General Election 2016

The Economy is What Happens When You’re Busy Making Election Plans

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An interesting piece of information came out from the CSO last week, three days before polling day. It showed increases in employment falling to a trickle. Are we seeing a new pattern emerging or just a short-term blip on the long road to full employment? Let’s look at the trend.

notf1

There are a couple of points to make here.

First, a significant part of the big increase during 2013 is likely to have been statistical (I discussed this here). During this period the CSO was making adjustments to its sampling base and specifically warned against interpreting trends. Employment increased phenomenally during this period even though we were still in a domestic demand recession which is be a big strange. Once the CSO ended their adjustments employment increases fell to almost nil – one more suggestion that the 2013 surge has to be treated cautiously. This is more than just a historical point; it may go some way in explaining why people weren’t feeling the recovery – because tens of thousands of jobs were only created on paper.

After 2013, employment statistics are more robust. It started off slow and rose to 16,000 jobs created in the second quarter of last year. But now we come to the second point.

In in the second half of last year employment increases slowed substantially. In the last quarter in 2015, employment rose by less than 5,000 – nearly two-thirds down on what was happening only six months previously. In the first half of 2015 employment rose by 30,000; in the second, 12,000. That’s a considerable deceleration.

How do we explain this? As mentioned, it could be a blip – one has to look at the long-term trend. Or we could be seeing pent-up demand coming through in 2014 as the economy burst out of a lengthy period of recession and stagnation. As the economy settles down – the Government expects GDP growth to slow considerably in a couple of years – so will employment. Are we seeing the beginning of those trends?

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After the Votes

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So what’s it going to be? Coalition? Minority Government? Extended stalemate?  What we do know is that support for the Government collapsed – by over half. Labour’s decline was anticipated, Fine Gael’s wasn’t – at least not in the pre-election polls.

We also witnessed Fianna Fail’s significant advance with a 40 percent increase in their first preference vote, winning an additional 25 seats.

In the new Dail Fine Gael and Fianna Fail look set to take 94 seats (at the time of this writing). In 2011 they won 95 seats. However, this is a smaller Dail. In percentage terms, the two conservative parties won 57.2 percent of seats in the 2011 Dail; now they won 59.5 percent. The conservative vote didn’t fall; it just swapped between the two parties. And this doesn’t count the increase in conservative and gene-pool TDs who look to increase from six to eleven seats.

Progressive parties and independents put in a credible performance. However, the breakthrough that many were hoping for (including me) didn’t come. Sinn Fein increased their popular vote by 3.9 percentage points with the AAA-PbP increasing by 1.5 percentage points. Combined, these two parties look set to gain 13 seats at the time of this writing – positive but about half the Fianna Fail increase. The Social Democrats took three percent but couldn’t increase on their outgoing total while the Greens are back in parliament with two seats. However, the number of progressive independent TDs doesn’t appear to be increasing of this writing.

So where next for progressives? Much will depend on the formation of government and potentially an election in the short-term. But for the medium-term here are a few suggestions.

1.    Start an Honest Conversation

In policy terms, wipe the slate clean. One of the messages coming out of the election was that people didn’t believe the promises to cut taxes, increase public spending and establish fiscal stability. Rightly so. There is little fiscal space – far less than parties claimed. The future is extremely uncertain: low Eurozone growth, interest rates, oil prices, currency movements, the stability or otherwise of the European banking system. Then there’s the question of the character of the recovery (how much real, how much statistical). And what about Ireland’s continuing and unsustainable reliance on a corporate tax regime which works at the expense of other countries. Start an honest conversation about the challenges we face over the next decade – and don’t be surprise how many people will thank us for it.

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“The Recovery Has Nothing to Do With the Government”

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“The recovery has nothing to do with the government”. So says Ashok Mody, former head of mission to Ireland for the IMF, according to a report in the Sunday Business Post. He goes on to argue that the current composition of the recovery is unsustainable and that it is unfair. He warns that an export-led recovery cannot be relied on in a slowing world economy and that regressive taxes should be changed. A full interview with him is promised later.

The judgement is valid. In terms of growth the current government’s track record is unexceptional. Taking the 4 ½ years of economic data under the FG/Labour coalition, real GDP grew by 15%. This is an average annual rate of just under 3.2%. This is slightly slower that the growth rate in the last 4 quarters of the previous government of 3.6%. No-one, not even in Fianna Fáil pretends that the previous government had sound economic policies.  

The reason for the moderate average growth rate, very modest following an extremely sharp recession, is that the economy actually contracted in the first part of the FG/Labour term (as shown in Fig.1 below). In the first quarter of 2013 real GDP was 0.7% lower than FG/Labour had inherited almost 2 years earlier. The trend line in the graph shows where GDP would now be if it had continued at the same pace over the last 4 ½ years.

ireland_realGDP

But the former IMF chief is mistaken in one important respect. The recovery is not export-led.

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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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The Collapse of Ireland’s Finances (again): A Reinterpretation

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As the election season reaches full swing, the inevitable claims of who did what and when, and what this means in the future intensifies. One oft-repeated tale beginning to reemerge is that an expansion in public spending during the 2000s is a, or perhaps the leading cause of the subsequent financial and debt crisis. After all, as seen below, the crisis manifested itself in an explosion of the public deficit and overall debt, which eventually culminated in an inability of the government to borrow from financial markets in 2010. While the topic has been much-discussed, it’s worth going over this again as there are several misunderstandings, and some questions which I think elements of the left have had difficulty answering too.

irelands_fiscal_stance

Notes: The Fiscal Balance and Adjusted Balance are shown on the left-hand side, Expenditure and Debt are shown on the right-hand side. Adjusted Balance taken from IMF’s World Economic Outlook. All others are taken from Eurostat.

The most obvious counter to the argument that bloated public spending was at the centre of the crisis is to point out the actual trajectory of fiscal policy in the 2000s. As shown above, Ireland actually ran a surplus (blue line) in all but one year of the 2000s pre-crisis, and also had one of the lowest debt-to-GDP ratios in the developed world. As a proportion of national income, spending increased, but quite modestly considering the low base. Thus, if anything, it was a model of fiscal prudency.

The counter to this is that, yes, the headline deficit was actually a surplus, but this masks underlying structural weaknesses. As we all know by now, the surpluses arose because of transient taxes such as stamp duty and other bubble-related windfalls. There was an expansion in public spending and the headline surplus was in reality a deficit (or as economists would say there was a structural public deficit). This was hidden by a basket-case economy, which delayed the inevitable collapse. In reality, the state was spending money it didn’t have – government profligacy in the form of excess spending has been a root cause of our woes. This can be seen clearly by the evolution of the cyclically-adjusted government balance, which clearly shows a large deficit from 2001 on.

A not inconsiderable portion of the left have difficulty answering this, and as a result it weakens the case for greater public investment in services, infrastructure, and so on. One response is to point to the costs of the bank bailout. Another is to repeat the point that the public finances were in surpluses. Another criticism is that it is in practice impossible to measure a structural deficit: that is, one cannot disentangle structural versus cyclical components of the deficit. I think all of these answers are somewhat weak, and leave open the charge of denial.

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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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In Praise of Ungovernability

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With the general election now upon us, Fine Gael and Labour can be expected to highlight the need for a “strong government”, while attacks on the left parties have suggested that they are uninterested in governing and only interested in being “wreckers”. This can be a difficult argument on the doorsteps, against a long history of assuming that only parties in power can “deliver” (usually particular benefits for local groups). I want to suggest that ungovernability would not be such a bad thing, and that a “weak government” is in the interests of most people in the country.

What “strength” has meant over the past five years has been strength at imposing decisions made elsewhere – by the Troika collectively, by the EU or ECB individually, by “the markets” or in some sweetheart deal with multinationals – on a population which has been increasingly recalcitrant. Not strength in representing our interests, but strength in riding roughshod over our interests and our resistance. A strong government is not our friend if it is on the right (and there is no real chance of anything else in the next Dáil). 

Conversely, on all recent opinion polls a weak right-wing government is almost certainly the least bad outcome we can hope for, whether that be a coalition of FG, Lab, SDs and independents or – on different numbers and backroom deals – FG in some sort of arrangement with FF (minority government? government of national unity?) The reason for this is that a weak government is one which is less cohesive, and less effective at imposing other people’s interests in the face of our resistance.

I don’t want to overstate the case for this – even a weak government will pull together and ignore all possible popular resistance to, for example, the US military use of Shannon or Shell’s presence in Erris, and will continue to stand over whatever violence is required. However, not every issue will be so easy to handle. Water charges stand at the head of the list of a series of impositions by recent “strong governments” which may prove far more politically problematic for a “weak government”.

At its simplest, a “weak government” is one which will have to pay far more attention to social movements and popular pressure; it will have fewer rewards to offer for loyalty and will have less scope to threaten internal “dissidents” within what is likely to be a fairly thin majority. Indeed, the strategy of “ram the changes through and people will have forgotten in five years’ time” becomes less likely if the government’s lifetime may be considerably shorter.

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