Will be away unti late August. To all readers, have a happy summer break.
IBEC’s pre-budget submission is a tour de force. In the name of ending austerity it calls for . . . more austerity; namely, reducing public expenditure in real terms. This is done to pay for tax cuts that will primarily benefit higher income groups. And in calling for real cuts in investment it then proposes to use fiscally inefficient public-private-partnerships which will drive up the cost of investment in order to create new channels of profits. And in all this it manages to avoid the elephant in the room – the long-term chronic under-investment of Irish business in the economy.
Irish business has gotten all the breaks. Historically, it has been the beneficiary of ultra-low corporate tax rates and social insurance while paying below-average employee compensation (compared to most other EU-15 countries). And, yet, it is a chronic under-investor. The following data is taken from the EU Ameco database.
In 2012, Irish corporate investment is at the bottom of the table. Even when adjusted for multi-national accounting practices (which is what the Irish Fiscal Advisory Council’s hybrid-GDP effectively does), we come in marginally ahead of battered Greece. Our corporate sector invests 38 percent less than the EU-28 average – or nearly €6 billion less. It invests less than half the level that pertains in other small open economics (SOE) – or nearly €9 billion less. This is pretty bleak.
But it is not unusual. It is not just a blip due to our severe recession. Irish corporate investment has been an historical under-achiever.
Even during the bubble period when profits were booming and credit flowing, Irish corporate investment never reached EU levels, never mind the levels of our peer group – other small open economies. These are big numbers. Over the last decade:
There is a caveat here: we don’t know to what extent corporate investment went into construction. The data doesn’t breakdown this information. However, it seems reasonable that Irish corporate investment disproportionately relied on construction activities during the boom period. If so, then Irish corporate investment in productive activity would fall even further in comparison to other EU countries.
We should take time out to deal with another measurement – foreign direct investment, or FDI. These numbers show a flood of money coming into Ireland from abroad. FDI into Ireland makes up 18 percent of GDP in contrast to the EU average of 2.5 percent. When criticism of corporate investment is aired, the FDI numbers are thrown about.
However, the FDI numbers measure ‘flows’; they are not an indicator of investment that actually ‘sticks’ in the economy.
The CSO classifies ‘reinvested earnings’ as investment for the purposes of determining foreign investment flows. However, the CSO defines this as ‘the direct investor’s share of the undistributed earnings of its branches, subsidiaries and associates.’ In effect, this is not so much ‘reinvested’ as ‘undistributed’.
Further, there are indications that the IFSC plays a prominent part in FDI flows, much of which has to do with (re)financing companies unrelated to the domestic economy.
A recent paper by the Central Bank observed:
‘FDI data in isolation do not give a good indication of the impact of foreign owned companies on the Irish economy. It is necessary to consider FDI statistics along with ‘real’ economic indicators such as employment, sales growth and value added to the economy.’
One of the ‘real’ economic indicators is actual investment – as recorded in national accounts by the CSO and Eurostat. This investment, which creates real activity in the economy comprises:
So when we discuss corporate investment, let’s keep an eye on real investment, not the ephemeral flows of money that do not make a significant contribution to growth.
So we return to the question: why? Why is corporate investment so low given all the incentives, tax breaks and ultra-low rates? This is not about bashing business or employer organisations. We need a strong, dynamic corporate sector that makes a real contribution to the Irish economy.
But we need an honest dialogue about what is wrong. There is a fundamental flaw at the heart of Ireland’s market economy. If we don’t ask the hard questions we won’t get the right answers. We won’t get a recovery – just a lot of statistics that cover up a dismal reality.
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.
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:
It is this inability of the latter to generate any momentum upwards that is particularly worrying.
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.
Yes, GDP grew in 2013, thanks to the Eurostat revision (for an interesting thought on these revisions see Constantine Gurdgiev’s post). But it was marginal – at 0.2 percent. Quarterly GDP grew by 2.7 percent but this was down to net exports. Leave aside the issue of how real these exports are, especially in the services sector; the real question is whether this export growth will have a strong spill-over in the domestic economy (employment, wages, sourcing from domestic companies). Forfas shows that exports grew by 11 percent between 2008 and 2012. Yet, employment and direct expenditure (payroll and domestic sourcing) fell by 3 percent each.
On the swings and roundabouts, Philip O’Sullivan of Investec makes an interesting point:
‘The national accounts release is not something that we particularly look forward to, given its tendency to be significantly distorted by idiosyncrasies relating to the multinational sector (such as the patent cliff in the pharmaceutical industry) and subject to frequent revisions. Today’s publication does not disappoint on either front. We prefer to base our core narrative around the Irish economy on the encouraging signals emanating from high frequency data on the domestic side (as reflected in positive labour market, retail sales, industrial production and residential property price data) . . . ‘
Whatever about house prices (if houses were being built there would be more economic activity but house price rises might be depressed – is that good or bad?), let’s look at the high frequency data – that is, data that comes out more frequently and up-to-date.
Labour Market: Quarterly employment growth in 2013 averaged 14,700 (let’s pretend this is real - for a more cautious reading of this data see here). In the first quarter of this year employment only grew by 1,700.
Retail Sales: That average monthly Index for retail sales in the first five months of this year is 2.4 percent higher than the monthly average for last year. So this is positive. But in the last month the index fell marginally. Hopefully this is not an emerging trend.
Industrial Production: There has been solid growth since December of last year. But this is concentrated in the ‘modern’ sector (primarily multi-national sector) – in particular, the chemical / pharmaceutical sector - but there has been little growth in the sectors dominated by domestic industry. We need to see more growth in the domestic sectors which are employment and sourcing-rich.
All in all, the economy remains in stagnation mode. There are some small positive signs but against the backdrop of the phenomenal crash, it is just that: small. We can call it a recovery and there is data to substantiate that. But that recovery is not inconsistent with what can be called stag-covery.
To my mind, that captures the state we’re in.
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.
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.
During the recession, Irish living standards fell faster than any other EU-15 countries, bar Greece. The following uses purchasing power parities which factors out currency and living costs.
Irish living standards fell by nearly 8 percent between 2007 and 2013. This shouldn’t be surprising. With a crash fuelled by a crisis in the private financial sector combined with austerity policies – it’s surprising they didn’t fall more (in actual Euros and cents, Irish living standards fell by nearly 14 percent but that includes inflation).
So while most other countries managed to increase living standards, we went in the opposite direction. Even Portugal and Spain didn’t suffer as much as we did.
The future doesn’t hold out much solace for us. According to EU projections, Irish living standards growth will trail all other countries.
Between 2013 and 2015, Irish living standards per capita are projected to rise by a little over 1 percent. This compares to an average EU-15 growth of over 4 percent. If this holds over the medium-term, Spanish living standards will surpass our own, sending us even further to the bottom.
We had a lot of commentary in the wake of the recent elections – about how the economy is recovering but people aren’t feeling it. Whatever about the recovery (let’s not forget that the latest official data shows the economy still mired in a domestic-demand recession; the only recovery is in forecasts), there is a real reason why people aren’t ‘feeling it’: quite simply, there’s nothing to feel. In 2013, Irish living standards actually fell.
No doubt, some will state that Irish living standards were bubble-inflated prior to the crash and that such a fall was inevitable. Maybe so. But it was never inevitable that over one million people would be living in official deprivation, that one-in-ten would suffer from food poverty, that unemployment and emigration would rise to such dizzying heights and that homelessness would reach ‘tsunami’ levels. Successive governments had many options and they took the wrong ones.
Nor is the future cast in stone. We can start growing our living standards with the right policies –raising the income floor, helping households with children (through affordable childcare and other programmes), increasing investment which is the key to long-term growth and housing the homeless.
But if all we get is a debate over tax cuts – well, don’t expect things to turn around any time soon.
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.
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.
If employee compensation were to rise to the mean average of other countries, workers in this sector would be getting a 9 percent pay rise in 2012. More interesting, if we exclude the bail-out countries (Greece and Portugal), Irish wages in this sector would have to rise by 21 percent to reach the average of the other EU-15 countries.
But let’s take a look at the flip side of this wages equation; namely, profits. Wages may be low in a sector because profits are low and enterprises are struggling. Fortunately, the National Accounts provides data on profits, or net operating surplus and mixed income. Net operating surplus is the gross profits minus capital depreciation – a measure favoured by the Department of Finance. Mixed income refers to the profits of the self-employed.
How much profits are made for every hour worked by an employee?
The situation is reversed. Irish profits in the wholesale/retail sector are well above the average of most other EU-15 countries – approximately 31 percent above the mean average. When the bail-out countries are excluded, Irish profits in the wholesale/retail sector are still 19 percent above the mean average of the other EU countries.
We haven’t factored in currency and living costs; these are just nominal numbers. So let’s use one more measurement to get a better sense of the relationship between total profits in the sector and total wages.
In Ireland, profits make up 64 percent of wages in the sector. The average for other EU-15 countries is much lower – 45 percent. In short, Irish employers grab a much higher proportion of the value-added created than employers in most other EU-15 countries.
So what have we got?
This is not intended to be a complete analysis of the sector – and certainly not after years of austerity which has seen many enterprises in this sector go to the wall, or cut prices to maintain volume. There’s no sense in pretending that all is well in the wholesale/retail sector.
But it gives a much different perspective than McQuaid offers. He would have been much closer to the mark if he had said the following:
‘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 profit levels in Europe, and then not be surprised that prices are more expensive than the rest of the bloc.’
But that never gets said. Funny that.
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.’
In a study from the Institute on Taxation and Economic Policy, the impact of the Maryland’s ‘millionaire tax’ was assessed in depth. It was claimed that this tax meant that millionaires were fleeing the state, thereby undermining the tax base. It turned out not to be true. Yes, there was a decline in millionaires but this decline was the result of a drop in incomes largely attributable to the stock market fall and recession, and not to migration.
Closer to our European home, the Wall Street Journal – not noted for its high-tax editorial line – reported on a Lloyd TSB study which assessed why affluent Britons were leaving (it was estimated that one-in-five were considering leaving over the next two years). Tories, of course, blamed the 50 percent tax rate. But the study found otherwise. According to the Wall Street report:
‘The top reason that the study group gave for leaving were crime and “anti-social behavior.” About the same number, however, cited the British weather as the top reason for leaving . . . When asked what would make the U.K. a better place to live, most cited infrastructure spending. That was followed by “cutting red tape for business.” Cutting taxes got about the same number of votes as “improving public services like healthcare, education and the police. In other words, the affluent want more government services not less. And taxes were a relatively minor concern in their decision to move.’
But what’s fascinating about this report is where these affluent Britons plan to move. The top destination is France. Yes, France, home of the wealth tax and the 75 percent tax rate on high incomes.
So this brings us back to the issue of tax increases on high income and wealth groups. If a wealth tax wouldn’t impact on migration, would it be worth the effort? The Minister for Finance claimed that a wealth tax, modelled on the French one, would bring in between €400 and €500 million. That’s a nice little sum.
Dr. Tom McDonnell over at the Nevin Economic Research Institute has produced the most comprehensive and detailed study of a wealth tax in Ireland. He estimated that a modest tax of 0.6 percent would raise €150 million. If this rate were doubled – to bring it in line with the French model – it would raise something closer to the Minister’s estimate.
How much a wealth tax would raise depends on thresholds (e.g. taxing assets above €1 million), the exemptions and reliefs (for businesses, farmland) and the total amount of assets in the economy. This is all up for debate. But we should debate this without unsubstantiated claims that the rich would flee. Or this curious claim from Molloy:
‘A wealth tax pre-supposes that we start living in the sort of police state that France, for example, has always been.’
France a police state? A bit extreme?
Let’s remember: a wealth tax is nothing but a property tax – but a tax on all property, both housing and financial. Therefore, a wealth tax is merely an extension of a tax we already have.
And let’s not forget that we already have a flight going on. Every week, approximately 1,700 ‘flee’ to other destinations. They are not leaving for tax reasons. Most of them are leaving to find a job and secure income.
That’s the flight that we should be discussing.
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:
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? It centres around three main issues, according to the newspaper reports: childcare, rent supplement and transport costs. It should be pointed out (and hopefully the ESRI report will do this) that these issues impact not only on households who do not gain from taking up work; it also impacts on households in work, who are better off than being on social protection, but who are nonetheless being squeezed by high costs and low wages.
Let’s briefly canvas these three issues.
The Independent reports that childcare costs take up 40 percent of the average wage. Ireland has one of the highest childcare costs in the EU. The reason is that in Ireland childcare is delivered on a market-model. Costs have to be recouped through childcare fees. In other EU countries, with much lower costs, childcare is delivered as a public service. In other words, households are not expected to pay the full costs of the childcare.
To provide affordable childcare the state must become actively involved in the delivery of childcare at greatly subsidised rates. This could be done through local authorities, in partnership with community and not-for-profit childcare groups. But the key is to greatly reduce the costs to households. This would be a huge windfall to families. Imagine childcare costs falling from €800 a month to €250 a month. This would be a social and economic boon. But this can only be done through major public intervention (here is an example of how it would work).
(b) Rent Supplement
Another major issue is the loss of rent supplement once the recipient works more than 30 hours. This is a significant loss. However, throwing more money into rent supplement – while providing a short-term gain to workers struggling on the breadline – is not the long-term solution. The long-term solution is the provision of affordable and quality rental accommodation to people both in and out of work. History shows that the major advances in providing decent and affordable housing are state-driven – from Red Vienna to our public housing drives in the 1930s to 1950s.
This will require a major reconfiguration of how we provide housing, especially for low and average income groups. This will require the state – through a public enterprise or a quasi-public corporation (the latter keeps expenditure off the state books) – to provide housing at affordable rents in both the public and private sectors. Indeed, the key is to abolish the distinction between public and private rental housing. This will require not only significant investment but a major change in policy focus. In this new dispensation, a more rational subsidy regime could be introduced.
We will have to await the details of the ESRI report to assess exactly what transport costs are imposing a burden on low-average income households. However, subsidies to urban public transport in Ireland are low compared to other EU cities. For instance, the public subsidy to Dublin Bus is 29 percent of revenue; in Brussels it is 67 percent – more than double. If our public transport were subsidised to the same extent as other EU cities, fares could fall. Alongside an investment programme to improve routes and frequency, this would not only benefit public transport users, it would hopefully improve traffic flows which would benefit car users. But the starting point is investment and subventions of Irish public transport at the same level as other EU cities.
* * *
We can add to this list: an increase in the national minimum wage, strong wage floors under the reconstituted Joint Labour Committees, an end to zero-hour/low-hours contracts.
What does all this lead us to? To make work pay requires a substantial extension of the welfare state, an increase in social protection: affordable childcare, affordable housing, and lower public transport costs. It requires a substantial intervention in key markets – notably in the housing and labour market.
The last thing we need, if we want work to pay, is tax cuts. Tax cuts won’t address any of these issues. We need more social investment – one that would pay off as households see their living standards rise and provide them an opportunity to participate more fully in the economy.
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.
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.
When we look at this measurement we find that Ireland falls well below the mean average of other EU-15 countries. The only countries that spend less than us are other peripheral countries.
Of course, this was in 2011. The Department of Public Expenditure and Reform estimates that between 2011 and 2014, health spending will fall by a further 8.3 percent. With the population rising, we should see health spending per capita fall even further.
On these OECD measurements Ireland is either average or substantially below-average when it comes to health spending in comparison with other countries. Now, let’s go back to the EU Commission’s numbers.
First, the EU rarely uses the GNI measurement (Gross National Income is essentially GNP plus EU transfers). In fact, there is no mention of GNI in any of the country specific recommendations for the other EU countries. In their twice-yearly Statistical Appendix, which publishes 62 measurements (GDP, wages, consumption, investment, exports, budget deficits) GNI is not referred to once. GNI is only used once in the Irish county specific recommendation – for health spending comparison.
So why would the EU use GNI to make a point about health spending? If there was input from our own Government, it could have been inserted to justify their continued determination to cut health spending. But to limit the domestic fall-out, our government gets the EU Commission to say it. Then they can claim to the masses that they are being put under pressure by Brussels. It’s all a bit of choreography.
Second, for many countries, Eurostat national accounting methodology excludes significant amounts of health expenditure from Government books. For instance, under the OECD measure above, German per capita health spending is nearly 40 percent higher than Ireland. But under the EU measurement German per capita spending is below Ireland. What accounts for this? Eurostat methodology.
For example, Eurostat data shows that there is almost no one working in German hospitals – no nurses, doctors, specialists, porters, etc. Expenditure on wages in hospital services is so low that it comes up as 0 percent in the Eurostat tables. This is because much of German health expenditure is ‘off-the-books’; it is spent through arms-length quasi-public corporations. These are not considered part of the public sector, even though they deliver public services. These are funded through mandated social insurance payments (German employers and employees pay seven and eight percent of wages respectively on social health insurance) but the expenditure is not on the public books. It is a similarly situation in Belgium where there are almost no wages recorded as being spent in the health system.
This is not a scam. It merely reflects the fact healthcare systems in many EU countries are produced by non-public sector agencies and funded through social insurance (PRSI) payments, rather than Exchequer funds. The OECD measurement, however, is not based on national accounting – rather it captures all public (i.e. tax/social insurance funded) expenditure.
So when a comprehensive measurement of health expenditure is considered, Ireland is relatively low. But now let’s go back to that caveat I referred to earlier. Ireland has a relatively young population. This means that we don’t experience the same age-related costs. It is often stated that Irish spending on healthcare is very high when factoring in age. Is this the case?
I came across a study in Finland which broke down health expenditure per age group. It shows that health spending per capita on elderly is nearly ten times that of young people. So let’s compare Finnish and Irish health expenditure factoring in age.
First, let’s bring heath spending up-do-date. Keeping the purchasing power parities constant and allowing for population increase, we can estimate that in 2014:
Irish spending is 15.3 percent below Finnish levels. Now, let’s apply age-related spending ratios. This study uses US dollars and it is a bit dated; however it is the only study that provides a detailed age breakdown. Besides, we’re just adjusting for age ratios and other, less detailed studies show similar ratios (e.g. this IMF assessment of German age-related health spending). .
If we assume the same spending and adjust for total population, we find the following.
Never mind the absolute numbers – it is the ratio of spending that we’re concerned with here. Irish spending should be higher among the under 30s, reflecting a youthful demographic. However, given a more elderly Finnish population, spending should be substantially higher among the over 60s. In total, Irish spending should be 15 percent below Finnish levels. And as we estimated above, Irish spending actually is 15 percent below Finnish spending – measured on a per capita basis.
This is not conclusive – it is only indicative. More research needs to be done on age-related expenditure in other EU countries and Ireland to provide a better measurement.
Nor does this measure health outcomes. Do Finns get a better health service than the Irish for the same expenditure? Do they get more services? The Irish do spend more privately (private insurance, GP care, prescription medicine). Again, more research is needed on this.
The point being made in this post is that the EU Commission’s health spending figures are unreliable and not representative of the full picture.
This is not an argument that all is well in the Irish health service. Anything but. We need structural reforms – in particular, abolishing the two-tier system. We need free GP care and subsidised prescription medicine. We need a more rational service infrastructure with key emphasis on primary care.
In short, we need reform, not more cuts. And here’s a hint: if you want to reform a service, go to the people who consume and produce that service. We need a programme of employee-driven innovation and reform. We need to establish action groups in communities to provide a bottom-up needs assessments. We need the broadest possible democratic dialogue.
What we don’t need are contrived numbers that justify driving our health services into the ground.
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).
These are valid criticisms and cannot be easily dismissed. One of the problems is that there is no full-scale BI programme operating anywhere, so empirical study is limited. However, there have been a couple of limited experiments:
These are insufficient to draw conclusions but they are provocative – and suggest the need for more field experiments in BI, to assess its real impact, rather than relying on models whose assumptions can be value-laden. However, rather than induce sloth, in both cases it induced increased social and economic activity. This shouldn’t be too surprising – BI can be seen as an instrument of social certainty, a prerequisite for increased social activity.
Implementing a full-scale BI – even if considered desirable – would be impossible in the short-term. But systems throughout Europe already contain BI elements – most notably, Child Benefit which is paid for each child regardless of the parent’s income or employment status.
There is one area where BI can help boost low-income groups –low-paid and casual workers. These workers are disadvantaged under the current tax-credit system. A worker in part-time or casual employment cannot use all the tax credits that other workers avail of. For instance, a worker on €20,000 has an income tax bill of €4,000. They have tax credits worth €3,300 which is used to reduce the tax bill. They end up paying only €700 in income tax.
For the part-time and casual worker earning €12,000, their tax bill is €2,400. Their tax credits reduce their tax bill to zero. However, there is €900 in unused tax credits. These are of no benefit to this worker.
We can understand personal tax credits as a type of BI – a flat-rate payment to all in employment regardless of income. The only problem is that workers cannot fully benefit from this unless their income is above €16,500.
So what would happen if we turned the personal tax credits into a BI payment – paid to all regardless of their income or employment status? For a single person, this would mean a BI payment of €3,300 a year, or approximately €63 per week.
First, it would have no impact on those whose income is entirely reliant on social protection payments (e.g. pensioners). The BI payment would merely replace a portion of the social protection payment. Second, it would have no impact on single persons with incomes above €16,500 – they already receive the full tax credit benefit. The benefit would go to those in part-time or casual employment.
Under the current system, a low-paid worker can’t get the full advantage of the tax credit because their income is too low. Under a BI system, paying the same amount as the tax credit, the low-paid worker in the example above would receive an increase of nearly €1,000 annually, or 8.2 percent.
Another benefit would be for casual workers. Currently, they face the prospect of going for weeks without social protection income due to administrative delays if they take up casual work for a few days. Guaranteeing €63 per week could help alleviate this problem (though not eliminate it altogether).
Couples would also benefit. For instance, a couple where there is one person working receives a tax credit of €95 per week. Under the BI system they would receive €127 per week. Currently, a couple on €20,000 is exempt from tax – but they have €950 of unused tax credits. If the tax credits were converted to BI payments, they would receive a boost of over €2,000 in net income.
The only beneficiaries of converting tax credits into BI payments would be low-paid households. The cost is difficult to assess. This BI proposal operates on the same principle as a refundable tax credit - something Social Justice Ireland has consistently argued for. Their excellent analysis shows that their scheme would cost approximately €140 million in 2010. However, they have a number of conditions that distinguishes it from a straight BI system (time at work, minimum income, etc.). The BI approach would cost considerably more.
However, this is the gross cost. There would be savings in programmes like Family Income Supplement since net household income would rise.
But the main cost claw-back would be the economic boost arising from increased demand. Increasing resources to low-income groups is merely a conduit for higher spending in the economy – which boosts tax revenue, business turnover and employment.
This is just one of many examples of how to introduce the principle of BI into the current system to create greater social equity and economic efficiency (another approach would be to introduce a Basic Pension – a guaranteed payment to everyone over the age of 66 - something championed by the Trinity Pension Group and Social Justice Ireland).
You don’t have to be a supporter of a full-blown BI programme to explore the benefits of introducing BI principles into our current system. But what is necessary is to start thinking outside the box, to look beyond tinkering with the current system and develop more reforming measures. The principles of Basic Income can be of help.
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.
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.
There may be knock-on effects of the trickery in the last budget where a €2.5 billion adjustment was actually a €3.1 billion adjustment (including temporary measures) but we were all relieved because it was only a €2.5 billion adjustment; and, in any case, it was ok because it got the stamp of approval from the Irish Fiscal Advisory Council. Is that little sleight-of-hand now impacting on next year’s budget?
The bottom-line, however, is that after all that fanfare, about how the Government’s deal on the Anglo-Irish promissory note was going to have a positive impact on the economy and households – its’ all gone up in a fiscal smoke.
Sometimes, you have to try very hard not to be cynical.
Today is 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.
In other words, to keep all things equal (profits, investment, etc.) prices would have to rise by 2 percent to make up the wage increase.
To put that in perspective, a Big Mac that costs €3.50 would now cost €3.57 – an extra 7 cents. That’s the price of paying a better wage.
However, the actual cost would be much less. That’s what would happen if every employee – including managers – were paid a €1 increase. What would happen if that wage increase was concentrated among the lowest-paid in the sector with small increases up the income distribution?
Dr. Tom Healy, Director of the Nevin Economic Research Institute has provided a breakdown of the median wage by decile (i.e. by 10 percent of employees). He has kindly sent me on the data. Here is the breakdown.
As the above shows, 10 percent of hospitality workers earned less than €8.71 per hour; nearly a third of workers earned less than €10 while half of all workers earned less than €11.51 per hour.
This data comes from 2009 (it’s the latest available). If anything, the situation in the lower income levels has probably deteriorated given that the Joint Labour Committees were struck down by the High Court, leaving wages to fall towards the minimum wage.
Using this data, let’s assume a €1 increase for the lowest 40 percent paid, with smaller increases for higher levels (75 cents for the fifth decile, falling to 25 cents for the top decile). What would the impact be on prices? 1.3 percent.
The cost of a Big Mac would rise from €3.50 to €3.55. 5 cents. That’s the difference. Of course, this only holds for a pay increase in this sector alone – but such increases throughout the economy directed at the low-paid would not see a significant additional increase.
The benefits throughout the economy would be meaningful.
Of course, we’re not going to get back on the road to recovery-for-all through pay increases alone. We need an end to austerity, higher economic and social investment; we need real growth in the real economy. But wage increases are a crucial ingredient and the most socially equitable and economically efficient place to start is with those on the lowest wages.
So that’s what is at stake. 5 cents for a Big Mac – a pay rise of €1 per hour for the lowest paid.
That’s one of the best deals you could get in the economy.
* * *
NOTE: Join the Action! In Dublin there will be a rally in Wynn's Hotel at 5:00 pm followed by an action outside a nearby global fast food outlet at 6:00 pm. In Cork, assemble Daunt Square at 5:00 pm for an action outside a global fast food outlet.
We have a housing crisis. 90,000 on the social housing waiting list of which 60 percent have been waiting for two years or longer. The private rental sector is not fit for purpose for many household types (and, in any event, is a highly fragmented, mom-and-pop operation). There are over 100,000 in arrears and that doesn’t count buy-to-let mortgages. The planning system is unreformed and we are stuck with inefficient and costly suburban sprawl. And there is a major supply problem in the main urban areas, especially Dublin, where rents are experiencing double-digit inflation.
So what’s the answer? Blame the workers, of course.
Prime Time had a feature on the housing crisis followed by a panel discussion. And what comes up? The alleged high cost of labour in the construction sector. There were two parts of these assertions.
Hubert Fitzpatrick of the CIF claimed:
House prices today are approximately 50 percent of where they were seven years ago but the cost of actually building those houses has not fallen by the same extent.
Economist Ronan Lyons stated:
The Government needs to be very forensic in saying if we have labour costs in construction that are 25 percent higher than in West Germany, why? Is there a reason for that? Can we get our labour costs in line with Eurozone partners?
We have had a spectacular roller-coaster ride in the property market, fuelled by speculation, non-regulation, massive capital inflows and, then, outflows – and we come back to ‘wages are too high’. You really would weep.
How valid are these assertions? Not very when you look up some basic facts.
First, it is true that property prices have fallen substantially. It is also true that building costs haven’t fallen by the same extent. But during the boom period house prices rose at an exponential rate compared to building costs.
Between 1994 and 2007, new house prices more than quadrupled. Construction costs didn’t even double. If house prices were to fall back in line with the cost of building a house, they’d have to fall even further, by more than a third. If there are problems in investment returns or margins, it’s not coming from the cost of building a house – of which wages are a significant component.
What about the claim that construction labour costs are 25 percent higher than West Germany? Here is the latest data from the European Labour Force Survey which measures labour costs per hour.
Ireland is below the mean average of other EU-15 countries. And below Germany. Compared to our peer group – other small open economies (Austria, Belgium, Finland, Sweden and Denmark) – Irish construction labour costs are 28 percent below their average.
And what about West Germany – the former Federal Republic? Destatis (the German equivalent of our CSO) shows that gross construction earnings are six percent higher than the national average. This is due to the lower wages in the former East Germany. So Irish construction labour costs are even further below West German labour costs.
And what’s happened since 2011? Eurostat estimates construction labour costs have increased by 3.2 percent in the EU-15 and 5.4 percent in Germany. In Ireland, labour costs have increased by a lowly 1.3 percent – falling even further behind European and German levels.
So here we go again. If there is a crisis going, blame the workers; blame the wages; blame the labour costs. Same ol’ same ol’. To be fair to Ronan, he did state we shouldn’t get hung up on wages and pointed to real problems in the housing market – namely, supply and, in particular, housing for one and two-person households. He also nailed the Government’s proposal to stoke the housing market – again.
There are a number of complexities in housing market that defy simple mono-solutions. It is a jig-saw that we must piece together carefully (not having a housing policy for the last six years doesn't help). However, in doing so we should always start with those in most need – those on the waiting list, the homeless, those living in unfit or overcrowded accommodation, households with medical needs. Not only will this stimulate economic activity and address social equity, it will open up more private rental accommodation to the market with the hope that this can take the heat out of inflation.
We need to focus on the private rental sector itself. There are issues of supply, price, quality and long-term stability. This should lead us to greater regulation (tenants’ rights, rent controls) and to consider a public intervention in the private rental sector – to create best-practice in the market and increase investment. This will provide another channel for demand.
But we desperately need a paradigm shift in our treatment of housing. The historical fact is that the major developments of housing for people was driven by the state – from Red Vienna to our own housing programmes in the 1930s. If we continue to treat housing as a private investment vehicle, if we think the COS’s Property Price Index is the bellwether of economic recovery, then we will stumble from crisis to crisis, band-aiding and creating perverse outcomes. (Question: why don’t we talk about the benefits of depressing housing costs to households and the productive economy?).
But if we allow the issue to be obfuscated by unsubstantiated assertions that labour costs are the problem, then we will end up in an even worse place.
I’ll leave the last word to Rob Kitchen, Professor of Geography in Maynooth and a leading expert on housing and urban development. He hangs out at Ireland After NAMA (you can follow him here: @RobKitchin ). He summarised the Prime Time programme in this simple tweet.
'PT re aff housing: need no regs, incentivize dev, lower taxes & wages - leave housing 2 free market . . . welcome back 2005'
Too too true.
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:
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.
When the Government does this – use €7 billion to pay down the debt – the level of debt falls, in both absolute terms and as a percentage of GDP.
Here is the question: is using that €7 billion to pay down debt the best use of that money? In the following I’d like to put forward an alternative use for that money and see what issues that throws up.
There are 90,000 people on the social housing waiting list. There are an estimated 5,000 people homeless at any one time. And there are tens of thousands of unemployed building workers – many of whom are being forced to emigrate. So let’s take half of that money the Government is using to pay down debt - €3.5 billion – and use it to build social houses, house the homeless and put some people back to work.
The Minister for Housing estimates that it costs €162,000 to build a single social house unit. This is based on requests for small developments from local authorities so this can’t be taken as average cost. I’ve seen lower estimates but let’s work with this.
The €3.5 billion would build approximately 20,000 social houses. This would house over 20 percent on the waiting list. And this programme could target the nearly 3,000 living in emergency accomodation.
This would make a significant impact on housing need in Ireland – though it would only be a beginning. More housing could be brought on stream if currently unsuitable social housing were brought back into the system – the average cost of rehabilitating social houses is €17,500.
The impact on employment would be considerable. 35,000 direct jobs would be created – that is, jobs on site. NERI estimates further job creation given the impact on downstream sectors (building supplies, transport) and the additional demand injected into the economy.
In the year that the social houses are built, nearly 60,000 jobs are created. Of course, once a house is built you can’t rebuild it. The need for labour goes away as it is a temporary expenditure. However employment still increases because of the demand that was injected into the economy – even on a once-off basis. A programme of building over 20,000 social houses this year will still mean a permanent employment increase of 3,000 by 2018. That’s a big boost.
Stay with the NERI estimates economic growth would also be higher. By 2018 GDP could by more than €800 million higher.
And what about public finances? The €3.5 billion expenditure would not require extra borrowing – don’t forget, the money in the cash balances has already been borrowed. So, neither would it require any extra taxation nor compensating spending cuts in other areas.
However, it would appear on the books – that is, it would drive up spending in 2014 and, therefore, the deficit. But there be would be no negative impact next year. If anything, it would have a positive impact down the years.
In 2014 the deficit would rise by one percent. Is that important? No. The Minster for Finance has continually stressed that the goal is to reduce the deficit – as per the Maastricht requirements – to 3 percent by 2015. Since the expenditure is a once-off, it is not repeated in 2015. In fact, the deficit falls even further than the Government projections after 2014 because of the extra demand injected in the economy. If anything, building social houses brings more manoeuvrability to public finances, not more restraint.
The only downside – if you want to call it that – is that by 2018 the General Government Debt will be 108.6 percent of GDP rather than the Government’s estimate of 107.2 percent. Any reasonable response to that would be: so what?
Let’s recap. Ending homelessness and reducing the social housing waiting list by nearly 20 percent would:
There are other benefits. Spending money on hotel rooms for homeless would be eliminated. Further, 48 percent of those social housing waiting lists are in private rented accommodation receiving rent supplement. On average, for every 1,000 social housing units built, the state would save €2.3 million on supplementary payments. And more rental accommodation becomes available on the open market. This would put downward pressure on rents and mean that private sector tenants would have more money to spend in the consumer economy. There any number of benefits from building more social housing.
The only argument that could be made against this proposition is that the EU Commission would oppose it. Would they? Would they say – we don’t want the deficit to fall faster, we don’t want more tax revenue, less public spending, higher growth, more people at work, less people homeless and fewer people waiting on housing lists? I know that many people don’t think much of the EU Commission but they’re not irrational.
This is one alternative to the Government’s decision to spend €7 billion on paying down debt. Building social housing to house the homeless is both socially equitable and economically efficient. But first we have to start a debate about this. We have to put it in stark terms.
To conclude (again): if by this time next year if there are still people are homeless, it’s because the Government made a policy choice. And the policy choice was to tolerate homelessness.
The good news is that it doesn’t have to happen.
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.
Conserve and Pay More
The Minister claimed that:
‘If people engage in conservation they will pay less. If people want to waste water, they will pay more.’
Is this true? Probably not. The Government needs to a pre-determined revenue target to move expenditure off balance sheet. Given the Government target of €240 per household and the fact that approximately 1.35 million households will be on the public network, this means the charges have to raise approximately €325 million. Whatever the per litre charge, regardless of free allowances, we must raise €325 million. That’s the starting point.
Let’s say everyone ‘engages in conservation’ and reduces water use by 10 percent. To maintain revenue of €325 million, the price of water would have to rise from 0.0029 cent to 0.0033 cent per litre (that is, if there is no change in the free allowances or reliefs). Households will be no better off.
The Minister claimed that reduced demand would mean reductions in expenditure because we wouldn’t need the same supply. This assumes that every one percent reduction in water use will result in one percent reduction in Irish Water expenditure. Will this happen? Doubtful. There is a certain level at which expenditure on a national infrastructure cannot fall below – regardless of how little is consumed. We still need treatment plants, we will still need pipes.
It is further doubtful given the woeful state of our infrastructure and the level of investment needed – which will have to be paid by borrowing with all the debt-servicing costs.
But at another level, this is all beside the point – because the Government is committed to ‘full-cost recovery’; in other words, the entire cost of Irish Water will come from charges. This will be phased in over time. How much will this be? Up to €560 per year for an average household. So charges will more than double. Conserving will knock a little bit off this but everyone will pay more.
The Government should be more honest with people.
Who Will Bear the Burden of Conservation?
There is a further perverse situation. There is a link between incomes and water consumption (similar to electricity consumption). Moderate consumers may try to reduce their use to save money because they are on low-incomes. But what about high-income, high-users of water (the ‘wasters’ the Minister referred to)? If a single person on high income uses 1.5 the average of water consumption, they would be facing a bill of €250 per year. Would that be high enough to incentivise conservation? Difficult to say – but if someone on €80,000 per year receives a 2 percent pay increase – or €1,600 - (managers and professionals have seen their weekly income increase by 10 percent over the last two years), then the extra net income would be more than enough and then some to cover the charge.
The perverse outcome is that the ‘burden’ of conservation will fall on those who are already moderate userswho can't afford the extra expense while the ‘wasters’ on high incomes won’t change their behaviour because they can well afford it.
This is all conjecture but reasonable conjecture. High-income high-users may not change their behaviour because they are not as sensitive to water pricing as those on low-incomes.
The wasters may continue to waste; moderate consuming households may be forced to cut back.
The Real Game Plan
There is so much we don’t know because the Government won’t release the information in a coherent and analysable form. But there are some things we do know:
But there is a broader narrative and this brings us back to Mary, John, Moira and Barry. They will all be hit with water charges. On average, they will pay an extra €4.60 per week.
However, the Government is committed to providing tax cuts to higher-income groups through raising the standard rate tax band threshold. If they raised it by €2,000 this would provide our friend on €80,000 with a tax break of €420. That would more than pay for their water charge.
In short, May, John, Moira and Barry will be paying more so that high-income earners get a tax cut.
In some places, this would be called horribly inequitable.
In Ireland, it’s called ‘reform’.
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.
There may be some slight variations due to rounding and small exemptions from the benchmark but this tells the broad story in absolute terms. This confirms the Government’s assumption of maintaining expenditure below the rate of inflation.
Between 2015 and 2019, real primary expenditure will be cut by 2.3 percent, or approximately €1.5 billion. This may not sound like much (and in comparison with what’s gone on before, it isn’t). But this is coming off the back of massive cuts. Between 2008 and 2015, primary expenditure has already been cut by a massive 18.5 percent in real terms. And now, we’re in line for more up to 2019.
But this only tells part of the story. For in that expenditure there will be certain demand-led programmes, expenditure that the government has no alternative but to increase. The big category is the increasing number of pensioners. There is no official estimate of this, but we can make a bit of a guess.
Between 2008 and 2012, there was annual increase of 3.5 percent in recipients of stat pensions (contributory and non-contributory old age pension, and widows’ pensions). There will be a blip this year with the increase in the retirement age but long-term growth is probably around 3.5 percent.
If this holds, then between 2015 and 2019 there could be an increase of between 75,000 and 90,000 in pension recipients. In 2012, average pension payments were €11,900 per recipient. On this basis, old age expenditure could increase by approximately €900 million. And this doesn’t factor in any increase in pension payments. Nor does this factor in increased demand on public services (health services, medical cards, eldercare, etc.).
In short, increased pension payment could take up 50 percent of the assumed increase in public expenditure up to 2019. If this holds, then expenditure on all other programmes – public services, social protection, and investment – will have to be cut further in real terms. And when the demand on services is considered, the cuts will have to be even more severe.
There will be some benefits to public expenditure; namely, reduction in unemployment benefits. There may be fewer primary level students, but there will be more secondary and third-level. The Government may be successful in passing on health expenditure to households (forcing them to purchase private insurance). So there are ups and downs.
But the bottom line is that expenditure will be squeezed, squashed and stuffed. There will be real public spending cuts under the Government’s scenario. Austerity will continue – but not because there will be actual cuts, though this could happen in particular programmes. It will mainly happen by letting inflation do the cutting – that is, below the radar.
Why? The Government is equally up-front about this.
So, reduced tax revenue and a budget surplus – it doesn’t take an economics department to figure out how you pay for that. You can only do that by cutting public expenditure in real terms.
There is one bright spot. All this may be on the planning boards, but those boards can be discarded. It is likely there will be a change of Government after the next election. I would like to think one possibility would be a progressive-led government but that looks unlikely if Adrian Kavanagh’s estimates are anything to go by.
However, there is a definite need to intervene in the debate – not only to highlight what’s being planned, but to provide an alternative; an alternative based on fiscal expansion, increased tax revenue and investment, growing efficient public services and providing a strong floor for all low-income groups whether in work or not.
This may sound all abstract – and that’s exactly what vested interests want you to think (‘oh, don’t you be worrying your little heads over structural balance assumptions, the experts are looking after you’). But it’s not. This is real – just as real as the nightmare we have had to endure over the last six years.
You may not believe in flying fiscal pigs but we had all better believing in fiscal sheep. Because we’re being herded into a place we definitely don’t want to go.
1,230,000. This number should be burned into the debate. This the approximate number of people included in the CSO’s enforced deprivation rate. This is the number of people who suffered two or more deprivation experiences in 2012. This is more than one-in-four – 26.9 percent - of all people in the state. This is a number that should drive the debate from here on.
The CSO sets out eleven enforced deprivation experiences:
Without heating at some stage in the last year * Unable to afford a morning, afternoon or evening out in the last fortnight * Unable to afford two pairs of strong shoes * Unable to afford a roast once a week * Unable to afford a meal with meat, chicken or fish every second day * Unable to afford new (not second-hand) clothes * Unable to afford a warm waterproof coat * Unable to afford to keep the home adequately warm * Unable to afford to replace any worn out furniture * Unable to afford to have family or friends for a drink or meal once a month * Unable to afford to buy presents for family or friends at least once a year
Those who suffer two or more of these experiences are officially categorised as deprived.
Deprivation has been rising since the beginning of the recession. In 2007, 11.3 percent were categorised as deprived. In 2012, it rose to nearly 27 percent – more than doubling. In absolute numbers, it has increased by nearly three-quarters of a million.
In this overall number there are approximately 375,000 children, aged 17 and under. Since 2007, this number has increased by 180,000.
There are sections of society that are under severe pressure. The following is the deprivation rate for particularly vulnerable sectors:
In these groups, one-in-two people live in deprivation.
It should never be forgotten that deprivation is not an experience confined to social protection recipients. Over 16 percent of those in work are categorised as deprived.
But for one-income households, over 30 percent – nearly one-in-three – suffer multiple deprivation. Even two-income households are not exempt from this social scourge: one-in-eight households with two incomes are deprived.
Social Justice Ireland has highlighted another poverty measurement – relative poverty, or ‘at-risk of poverty’. This measures the number of people whose income is 60 percent of median income. Median income is the mid-point in income distribution– where 50 percent earn above that amount and 50 percent earn below.
Using this measurement, SJI points out that 757,000 are at-risk of poverty, or 16.5 percent of the population. Of this number, 220,000 are children.
This is a helpful measurement but like all such measurements, it has limitations. The main limitation is that this poverty line is linked to median income. And when the median income falls, so does the poverty line. The following graph shows how this works.
Median income has fallen by 14.7 percent; therefore, the poverty line threshold has also fallen. That’s why the number of those categorised at-risk of poverty has remained fairly stable (in 2008, 14.4 percent were at-risk). The Government and the IMF has made much of this – how the austerity programme has shielded the most vulnerable.
However, because median income has fallen, we have this weird situation whereby you could be in relative poverty in 2008, have your income cut, but find yourself statistically out of relative poverty – simply because median income fell faster than yours. Example: you had €12,400 equivalised income in 2008; as the chart above shows, you would have been categorised as at-risk of poverty. Now, let’s say your income fell by 10 percent by 2012. Using this measurement, you’d no longer be considered at risk of poverty. Why? Because even though your income fell, median income fell faster,
The CSO provides a little twist to this measurement. How many people would be at-risk of poverty if the median income hadn’t fallen; or was frozen at 2007 levels? Over 24 percent – or more than one million people. This would correspond to the numbers suffering deprivation.
One final deprivation stat.
While the CSO’s deprivation rate includes those who have suffered two or more such experiences, we find that the number suffering one deprivation experience has increase from 11.3 to 16.1 percent. Therefore, in 2012, over 40 percent of the population suffered at least one deprivation experience – up from a quarter in 2008.
Deprivation, relative poverty, consistent poverty – this should now drive the debate. When we have over one million people living in deprivation and poverty, public policy and political discussions should be wholly focused on how we end this disgrace. Yes, there will always be people who have less than others – whether that’s income or property.
But is anyone going to rationalise a society where people go without food or without home heating or a winter coat or a pair of shoes? No, there isn’t (at least I hope there isn’t). But what may happen is that all this will be ignored, that those living in poverty and deprivation will be air-brushed out of the public debate, that there won’t be any need to rationalise it – because for all practical purposes it won’t exist.
And when that happens we will have truly lost not only our grasp on rational economics but our moral compass as well.
The Government’s paper on Ireland’s effective corporate tax rate confirms what the dogs in the street have known for a long-time: Ireland has a low,extremely low, corporate tax rate.
There is that vexed question of what corporate income counts for the purposes of determining the actual rate of tax companies pay here. Professor Jim Stewart produced data which showed that the effective tax rate of US multinationals operating here was 2.2 percent in 2011. This was disputed because Stewart – using the US’s Bureau of Economic Analysis – included the $140 billion that US multinationals move through Ireland on their way to other places, including tax havens. Some claim you can’t count this because it is not taxable in Ireland.
But, of course, that is the point. The issue is not the Irish corporate tax rate per se but the role that Ireland plays in the global tax avoidance chain – the ability of multinationals to use Ireland to avoid paying taxes that would be due elsewhere. That is the character of a ‘tax-haven conduit’.
In this respect, it is worth remembering:
‘Tax havens attract foreign investment not only because income earned locally is taxed at favorable rates, but also because tax haven activities facilitate the avoidance of taxes that might otherwise have to be paid to other countries.’
The Irish corporate tax rate is the sign on the door. It’s an inviting sign – a low-tax rate of 12.5 percent. But the real goodies are what's behind the door – the prospect of using Ireland as a transit point in the global avoidance chain.
Let’s park that issue for the purposes of this post (in a guest post yesterday, Niall MacSuibhne examined some of these issues) and look at the sign on the door based on the paper’s own (and contentious) estimates of what is the appropriate level of corporate profits that should be calculated here. The paper rightly shows that there are a number of different methods to determine the effective tax rate. In a previous post I used ‘entrepreneurial income’ because both the CSO and Eurostat stated this was the best measurement of pre-tax profits.
The Government paper prefers another measurement – net operating surplus. Ok, there’s not a whole lot of difference. Net operating surplus is roughly equivalent to profits minus consumption of fixed capital.
So when we use this measurement, how do we compare with other countries? The following is taken from a helpful table put together by one of the authors of the Government report, Seamus Coffey.
Among advanced European Economies (the EU-15), there’s Ireland – right at the bottom. To reach the average of the other countries, our effective tax rate would have to nearly treble. To put a money figure on this – corporate tax revenue would have to rise from €4 billion to €10.7 billion.
However, corporation tax is not the only ‘tax’ that companies pay. They also pay social insurance (or the ‘social wage’). We have looked at this before and – surprise, surprise – found that Irish employers also pay a low, low effective social insurance.
If Irish employers were to pay the same effective social insurance rate as employers in other EU-15 countries (excluding Denmark which doesn’t have a social insurance system), revenue would rise by €6.4 billion.
Now that’s what I call ‘corporate welfare’.
That’s the sign on the door. Low corporate tax rates, low social insurance. No wonder companies put their hand on the doorknob. Here’s what Arthur Cox offers to German companies who want to re-locate to Ireland:
'There are numerous advantages for multi-national companies with large Intellectual Property (“IP”) portfolios who locate and manage these portfolios in Ireland. The effective corporation tax rate can be reduced to as low as 2.5% for Irish companies whose trade involves the exploitation of intellectual property.'
No wonder so many foreign companies are opening the door.
This is a guest post by Niall MacSuibhne, a former civil servant.
Well, well, the Department of Finance have decided to issue a "Technical Paper" to back up the myth of Ireland as a full tax-compliant member of the World. Not surprisingly, a search for the word ‘haven’ results without a single match in its 48 pages. Nor will it surprise anyone to read the paper’s expression of thanks in Section 1.1 to ‘. . . PwC Ireland in supplying and explaining the data referred to in this Technical Paper is gratefully acknowledged.’ There is no longer any effort to hide it - Irish tax policy is now, if not run, then certainly influenced, by those advising multi-nationals on how to avoid or minimise their liabilities.
The technical paper, written by Seamus Coffey (UCC Lecturer in Economics) and Kate Levey (Department of Finance) runs through various methods of calculating the income taxable in Ireland, until it gets to its real target: Dr. Jim Stewart's recent paper and his use of US Bureau of Economic Analysis figures to calculate tax. All of the previous methods selected, luckily for the Government, produce similar results.
The difference, of course, is income attributed to Irish Registered, Non Resident companies (IRNR). These are companies “born” in Ireland which “emigrate” to the sun of Bermuda or similar spots. For the purposes of the Government’s calculations, the activities of these companies are excluded from the calculations though their income normally flows from other Irish companies. This is what is referred to as a “Double Irish” structure. In the past, you needed a Dutch conduit to connect the two (the Dutch sandwich), but the Revenue Commissioners helpfully did away with that requirement.
In effect the paper argues that only income attributable to businesses resident in Ireland should be considered and that if others decide to do make use of Ireland for nefarious purposes, it is not our fault. If one accepts this, well, then Ireland is clearly an honest, decent, upstanding World citizen. However I don't think too many people believe that.
In May 2009, Dharmapala and Hines published a paper, Which Countries become Tax Havens? In it they make the following observation:
‘Tax havens attract foreign investment not only because income earned locally is taxed at favorable rates, but also because tax haven activities facilitate the avoidance of taxes that might otherwise have to be paid to other countries.’
As the technical paper has not provided us with any bibliography, we cannot be sure whether this paper was consulted or read.
Let us look at this statement and talk about Ireland. Ireland has a low Corporate tax rate and income earned locally happens to be taxed at favourable rates. I don't think that anyone can disagree with that statement. But now the second part: does Ireland facilitate the avoidance of tax in other countries, that would otherwise be payable in those countries?
In answering this part of the question, we need to look at how Irish company law and tax law operates.
Let us go back to the original Google story written by Bloomberg's Jesse Drucker as an example. The income from all over Europe ‘belongs to Google Ireland Ltd (GIL). However as soon as it is received by GIL it takes electronic flight to Bermuda and to Google Ireland Holdings unLtd - an Irish emigré now resident in sunnier climes. It used to have to make a pit-stop in Amsterdam – using the Dutch sandwich -, but that part of the journey is no longer necessary. The payment going to Bermuda is called a ‘royalty’, which in the case of Google sweeps all the income bar the costs of the Irish operation and a very small profit, around 4% of costs. This means that if GIH has an income of €10,000 million and costs of €500 million, €9,480 million goes to Bermuda, leaving just €20 million (cost plus 4%) taxable in Ireland. However, we do not know fully what is going with Google Ireland Holdings, because it is an unlimited company and does not submit accounts.
Not only does the Irish State ‘facilitate the avoidance of taxes that might otherwise have to be paid to other countries’, but also hides it via the use of unlimited status. The use of unlimited status extends throughout the Irish corporate sector, both multinational and native alike. I think it is clear that Ireland falls within the definition of a tax haven.
For other similar purposes, the point of registration of the company is taken. The European Court ruled that the liquidation of Eurofood IFSC Ltd. should take place in Ireland because it was Irish registered and directors of an Irish registered company are liable to Income Tax in Ireland, whether they or the company are resident in the State (Tipping V Jeancard).Yet in one recent decision, the Irish Revenue accepted that an Irish registered company was resident in Netherlands, yet it still had hundreds of employees here. It became an Irish registered, non resident company with a branch in Ireland. The myth is that it is “controlled and managed” from Amsterdam because the directors may meet there, while the staff and all economic activity occurs in Ireland. This is I presume what the Government paper covers when it states:
‘A company which is not resident in Ireland for tax purposes but which has a taxable presence in Ireland will only be liable for Corporation Tax on its profits sourced in Ireland.’
Now the fall-back of the Dept. of Finance and their various apologists is that the country operates within the OECD framework. In a short and succinct critique of the “arm's length method” of transfer pricing, it is hard to beat a weekly column from the LSE academic and Financial Times columnist, Prof. John Kay in that paper from December 2012 entitled "Starbucks shows need for tax change" (subscription required), in which he finishes with the following
‘The OECD asserts that the practical difficulties of the arm’s length principle are outweighed by its theoretical soundness. The reality is that these practical difficulties arise from its theoretical weakness.’
In a previous piece by Prof Kay a few weeks earlier, in discussing profit shifting, he said.
‘Intriguingly, the consequent overstatement of Ireland’s rate of economic growth contributed to the hubris of Ireland’s era as the Celtic tiger.’
There was a response to the piece in the paper's letters' page from one Will Morris, who is chair of the OECD’s Tax Committee of the Business Industry Advisory Committee. This is part of the problem with the OECD. It takes into account the views on issues such as transfer pricing from the very companies who abuse the rules.
And given the Government’s technical paper, we should ask whether this is the case here in Ireland.
Take a very quick look at the green line on the chart below. Very quick – the green line represents Irish labour costs.
On a quick look, it appears that Irish labour costs started growing in 2010; and that by last year labour costs growth in the EU and Ireland converged. Now take a closer look. In reality, Irish labour costs actually fell in 2010. In fact, the gap between the EU and Ireland are actually widening. The chart was ‘structured’ to not only to elide over these inconvenient facts but to actually give the opposite impression. Welcome to the world of massaging stats to fit a political purpose.
For make no mistake – the National Competitiveness Council’s Costs of Doing Business in Ireland completely fails to present the reality of wages, labour costs and taxation in the Irish economy. Instead, they construct ‘evidence and arguments that neatly into line with the Government’s desire to depress wages and cut taxes. Funny that.
Are wages a danger to ‘competitiveness’? First, let’s remind ourselves of the current situation, something the National Competitiveness Council (NCC) fails to do (again, funny that). Using the last year for available date we find, using the mean average:
Whether using the labour cost survey (which surveys firms) or the macro-economic data contained in the national accounts (where you divide employee compensation by hours worked) the results are pretty much the same. We are well below averages – in particular, when compared to EU-15 countries not in bail-out (excluding really low-waged Greece and Portugal) or other small open economies.
So we start out pretty low.
Now let’s revisit the NCC’s chart above showing growth in labour costs in the market economy) and compare it with the actual trend since 2008.
Compare this to the top chart. This is a better representation – and it shows that growth in Irish labour costs is substantially below that of the Eurozone average. Since 2008 Irish labour costs have grown by 1.5 percent. In the EU-28 and Eurozone area, growth has been 10.9 and 11.2 percent respectively. Yet the NCC makes the audacious claim
‘ . . . now is not the time for unions to make wage demands’
That’s an audacious political claim, unsubstantiated by the evidence.
Let’s turn to an alleged indicator of competitiveness – unit labour costs. They are the only labour market element of the EU’s Macroeconomic Imbalances Procedure. Dr. Rory O’Farrell has shown why this is an inadequate measure of competitiveness and you can read the discussion here. I share this scepticism. For instance, we don’t have a unit profit costs (though there is a provocative discussion of this here). Competitiveness goes far beyond such simple measures. But let’s play in the NCC sandbox.
The nominal unit labour cost index measures the growth of the ratio of compensation per employee to real GDP (excluding inflation) per person employed. What does it show? Here is the EU Commission’s estimate for 2015.
The EU Commission expresses unit labour costs in 2005 terms. It shows that by 2015, growth is minimal in Ireland. The growth rate in the EU 28 and the Euro area 17 are substantially higher.
The NCC doesn’t show this basic ‘competitiveness’ indicator – even though it is only one that counts that in the EU’s macro-economic scoreboard. They, instead, use the real unit labour cost – which is essentially the share of wages in the economy. This, too, is fraught with problems but it shows that the wage share in the Irish economy this measure has changed much since 2005. Nor has it changed much in the EU 28 and Euro area. It tells us little about wages – but a long-term analysis shows that throughout the EU, the wage share has fallen as profits have risen.
The NCC also raises red flags over taxation. This would take another blog to go through this analysis; suffice it to say, they once again they elide over uncomfortable facts. Taxation on Irish labour is low, low, low
We can go around the houses debating the impact on this wage level or that, the distribution of taxation between the employee and employer; fine, let’s have that debate. Let’s discuss the trade-off between a higher social wage (employers’ PRSI) and the benefits that employees would receive via free health services, pay-related social insurance pensions, and pay-related unemployment benefit. Such measures which would have a beneficial impact on business, too, through higher demand arising from the fact that workers don’t have to purchase public services and income supports from an expensive private market (this will surely feature in the debate over the Government’s privatised health insurance plans).
These are all important debates. But let’s start with the reality hat we have the lowest levels of taxation on labour in the EU, bar Bulgaria and Malta.
In conclusion, here is where we are at:
If the NCC doesn’t want to acknowledge these demonstrable and verifiable facts, then the debate will be all the poorer. And they will be unable to make an independent contribution to the debate – one that people have confidence in.
NOTE: for an evidence-based analysis of wages and labour costs, see Unite's 'Ireland Needs a Wage Increase.'
This is a guest post by Michael Burke. Michael 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 slump in the Irish economy continues to be driven by the collapse in investment. The fall in investment more than accounts for the entire contraction in the economy during the recession.
The chart below shows the annual totals for both GDP and investment (Gross Fixed Capital Formation, GFCF) versus the peak in 2008. The worst GDP outcome was in 2010 when it was €12.7 billion below the 2008 peak. But by 2013 it was still €9.5 billion lower. Not much sign of genuine recovery.
Investment has fared even worse. It carried on falling even after GDP had stabilised. The low-point was in 2012, when investment was €16.6 billion below the previous high-point. But in 2013 it was still €15.9 billion lower.
Over the 6 years of the slump GDP has fallen by 9.6%. Investment has fallen by 47%. As a result, investment as a proportion of GDP has fallen from 20.8% to 12.1%. Since the level of investment is decisive for the long-term productivity of any economy, a falling rate of investment will hurt growth over a prolonged period.
The relative weakness of investment by firms in Ireland is shown in the OECD chart below. Over a prolonged period leading up to the crisis private firms (Private Non-Financial Corporations, or PNFCs) operating in Ireland invested much less than firms in the other industrialised countries.
This weakness has been further exacerbated by the crisis. Since 2008 firms’ profits have actually risen in cash terms, by €6.7 billion. But on the same basis, investment in transport equipment and other equipment have both fallen by €1 billion, road building and other construction apart from homes have slumped by €5.4 billion.
Private Non-Financial Corporations Investment: Decade Averages
One of the key factors which has worsened the crisis is that successive governments have cut the state’s own level of investment. On the same cash basis, government has cuts its investment by €7.6 billion. This was not always the case. Previously, when the economy was growing rapidly government had a higher level of investment than in the other industrialised economies, as shown in the chart below.
This is the see-saw of the Irish economy: very low levels of private firms’ investment and relatively high levels of government investment. The policy of austerity is pushing down on both ends of the see-saw at once. As a result the economy is cracking.
General Government Investment: Decade Averages
This level of state investment was a key factor in the genuine growth of the Irish economy, much faster then most other industrialised countries over the same period. On past form, the wait for firms to invest might be a very long one.
As a minimum, in order to achieve both a real sustainable recovery and to prevent further declines in GDP, the government should restore its own level of investment. It should also use all available mechanisms in order to increase investment by deploying the resources of the private sector, which would naturally include taxation.
The Universal Social Charge (USC) is a great tax. Many progressives were critical of its introduction and rightfully so. In replacing the Income and Health Contribution levies, the USC ended up increasing tax on low income earners – at a time when the economy was still melting down, people were losing their jobs and income was falling. That was inequitable and economically irrational.
However that is a criticism over rates and thresholds – elements which can be easily changed. The reason the USC is great tax is because it is simple, transparent and, most of all, no matter how many tax accountants you hire, you can’t escape it. The tax has almost no exemptions, reliefs, or allowances – unlike the income tax system.
Dr. Tom Healy of the Nevin Economic Research Institute made an interesting observation:
‘Perhaps there is a case for abolishing income tax as we know it, replace it with USC, make the rates more progressive (e.g. by introducing three or even four bands) and then re-term it as ‘income tax’! . . You see - the beauty of USC is that, it applies to many different kinds of income, it is not riddled, to the same extent as ‘income tax’ with all sorts of reliefs and exemptions, it is reasonably simple to understand and operate.’
Now that's blue-sky thinking. Check out this little stat: income tax– with tax rates of 20 percent and 41 percent - raises €11.4 billion in revenue. The USC, with a tax rate of 7 percent raises €3.9 billion. At a much lower rate, it raises over a third of the entire income tax system.
To raise the same amount as income tax, the USC would need to be raised to 20 percent (with the lower rates rising proportionally). A tax rate of only 20 percent would raise as much as income tax. That’s pretty effective and efficient.
This is not an argument for a flat-rate tax. Dr. Healy points to the potential of introducing three or four different tax bands. In fact, in the EU-15 only Ireland and Germany have two tax rates. Other countries have three or more:
So a number of tax rates can be used, rather than an essentially flat-rate.
Moving to a USC-based income tax system would mean the end of personal tax credits and a number of reliefs, allowances and exemptions. The system would be entirely individualised (that is, there wouldn’t be different thresholds for single and couples). It would result in an administratively simple system. And it would mean that tax rates and thresholds could be lowered without reducing tax revenue. In other words we could reduce tax rates, extend thresholds and still maintain current tax revenue.
Be warned: the following is my own back-of-an-Excel-sheet estimate, using Revenue income distribution figures. Unfortunately, these treat ‘married couples’ as one tax unit; further, there can be double-counting where someone has two jobs. So, I’ve tried to make adjustments but this is all very ball-park.
Currently, income tax and USC combined raise approximately €15.3 billion. To raise a similar amount, what could a USC-based income tax system look like?
This would dramatically reduce the marginal tax rate (the rate of tax applied to the next Euro you earn). Excluding PRSI, for someone currently on the standard tax rate, the marginal rate would fall from 27 to 20 percent. For someone on the average wage, the marginal tax rate would fall from 48 percent to 20 percent. Even at the very top, the marginal tax rate would fall from 48 percent to 45 percent – and you only reach the top rate of tax €55,000 (currently it is €32,800).
So marginal tax rates are slashed but tax revenue is maintained. That's because the overall 'effective' or average tax rate stays the same. The idea is that most of the impact would be absorbed by higher income groups which avail of more reliefs and allowances. I’m not recommending this particular model of rates and thresholds, just showing the potential.
The above doesn’t provide for any tax reliefs. Certainly, we would need tax credits for dependent adults (where there is one person working). We could introduce a number of other credits – mortgage interest relief, health insurance and pension contributions – but for each credit introduced, we’d have to increase the tax rates or lower the thresholds or both.
However, moving towards a USC system would allow us to revisit the way we provide resources for particular households. Take the Blind Persons’ Tax Credit. The implication of moving to a USC-based system would be to remove this credit (don’t forget, the reason marginal rates fall and thresholds rise is because almost all the credits and reliefs are removed from the system). This credit is worth €1,650 (or approximately €32 per week). There is an additional relief for guide dogs worth €165. Removing the tax credit from Blind Persons would seem, at first glance, inequitable.
But let’s look at what the Commission on Taxation says about this credit when it recommended that it be abolished:
‘We consider it inequitable that this tax expenditure only benefits blind persons who are liable to tax and with sufficient income to absorb the credit; blind persons on lower incomes or those dependent on social welfare obtain no benefit from this credit. We recommend that the appropriate level of State support be provided to blind persons through the direct expenditure route and that the tax credit be discontinued. However . . direct expenditure support at the appropriate level should be put in place first; only then should the tax credit be withdrawn.’
So those on social protection and those at work, but whose income is so low that they don’t pay income tax, do not benefit from this credit. This is not equitable. The Commission’s proposal would mean that all people with visual impairment would benefit – regardless of their employment or tax status.
We could go one better. We could increase the direct payment and tax it. This would mean that those on low incomes would benefit even more while those on high incomes would receive only a proportional benefit, commensurate with their income. This would turn the payment into a progressive one.
There are a number of tax expenditures that could be turned into direct payments with progressive effect. Another one is the credit for households with an incapacitated child. This is a valuable credit for households with real needs; however, those on low incomes do not benefit. Again, the Commission on Taxation proposes the credit become a direct expenditure equivalent to the same amount – and then abolish the credit.
So moving to a USC-based system is not just about tax rates and thresholds – it also includes the way we deliver support to households. This is about reforming both our tax and social protection system.
Such a system could facilitate a move towards a strong social insurance system. Ireland is an above-average income tax system in the EU but a real bottom-dweller when it comes to social insurance – especially employers’ social insurance. Moving to a USC-based income tax system could facilitate a rebalancing between income tax and social insurance, between the contribution of employees, self-employed and employers.
We would need more detailed data and an assessment of the impact on different income groups – especially those that rely on crucial tax reliefs to make ends meet. And transforming the tax system is harder when the economy and incomes are stagnating. So care has to be taken at each stage and would probably have to be phased in.
But this approach can put progressives in the driving seat. The Government is promoting a crude tax-cutting agenda – which will have a negative impact on public investment, public services and income supports. They can drive this agenda by focussing on the marginal rate. Progressives must ground themselves in the ‘effective’ tax rate. You can have a seemingly progressive system with high marginal rates but if the system is stuffed with tax reliefs and exemptions which high income groups can use, this means that the average tax paid is much lower.
The key issue is reform. Should we ‘abolish income tax’ and substitute a USC-based system? It is a reform worth debating – and progressives should lead that debate. Dr. Healy suggests a car bumper-sticker campaign, highlighting the benefits of the USC. If I had a car I would put one on. It would read:
I ❤ the USC.
Some commentators are celebrating our ‘recovery’. Some have even said that we have recovered relatively quickly, after a dramatic fall. Here we go again – rewriting history, distorting the current situation.
Ireland holds the record for the longest domestic demand recession in the EU. And the really bad news is that we may not be out of it yet. The following table breaks down the length of consecutive domestic demand recession that EU countries have suffered since 1960.
Almost all EU countries have, since 1960, suffered at least a two-year domestic demand recession – with the exception of France and Malta (though data only goes back to 1996 for the island). Some domestic demand recessions have been harsh – Estonia’s two-year experience saw a fall of over 30 percent; some have been mild – Poland’s two-year experience saw a fall of less than one percent.
Ireland – along with Spain and Greece – have the longest consecutive domestic demand recession: six years. And in the tradition of breaking the tie, let’s count the number of years that domestic demand fell since 1960:
With 12 years where domestic demand fell, Ireland wins on points.
Indeed, Ireland wins the double: longest domestic demand recession and the highest number of years where domestic demand fell. Since 1960, Ireland has spent 23 percent of the time suffering from falling domestic demand. That's the cup.
But, surely, this is nit-picking – what with all that recovery going on. So don’t worry about it.
Enjoy the weekend.
There’s a lot of confusion out there. IBEC found the recent fall in consumer spending ‘puzzling ‘ - what with all the increase in employment. Others have found it strange, too – strong employment growth but falling consumer demand. Shouldn’t the big increase in employment translate into higher consumer spending and domestic demand? What’s going on here?
Well, it’s only puzzling if you accept that employment grew by 60,000 over the last year. However, once you lift the lid on the numbers and find that the 60,000-growth number in the CSO’s Quarterly National Household Survey (QNHS) is a statistical quirk, then it starts to make sense.
First, let’s note the CSO’s warning about interpreting trends in employment growth during the period they are realigning their sampling base with the 2011 census. This realignment ensures that their Quarterly National Household survey sample is aligned with the population. They do this after each census.
‘After each Census of Population the sample of households for the QNHS is updated to ensure the sample remains representative. The new sample based on the 2011 Census of Population has been introduced incrementally from Q4 2012 to Q4 2013. This change in sample can lead to some level of variability in estimates, particularly at more detailed levels and some caution is warranted in the interpretation of trends over the period of its introduction.’
Now let’s look at the employment numbers. Between the 4th quarter in 2012 and 2013, employment grew by 60,900 – or 3.3 percent (not seasonally adjusted). However, self-employment grew by 33,400, or 11.5 percent. So, self-employment made up 55 percent of all employment growth. Is this realistic? No.
Are we really expected to believe that self-employment grew 3.5 times faster than during the boom years – when domestic demand was stagnating? Are expected to believe that rivers flow uphill?
So what are we to make up of this? Davy Stockbrokers identifies the problem. They hone in on the agricultural sector which also shows a phenomenal increase. While total employment grew by 3.3 percent over the last year, agricultural employment grew by 30 percent. This reflects the growth in self-employment. Regarding these self-employment/agricultural numbers Davy states:
‘ . . . the current sectoral split of the jobs numbers is not reliable. The introduction of a new population sample following the 2011 Census means the sectoral split has been skewed, particularly in relation to agricultural employment. This over-estimation is due to a reciprocal underestimation of agricultural employment after Census 2006.’ (bold is mine).
This is the key observation. Adjusting for the 2011 census, the CSO has found that in the past, self-employment/agriculture numbers were under-estimated. In other words, there were more people working in the economy than was previously thought. Therefore, the current increase in employment is less than the 60,900.
The CSO has warned on a number of occasions about interpreting trends during the period they are re-aligning their survey sample. The Government knows this but Ministers still go about claiming 60,000 new jobs, ignoring these warnings and, so, misleading the debate on this crucial issue.
We won’t be able to make reliable comparisons on overall employment growth until the last quarter of this year. That’s because the CSO has been incrementally introducing the new sample over the previous year.
Is there any part of the employment figures that are reliable for assessing current job creation trends? Fortunately, yes. We can reasonably rely on the category of ‘employees’ because the CSO has two surveys on employee numbers – the QNHS and the Earnings Hours and Employment Costs Survey (EHECS). The latter is a survey of employers and measures employee numbers, hours and wages. There is a slight difference. The survey of employers excludes agricultural employment and micro-enterprises (companies with two employees or less). So this will show slightly lower number of employees.
However, if the trend in employee numbers in these two surveys mirrors each other, we can assume they are reasonably robust. And that’s what exactly what happens.
The trend – whether falling or, more recently, rising – mirror each other almost exactly. This suggests that we can rely on the employee numbers in the QNHS.
Now on to puzzle-solving. In the last year, the QNHS showed an increase of 28,300 employees, a 1.8 percent increase. This is not an insubstantial amount; however, it is far below the 60,000 headline number. [Just to note, 2,300 of this increase was due to increased participation in labour activation schemes such as JobBridge].
However, at the same time, weekly income was falling. Overall wages (weekly earnings) fell in the last quarter we have data for (the 3rd quarter of 2013).
Due to the fall in weekly earnings, total wages in the economy has not been increasing despite the increase in employee numbers. There are a few caveats, here.
So there shouldn’t be any confusion about why consumer spending fell in the last year – once you’ve accepted that the headline growth rate in total employment is unreliable and factor in declining weekly income.
That’s why domestic demand remains flat. That’s why consumer spending is still falling. There’s no puzzle here.
Just an economy that is stagnating.
NOTE: I will look at where the jobs are being created in a post next week.
RTE’s David Murphy described the Quarterly National Account numbers as ‘really good’. Professor John Fitzgerald said the numbers showed a ‘reasonably robust recovery’. We are told the actual numbers aren’t all that important– the ones that show economic growth actually declining in 2013, the ones that show that the decline in the final three months of last year was the worst quarterly performance since 2008. Don’t mind any of that downer stuff. Like the following chart.
Domestic demand comprises consumer spending, investment and government spending on public services (excluding exports and imports). This makes up 75 percent of GDP. It is one of the better indicators of the domestic economy, but by no means the only one. Another great advantage is that it is not as sensitive to multi-national accounting activities as other indicators.
So what does the above chart show?
A flat-line for the last three years.
Six years of a domestic demand recession.
It goes up a bit and a down a bit (slightly more down), but never strays too far from the flat-line. Domestic demand fell in three out of the last four quarters. Since the Government took office, it has fallen seven out of eleven quarters. In the final three months of last year, the fall in domestic demand was the most severe since 2011. ‘Really good’? ‘Robust’?
Some commentators pointed to rising GNP. The problem with using GNP is that it is determined by international flows; if a company keeps profit here, GNP goes up; if they export it, GNP goes down. Whichever the company does has little impact on the domestic economy. So GNP went up last year - but it was not based on rising domestic activity.
RTE news last night, as part of its coverage of the CSO economic numbers, featured a successful café. The owner claimed that patrons have started spending a little bit more – which I’m sure is true (the business opened its third outlet). This anecdote was used to portray the entire economy as starting to grow through higher consumer spending.
But the CSO reported that consumer spending fell last year. It fell faster than the year before - 2012. It fell three times more than the year before. Nothing on that in the RTE report – that would cut across the constructed narrative of an improving economy.
Have a good St. Patrick’s weekend. Have a better one than the economy is having.
The Youth Guarantee programme is potentially a positive development. To prevent long-term youth unemployment, the Government launched a programme that would guarantee young people either a place in education, training or a job.
However, a couple of developments put in question the operation and effect of this guarantee - and both revolve around our old friend, JobBridge. First, as part of the Youth Guarantee Implementation Plan, JobBridge will now become mandatory:
In the case of young people, failures to engage that will give rise to sanctions will include:
This suggests two things: first, young unemployment must now pro-actively apply for JobBridge – something that wasn’t required before. Second, it seems the Department will pro-actively create new JobBridge opportunities (that is, contacting employers to participate in the scheme) and then offering them to young unemployed; previously, JobBridge opportunities were generated by businesses alone. This indicates a substantial increase in the scheme.
And the sanctions will be pretty harsh. Young people could see their Jobseeker payment cut by up to 25 percent.
The second development is the news that one company – Advance Pitstop – has taken on 28 interns. This company employs 200 people nationwide so the interns, whose labour is essentially free, make up 14 percent of their payroll. Unsurprisingly, this made national news and not a little bit of criticism (this company is not the only one that has been featured in the media).
Should a scheme that provides labour to employers for free be mandatory? Clearly, there are areas of social protection which are already mandatory. For instance, a Jobseekers’ recipient must show they are available for, and actively seeking, work. Past practice also requires recipients to meet with Department officials as part of the evaluation process, take up a ‘legitimate’ offer of training / job or attend an accepted training / education course (of course, there’s a number of issues with ‘legitimate’).
However, a mandatory scheme that supplies free labour to employers raises a number of concerns. In this post, I’m not addressing the effectiveness of the JobBridge scheme – its ability to help people transition from unemployment into work. We don’t have a lot of information about this aspect, despite the Indecon Report which assessed the scheme without a control group. The ESRI’s Philip O’Connell – a leading researcher in labour market programmes’ effectiveness – stated that, ‘We don’t know the deadweight or displacement’ of the scheme.
I want to focus on the issue of distortion to competition and the loss to the Exchequer. Displacement is usually defined as a situation where an intern replaces an existing employee. We don’t know to what extent that occurs. However, there is another type of displacement that can occur – where an employee might have been hired if JobBridge didn’t exist.
Let’s take a company that currently employs 100 people takes on 14 interns. No doubt they do this because they can fully employ their labour to the benefit of the company. If they employed 14 people at the national minimum wage for a minimum period of six months:
Total personnel costs might be reduced if the employer hires someone covered by the Employer Job (PRSI) Incentive Scheme which reduces their PRSI payments – but in this company it would apply to only 5 employees.
So that’s a subsidy over €136,000 to this company – the increase in payroll costs if the 14 people were actually employed rather than taken on as interns. That’s a nice subsidy.
The CSO estimate that the average personnel cost in the car repair sector was €27,600 in 2011. So for the six-month period, the intern subsidy represents nearly 10 percent of their personnel costs. That, too, is a nice subsidy.
What is the cost to the Exchequer if the company had employed the 14 people rather than taken them on as interns? It’s the social protection payment, plus the €50 top-up, plus the lost tax revenue. Let’s assume the intern is a young person (receiving €144 per week) though JobBridge is open to all ages.
The loss to the Exchequer for each intern is €5,809. For all the interns, it is approximately €81,300. This doesn’t count tax revenue from higher spending or the benefits to other businesses from increased demand.
So a subsidy of over a quarter of a million to the company results in an Exchequer loss of €163,000.
But there’s another problem. Competitors are put at a disadvantage. The company is receiving a subsidy of 10 percent of personnel costs. Competitors may have to compensate. They can do this by either cutting their own payroll costs. Or by also availing of the JobBridge scheme – not for the primary purpose of providing in-work experience for the interns – but to compensate for labour costs.
We have a situation where JobBridge could be increasingly used by companies to reduce labour costs to remain competitive.
I’m not suggesting that JobBridge is, in general, being used in this way. But the JobBridge advertisements show a significant number of vacancies which would seem to be more appropriate to market employment (‘sales and marketing executive’? ‘accounts administrator’?).
Making the JobBridge mandatory could increase this trend – increase subsidies to companies, increase loss to the Exchequer, and increase the distortion in the market, opening up an intern-race-to-the-bottom.
What started out as a reasonable scheme – to provide people with experience in the field they are seeking to find employment – is in danger of turning into a scheme where more and more employment can only be found through subsidised internships, where there is even more competition for genuine market vacancies and where companies avail of JobBridge to reduce their labour costs. And now make it mandatory?
This is not much of a guarantee.
The Live Register has fallen below 400,000 – the first time since May 2009. While the Live Register is not an official measurement, the Seasonally Adjusted Standardised Unemployment Rate shows unemployment at 11.9 percent. Our unemployment rate is now down to the Euro zone average. This led the Minister for Social Protection to state:
'Minister for Social Protection Joan Burton said the figures were encouraging and signalled Ireland’s return to being a “normal euro zone country”'.
Yes, when it comes to a straight unemployment rate we may well be a ‘normal euro zone country’. But there’s something that has been not so normal and which has impacted directly on the Irish unemployment rate. Yes, I’m talking about emigration.
Let’s compare the increase in Irish emigration since 2008 with that of other EU-15 countries. We’ll do this by taking the annual average number of emigrants between 2008 and 2011 (the last year Eurostat has data for) and comparing it with the annual average number of emigrants between 1998 and 2007.
Irish emigration has been more than five times the average of other EU-15 countries. In terms of emigration, Ireland is hardly normal.
The number of unemployed has been falling. The Government would have us believe that this is due to rising employment and the success of their ‘jobs’ policies (we will address the issue of the rising employment numbers next week). Here, let’s look at what might be contributing to falling jobless numbers.
This measures numbers between the 3rd quarter of 2011 (when unemployment in absolute numbers was at its highest) and the 4th quarter in 2013. The numbers in unemployment fell by 75,000. However, the number of working age people emigrating was 116,000 while the numbers on labour activation schemes (training, education, etc.) increased by 29,000.
The total number emigrating or additional labour activation participants increased at nearly twice the level of the fall in unemployment.
There are some notes to this table:
Even if there was no additional recession-related recession or an increase in labour activation participants, this wouldn’t necessarily equal a corresponding rise in unemployment. Some would be dependents, some would be ‘discouraged' (i.e. leave the labour force), some might be in education. However, it is reasonable to assume that unemployment would have increased substantially, even if we can’t put an exact figure on it. In all probability, the number of unemployed would have remained broadly the same, if not rise.
No, Ireland is not a normal Eurozone country. It’s just that Ireland has returned to form, exporting its excess labour. If not for that, we would be exposed for what we are - a truly abnormal Euro zone country.
There is one stat that stands out this week.
This Sunday the Ballyhea Says No campaign will be celebrating their 3rd year of protest - marching every Sunday over the past three years. Marching in protest against the colossal and economically-criminal transfer of wealth from the people of Ireland to financial institutions; marching on our behalf; marching for this and future generations; marching on in support of that thing which is in short supply these days – rational policy-making.
Let’s all send messages of support to the campaign and campaigners. Even if we can’t make it down to Ballyhea this Sunday, wherever we are - walking to the shops, walking to the park, walking to church – walk in solidarity with these famous activists. They have been marching for us for three years.
'Michael Noonan, finance minister, signalled in a statement last Thursday that his Department is preparing a report on the corporation tax rate that is expected to be ready by the end of March as part of a publicity offensive to counter claims that Ireland's effective rate (actual tax paid or provided for in an accounting period as a ratio of reported net income) is in low single digits.'
Apparently, the Government has ditched its previous claim that the effective corporate tax rate is 11.9 percent – when the study this was based on was shown by Dr. Jim Stewart to be defective as a comparator. Now it needs a new study to substantiate an old claim (it helps that the Government has already predetermined the conclusion, now they just have to fill in the numbers).
This blog has always endeavoured to assist the Government. So I'd like to point the Government to some reasonably robust numbers. It can use either Eurostat or its own Central Statistics Office. Either way, they show Ireland has a low-low effective corporate tax rate.
One part of the equation – how much corporate tax rate is paid – is easy to determine. What is more difficult to estimate is the level of profits. Both Eurostat and the CSO use the category ‘entrepreneurial income’. Eurostat defines it this way:
‘. . . net entrepreneurial income . . . approximates the concept of pre-tax corporate profits in business accounting. ‘
The CSO defines entrepreneurial income as
‘ . . a more comprehensive measure of corporate profitability.’
So, armed with this ‘more comprehensive measure of corporate profitability’, what are the effective corporate tax rates for EU-15 countries – combining both financial and non-financial companies?
Ireland is down there at the bottom at 5 percent – only slightly above that other notorious low-tax regime, Luxembourg.
There are three countries – Portugal, Italy and Finland – that comprise the highest tax rates. Most of the EU-15 countries are grouped in the middle between 12.1 and 14.5 percent.
And then there are the three low-tax regimes – Netherlands, Ireland and Luxembourg. These happen to be the countries that the EU Commission is investigating for corporate tax practices.
So how much revenue would Ireland gain if it taxed corporate profits at the average EU-15 rate? It would gain an additional €6 billion. That’s a healthy revenue boost. Of course, some would point out that if Ireland raised its tax to the EU average, then much of the profit that is booked here (i.e. profits generated in other economies and imported here to take advantage of our low tax rates) would go somewhere else. Therefore, goes the argument, we could raise the rates but not end up with more revenue.
There’s something to this argument – in a dismal way, debilitating way. For Ireland has been a leading agent – though by no means the only one - in the race-to-the-bottom in corporate taxation. Some call this ‘competitive’ in the same way that cutting wages, incomes and living standards is called ‘competitive’. This is taking a significant toll on the Eurozone economy and public finances.
Back in 2000, the effective corporate tax rate in the Eurozone was 18.4 percent. By 2011, this had fallen to 12.5 percent. This may not seem like a lot but it is. This is equivalent to approximately €107 billion reduction in Eurozone corporate tax revenue. €107 billion.
Imagine if that revenue was available to the Eurozone: less tax on labour, more expenditure on public services and social protection, higher investment in telecommunications, renewable energy, and education (let’s not forget that there are 76 million people in the Eurozone at risk of poverty and social exclusion). That €107 billion would mean a significant boost to domestic demand which would, in turn, mean more prosperous markets for exporting firms to operate in.
Instead, there’s less of all that – and Ireland is trapped in a low-tax regime, flattered by artificial export numbers to make us feel that our system is working when in fact we are a leading contributor to a system that is not working.
The Government has the opportunity to take a first step towards a more open and honest approach to all this. And that can be done by acknowledging that we have an ultra-low tax regime (the second step would be to acknowledge that we are tax haven-conduit but let’s not get ahead of ourselves).
And that first step should be easy because all the data is there.
Can’t wait to see what the Government comes up with.
There are many issues to be sorted with the introduction of the Universal Health Insurance: will it be a competitive private insurance market (a la Netherlands with its rapidly rising health costs) or will it adopt a single-payer model; what services will it include; will it contain truly free GP care and will it include considerable subsidies for prescription medicine? And then there is the issue of whether an NHS-style system (most EU-15 countries finance their health systems out of general taxation) would be more cost-effective – that is hardly featuring in the debate.
Here I want to look at how it will be financed based on the Government’s current proposals. It seems clear that people will be required to purchase a basic health insurance package (contents unknown) from one of a number of competing health insurance companies.
But there is a real danger that the Government is intending to introduce a finance model that will be regressive (i.e. impact on low-average incomes more than higher incomes) and contain no obligations from employers to make any contributions. Both these elements fly in the face of social health insurance models that exist in Europe.
First, the method of financing will be regressive. We don’t yet know the cost though the Department of Public Expenditure and Reform is reportedly claiming that it could be €1,700. In the Netherlands, which is supposed to be the Government’s template, the cost is €1,478 for each insured adult with reliefs for low-income earners.
Let’s assume, for this argument, that the package is €1,500. The Government is committed to exempting low-income groups (unemployed, etc.) and subsidies for the low-paid, though we don’t yet know the threshold. This helps, of course. The problem lies with income groups above the threshold – in other words, those that don’t receive a subsidy.
We can see immediately that a flat-rate payment will be more expensive – as a proportion of gross income – for those at the lower end. For instance, if you are on an average income of €36,000, the health insurance will be approximately 4 percent. If you are on €100,000, the health insurance will be 1.5 percent. That doesn’t seem very equitable – because it isn’t.
How do other European social health insurance systems treat this cost? They do it on the basis of ability-to-pay – or income-related.
In Germany, Luxembourg and Austria there are income ceilings (there is no contribution above €47,250, €52,280 and €112,450 respectively – though there is continued contributions paid on bonuses in some countries). In France there is no ceiling.
Belgium also operates a social insurance system in health, but the contribution is included in the universal social insurance contribution of 13.1 percent with no ceiling.
The ceilings result in a slightly regressive impact on incomes (though see below for employers contributions). But all these systems – including Belgium – are more progressive when comparing average incomes to those on high incomes.
The reason that Germany has such a high contribution rate is because healthcare there is largely funded by the social insurance system, rather than the Exchequer.
If the Irish Government were keen on creating a more progressive system they would move from a flat-rate payment to one that is based on income – just like our current PRSI system.
It appears that employers’ will make no contribution to funding health insurance. This goes against the model of health insurance in all the other countries.
As seen, there is a contribution from employers in all cases. In the Belgian case, this represents the total social insurance contribution (and includes unemployment payments, etc.). In Germany, Austria and Luxembourg the employers’ contribution is equal or almost equal to the employees’ contribution. In France, employers pay for almost all the total social insurance contributions.
This makes these systems far more progressive than what is currently being debated in Ireland.
An Income-Related System
In terms of financing the health insurance, equity and economic efficiency requires two things:
Let’s play a little game. Let’s assume that the universal health insurance costs €1,500 for each adult. Let’s further assume that the State picks up 30 percent of the bill (for pensioners, unemployed, etc.). The cost would be €3.5 billion or about 5.5 percent of total gross wages in 2014.
What would the impact be of a more equitable financing system?
Assuming that the Government’s health insurance package would come to €1,500, a more equitable system would be far more beneficial to those on low-average incomes. Only on incomes above €55,000 would contributions be higher than the Government’s proposals.
This equitable model of financing can be used for a NHS-style system, a single-payer system or even the Government’s private insurance model. While all this is based on numbers that the Government has not produced, the trajectory would be the same.
But there’s one big elephant that no one has discussed. The impact of universal health insurance – whether it’s through the Government proposals or a more equitable model – will be minimal for those who already have health insurance. For these people, it would just mean substituting one payment for another.
The impact will be very high on those who don’t have health insurance – about 53 percent of the population. They will be required to purchase health insurance, unless they are covered by a state subsidy. This would mean many low and average income earners who can’t afford health insurance would be hit. What would the social and economic impact of this be?
Moving to an income-related insurance package, with an employer contribution, would be far less onerous. If this were phased in over a number of years while at the same time supporting the low-paid (through higher minimum wages) we could minimise any negative impact further.
But the starting point is a health insurance based on the ability to pay. If Labour wants to pick a fight with Fine Gael, this could be the battleground: a more equitable system for financing health insurance.
Ok, this follows on from yesterday's post but whenever I hear someone on the media claiming that Ireland is a high-tax economy, I'm going to @ the programme with this graph.
The question is simple: if Ireland is a high-taxed economy how come we have the lowest tax on labour in the EU except for Bulgaria and Malta?
Don't underestimate the import of this battle. Keeping taxes low (while at the same time fighting off wage increases) is just a continuation of the austerity battle. Pepole paid for the crisis; now there will be an attempt to make people pay for the recovery. What little is given in tax cuts will be taken away from free health, free education, affordable childcare, public services and income supports; in other words, all the programmes and infrastructure that can raise living standards. People will be required to subsidise their own tax cuts - and this after we've been forced to subsidise financial instittuions and the economic collapse caused by speculative activity.
So please feel free to use this graph to get the word around. We're not a high-taxed economy - but we are a low waged economy with even lower levels of public services and income supports. The only high this economy exepriences is rising profits.
Oh, and deprivation and emigration, too.