collapsed.

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From Protest to Politics: How Can We Get a New Republic?

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An important question that those opposing the water charges, austerity, growing inequality and those looking for an alternative to the establishment political parties are asking is; what exactly are we looking to achieve and how are we going to do it? There are immediate changes needed such as getting rid of the water charges and Irish Water, reversing austerity and cuts and standing up to Europe (and with Greece) on the immoral debt. There are also more profound changes being sought such as achieving the right to housing, health, education, decent jobs etc for everyone. These will require the creation of a real Republic of equality and a genuine democracy where people are treated with dignity and have a real say in the running of their community, their country and Europe. But the most important change is already happening; that is the active participation and empowerment of the (extra) ordinary citizens at the grassroots who are changing their world by standing up for themselves through protest and political action.

It is becoming clear to more and more people that a government dominated by the establishment parties (Fine Gael, Fianna Fail, Labour, Renua & other ‘fake’ independents) will not achieve these necessary radical reforms. Ordinary people have to do it themselves by creating a government that is made up of the people’s representatives – without any of the establishment parties involved. A people’s government would be anti-austerity, anti-establishment, rights-based, and progressive. Let us learn from previous mistakes and understand that it is not sufficient to be a minor player in government – for real change the people’s representatives must be the government.  To do this anti-establishment and anti-austerity groups and parties will have to convince the majority of people in Ireland (particularly the undecided voters from a wide breadth of societal groups) to vote for anti-establishment candidates. The task then is not just to protest and resist but also to try win the coming general election. In order to win we must believe that we can win and we must plan to win. But winning is not just changing the faces in government, it is bringing about a New Republic – a real democratic transformation by an empowered citizenry.

This means that electing an anti-establishment government is only one part of a process of empowerment of ordinary people to transform Ireland. That process must also take place in communities and workplaces, creating new forms of socially caring and enterprising employment that can make solidarity and cooperation the key values of any New Republic. It also means that election and government processes should be led by the citizens, communities and ordinary people. It should continue the new wave of citizen empowerment from the water movement. This also means that if anti-establishment opposition do not win the coming election at least we will have been further empowered to pressure whatever new government is elected to take these issues seriously. Importantly, it will ensure that a solid foundation is put in place to be the major opposition (in the Dail and on the streets) and to be in a much better place to win in the subsequent election, which could come much sooner than expected, and to continue to protest and campaign on a wide range of issues.

Convincing a majority of the population to support an anti-establishment political alternative is going to be extremely difficult and challenging. Multiple approaches and strategies are required. None of the anti-establishment groups, the trade unions, independents, Left political parties, or the communities can achieve this on their own. Therefore, unity and coherence is required amongst as many of these as possible in order to offer a clear alternative to people in the election. This will show people that we are serious and that there is a credible, serious and coherent alternative that is worth voting for.

That is not to say everybody has to be part of the one organisation or alliance. There is the opportunity for multiple organisations to be part of a new alliance or there might be a number of alliances and parties co-ordinating together. There will be some who do not wish to be part of any of these and that should be respected just as the desire for those who want to work together on this new alliance should also be respected. The politics of new alliances must be inclusive and respectful of each other and the principles or plurality and diversity. If we are not trying to be the very change we want to see in the world then we have failed from the start.

One idea could be to form a new umbrella alliance or political movement like Syriza in Greece, Podemos in Spain or the SNP in Scotland. This new alliance could be made up of some of the Left parties, new movements, independents, communities, trade unions, and individuals. Let’s call it the Movement for A New Republic for the moment. In the election the people would have a real choice between the Movement or the establishment parties. The Movement for A New Republic would say to the people ‘we are standing for election to become a government of the people that will not involve any of the establishment parties’. This new political movement would aim to represent the ideals and vision of the 1916 Proclamation- in a meaningful way – for a sovereign, democratic, New Republic, New Ireland of equality and social justice, based on the protection of the vulnerable, community and fairness and assertion of the rights of all.

One single major political alliance or movement appears to be a key part of gaining majority public support for a new radical politics in Greece and Spain, rather than lots of smaller groups. The experience of other countries also suggests that the success of new political parties and movements is exactly that – that they are actually new and are not dominated by their past. A new movement that is clearly anti-establishment, standing for the ordinary people against the cronies and elite, made up of leaders that are new (or clearly independent from) to the political system, could gain significant additional support, and therefore, increase the possibility of an alternative government and a new politics in Ireland. This movement should also play a key role in representing the desire for a completely new politics in Ireland for the long term beyond the coming election.

Ideally then the Movement for a New Republic would include the broadest possible alliance from Sinn Fein to Says No Groups, trade unions, independents, communities and socialists, similar to the successful water movement. While there are many differences between these groups – the only realistic way an alternative government is going to be formed is to work together. Anti-establishment candidates should be supportive of each other against the common enemy of the establishment parties. There has to be an end to divisive actions and attacks on each other, and removing dogmatic approaches that alienate potential supporters beyond the ‘true believers’, and an agreement that we want to be in government and not just permanent opposition. There would need to be Movement candidates in every constituency in order to get sufficient TDs to gain the majority to form a government. The media will also be an important battle ground and, therefore, leaders and spokespeople are required who can represent the message of the new movement in a way that connects with the majority of people.

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I Don’t Want Tax Cuts! I Want Investment and Public Services! And I Want it Nowwwww!!!

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Fianna Fail has announced that it will bring in a new childcare tax credit f it gets elected.  On that basis alone we can only hope they don’t get elected. And any other party that offers such a sop.

It seems that whenever there is a problem in our economy, some party or group of experts have a ready-made response:  tax break.  An under-performing enterprise sector?  Tax break.  A problem with housing?  Tax break.  Poor take-up of costly and uncertain private pensions?  More and more tax breaks.  It’s easy to understand.  With tax breaks, policy-makers don’t even break out into a sweat.  No detailed analysis, no innovative thinking, no attempt to build an infrastructure (which is truly hard work).  Nope.  Just close your eyes and throw the tax brteak at the economic dartboard.  And if it misses?  Throw another, throw more, convince yourself that you’re solving the problem.

Let’s cut to the chase:  if tax credits are introduced it won’t do anything to make childcare affordable.  It will probably increase the cost of childcare, thus wiping out some/most of the cash given to households through the taxation system.  There is nothing to suggest it will increase quality of care.  And it will have the least impact for the low-paid.  Here are some of the arguments. 

Childcare is costly – labour-dense and, thankfully, tightly regulated which can drive up costs.  A model that is based on economic charging – which means revenue must at least equal expenditure – has to charge high fees.  Deloitte’s Review of the Cost of a Full-Day Childcare Placement (which doesn’t seem to be on-line) estimated that the weekly cost per child is between €215 and €254 per week.  And that was in 2007.  Inflation index that up now and the costs will have increased.  For a 45 week placement, the costs could reach €10,000 per year.

Let’s say a tax credit of €2,000 is provided.  While that sounds high it would only mean a tax break of €400 (€2,000 at the 20 percent tax rate).  This wouldn’t even pay for two weeks for a full-day childcare place.

If the tax credit was increased to €5,000 – a hefty amount – the cash amount would be €1,000.  Again, sounds like a lot but would only amount to a few weeks cost.  This could assist households that only use childcare part-time (e.g. after-school) but it is the households that need full-time childcare that face the greatest costs.

In short, the tax credit could be substantial but would still have little impact on households most in need.

Then there is inflation.  Childcare providers are experiencing considerable cost pressures; most notably in the area of wages.  Some are using JobBridge and the Community Employment Scheme to lower costs while others have been suppressing wages to near minimum wage level.  Many community non-profit providers have experienced cuts in public grants and subsidies.  There would probably be pressures related to delayed investment as well as providers would be trying to minimise costs during the recession and stagnation.

Which is why it would be understandable and economically rational (if not necessary) if providers increased their fees were households to receive a subsidy.  In effect, the tax break would subsidise the provider, not the household.

We can see how this works when looking at the historical trajectory of childcare inflation. In the periods between 2000 and 2008, child income support increased dramatically (e.g. Child Benefit, Early Childcare Supplement).  So did childcare costs.

  • Between 2000 and 2006, overall inflation increased by 12 percent; childcare costs increased by 32 percent.
  • Between 2006 and 2008, overall inflation increased by four percent; childcare costs increased by 11 percent.

Let’s assume that childcare costs increased by five percent over the two years after a credit was introduced.  This would completely erode the benefit of a €2,000 credit and cut the €5,000 credit by half.  Households would be running to standstill.

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Bernanke versus Summers and the Irish ‘Recovery’

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There is widely followed debate between Ben Bernanke and Larry Summers which has important implications for the Irish economy and its trajectory. 

Summers, who holds innumerable titles is a Harvard Professor and formerly chief economist at the World Bank, initiated the debate with the view that the advanced industrialised economies were experiencing ‘secular stagnation’ (pdf). Bernanke, who is ex-chair of the Board of the US Federal Reserve Bank, accepts that the industrialised economies have been experiencing weak growth but argues that that this was because of very different and easily remedial problems.

They are both wrong. Those who are interested in their detailed arguments, and the responses and counters, should read their many articles and papers in full. But the debate does shed light on some key problems, and the shortcomings of mainstream answers. Here the particular relevance is to the Irish economy.i

In dismissing the idea of ‘secular stagnation’ (that is, a long-term economic malaise which is distinct from the recent slump and its aftermath) Bernanke argues that it is the imbalances of savings and investment between countries that are the key problems. In a generic sense this would place Ireland in the dock, since the CSO reports a current account surplus in 2014 of €11.4bn, roughly 6% of GDP. Ireland escapes Bernanke’s censure, unlike China, because the scale of the Irish surplus is trivial in a global context.

But this highlights a wider point. The Irish current account surplus barely represents the activities of anyone based in Ireland at all. It is due to the activities of multinational corporations, many of them US-based, who park profits and other activity in Ireland to avail of ultra-low corporate taxes. Any national accounts are the sum of the different sectors, or classes, operating within it.

Risk and reward

Summers’ analysis has the merit of not treating the world as an economic version of the board game Risk. He relates ‘secular stagnation’ to the declining rate of productive investment (plant & machinery, factories, software, vehicles and so on, not housing) by companies operating in the industrialised economies.  He also argues austerity is counter-productive, as it reduces their incentives to invest.

But Summers uses the economic jargon the ‘declining natural rate of interest’ to describe the decline of investment. This is in effect a decline in profitable investment or the requirement for investment to achieve profitability (citing companies such as Google and Apple who are hoarding vast sums of cash or WhatsApp which required little productive investment before becoming a stock market darling).

Yet WhatsApp made only losses, not profits before it was bought by Facebook for $22billion. Summers confuses stock market or financial speculation returns with profits. It is also the case that both Apple and Google do invest in new products, and require increasing productive capacity to do so. It is simply that the growth in their profits exceeds the growth in their investment, so that the cash hoard continues to grow. In effect, this is a drain on the economy as profits are realised but this capital is withdrawn from productive use.

How does any of this affect Ireland (apart from many of these companies being based here, for accounting purposes or otherwise)?  This is shown in Fig.1 below, the total financial balances of two key sectors of the economy, companies (Non-Financial Corporations, NFCs) and government. 

 

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2010

Not a Vintage Year

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This is a post by Michael Burke originally posted on Notes on the FrontMichael works as an economic consultant. He was previously senior international economist with Citibank in London. He blogs regularly at Socialist Economic Bulletin.  You can follow Michael at @menburke

The publication of the ESRI’s latest Quarterly Economic Commentary follows the recent publication of the national accounts for 2014. But they were both strangely muted affairs given that the headlines were GDP growth of 4.8% in 2014 and GNP growth of 5.2%. The ESRI is forecasting 4.4% and 4.1% respectively for 2015- although it does not have a very good forecasting track record.

Not only are these the strongest actual and projected growth rates since the recession began but they are also the strongest growth rates in both the EU and in the OECD. So why the long face? Why are people still taking to the streets to protest water charges and the government parties getting no bounce in the opinion polls?

One factor is that despite all the talk of recovery, even on the distorted GDP measure of activity the patient is still convalescing. The economy has not returned to its pre-recession peak, as shown in Chart 1 below. GDP contracted by 12% from the end of 2007 to the end of 2009. In the 5 following years about 70% of that shortfall has been recovered.  On that trend it will be 2016 before the economy is finally in recovery.

Chart 1. Real GDP

MB ESRI 1

On most indicators including GDP the level of activity is now back to around the level last seen in 2010, which was hardly a vintage year. Following a deep recession, industrialised economies much more usually bounce back equally sharply. But this is a slow, painful and incomplete recovery from a deep recession.

Stagnation apart from exports

There is another factor in the subdued mood. GDP is a measure of activity. But it is not designed to be a measure of prosperity. It is widely accepted that recorded export activity is hugely distorted by the activities of multinational company operations in Ireland. Yet since the economy stopped contracting at the end of 2009 these highly distorted net exports (exports after imports are deducted) have risen by an annualised €16bn, almost exactly equal to the rise in GDP.  Net exports, many of them purely fictitious, account for the entirety of the partial recovery.

Chart 2 below shows that the key components of domestic activity are either still falling or are stagnating after a sharp fall. Personal consumption is over €7bn below its peak on an annualised basis and is stagnating. Government spending is €5.6bn below its peak and continues to contract. Popular anger is actually inclined to grow the more there is talk of ‘recovery’.

But the most dramatic contraction is in fixed investment which is now €23.6bn below its peak at the beginning of 2007. The decline in investment led the recession and continues to act as the main brake on recovery. The fall in investment now far outstrips the total decline in GDP since the recession began.

Chart 2 Personal Consumption, Government Consumption and Investment

MB ESRI 2

There might be grounds for increased optimism if the ESRI were plausibly making the case for higher consumption, government spendign and investment. But that is not the case. Private consumption and government consumption are projectedf to rise by just 2% and 0.5% respectively in 2015. Investment is forecast to rise by 12.5% following a double-digit increase in 2014. Even if the ESRI’s optimism is borne out, the fall in investment is now 60% from its peak. So it would take another 4 years of growth at that pace to begin a full recovery.

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1t

Economic Fundamentals and a Unified Irish Economy

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This article is based on a background paper which was delivered to a fringe meeting at the recent Sinn Féin Ard Fheis

In Ireland there are two separate economic entities. Their separation means they run up against the fundamental laws of economics, as first identified by Adam Smith[i]

In the first instance it is the size of the home market which determines the scope of the division of labour. But in Ireland both economies, by their separation, have a truncated home market. This was not always the case. As part of the British Empire the North East portion of the island was highly integrated into what was then the largest ‘home’ market in human history. At the same time most of the rest of the island was primarily a breeding ground for cattle, to help feed the large metropolitan imperial centres.

Post-Partition the situation has dramatically changed.  The Empire is gone while the southern economy has both developed a home market of a certain size while integrating itself to one of the world’s largest markets in the EU. This is the key fundamental fact which explains the dramatic changes in average living standards in the two parts of the Ireland since Partition. 

This is illustrated in Fig.1 below, which shows per capita GDP using common international Dollars (adjusted for Purchasing Power Parities, first Angus Maddison and then OECD). It amounts to a startling transformation of relative prosperity within Ireland.

To specify the data, Maddison shows that per capita GDP in Ireland in 1921 was $2,533 and that in Britain it was $4,439 (and from a variety of sources that average incomes in the north-east counties of Ireland was at least on a par with Britain). From OECD data per capita GDP in RoI was $37,581 in 2013 and in the UK it was 34,755 (and the ONS data shows NI per capita output was 82% of the UK level).

 fig1_mb

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1a

Starving Ourselves: Ireland’s Low-Spend Economy

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When we look at the headline numbers, it appears that Ireland is a low-spend economy – that is, Government spending is well below EU averages.  This helps explain why we don’t have anything near the public services, income supports and investment that other EU countries enjoy.  However, it is claimed that a significant part of the extra spend in other EU countries is due to their older demographic which necessitates higher public resources (pensions, healthcare, etc.).  Strip this away, and we may find that Ireland is actually a high spending country.

Seamus Coffey has contributed to the debate by doing just that – stripping out spending on the elderly.  When this is done Ireland comes in, not near the bottom, but near the top:  the 5th highest public spending economy in the EU-15, even ahead of ‘high-spend, high-tax’ Sweden.

This is a politically loaded argument.  If it can be established that we are, in fact, a high spending country this would justify a tax-cutting agenda.   We have the money, so the argument would go, we just don’t spend it right.

So are we an average or even high spending economy by EU standards?  No.  Not even close.  In fact we are starving ourselves of public resources.  Let’s go through this argument because I’m sure we’ll hear more of this as the campaign to cut taxes continues.

Headline Figures

First, with the help of the EU Ameco database, let’s look at primary expenditure (public spending excluding interest payments) with an adjustment for GDP per the Irish Fiscal Advisory Council (which has created a hybrid measurement between GDP and GNP).  2012 is the last year we have data for old age expenditure – and as we will see below, it is highly misleading to make any conclusions about spending levels for this year.

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