Notes On The Front

A Really Really Special Case Requires a Really Really Special Solution

With considerable speculation about an impending deal on bank debt, with the Taoiseach and the German Chancellor jointly stating that Ireland is a ‘special case’, it is helpful to remind ourselves just how special a case we are. 

Eurostat, the EU Commission’s data agency has calculated the cost of the banking crisis in each EU country.   The following focuses on the cost to general government budgets.  Ireland has really taken one for Team EU.

Yes, there’s wee Ireland up at the top, just edging out Germany for the dubious title of spending the most on the banking crisis.  €41 billion to date according to the Eurostat accounting data (this doesn’t count the billions ploughed into the covered banks from our National Pension Reserve Fund as this was not counted as a ‘cost’ to the General Government budget). 

Of course, this doesn’t give the best picture.  What happens when we look at the cost as a percentage of GDP?

Ireland may not win football’s European Championship but when it comes to banking debt we are Barcelona, Bayern Munich and Manchester United all rolled into one with Real Madrid for a bench.  Germany may have run Ireland close in the nominal amount of banking debt but when it comes to a proportion of GDP, it is just pennies behind their sofa. For Ireland, it’s the entire house.

Here’s another little stat to chew on.  The European banking crisis is just that – a European crisis.  But as we know, this has not been addressed at European level.  Rather, the cost has been delegated to individual countries regardless of their size or ability to pay.  For instance:

• Ireland makes up 0.9 percent of the EU population
• The Irish economy makes up 1.2 percent of EU GDP

Ok, we’re small.  So how much of the entire European banking debt have we paid?

• The Irish people have paid 42 percent of the total  cost of the European banking crisis

We may be minnows when it comes to population and economic size, but when it comes to banking debt we are the whale in the pond.

One more breakdown.  How much have countries paid per capita?

The European banking crisis to date has cost every individual in Ireland nearly €9,000 each.  The average throughout the EU is €192 per capita.  I really don’t know what you can say after that. 

So, Ireland is a really, really special case.  We require a really, really special solution.  The Government (and we must always remember that this mess wasn’t created on their watch) has a real challenge in the negotiations over bank debt.  But there is a bottom-line here.

If any deal does not qualitatively alter these dismal statistics, then it won’t be a deal worth applauding.  The Government may be tempted to return to the Irish people waving a sheet of paper claiming ‘a bank debt deal for our time’. 

But if are still paying nearly €9,000 each while the remainder of the EU pays only a fraction of that, then it is no deal at all; just a re-arranging of Euro notes – a lot of Euro notes - on the decks of a sunken ship.

Let's Remind Ourselves that Downsizing the Public Sector is Economically Daft

With negotiations over an extension of the Croke Park Agreement starting today, it is helpful to remind ourselves how daft it is to downsize the public sector payroll in the hopes it will reduce the deficit. 

There are two ways to downsize the public sector payroll:  cut public sector employment and/or cut public sector pay.  Since the crisis began, we have been doing both.  Public sector pay has been cut twice through the pension levy and the wage cuts of Budget 2010.  Public sector employment has been cut by approximately 29,700 since late 2008, or 9.3 percent. 

Yet, the Government finds that it must cut more than it had already planned.   It needs €1 billion more in austerity measures to achieve their targets.  It’s like running in quicksand – cut, sink, cut some more.

Yet, downsizing the public sector produces little benefit in stabilising public finances.  Why?  Because it is so darned deflationary – it bleeds the economy of employment, consumer spending and growth.  When you factor in the economic consequences of the cuts, you find the Exchequer hasn’t saved as much as it hoped.

Let’s look at the estimates from the ESRI.

Public Sector Employment

Even using common sense, without the aid of calculators or models, cutting jobs in a jobs recession is not a very good idea.  The ESRI’s model confirms this.  They took the example of ‘saving’ €1 billion by cutting public sector employment.  Because this is a model, they assumed the cut would happen in one year (but there would be little difference if this was spread out over years).  So what would be the impact by 2015?

• Impact on domestic growth:  ‘Saving’ €1 billion would reduce GNP by €1.85 billion, or 1.3 percent.  This is the most deflationary of the six budgetary cuts/taxes that the ESRI estimated. 

• Impact on employment:    There would be 20,000 job losses.  In the last budget the Government was estimating that employment would grow by 43,400 between 2012 and 2015.  However, if it seeks ‘savings’ through public sector job losses, employment growth would be reduced to 23,400.  Unemployment would rise from 13.1 percent to 13.8 percent in 2015 – and that’s only if there is increased emigration.

So growth and employment is cut, with a rise in unemployment.  Consume spending would fall by 1.2 percent (or approximately €1.13 billion) in 2015, putting more pressure on domestic businesses.  What would be the impact on the deficit?

A €1 billion ‘savings’ would only reduce the budget by only €420 million – or 42 percent of the headline cut.  This is extremely inefficient.  In percentage terms, the deficit would fall by only 0.23 percent.  That’s all.

Whatever the reasons for cutting public sector employment, reducing the deficit is not one of them.

 Public Sector Pay

The ESRI did the same exercise with cutting public sector pay by €1 billion (or approximately 6 percent).  While the deflationary impact is not as high, it is also inefficient at cutting the deficit.

• Impact on domestic growth:  ‘Saving’ €1 billion would reduce GNP by €700 million, or 0.5 percent by 2015.

• Impact on employment:  there would be a loss of 3,700 jobs.  These would be private sector jobs, lost through reduced domestic demand.

Naturally, consume spending would also be hit – almost as severe as cutting public sector jobs.  Consumer spending would be cut by over €950 million.

After all this, the impact on the deficit would be minimal.  By 2015, the deficit would be reduced by €479 million – or 0.26 percent.  This is approximately the same impact as cutting public sector jobs.

What Could Happen

The Government has stated that they are looking for a mix of pay and job cuts in the public sector.  So let’s use the ESRI numbers to estimate the impact of €1 billion ‘savings’ with half coming from both wage and jobs cuts.

Over a billion Euros is lost in growth and consumer spending, nearly 12,000 jobs lost; and the deficit falls by only 0.2 percent. 

Of course, models are not very nuanced.  They just take numbers on the large stage and apply them through a number of indicators.  For instance, what happens if you cut the pay of higher-income earners?  The impact on demand would be less, so the damage to the domestic economy would be reduced.  But the revenue gain could, ironically, be even less – in particular, given that the marginal tax rate of high-income public sector employees is 62.5 percent (tax plus pension levy).  So a €1 billion cut would reduce direct tax/pension levy revenue by €625 million – and that’s not counting the loss from spending taxation. Given that there are only 6,800 public sector employees earning over €100,000, there’s not much change in that.

But a real problem with these estimations is that they were made in 2010.  The base-line the ESRI used was one of modest growth (from the World Recovery Scenarios).  What might such estimations look like against a base-line of lower growth and following on from substantial cuts in pay and jobs?  It could be reasonable to assume that the risks to these estimations are on the down-side – that is, if they change, they are likely to change for the worse.

This raises fundamental questions:  is the large economic price worth the small fiscal gain?  Is there a better way of reducing the deficit?  And is the best suggestion that the Government can come up with?

We elected a new Government but all they did was to take over Fianna Fail policy – a policy of down-sizing.  A new Government could have taken a step back, tested these policies against the best available evidence, and engaged in some new thinking.  They didn’t.  Its’ all rote and automatic pilot.

If we can’t elect another new Government, can we at least elect some new ideas?

 

 

Be Glad You're Not Living in One of the Those Terrible High-Tax Countries

The Government seems to have done a U-turn on the issue of tax exiles.  Despite the Programme for Government’s commitment on the issue, the Sunday Business Post reports that following an avalanche of submissions from the likes of the American Chamber of Commerce, etc. the Minister for Finance looks to do nothing.  Why?  Because it would undermine investment.

Minister Brian Hayes was also at it – claiming that tax increases were effectively over.  Minister Lucinda Creighton backed up her party colleague.  And Minister Richard Bruton also warned against further tax increases on high-income groups; again, because of that ol’ investment problem.

Do we see a pattern?  If we increase taxes on high-income groups or the business sector we will lose out on investment.  How valid is this argument?

Let’s bottom-line this:  if maintaining a low-tax regime, whether on high-income earners or the business sector, is the key to ensuring high levels of investment in the economy, then that policy has already been judged to be an utter and absolute failure. 

Okay, now let’s work through some arguments.

First, Irish high-income earners pay a lower tax rate than equivalent earners in most other EU-15 countries.  The following is from the OECD Tax and Benefits Calculator, using a two-income household example where one person is earning twice the average wage and another person earns 1.67 the average wage.  In Ireland, this equals €118,750.

As seen, Irish high-income earners are taxed at relatively low-rates.  We’re right down there with other peripheral countries (with the exception of Italy) and low-tax, high-poverty UK.  There has been tax increases since 2010.  The current rate is 33.7 percent but we don’t know to what extent other countries have increased taxes.  We should also note that the above doesn’t include local taxation (property taxes, service charges, etc.) which are higher in a number of other countries.  Nor does it include tax breaks (these are just headline figures).

In effect, in 2010 two-income earners would have to pay over €6,000 more a year to reach the average of other EU-15 countries; they would have had to pay nearly €12,000 more to reach the average of other small open economies; and they would have had to pay over €15,000 more to reach German levels. 

Second, Irish corporate tax rates are ultra-low compared to other EU-15 countries.

Of course, these are headline rates.  Effective tax rates in other countries (after tax breaks, allowances, etc.) would be lower than the rates above.  But so would it be in Ireland – especially given that Google’s tax rate (as a percentage of gross profits) was less than one percent.

Third, employers’ social insurance (i.e. PRSI) in Ireland is even lower relative to other EU-15 countries.  We are ultra-ultra-low.

Yes, there we are again – at the bottom.

So what do we have?

All those other countries are doing what we have been warned against:  higher tax rates on high-income earners and business.  This is the type of thing that would devastate economies according to Fine Gael.  Obviously, investment must be flooding out of those countries.  In fact, with such high tax/insurance rates, they must be facing into an investment crisis.

So what level of investment does the IMF project for these countries by 2017?

Wow.  Ireland has followed the Fine Gal prescription for higher investment and what do we find?  Ireland will have the lowest level of investment in the EU-15.  The average investment rate in other EU-15 countries is will be 19.5 percent in 2017; the Irish rate will be almost half.    All those countries with higher tax rates on profits, income and payroll – they will have twice the level of investment.

In short, low-tax Ireland is facing into an investment crisis. 

So is higher taxation a bar to high investment levels?  Obviously not; otherwise Ireland would be a league leader.  In fact, higher taxation can induce higher levels of investment – through higher public investment, public consumption and progressive social transfers.  That is what we are seeing in other countries.

In Fine Gael’s Ireland, however, we must not scare the high-income and corporate horses with talk of higher taxation.  Otherwise, they won’t invest. 

But as we see, they’re not investing anyway.  Beyond the insipid tax debate lays a more fundamental question:  what is wrong with our economic model?

That is one of the key questions for 2013.

End of Year Break

Am taking a break from the blog until the first week of January. 

Wishing all readers the very best in this holdiay season.  Rest up. 

There is plenty of work to do in the New Year. 

In Search of Labour's Half Billion

In defending Budget 2013 Labour has argued that it contained €500 million in a ‘wealth tax package’ or revenue from taxation on high income groups.   This, goes the argument, is evidence of Labour’s influence on the budget – revenue that would be missing were Labour not in Government.  So what are the measures that add up to €500 million?  And is this sum robust?

First, we have a problem with labelling.  While some Labour TDs have called this a ‘wealth’ package, the only tax on wealth (defined as an asset) is the property tax.  However, they do not refer to this and with good reason – the property tax will attract revenue from high income groups.  So Labour is not referring to tax on wealth but rather on personal or capital income. 

The list that Labour has been putting forth includes:  a mansion tax on properties worth over €1 million (this is a small tax on wealth), an increase in the USC on high-income pensions, extending PRSI to trade and unearned income, reducing tax reliefs for large pension pots, an increase in Capital Gains tax, Capital Acquisitions tax and Deposit Interest Retention Tax (DIRT), etc.  So does all this add up to €500 million?

Let’s look at the measures that will be introduced in Budget 2013.

In the above measures we find that €114 million will be raised in 2013 with a full year yield of €174 million – though this latter figure is slightly inflated by an extension of the PRSI base on to unearned income that won’t be introduced until 2014.

This seems a long ways away from the €500 million package Labour has referred to.  What else could there be, that is not captured by the table above?

Deposit Interest Retention Tax:  This has been referred to as a tax on high incomes and clearly high income groups are more likely to hold more cash than the rest of us.  However, low and modest income groups also have deposits.  And the tax rate is somewhat quirky.  If interest on deposits were included in the income tax regime, low-modest income groups would pay only 20 percent while those on the top rate would pay 41 percent.  As it is, low-average income groups pay more under DIRT and high-income groups pay less.  Nonetheless, let’s allow this a tax on high-income groups, knowing that others will be caught.

Pre-retirement access to funded Additional Voluntary Contributions:  this is the provision that allows people to draw down 30 percent of their AVC prior to retirement.  This is intended to give a boost to consumer spending (more on this in a later post).  Holders of AVCs would usually be higher income earners and if they pull down this money they will be taxed at the marginal rate – for most this would be 41 percent.  However, this is not a tax.  If I don’t pull down my AVC, I face no tax.  In essence, the 41 percent tax I would pay is the price for being allowed to draw down the money.  And if no one, or very few, draw this down, there is no gain to the Exchequer.  This is not a tax and shouldn’t be included.

Changes to the maximum allowable pension fund:  this refers to withdrawing relief from large-pension pots.  This is a good step.  The problem is that this is not part of Budget 2013.  This is intended to be introduced in 2014.  We have no details of how this will be achieved or what the estimate of €250 million revenue is based on.  If we allowed this as part of the calculation then we would have to spread the impact over two years which would dilute the impact of the €500 million package.  It’s not consistent to include this in the package since it plays no part in Budget 2013.

‘Mansion Tax’:  as compensation for not achieving an increase in the USC on incomes over €100,000, Labour was able to get an increase in the property tax of 0.25 percent on houses valued over €1 million (but only on the portion that exceeds €1,000, 000).  The Minister has provided no estimate as to how much this will bring in.  The Commission on Taxation, using 2004 valuation data, assumed that there were 3,000 houses valued at €1 million or more.  However, this was a guestimate and was not grounded in any data.  But assuming 3,000 houses in this category, and an average value of €2 million, the mansion tax would raise approximately €7.5 million.  Let’s include that.

Now we have a sum of €168 million in 2013 and €245 million.  One could make an estimate of property tax revenue from high-income groups that don’t have houses valued at €1 million or more, but even if we could agree the assumptions, the sum would only push up this total by a relatively small amount.

How does this compare to the previous two budgets?

In last year’s budget, €229 million was raised from taxes targeted primarily at high-income groups.  The big items were changes to capital income and DIRT. 

In Budget 2011, Fianna Fail’s farewell budget, nearly €470 million was taken from primarily high-income groups.  The big items were the abolition of the PRSI ceiling for incomes above €75,000, restrictions on legacy property reliefs, PRSI on pension contributions (this raised €60 million but, like DIRT, would have hit some average incomes), other pension contribution changes, DIRT and capital income.  Of course, this was also a budget which hit low-income earners through cuts in personal tax credits (much like the current abolition of weekly PRSI allowance) and the Universal Social Charge.

So Budget 2013 is not much different than last year and is yielding less than Budget 2011 when it comes to targeting high-income groups.

Of course, some may insist on adding the €250 million in changes to the pension pots which was announced Wednesday but won’t be implemented until 2014 – and in a way we don’t know yet.  But that would only be taking the progressivity from the 2014 budget and inserting in this one artificially.  To my mind, let Budget 2014 speak for itself and hope that Labour can build on it.

It is hard to see where Labour’s ‘€500 million wealth tax package’ is coming from,  But in one sense I doubt that it will have much political impact.  It will be little solace to low-paid PAYE workers affected by the PRSI changes, or medical card holders facing a trebling of prescription charges, or parents seeing their Child Benefit cut – little solace to be told that x amount of money is being levied on high income groups.  For one is concrete – the impact on one’s own household where the increase is almost, if not fully, unaffordable; the other is abstract or, at least, distant – the impact on a household that can afford it anyway.

For therein lies the problem that Labour faces.  I have no doubt that this is not the budget that Labour backbenchers would have introduced.  Using inflated or highly contestable figures to counter what is a regressive budget will not diminish the cuts and regressive taxes.  The cold political reality, being in government with a larger party that does not share its values, is that they may have to vote for budget not of their making.

‘May’ being the operative word.

 

Deflationary, Dispiriting, Depressing

This post was originally written for TheJournal.ie

Child Benefit cuts, PRSI rises, respite care cuts, property tax, pension caps (eventually) – how does the budget look when we stand back from the individual elements?  What is the narrative?  How does it fit with what the Government is projecting over the medium-term? 

There are two elements that stand out.  First, is the impact on employment.  The Government has accepted that its current employment policy is failing – projecting that unemployment will only fall by one percentage point during its lifetime.  And no wonder.  The Nevin Economic Research Institute has estimated that up to 29,000 jobs could be destroyed as a result of this budget.  The cuts in public investment and the continued job losses in the public sector will have a particularly negative impact.  But the overall reduction of disposable incomes – through the flat-rate PRSI rise and property tax, to the cuts in social protection, increases in prescription charges and reductions in community supports – will mean less spending power in the economy which, in turn, will postpone private sector investment.  So we shouldn’t be surprised that the Government is projecting that the domestic-demand recession will continue into next year – a recession caused by the Government’s own policies.

But what of the 10-point employment plan that the Minister for Finance led off with?  It’s part of a trend.  The Government has launched the Jobs Initiative, the Action Plan for Jobs (which had 77 points), the ‘Investment Stimulus’ – and yet  since taking office the Government has regularly revised unemployment upwards and employment creation downwards.  Micro-initiatives are insufficient when there are 30 unemployed people for every job vacancy.  The issue remains one of demand – and the Government’s budget will reduce that demand further.

Second is the hollowing out of social protection.  Social protection goes beyond cash transfers; it encompasses the provision of services and supports – cash or in-kind – for people, whether in work or not.  The budget will drive Ireland’s social protection system into further means-testing – and we already have the most means-tested social protection system in Europe.  It will undermine the quality of public services – with further expenditure cuts.  It will reduce the ability of social insurance to provide a living income floor – with cuts to Jobseekers’ Benefit duration. 

A number of factors will work to see yet another rise in income inequality and further increases in the deprivation rate:  the abolition of the weekly PRSI allowance, the projection of only marginal employment growth next year, and the real cuts (i.e. after inflation) in basic social protection payments.

Within these basic elements – the loss of employment and the hollowing out of social protection – lie further stories of contradictory policies.  The claim that this budget will protect/grow employment is at odds with the cuts investment and demand.  The goal of caring in the community is at odds with cuts in home-help and respite care (the latter suffering a 19 percent cut).  The goal of education, up-skilling and re-skilling is at odds with cuts to the Back-to Education Allowance grants.  All this suggests Ministers working in their individual silos trying to meeting departmental targets without reference to wider policy goals.

All this will lead to what the Government has already projected – an extended period of stagnation.  The domestic economy is only expected to grow by 1.6 percent annual average over the next three years.  On current trends, we shouldn’t expect the domestic economy to return to pre-recession peak levels until 2017 or 2018 – representing a lost decade.  Unemployment is still expected to be above 13 percent by 2015, while wages (after inflation) will continue falling for years.

In all this Labour carries a particular burden.  It is only the junior party.  The very math of the coalition means that they cannot direct economic policy.  But the problem for Labour is that they carry high expectations – for low-income earners, for the unemployed, for those reliant on social protection, for those who see their household income falling in the face of arrears, childcare and living costs.   To meet those expectations would seem impossible – especially when they are implementing austerity policies.  This contradiction makes it difficult for Labour to explain, never mind justify, a budget largely not of their making.  This was always going to be the logic of entering Government with a party opposed to social democratic values.

However, Labour should still take care in how it explains their input into this budget.  They have pointed to ‘a €500 million wealth tax package’ in the budget.  This is hard to credit – especially as they are not referring to the property tax (which is arguably the only ‘wealth’ tax – as it is a tax on a capital asset).   The best revenue estimate of taxes that can be described as ‘targeting’ high income earners (capital taxes, PRSI and USC extensions, smaller measures) is €114 million in 2013 and €174 million in a full year.  The cap on pension pots – which is a positive measure – won’t be introduced until 2014 and, so, does not figure in the budgetary arithmetic for next year.  This is a long way from half a billion euros. 

In one sense, this budget didn’t do anything different than what was signalled last year when the broad targets were established.  In that sense, it doesn’t disappoint.  What is disappointing is that the Government didn’t work the budget to ensure a progressive impact (Department of Finance comparisons of the impact on different income groups and household types show that earners between €25,000 and €45,000 will take the biggest hit, whether single or couples).   Or that it didn’t work to reduce the extent of cuts in public investment.  But in all other respects, it is what we expected.

And that is probably the most depressing thing to come out of Budget 2013.

Why Some People Will Get Hit Very Hard

Whatever about the leaks, the underlying thinking in much commentary and policy analysis shows why some people will get hit very hard.  Yes, those on social protection should look out –especially around secondary benefits and eligibility.  And pensioners – many of their programmes will be sliced if not totally jettisoned.  If you’re unemployed, don’t expect much help from the budget (it will end up destroying jobs – especially through investment cuts). 

What struck me most is the proposition that Child Benefit should be taxed.  This featured on RTE’s This Week (the weblink to the programme is unfortunately not available).  The Minister for Social Protection claimed her preferred position was to tax Child Benefit since this would protect the most vulnerable.  The ESRI’s Professor John Fitzgerald made a similar statement – that those on high incomes would be taxed while the vulnerable would be spared.   This view shows a lack of appreciation of what can happen to hundreds of thousands of households struggling on modest incomes. 

Of course, Child Benefit will not be taxed in this budget; apparently, the computers in Revenue and the Department of Social Protection still can’t ‘talk’ to each other.  And here’s another thing:  taxing universal benefits does not undermine the principle of universality.  Taxation can introduce a progressive feature in payments that are granted to all, regardless of income or employment.

But the emphasis on ‘protecting the vulnerable’ ignores the fact that people at work are also vulnerable.  Yet it is this crucial group that would be hit in the ‘preferred option’.   It underlines a view that social protection is for the poor, rather than for protecting the social.

What would happen if Child Benefit were taxed?  How would some income groups be hit?  Those on social protection would be protected – but low and average paid should watch out. 

People – whether single or couples - on low or modest incomes would be hit significantly if Child Benefit were taxed.  The most vulnerable would be protected, yes.  But there are two issues here:

These income groups may also be vulnerable – with the cost of raising children, possible childcare costs, mortgages, etc. 

Hitting these groups will put pressure on even lower income groups – because the loss of demand will result in more cuts in weekly incomes for those employed in domestic service sectors  (e.g. retail, hospitality) while ensuring that next year there will still be pressure on public finances – thus maintaining social protection in the austerity spotlight.

Okay, this is an academic exercise – though the leaks suggest that the households above will suffer cuts of €120 for each child, with additional cuts for three or more children.  But what about the property tax?  Leave aside the vexed question of whether housing property should be targeted while exempting financial property.  Leave aside whether it is economically prudent to impose a tax when domestic demand is still falling.  Let’s just look at the ‘protecting the vulnerable’ angle.

Leaks suggest that single people on €25,000 or less will either be exempt or the payments deferred; this rises to €30,000 for couples.  So how many average income earners will still be hit by this tax – those on moderate means but above the thresholds?  From the Revenue Commissioners data for 2010 (the latest year we have data for) we find the following:

There are 438,000 taxpayers in these very modest income ranges.  We don’t know how many are home-owners so we can’t assume all will be levied a property tax.  But for those who are home-owners, they are not likely to gain any relief from a property tax.

One could argue that these are not ‘vulnerable’, but these are income groups that have suffered income falls over the last few years – whether through pay/working hour cuts, tax increases, and social protection cuts (e.g. Child Benefit).  A property tax will see an additional cut in disposable income – and if they have children, it will be even more.

There is a social equity issue here and there is an economic argument – the impact on domestic demand.  However, what I’m suggesting is that the ‘protect the most vulnerable’ position means that many people who are struggling will not get protected because they do not fall in that category.  These income groups need social protection, too – in the broadest sense (income support, health services, educational resources, childcare, eldercare, etc.) 

That is why some people will get hit very hard - they don't fit in the politically instrumental category of 'the vulnerable'.

That the most vulnerable will also get hit merely reinforces the view that whatever the government does, it has little to do with social equity or economic rationality; never mind ‘protecting the vulnerable’. 

Many people will get hurt in this budget.   This should lead us to a broader interpretation of social protection.  The former will happen, the latter will not. 

U-Turning Our Way to Somewhere Else

The Independent has published leaked budget proposals (but, as always, check against delivery).  There are three issues covered:  cuts in Child Benefit and medical card prescription charges, and the imminent property tax.  Here is what the parties and the Government said about these issues in the recent past.

Property Tax

There are so many U-turns on this issue, I’m surprised Government Ministers haven’t fallen down from dizziness.  The fact is that both Government parties actually campaigned against the  property tax they are now going to introduce.

Fine Gael actually opposed the introduction of an annual household property tax.  This is from their election manifesto:

Fianna Fail’s proposal, now endorsed by the Labour Party, to introduce by 2014 an annual, recurring residential property tax on the family home is unfair. But as we tackle the fiscal crisis, we will have to cut central exchequer funding for local authorities, and we recognise that local authorities will have to find more sustainable sources of revenue appropriate to local circumstances. What will be viewed as fair in South Dublin might be viewed as unworkable in rural Clare.

In this context, we will empower local authorities to put in place, following the 2014 local elections, fairer alternatives to Fianna Fail’s and Labour’s recurring annual tax on the family home. The options would include:

• No extra local taxes, forcing local authorities to close non-priority services and / or to deliver increased efficiencies;
• Increased local user charges for waste etc.; or
• The option of a local “site sale profits tax”. Such a tax would be levied on the profit made from the site value on the sale of a residence (sales proceeds, less cost indexed by inflation, less stamp duty paid and less home improvements)

The final measure might be considered as both fairer and more economically sensible than an annual recurring property tax.

There is no question – Fine Gael campaigned against a property tax.  It called for alternatives (the site sale profits tax could be a positive measure) but committed that those alternatives would not be introduced until after the 2014 local election.

Yet now they are introducing a property tax.  This is similar to their opposition to a Household Charge and their u-turn on the issue when they introduced . . the Household Charge.

Labour took a different tack.  In their election manifesto, Labour called for a ‘site-value’ tax.

Labour accepts that it will be necessary to introduce a site value charge, in order to prevent higher taxes on work. The Government has not, however, carried out sufficient work to allow such a charge to be introduced in the short-term. Further detailed study will be required to devise a fair basis for such a charge that takes account of the value of property in different regions, the need to exempt some categories of homeowners, and the need to take account of those who have recently paid large sums in stamp duty or who are in negative equity.

Any charge of this sort, therefore, cannot be set in place before 2014. Accordingly, Labour will publish a Green Paper by the end of 2012 on how the charge can be structured in a fair and efficient manner. As an interim measure, Labour will increase the second homes levy by €300 to yield €95 million.

Fair enough – and the commitment to a Green Paper showed the importance of debate and transparency.  This position found its way into the Programme for Government: 

‘Consider, arising from the previous Government’s deal with the IMF, various options for a site valuation tax.’

But now we’re getting a different kind of property tax  - a market value tax which Fine Gael opposed – and we’re getting it in 2013.  Crucially, there has been no Green paper and no debate on specific proposals; the Government couldn’t even see fit to publish the Thornhill report which contained proposals for the property tax that is being introduced.  

Medical Card Prescription Charges

Fianna Fail introduced a 50 cents charge for each prescription for medical card recipients.  Previously, prescription medicine was free under the medical card regime.  The Department of Health commissioned a study, headed up by the ESRI’s Frances Ruane, which recommended that the prescription charge be abolished on the grounds that it was a disincentive to medical card holders to obtain prescription medicine – especially elderly people who may have a number of prescription medicines.  Further, the administration costs of charging for prescription medicine would eat up most of its revenue.

The Minister for Health agreed with this finding and promised to abolish the charge. 

‘Dr Reilly said the prescription charge was not a wise policy as it could prevent people from being able to get their medicines.’

Now it appears the prescription charges may be doubled.

Child Benefit

In the last election, Labour was very clear about Child Benefit cuts:

Labour believes that our children should not be made to pay for the current economic crisis. Labour will not cut child benefit, because we acknowledge that:

• Some extremely harsh budgets in recent years have meant that family incomes have already taken a substantial hit.
• Despite our current economic problems, Ireland remains a very expensive place to raise a child, and child benefit is the only recognition by the State of this high cost.
• Cutting child benefit will create poverty traps, work disincentives, and will substantially increase the already high number of children in poverty.

The bold is Labour’s.  Child Benefit has already been cut – for the third and subsequent children.  That was cut last year and will be cut this year.  And now it appears there will be another cut to the standard rate.  Oh, well.

Fine Gael, at least, was more honest.  They specifically stated they would cut Child Benefit:

'In government, Fine Gael will implement a rebalanced and integrated “Child Income Support” with universal and targeted components to make the overall system more coherent and effective, and to deliver target savings of €250 million by 2014 (about 7.5% of the current total budget for child supports). The “Child Income Support” will replace Child Benefit, the Qualified Child Increase and the child related component of the Family Income Supplement. It will be integrated into the social insurance system to support the low paid at work. We will protect the 300,000 children at greatest risk of poverty from any cuts in child income support.'

They didn’t state how much they would cut Child Benefit by but it led Labour to attack Fine Gael in the last general election – accusing them of wanting to cut €252 for the average family.  The current cuts will achieve much of the cuts that Labour opposed.

* * *

Yes, the fiscal situation is deteriorating.  This and the last Government were warned this would happen if they continued to pursue austerity measures.  But if you’re going to go U-turn on commitments, why go back on those which were intended to protect low-average income groups.  Why go after medical card recipients?  Why cut Child Benefit (it has already been cut by 16 percent) – especially when the Programme for Government said ‘we will maintain social welfare rates’.  Why impose a tax which you imposed on low-average income earners?

Why not do something different?

Means-Test Central

The Troika is at it again – putting pressure on the Government to do something.  This time the ‘something‘ is to introduce more means-testing. 

 ‘The Irish Times understands that the Government is under pressure from the EU-IMF-ECB troika to reduce the duration for which the means-tested jobseeker’s benefit is paid.  At present the payment – worth up to €188 a week – is paid for up to 12 months to people who are out of work and covered by social insurance. However, this would be reduced to nine months under proposals to be considered by the Cabinet.  As a result, those on the benefit would face moving on to means-tested jobseeker’s payments much earlier. This would see thousands of people receiving lower rates. The move is aimed at encouraging people to seek work, or what policymakers call a “labour activation measure”'

The report above is somewhat confused – Jobseekers’ Benefit is not means-tested (this could be a typo).  But you get the point:  increase means-testing.

This is being presented as a ‘work incentive’ measure but in truth it is cost-cutting measure – for many households, once their Benefit runs out they will either be excluded from Assistance (e.g. if their partner is working) or have the payment cut because they have savings, etc. 

Or it is an attempt to drive people back into the labour market at lower wages; more people competing for fewer jobs has that effect.  Whichever, It will represent one more step in degrading an already enfeebled social insurance system.

But let’s take a step back and look at the wider picture.  To what extent does Ireland means-test its social protection payments compared to other EU countries?  There is a powerful lobby calling for more means-testing in order to ‘direct money to those who most need it’.  How do we compare now? 

Ireland already means-test more than any other country – by country miles.  Ireland is means-test central. 

If means-testing delivers resources to those most in need, then we should have seen this in Ireland.  Have we?

• According to the means-test mantra we must focus resources on those who ‘need’ them, the most ‘vulnerable’, etc.  If this works, it must be working in Ireland.   Is it?

• One million people suffer multiple deprivation experiences – nearly one in four; nearly 350,000 of these are children.

• Deprivation has grown dramatically since the start of the crisis – 65 percent overall between 2008 and 2010 (the last year we have data for); for children, the growth rate has been nearly 75 percent.

• One in ten now suffer from food poverty – that is, hunger

According to the means-test mantra we must focus resources on those who ‘need’ them, the most ‘vulnerable’, etc.  This is exactly what the Irish social protection does through extensive means-testing. It does this more than any other country.  And, yet, it has failed to stem the tide of rising deprivation in society.

But true to form, we have calls for even more means-testing, just as have calls for more austerity, more spending cuts, more wage cuts.

 I’m afraid the paraphrase of the old saying might be true – you can’t teach a broken economy the right tricks. 

The Unemployment Crisis: A Modest 0.7% Response

Even the Government admits their policies are having little effect on job creation.  They expect unemployment to remain at 13 percent by 2015, a fall of only one percentage point since they took office.  The number of people at work will only grow by 12,000 over the lifetime of this Government. Truly, we are into a period of medium-term stagnation.

A number of analysts have rightly called for a sustained and substantial programme of investment.  This would boost growth in the medium-term while putting people back to work in the short-term.  But it cannot, alone, fill the jobs gap – especially for those seeking to participate in the service sectors of the economy.  There needs to be complementary strategies.

David Begg, General Secretary of ICTU, recently provided one of them. Speaking at the TEEU annual conference he said:

‘I would say that ultimately the State must be willing to contemplate being an employer of last resort through local authorities or social employment. The lessons of the Great Depression may have been lost but they are as valid in social terms now as they were in the 1930s. No country, no society can afford to regard so many of its unemployed citizens as expendable.’

The state as Employer of Last Resort (ELR) – that’s a considerable intervention.  The concept is simple:  during periods of enforced unemployment, where the private markets cannot employ people who want to work, the state should employ people until sufficient job creation commences. 

An ELR programme would employ people through the mainstream public sector, local authorities, or community, voluntary and non-profit organisations on socially beneficial projects.  There are a number of questions over how this would work.  I will focus on two and, in so doing, start the work of outlining an ELR programme.

I Want to be an Agent of Economic Recovery but They Won’t Let me Play!!!

One of the keys to an alternative budgetary strategy is to stop cutting current public spending.  This would provide an opportunity to re-direct or re-invest productivity gains and spending efficiencies into expanding growth and employment.  This would be more effective at repairing public finances than the current austerity strategy. 

Let’s take an example.  The Government reduces the drugs bill by €400 million.  This is a good cut.  There is likely to be little if any deflationary impact; jobs will not be lost, income will not fall, and growth will not be cut.  This is one of the few examples where a cut actually equals a savings of the same magnitude.

What do we do with that cut?  Do we just remove it from public spending?  If so, the deficit falls by €400 million but not much else happens in the economy.

So, why don’t we do something creative with it – address a social need, increase growth and employment, and reduce household costs?  Why don’t we roll out an affordable childcare programme?

Childcare in Ireland is one of the most expensive in the OECD and has been identified as a substantial cost to households in work, or attempting to return to work.  What would be the economic and fiscal impact of rolling out an affordable childcare network?

Let’s first examine the cost of rolling out such a network.  Deloitte, on behalf of the National Children’s Nurseries Association, prepared a detailed study - Review of the Cost of a Full-Day Childcare Placement (it no longer seems to be available on-line). They calculated the cost providing childcare places – wages, rent, insurance, materials, food, etc.  In 2007 they found that the average weekly cost of providing a full-time childcare place was €227. 

I updated costs – by increasing non-staff costs by 10 percent and staff costs by 17 percent (employing childcare assistants at €19,300 is far too low for this important function).  When I do this, the cost of providing a place in a childcare centre comes to €260 per week. 

Therefore, the €400 million drug bill saving would, if re-directed, finance 30,000 affordable childcare places.  Does this mean there is no deficit reduction?  Let’s see.

Employment:  The €400 million investment in childcare places would directly create 7,700 jobs – based on the ratios used by Deloitte. Of course, a portion of this would be a transfer of staff from existing private and voluntary crèches so that job creation would not be net.  Still, there would be considerable job creation from this.  This doesn’t count the jobs created/retained due to non-wage expenditure – purchasing materials to run the childcare centres from private sector (purchase of food, materials, etc.).

Impact on GDP:  Being job dense, this investment would increase in GDP by €350 million.  This only counts the wage element of the expenditure.  There would be additional growth from the non-wage investment.

Impact on Deficit:  Using the Department of Finance’s Debt Sensitivity Analysis, this growth would reduce the deficit by €175 million – but this would be slightly higher when the non-wage impact is included.

Fees Income:  If we assume an average weekly fee of €60 per week at 45 weeks, the potential income would be €80 million.  This would reduce the gross cost and, so, feed into deficit reduction.

There’s more.  What’s the impact on those using this service?  Let’s assume a household is paying €185 a week for childcare for one child.  This new public sector-driven childcare network costs €60 a week.  Over the year (45 weeks) the savings is €5,625.  That’s substantial.  What happens to this money?

A large part will be spent in the consumer economy, some may be saved, and some may be used to pay down debt.  It is difficult to assess the economic impact but it amounts to a mini-stimulus. The total savings to households could be as high as €168 million (the total savings on childcare costs from 30,000 affordable childcare places) - with a high percentage being redirected into other consumer spending.

So let’s summarise.

There is no impact on employment, growth and household income from the Government’s strategy of pocketing the savings on the drugs bill.  By re-investing that savings into childcare, all these categories turn positive.  And the difference on the deficit is trivial – with the reinvestment strategy being an under-estimate as it does not include the impact of non-wage expenditure or the reduction of childcare costs to households.

This is, of course, a back-of-the-Excel –sheet calculation and, therefore, should only be treated as indicative. Much of this would replace existing activity, though where voluntary organisations exit, this new strategy could just upgrade - which would reduce the overall costs as many of these groups are already subsidised.  There may be a reduction in informal childcare as many families cannot afford creche places. 

But there are other boosts that are not included in this short-hand balance sheet; namely, the impact on the little ones in childcare centres that integrate care and education.  This should lead us into a more integrated package of childcare/early childhood education.  That is the ultimate goal – for this is an investment with one of the best returns.

The point of this post, however, is to narrowly focus on the comparative advantages of taking savings and directly reducing the deficit, or taking the savings and reinvesting into public services.  In the case of childcare, it needn’t be a state agency.  A co-ordinated strategy linking up local authorities, social and voluntary organisations, and not-for-profit establishments could roll-out the network. The same case can be made for early childhood education, or primary health care, or support services for the elderly, or community services for the unemployed, drug rehabilitation schemes, etc. etc. 

This is the lesson, a lesson that the best businesses understand.  You don’t downsize, you expand.  Drive efficiencies and reinvest.  Constantly seek out new opportunities.

And when it comes to children, the opportunities are countless.  Serve them and they, in turn, will drive the economy.  So let them play.

 

Claiming the Alternative

How many times do we hear from those who criticise the critics of austerity – ‘well, what’s your alternative.’  That the alternative has been outlined and measured by a number of groups for years is rarely acknowledged.  This time, however, it will be difficult to ignore given the recent work by Claiming our Future. 

They have compiled a menu of tax measures which would largely impact on high income groups, capital, property and corporate income taken from a range of civil society groups. It shows that not only are spending cuts unnecessary, tax increases on low-average income groups are also unnecessary.  The key message in the CoF document is that if the Government wants to hit low-average income groups, it is a political decision – not one based on economic or budgetary necessity.

CoF takes proposals from TASC, UNITE, Social Justice Ireland, Nevin Economic Research Instiute (NERI) and ICTU which supplied the revenue estimates – most of which has been taken from the Department of Finance (the proposals and estimates supplied by UNITE have not yet been published). 

The full list can be accessed at the link above.  Here is a broad breakdown.

There are also proposals to increase DIRT and introduce a Financial Taxation Tax (though the revenue estimate of €500 million is not included by CoF in its final tally since it wouldn’t come on stream in 2013 even if the Government supported it).

So what’s the bottom line?  CoF provides three of them.

• The total for all measures would raise between €5.5 and €6.9 billion.

• The total for all measures, excluding a recurrent household property tax, would raise between €5.2 and €6.2 billion.

• The total for all measures, excluding a recurrent household property tax and a rise in the corporate tax rate, would raise between €4.7 billion and €5.4 billion.

These measures would be sufficient not only for Budget 2013 but for Budget 2014 as well. 

The CoF also brings together the recommendations for investment which is not only a tool of economic growth and employment but fiscal consolidation as well – since growth and employment increases tax revenue and reduces unemployment costs.  Proposals from NERI, ICTU, Social Justice Ireland, TASC and UNITE all propose investment programmes ranging from €1 billion to €3 billion sourced from different funds:  Government cash reserves, National Pension Reserve Fund, private funds (pension funds, etc.), Recovery Bonds, etc.

So how much better would it be?  NERI, using their HERMIN model, has already measured the impact of a budget with €2.3 billion in tax increases, €400 million in spending cuts (via Croke Park savings) and a once-off investment of €500 million.  They found that this set of proposals would create an extra 21,000 jobs and boost growth by an additional 1.3 percent – while hitting the Government’s own deficit reduction target.

All of this shows what progressives have been saying for some time – a budgetary strategy combining investment and ‘growth-friendly’ fiscal adjustments (increased taxation on high-income groups) will produce a better result than an austerity strategy. 

Claiming our Future has brought together the information for a budget strategy that does not rely on spending cuts or tax increases on low-average incomes.  So the next time someone asks, ‘What’s your alternative’ – just direct them to the work of CoF. 

A Small Slice of Workplace Life

The following is a statement from eleven service-support workers who were made redundant by Chartered Accountants Ireland.  In the grand scheme of things it may be a small story - but it is story, many of which don't hit the headlines, that is being repeated in hundreds of workplaces every month.  It is not just the fact of redundancy - it is the manner in which businesses behave.  It is all the more incredible that the Chartered Accountants Ireland, a regulator body, believes that this behaviour is acceptable.

Welcome to the new way of conducting business (very very similar to the old way).

* * *

Chartered Accountants Ireland: Watchdog turned Wolf

Despite their role as regulatory watchdogs Chartered Accountants Ireland's actions in forcing compulsory redundancies on our members have been a textbook example of how a responsible employer should not treat their workers.

Their actions are a throwback to the days of the worst excesses of rogue employers:

• The selection in secret of employees none of whom were aware that redundancies were even planned
• The refusal to consider voluntary redundancies or other alternatives
• The refusal to look at any other cost saving measure prior to dismissal of workers
• The use of internships even while redundancies are being implemented

Above all else, the refusal to enter conciliation talks in the Labour Relations Commission qnd the flagrant breach of our Collective Agreement.

In addition, this not-for-profit organisation, which is claiming to be cash strapped,  is paying its CEO in excess of €300,000, and the organisation's pattern and level of spending is lavish for the current climate.

Despite Unite the Union representing just over 40 of 130 plus staff at Chartered Accountants Ireland all of the employees selected for redundancy are UNITE members. They are not Chartered Accountants, they are support staff working across multifunction roles.  Between them they have given 150 years of service to this institute, some of them have over three decades of service.

The Chartered Accountants Ireland branch of Unite the Union has never previously taken Industrial action or even considered it. We have met all previous requests for cost cutting measures, no matter how difficult, with a positive response. The maverick actions of Chartered Accountants Ireland management have left us with no option but to take industrial action to protect our members from unfair dismissal.

Our sole demand to Chartered Accountants Ireland is simple and reasonable: Honour your Agreement: Attend the Labour Relations Commission.

Their course of action shows a complete disregard for the industrial relations mechanisms of the state and the reputation of the chartered accountant brand. It is time that they held themselves to the standard that they expect of the accountancy profession.

Statement issued by the Chartered Accountants Ireland branch of UNITE the Union.

It's Official. Government Employment Policy is Failing (so says the Government)

It’s official.  The Government’s employment policy is failing.  This finding comes from the Government itself, in the form of projections contained in yesterday’s Medium Term Fiscal Framework.  The projections are chilling and depressing.  Let’s first turn to employment.

In April last year, the Government was somewhat bullish about employment growth; projecting that the numbers at work would grow by 102,000 by 2015.  After the launch of the Jobs Initiative and the Action Plan for Jobs, the Government lowered their forecast to 67,000.  Yesterday, they lowered their forecast again – to 18,000.

In 2011, there were 1,810,000 people working (this includes full-time and part-time).  By 2015, the Government expects this to rise to 1,828,000.  After all the Government’s initiatives, IDA job announcements, protestations that jobs remains at the core of public policy – the Government itself admits that net job creation will only be 18,000 by 2015.

Let’s look at the annual projections.

In April last year, the Government expected employment growth to start this year, increasing by 37,000 in 2015 alone.   Now, the Government accepts that employment will fall this year (by 22,000) and won’t start growing until 2014.  In 2015 alone net job creation will only be 24,000.

This is grim.  During the life-time of this government, employment will rise only marginally. 

We can now see why unemployment is barely moving.  In April last year, the Government projected that the unemployment rate would be 10 percent in 2015 – not great at all, but at least showing some movement downwards.  Now the Government projects unemployment to be 13 percent.  That shows almost no movement at all.

When the Government took office unemployment was 14.2 percent.  By 2015 it is expected to be 13 percent – a reduction of one percent.

We should acknowledge the difficulties of reducing unemployment – especially after it skyrocketed under the previous government following the property crash.  Unemployment is like a huge ship – you first have to stop it, turn it around and start it going in a different direction; not an easy thing to do in the short-term. 

However, the Government has pursued policies that have (a) not addressed the underlying problem and (b) actually exacerbated the situation.  In regards the former, they have treated unemployment as a supply-side problem (issues of training, wage levels, employers’ PRSI, etc.) when in fact it is a demand-side problem.  When you have nearly 30 unemployed for every job vacancy, the problem lies in the lack of demand for labour.

But they have actually worsened the situation by budgetary measures that have actually depressed the demand for labour – cuts in investment and public spending along with regressive tax increases.  ICTU projected that the last budget cut nearly 30,000 jobs out of the economy while the Nevin Economic Research Institute projects that Budget 2013 could cut another 29,000 out of the economy.  Don’t be surprised if unemployment remains high the Government pursues job-cutting measures.

The Government has admitted its current policies are not working.  They are not generating much in the way of jobs, they are not reducing unemployment.  Following this admission, they should now launch a new jobs policy, or at least launch a short, sharp national debate over what that policy should be.

But if official spokespeople come forth and state that they remain focussed on jobs, that they will double their efforts, that jobs remain at the heart of policy – we will know:  not only do we have a Government out of touch with reality, it is even out of touch with its own official projections.

Treasure Ireland

We are constantly assured (warned) that ‘everything is on the table’.  All manner of tax increases and spending cuts are being considered, and none are ruled out in principle.  So, goes the script. There is one issue, however, that is not on the table.  It is not even in the room.  It is not even in the house or lurking around the grounds.  And that issue is the corporate tax rate.  Why?

If we increased the corporate tax rate, this would undermine our ability to attract foreign direct investment.  This, in turn, would result in fewer jobs being created and put current jobs at risk; further, it would lower exports which would skewer our balance of payments.  All that value-added and economic activity would be jeopardised. 

Before we confront this argument, let’s first look at how successful multi-nationals (MNCs) are in racking up profits in Ireland (also, this analysis from Michael Burke is also worth a read).  From this, we might get a sense of how sensitive they would be to an increase in the corporate tax rate. For, in truth, they are really really racking up the profits.

 

 Ireland is not just a league-leader, it is off the chart.  MNCs here make more than four times the profit per employees than the average of the other EU-15 countries reporting (no data for Belgium or Greece). No wonder more and more multi-nationals are making Ireland their home.  It should be noted that this Eurostat data does not include the financial sector so the massive profits being made in the IFSC are not included.  Nor does the above include taxation – we’ll come to this later.

Not only are MNC profits high in Ireland, they are resilient.  2009 was the year that saw global profitability fall.  But not in Ireland.  Whereas in 2009 profits fell in the other EU-13 countries by an average of 17 percent, in Ireland they fell by less than 1 percent.

This is just the overview – let’s look at some key MNC sectors in Ireland.  In the Manufacturing and Information & Communication sectors, Irish MNC profits are through the roof.

 

 In the Manufacturing sector, MNC profitability in Ireland is nearly 10 times that of MNCs in other countries.  In the Information & Communication, the ratio is more than three-to-one. 

In other sectors, MNCs in Ireland also exceed the EU average but not to the same degree.

 

 

In each of these sectors – particularly retail and transport – MNC profits in Ireland significantly exceed the average of other countries.

Only in two sectors – the Professional & Scientific and Accommodation – is MNC profit in Ireland lower than the average of other EU countries.  These two sectors, however, are relatively small, making up less than 2 percent of the turnover of all MNCs in Ireland.

Another insight is MNC by home country.  US multi-nationals have a strong presence in Ireland – making up nearly two-thirds of all MNC turnover in Ireland.  American MNCs take €240,000 in profit per employee here in Ireland; in the other EU countries, they take only €31,800.  More interesting, despite the global recession, American MNCs increased their profit per employee in 2009 by over 8 percent in Ireland.  In other EU countries, American MNCs suffered a loss of nearly 21 percent.

Another, albeit smaller category, is MNCs owned by ‘offshore financial centres’ (OFCs).  One would assume that these would be primarily involved in the financial sector.  But the data here refers to the non-financial business sector.  These OFCs are still relatively small (making up only 3 percent of all MNC turnover in Ireland).  But they are growing.  In the dark days of 2009, OFCs saw their turnover nearly double over 2008, with the number of OFCs operating in Ireland also doubling.  And no wonder:  they take nearly €61,000 in profits per employed in Ireland while in other countries this figure is nearly half - €34,300.

Of course, there is an Alice-in-Wonderland character to all these numbers.  Profits, turnover, value-added – these are all distorted by transfer pricing.  MNCs do not actually produce these levels of profit in Ireland - not all of them; they ‘report’ a considerable level of profit here, taking advantage of transfer-pricing in order to exploit our ultra-low corporate tax rates and the facility to engage in global tax avoidance (which is why a US Senate Committee described Ireland as a tax haven – see page 30). 

But we should also take note:  all of the above reports profits before tax.  If we had an after-tax figure, we’d find the gap between MNCs in Ireland and the other EU countries grow even wider.  For instance, Germany comes second when it comes to MNC profit per employee at €42,600.  On that they pay a headline corporate tax rate of 30 percent.  In Ireland, with MNCs taking €110,600 per employee, the headline rate is 12.5 percent.  Yes, the effective tax rate (after reliefs and allowances) will be lower – but it will be lower for both countries.

Profits are rising in Ireland.  They increased by 4 percent in 2010 and 7 percent in 2011.  According to the CSO, this is largely accruing to multi-nationals.

So here is a question:  if all things are on the budgetary table, why is there no place for an increase in the corporate tax rate?  This would not undermine pre-tax profits, and even if it were raised by a mere 2.5 percent, it would still be lower – much lower – than almost any other European country.

And here is another question:  where in Europe, indeed the world, can MNCs make as much profit as in Ireland even if the corporate tax rate were increased?

So, why is the issue of the corporate tax rate taboo?  That’s an easy question to answer:  because it has been elevated to almost metaphysical status.  In the Dail the Taoiseach stated piously:

‘The key elements of the Jobs Initiative included: reaffirming, as the Minister for Finance repeated yesterday, that our 12.5% corporate tax rate remains sacrosanct . . . ‘

To declare something sacrosanct is not an invitation to debate.  It is a threat.  For to challenge the sacrosanct is to engage in heresy, blasphemy, apostasy. 

So suck it up.  Cut homecare help, bash low-paid workers (public and private), slash social protection, close down services, tax average income earners even more.  But don’t anyone dare mention the holy of holies – the corporate tax rate. 

As Minister Creighton says – stop whingeing. 

 

In each of these sectors – particularly retail and transport – MNC profits in Ireland significantly exceed the average of other countries.

Only in two sectors – the Professional & Scientific and Accommodation – is MNC profit in Ireland lower than the average of other EU countries.  These two sectors, however, are relatively small, making up less than 2 percent of the turnover of all MNCs in Ireland.

Another insight is MNC by home country.  US multi-nationals have a strong presence in Ireland – making up nearly two-thirds of all MNC turnover in Ireland.  American MNCs take €240,000 in profit per employee here in Ireland; in the other EU countries, they take only €31,800.  More interesting, despite the global recession, American MNCs increased their profit per employee in 2009 by over 8 percent.  In other EU countries, American MNCs suffered a loss of nearly 21 percent.

Another, albeit smaller category, is MNCs owned by ‘offshore financial centres’ (OFCs).  One would assume that these would be primarily involved in the financial sector.  But the data here refers to the non-financial business sector.  These OFCs are still relatively small (making up only 3 percent of all MNC turnover in Ireland).  But they are growing.  In the dark days of 2009, OFCs saw their turnover nearly double over 2008, with the number of OFCs operating in Ireland also doubling.  And no wonder:  they take nearly €61,000 in profits per employed in Ireland while in other countries this figure is nearly half - €34,300.

Of course, there is an Alice-in-Wonderland character to all these numbers.  Profits, turnover, value-added – these are all distorted by transfer pricing.  MNCs do not actually produce these levels of profit in Ireland - not all of them; they ‘report’ a considerable level of profit here, taking advantage of transfer-pricing in order to exploit our ultra-low corporate tax rates and the facility to engage in global tax avoidance (which is why a US Senate Committee described Ireland as a tax haven – see page 30). 

But we should also take note:  all of the above reports profits before tax.  If we had an after-tax figure, we’d find the gap between MNCs in Ireland and the other EU countries grow even wider.  For instance, Germany comes second when it comes to MNC profit per employee at €42,600.  On that they pay a headline corporate tax rate of 30 percent.  In Ireland, with MNCs taking €110,600 per employee, the headline rate is 12.5 percent.  Yes, the effective tax rate (after reliefs and allowances) will be lower – but it will be lower for both countries.

Profits are rising in Ireland.  They increased by 4 percent in 2010 and 7 percent in 2011.  According to the CSO, this is largely accruing to multi-nationals.

So here is a question:  if all things are on the budgetary table, why is there no place for an increase in the corporate tax rate?  This would not undermine pre-tax profits, and even if it were raised by a mere 2.5 percent, it would still be lower – much lower – than almost any other European country.

And here is another question:  where in Europe, indeed the world, can MNCs make as much profit as in Ireland even if the corporate tax rate were increased?

So, why is the issue of the corporate tax rate taboo?  That’s an easy question to answer:  because it is no longer a policy issue around which we can have a rational discussion.   Rather, the corporate tax rate has been elevated to almost metaphysical status.  The Taoiseach in the last budget stated piously:

‘The key elements of the Jobs Initiative included: reaffirming, as the Minister for Finance repeated yesterday, that our 12.5% corporate tax rate remains sacrosanct . . . ‘

To declare something sacrosanct is not an invitation to debate.  It is an injunction not to debate.  For to challenge the sacrosanct is to engage in heresy, blasphemy, apostasy. 

So suck it up.  Cut homecare help, bash low-paid workers (public and private), slash social protection, close down services, tax average income earners even more.  But don’t anyone dare mention the holy of holies – the corporate tax rate. 

As Minister Creighton says – stop whingeing.   

So . . . are You Marching on November 24th?

From the wonderfully subversive Conor McCabe.

Just When You Thought It Couldn't Get Any Worse

Just when you though it couldn’t get any worse, along comes the EU Commission with their projections for the Irish economy.  It will make grim reading for the Government.  All their projections are being undermined.  Of course, the EU could turn out to be wrong and the Government right – so we are just dealing with projections.  However, with media leaks that the Government will be revising growth downwards in a couple of weeks, even they are heading in the direction of the EU projections.  Let’s compare some indicators.

GDP Growth

The Government is hoping for a quick return to robust growth.  The EU is not so hopeful.  The Government is hoping for an average annual growth rate of 2 percent up to 2014.  The EU expects it be 1.2 percent.  At that level, the economy is stagnating.

Employment

To bring down unemployment, there has to be job creation.  To absorb new entrants into the market and reduce the dole queues.  But the EU suggests that job creation will be sluggish over the medium term.

The Government is hoping that there will be 31,000 more people at work by 2014 compared to last year.  The EU projects that there will be 5,000 fewer people in employment by 2014 compared to last year.  That’s why unemployment will remain so high and why emigration will continue apace.

Real Wages

People are trying to deal with higher taxation, higher prices and some of the highest debt levels in Europe.  All this might be bearable if real wages were rising – that is, wages were rising after inflation.  Even the Government’s projections are pessimistic.  They project that average real wages will be static in 2014.  The EU, however, projects that average real wages will fall by 1.4 percent.  Hard to see households coping with that. 

Investment

Investment is the key.  Drive investment (and in the right places) and we can start to turn this mess around.  The Government is hoping that investment will rise by 3 percent by 2014 – not much, but better than nothing as the saying goes.  But, again, the EU throws cold water on that projection – suggesting that investment will fall by 3 percent up to 2014. 

But, saving the worst for last:

Unemployment

When the Government took office last year, unemployment was 14.2 percent.  To be fair to any new Government, it takes time to bring down the unemployment rate – especially after it increased so quickly under the previous Government.  But after the Jobs Initiative, the Action Plan for Jobs, a ‘jobs-friendly’ budget last year – the EU is projecting that unemployment will still be 14.2 percent in 2014. 

Ireland will be a relative outlier, though not as bad as chronic Greece and Spain.  Still, the majority of EU-15 countries are estimated to have unemployment rates in single figures.  We are a long, long ways from that.

And these are not just numbers on a page.  This will have a real impact on people’s lives – more joblessness, more emigration, reduced living standards.  And it will have an impact on the budgetary arithmetic.  With lower growth and higher unemployment, even more cuts and tax increases will be necessary to keep the austerity programme on deficit-reduction target – at least, on paper.

Personally, I didn’t expect this level of pessimistic revision.  One day I’ll learn.

Smart Fiscal Consolidation: Why A House-Property Tax Shouldn't Be Introduced Next Year

Let’s assume the Government comes up with the best house-property tax ever devised – truly progressive, taking into account all the social factors such as unemployment, low-income, arrears, and mortgage equity (or lack of).  Yes, it’s a big assumption but let’s try it anyway.  If this occurred there is still a strong argument that the Government should not introduce such a tax next year or even the following.  And that is because the economy and hundreds of thousands of households cannot absorb it.  Let’s run through some of the arguments.

First, the domestic-demand recession is expected to continue next year – the sixth year in a row.

As seen, both the EU and the IMF expect domestic demand (consumer spending, government spending on public services, and investment) to fall again next year.  They both estimate that consumer spending will fall, as more people wilt under the combination of austerity measures, falling incomes and unemployment.  Even by 2014, domestic demand will start rising but only marginally. 

While under normal growth conditions, a house property tax would be an efficient tax – limited impact on the domestic economy and more efficient at reducing the deficit; relative to spending cuts.  Even so, the impact on consumer spending would be high:  for every €100 raised in a house-property tax, there is a resulting reduction of approximately €75 in consumer spending.  In normal growth situations, the economy would absorb this.  But as we know, these are not normal times.  So what would be the impact of introducing such a tax while the economy is still in a domestic-demand recession?

Second, what would the impact of such a tax be on mortgages in trouble?  The Central Bank reports the following.

In June, 28 percent of all mortgages were in arrears or were restructured (interest payments only, reduced payment, payment moratorium, etc.). That comes to 213,000 mortgages.   Even more worrying, 34 percent of the value of all mortgages are either in arrears or has been restructured.

This picture is getting worse.  Back in September last year there were 183,000 in arrears or restructured.  There has been an increase of 16 percent in troubled mortgages in the last nine months.  And there is no sign that the trend has topped out. 

Question:  is it a smart idea to introduce a house-property tax with so many mortgages in trouble?

Third, the League of Credit Union’s What’s Left Tracker shows the low and ultra-low level of discretionary income people have at the end of the – that is, what’s left after tax and essential bills.  The numbers are staggering.

1.9 million – over half – have less than €100 at the end of the month.  Though not everyone in this category will own a house (such as public and private rented tenants) there will be a sizeable proportion who will be subject to a house-property tax if it is implemented.  And though this is a subjective measurement (it is left to people to determine what an essential bill is), what is worrying is that this number – 1.9 million – has increased by over 50,000 in just three months.  It is a strong indicator of the high number of people on the edge.

Fourth, real wages are projected to fall next year.  The EU projects that wages (employee compensation) will fall by 1.3 percent after inflation.  The IMF and the Government are less pessimistic – projecting falls of -0.2 and -0.3 respectively.  The ESRI projects a real wage fall of -1.8 percent, using the Consumer Price Index.  Whichever is more prescient, they all agree – wages will fall after inflation.  With living standards falling, what will the impact be of introducing a new layer of taxation?

What we have left is a grim set of indicators of continuing recession, growing arrears and falling income.  It is questionable how much more the economy can take – never mind the people who populate that economy.

There will be the claim that the Government has to get money from somewhere.  Yes, of course, but here is the problem – if you introduce new taxation measures on a depressed economy and an even more depressed society, you won’t get the money, whatever the budget line promises.  For the extra taxation results in people reducing their spending; businesses react to falling turnover by squeezing their payroll through cutting wages, working hours and even employment.  This, in turn, leads to depressed tax revenue and higher public spending if there are job losses.  And, so, the deflationary cycle continues its downward slope. 

None of this argues against the principle of a house-property tax, only its timing (though I hold heretical, minority thoughts on the subject:  houses, when consumed as homes, should be exempt from recurring taxes; houses, when used for a capital gain or income, should be taxed appropriately – but I accept this will probably not get much traction).

Of course, there is the issue of the design of the tax – will the Government tax all property - housing and financial?  If it excludes the latter it will be giving a substantial subsidy to high income groups.  Will the house-property tax be progressive?  And how will we know if they don’t measure the income-distribution impact (don’t hold your breath).  How will it treat low-income earners, unemployed, those in arrears, etc.

The point in this post, however, is the fiscal timing during a period of stagnation.  In the medium-term taxation will have to increase (and Donagh Brennan poses this issue with clarity).  But smart fiscal consolidation lays down a few principles.  Before taxation rises we must first return to reasonable growth – employment and real wages.  This will broaden the tax base and make it easier for households to absorb the increase without a negative impact on consumer spending.  Before taxing houses, we can add another principle – we need a substantial write-down of mortgage debt.  Otherwise, we will be taxing arrears and debt, rather than equity.

So where do we get the money in the short-term, while introducing measures to lay the foundations of growth and debt write-down?  The Minister for Finance provided the answer to the Dail:

‘The Deputy (Seamus Healy) referred to the wealth tax in France, which is at 1.5%. On a pro rata basis, that kind of tax in Ireland would have a yield of €400 to €500 million per annum.’

Hmmm.  Here is a property tax, a comprehensive property tax which includes both housing and financial property, a tax that would have minimal impact on domestic demand as it would hit only a tiny proportion of households, a tax that would raise up to €500 million.  That’s the same amount the Government has said it wants to raise from a house-property tax. 

Isn’t it time to pursue smart fiscal consolidation?

The Latest Instalment In Poverty Denial

Is there no limit to the extent to which poverty deniers will twist and misrepresent facts to fit their agenda?   If Eilis O’Hanlon’s piece in the Sunday Independent is anything to go by, probably not.  I usually don’t write about Sindo pieces – the day is too short; if the day were a thousand hours long, it would still be too short.  I let Garibaldy do the heavy lifting in responding to Sindo nonsense (he does it with far greater patience than I could).  But O’Hanlon’s piece – mocking people who are experiencing deprivation, labelling them pawns and refusing to face up to the elephant-fact in the room:  that austerity is driving people into despair - this kind of thing should not go unchallenged.

O’Hanlon takes issue with the Irish Times article, written by Kathy Sheridan, about a  family who had gone to the Money Advice and Budgeting Service (Mabs) because they were finding it extremely difficult to make ends meet.  O’Hanlon purports to break down the income and expenditure of this couple as reported by Sheridan, comes to a bottom line and then criticises, in a condescending tone, the couple for spending too much.

The first thing O’Hanlon does is to misrepresent the family's income figure.   Sheridan is quite specific on this:

Now, the family’s total weekly income, including child benefit, is €807 net, according to Mabs.

€807 net a week; when I punch that into my calculator I get €3,497 a month.  You try it.  You’ll get the same figure.  What figure does O’Hanlon get?  €5,080.  An inflation of 45 percent. 

The EU Survey on Income and Living Conditions estimates the proportion of the population that experience multiple deprivation experiences by equivalised incomes.  Equivalised incomes attempt to factor in household size. It does this because a single-person household earning €807 a week has a different living standard than a household with two adults and children.

So what is the equivalised income of the family Sheridan writes about (hereafter referred to as Family X), assuming that the €807 net income is valid for the CSO Survey?   €271 per week.  That’s assuming they have three children.  Sheridan rightly doesn’t refer to the number so as to protect anonymity but it certainly appears from the piece that it is at least three children – even O’Hanlon accepts this.   (NOTE:  the calculations using the CSO’s equivalence scale are shown at the end of this post.)

That puts this family, in 2010, in the 4^th lowest decile, or in the lower half of the table.  The average in 2010 was €424 weekly.  So this family earns 36 percent below the national equivalised average.  Of course, the family’s income is in today’s numbers and the benchmarks I’m using are from 2010, the last year we have data for; however, this is unlikely to change the overall situation by much. 

So what is the likelihood of suffering multiple deprivation experiences if you are in the 4^th decile according to the CSO?

Those in the 4^th decile have nearly a third of a chance of being included in the CSO deprivation rate.  This compares to a national average of 22 percent.  So there is a reasonable chance that Family X is actually suffering multiple deprivation experiences. 

O’Hanlon writes:

‘The new figures showed, for example, that the family was spending well over €1,000 a week, a huge amount by any standards, including a significant sum of €200 a week on food.’

Let’s turn to the CSO’s Household Budget Survey to test this ‘huge amount’ and ‘significant sum’ claim.  The survey gives household expenditure broken down by actual disposable income.  These figures come from 2009/2010 – the latest year we have data for.   Family X would be placed in the 6^th decile, below the national household average of €885 per week in disposable income.

While the CSO doesn’t perform this operation, I will attempt to equivalise household expenditure – because a single-person household spending €800 a week has a higher consumption level per person than a family with children spending the same amount.  The following, however should be treated as indicative as I’m working from different databases with different methodologies.

6^th decile households spend €776 per week.  Family X spends €1,094.  However, in this family there are at least five people; the average household size for the 6^th decile is 3.1. The average household size nationally is 2.78.  So if we equivalise the latter two upward to Family X’s size we find the following.

In terms of total expenditure, Family X spends slightly more than other households in the 6^th decile, but less than the national average.  However, when we exclude housing costs – and this is a big expenditure for Family X and so many others caught in the bubble economy – we find that the family that is criticised by O’Hanlon for spending a ‘huge amount’, actually spent 10 percent less than households in the 6^th decile and 25 percent less than the national average.  So much for allegations of ‘huge amount’.

O’Hanlon seems to have problems with Family X’s food and clothing budget (she claims they are spending €200 a week on food which is misleading; the category used in Sheridan’s article is ‘Food / Housekeeping’, not just food).  Anyway, let’s examine these categories.

Family X’s expenditures are not out of line with the average and, in terms of food/housekeeping (for the latter I use Household Non-Durables in the CSO tables), it is 10 percent below the national equivalised average.  Similarly, spending on clothing/footwear is not out of the ordinary.

It should be noted here that the categories that Sheridan uses do not necessarily coincide with CSO listings – so families might categorise an expenditure differently.  How would any family categorise bank charges, barbers and hairdressers, newspapers, books (especially for children), household repairs, household and kitchen durables? 

None of this is out of the ordinary.  That Family X is going through seriously difficult times is, unfortunately, becoming ever more ordinary for hundreds of thousands of households.  So why is O’Hanlon having such a go at them?

‘Far from being one family's personal testimony, it was blatantly political . . . If the children of public sector workers are going hungry, then clearly there is no more fat to trim from public sector expenditure. End of. That's why they leapt on the garda's wife as their new poster girl rather than one of the hundreds of thousands of private sector workers who've been forced into unemployment, emigration, repossession and depression, and who would dearly love to have a "mere" €800 a week on which to get by, and certainly wouldn't use their unfortunate children as ideological pawns if they did. . . .Was the Irish Times duped by a crude propaganda stunt on behalf of the public sector unions?'

Oh, lord, please save me.   What it comes down to is that one of the adults in Family X works for An Garda Siochana.  This is beyond logic and reason (the attack on the public sector trade unions is interesting insofar as the Garda Sergeant is not allowed to be a member of one).  In short, if O’Hanlon doesn’t like your employer, If you happen to be a member of a trade union - and most trade unions have public sector members - not only will you get no sympathy from her, you’re likely to be attacked in the Sunday Independent.

For O’Hanlon, her attack was embarrassingly mistimed.  This morning the League of Credit Unions published their What’s Left tracker.  Some key points come across:

• 1,855,000 left with €100 or less at the end of the month after essential bills are paid
• Half of all adults now struggling to pay their bills on time
• 42% of consumers have had to borrow money to pay bills in the last 12 months
• 8 in 10 consumers are worried that they won’t be able to cope with the increasing energy costs this winter

So when O’Hanlon is attacking Family X, she is attacking hundreds of thousands of households whether in the public or private sector as well as those out of work.  Her attempt to distort and twist a story to her own ideological agenda means she has to rubbish the experience of so many people.

Personally, I think Family X is brave.  Deprivation is hidden and, for too many people, a source of personal shame.  Too many people believe the deprivation and poverty they experience is a personal fault when in truth it is an economic and social phenomenon, produced by political elites who are forcing people and their families to pay for a crisis not of their making.  I hope more people will come forward to tell their story and force deprivation on to the agenda. 

Of course, they should be warned that if they do, there will be ideologues waiting in the long grass, ready to attack them if they dare tell their story.  My advice:  don’t let that deter you.  The majority of people are on your side.

NOTE:  Next instalment in poverty denial:  no one is really homeless.  All those people sleeping rough in the rain and the cold are actually well-paid public sector workers who have been ordered to do so by their trade union leaders, in collusion with RTE and the Irish Times.

NOTE:  The CSO uses the following scale to equivalise household incomes. ‘The national scale attributes a weight of 1 to the first adult, 0.66 to each subsequent adult (aged 14+ living in the household) and 0.33 to each child aged less than 14.’  Family X would therefore have an equivalised 2.98 in terms of assessing income.  Using Household Budget Survey expenditure data, I approximate the 6^th decile with a 2.25 and a national average of 1.98.  To compare expenditure on an equivalised basis, I increase the respective spending up to 2.98.  As stated, expenditure estimates are indicative only.  There is no data specifically relating to expenditure per child by age or adult.

 

It's Called Hunger

A new report is out - Constructing a Food Poverty Indicator for Ireland.  It estimates that one in ten people experienced ‘food poverty’ in 2010.  In other words, hunger.  I know the phrase ‘must-read’ is sometimes over-used, but this is truly a must-read report.  The very idea that one-in-ten of our neighbours suffer from food poverty is truly frightening.  Maybe you won’t be guaranteed a job, maybe you won’t be guaranteed free medical care regardless of your need, but surely in a civilised society we can ensure that no one goes without food.  That we can’t, that we don’t, says something about the kind of society that is being created for us.

This estimate produced by Caroline Carney (General Council of the Bar of England and Wales) and Bertrand Maître (ESRI) is based on a careful methodology.  It uses deprivation indicators that relate to food in the EU’s Survey of Income and Living Conditions:

• Inability to afford a meal with meat or vegetarian equivalent every second day

• Inability to afford a roast or vegetarian equivalent once a week

• Whether during the last fortnight, there was at least one day (i.e. from getting up to going to bed) when the respondent did not have a substantial meal due to lack of money

• Inability to have family or friends for a meal or drink once a month

While they produce a number of findings based on these indicators, in the final analysis they omit the last one – having family or friends over once a month for a meal or drink, though they acknowledge the importance of this indicator:

‘This paper does not suggest that this item is not a valid indicator of deprivation per se but is concerned with its ability to identify food deprivation specifically. This item captures deprivation of social participation, in particular social participation relating to food and drink. However the other deprivation items being used by this research capture deprivation that is specific to not affording adequate food.’

I don’t intend to reproduce the numerous tables contained in the report to show the extent and scale of food poverty.  However, I would like to draw attention to the following findings:

For those who find it difficult to make ends meet, the food poverty rate is 24 percent – which means that one-in-four in this category experience one of the three indicators used above.  Those suffering from poor self-reported health status rank close behind.

There are a couple of things to note.  First, these numbers are probably an under-estimate.  The authors point out that the data they were using, from the EU-SILC report, covers only private households.  This would exclude homeless, asylum seekers, travellers and people in institutions.  As the report rightly points out, ‘These groups may be more vulnerable to food poverty.’

Second, this only goes up to 2010.  We should not be surprised if the food poverty rate has risen since then.  Budget 2011 contained a number of highly regressive measures (cuts in social protection payments, the flat rate tax in the form of cutting personal tax credits, the USC) along with falling employment and income for key groups.  Budget 2012 contained social protection cuts in particular items and across-the-board cuts in real terms (that is, after inflation), along with the regressive Household Charge.

I urge you to have a look at this highly accessible report.  Flip through the tables and graphs.  At least read the conclusion.  It may not be as sexy as the latest story about property prices or public sector allowances or some Minister’s latest peccadillo – but can we please have some perspective in this debate.

Some of our neighbours are going hungry.

They’re Already Cutting Child Benefit

According to leaks, the Government is apparently ‘considering’ proposals from a Department of Social Protection working group to reform Child Benefit payments.  There is something profoundly manipulative about this debate.  Only one part has been leaked – the overall cut.  It would have been just as easy to leak the entire set of proposals.  Partial leaks usually suggest there is an agenda at work.  Given that parts of the proposals are in the public debate, the Department should now just publish the entire report so we can read, judge for ourselves and be part of the ‘consideration’. 

That said, the media reports that the Government is considering cutting Child Benefit is not correct.  The Government is already intending to cut Child Benefit.  They announced it last year, started it last year and intend to continue doing it next year.  So the Government is not considering cutting Child Benefit.  It is considering cutting more Child Benefit.

Last year, the Government announced its intention to eliminate the Child Benefit supplement to the third and additional child. 

The Government is already cutting Child Benefit.  For households with three children, the Government intends to cut the supplement for the 3^rd child by 17 percent over two years and the supplement to the 4^th child by 21 percent.  And that’s on top of cuts that started since Budget 2010.  So what has been the total level of cuts for larger families since the crisis began, factoring in the cuts the Government has already announced for next year?

Child Benefits payment for households with more than two children will be cut by €63 a month for each child – or 31 percent.

That is a big, big hit.  And that doesn’t count the abolition of the Early Childcare Supplement – which had nothing to do with childcare; it was essentially a Child Benefit supplement.  This was worth €83 a month for families with young children.

All households have been hit by cuts in Child Benefit – but larger families have been hit the most.  This goes a long way towards explaining the exponential rise in deprivation among larger families. 

Let’s look at the Eurostat’s measurement of severe material deprivation.  This is a harsher measure than the CSO’s deprivation measurement.  Under Eurostat, a household suffers from severe material deprivation if they cannot afford four of the following items:

• to pay their rent, mortgage or utility bills
• to keep their home adequately warm
• to face unexpected expenses
• to eat meat or proteins regularly
• to go on holiday
• a television set
• a washing machine
• a car
• a telephone

I don’t know about you, but I would find it terrible not to be able to afford one of the above.  But four?  This is truly a severe material deprivation rate.

So how do families with three children fare under this measurement?

Ireland is grouped up at the top.  11 percent of households with three or more children suffer from severe deprivation.  And let’s remember – that was in 2010.  There have been cuts in Child Benefit and working age social welfare payments in Budget 2011 and cuts in large family supplements last year.  And this doesn’t count falls in income, job loss, etc.  There is every reason to believe that severe deprivation rate will be higher this year.

The growth in deprivation among large families has been exponential.

Deprivation among large families has more than quadrupled since the crisis began.  This will no doubt have increased again by this year. 

The Government was aware of this data when they decided to cut Child Benefit for larger families.  Why did they do it?  Because large families are a small subset of all households with children.  77 percent of families receiving Child Benefit have fewer than three children.  Therefore, they weren’t affected by the cuts.  Indeed, they would have been, understandably, relieved that their payment wasn’t cut.  By focusing on a portion of a payment that goes to a relatively small group with little political and economic influence (136,000 families) the Government was able to cut Child Benefit without incurring political blow-back if they had done it across the board.  Some might say this was politically clever.  Others might say it was cynical – especially as the group was targeted as the highest level of deprivation of all households with children.

So over the next few weeks, when you hear commentators asking – ‘will the Government cut Child Benefit ‘ – just remember:  they are already cutting it.  And for a group that already suffers disproportionately from severe material deprivation.

If It Works, Work It

The Government claims that ‘everything is on the table’.  If so, let’s put the findings of the ESRI paper, ‘Emerging From Recession?’  by John Bradley and Gerhard Untiedt in the centre.  It is an extremely useful paper that provides three future scenarios for the Irish economy with a provocative discussion on competitiveness and new industrial / enterprise strategy. They make a very telling overall point:

‘Although medium-term forecasting is a hazardous activity these days, strategic thinking is even more necessary than it was in better times. Day to day decisions continue to have to be taken under the pressure of circumstances. But good strategy almost never emerges from short-term actions. It needs to be thought out explicitly.’

 It is lengthy and deserving of a number of blogs but here I want to focus on their estimates of the benefits of a modest investment programme.

They put a modest investment programme to the test and measure the impact on GDP, employment, and borrowing (i.e. the deficit).  They propose, for this exercise, an investment programme of €2.5 billion spread out over three years (€1 billion in 2013 and 2015, with €500 million in 2015).  It would be made up of 80 percent investment on physical infrastructure with the remaining 20 percent focused on education/training and innovation.

They further measured it under three funding sources:  ‘free’ money from the EU, traditional borrowing, and taxation.  Let’s examine their findings from these three perspectives before coming to some overall conclusions.

Mapping Out a Clear Alternative

The Nevin Economic Research Institute, ICTU’s think-tank, has looked into the budgetary future and finds there is a better way of doing things.  They have utilised all the tools of economic analysis to show that, what they call Plan B, is a far better way of doing business than what the Government intends.  Their budgetary proposals would remove the need for cuts in public services and social protection, increase investment, and keep more people at work than under the Government’s plans – and all this while maintaining the same pace of deficit reduction.  It doesn’t make grandiose claims (billions in soaking the rich, hundreds of thousands more at work, etc.). It merely shows that there is an alternative that is better.  This is an analysis and a programme that all progressives – in civil society, trade unions, political parties (including the Labour Party) – can rally around, while providing that commodity we need the most – hope.

NERI bases its proposals on a sophisticated model – the HERMIN model which is used by other economists (see here for another example). 

‘The HERMIN model uses macro-economic data to allow researchers to bring together different production sectors of the economy in a complex model that relates producer, consumer, investor and labour market behaviour to external developments in trade, prices and currency movements.’

I’m not suggesting that NERI’s modelling is superior to any other, or that we should become seduced by models (all the models in the world didn’t foresee the recession in the first place).  However, it shows that NERI’s programme is not a wish list or some back-of-the-envelope job.  It is a serious piece of work that deserves the same consideration as other programmes and analysis.

So what are they suggesting?  Namely, that the Government’s fiscal adjustments should be turned on its head. 

• The Government proposes that spending cuts make up 64 percent of the total fiscal adjustments.  NERI proposes that tax increases make up 85 percent of the total adjustments.

• The Government intends to cut public investment by €550 million.  NERI proposes to reverse this cut and add an additional €500 million.  Under NERI, there will be €1 billion more investment flowing into the economy, increasing its capacity to grow and putting people back to work.

• The Government intends a fiscal adjustment of €3.5 billion.  But because the tax and investment dynamic produces a better outcome, NERI proposes a fiscal adjustment package of €2.7 billion.

So what are the results?

Under NERI’s Plan B, GDP rises by more than €2 billion above the Government’s projection.  There will be 21,000 more people at work under NERI’s proposals.  And the deficit will be the same.  That’s the effect of a progressive, investment-based, pro-growth economic strategy.

What’s particularly interesting – and here I’m working on my own calculations, so any mistake is mine, not NERI's – is that not only are most budget cuts removed, the end effect of NER’s strategy is that we would be able to spend more on public services and social protection.  This is defined by what is called the ‘primary current budget’.  This refers to the current budget (spending on public services, social protection, wages, etc. - excluding the capital budget) minus interest payments.  I have used investment as a substitute for the capital budget.

Not only is primary current spending higher under the NERI programme than the Government’s in 2013 (€1.3 billion higher), it is slightly higher than this year and almost returns us to 2011 levels. 

This opens up the scope for further increases in spending on public services and social protection by re-directing spending within the current budget – savings on public service efficiencies, removal of regressive spending, and reduced unemployment costs.

NERI proposes a menu of progressive tax measures that could be introduced which would spare low and average income earners and, therefore, would limit the damage to the domestic economy.  I just want to draw attention to three measures under corporation tax:

• End the manipulation of carrying forward of losses – NERI claims these are of dubious economic impact and regressive

• Abolish/Reform the treatment of undistributed reserves where by company directors can manipulate the system to drawdown tax-free lump sums of hundreds of thousands of Euros on retirement.

• Reform interest deductions – by imposing a limit on interest paid by companies as a percentage of a company’s assets. This would prevent public subsidisation of speculative debt.

These innovative measures wouldn’t impact on the corporate tax rate (though the Government has claimed everything is on the table, the corporate tax is not – in fact, its’ not even let into the dining room) but it would remove inequitable tax avoidance.

NERI has presented us an authoritative template upon which can rally the broadest possible coalition against failed austerity policies.  That doesn’t mean progressives will agree with everything contained in the latest Quarterly Observer.  I have a few quibbles with details.  But you don’t build coalitions around details, you build them around principles.  NERI’s principles of investment and tax-driven fiscal adjustments have been shown to work. 

Not a bad day’s work.

Chasing Mice While the Elephants Destroy the House

We’re really lucky to have public sector workers to kick around – what with all their allowances and increments.   If we didn’t, media and commentary would have to give more attention to the CSO’s two reports that came out last week.  The first, discussed here, showed the economy destroying 1,200 jobs a week.  The second, discussed below, shows a continuing downward trend, confirming that just when you thought it couldn’t get any worse, it gets worse.

The CSO’s Quarterly National Accounts (provisional) showed all the main indicators going south.

The only reason that the overall GDP flat-lined was because imports fell faster than exports, declining by 5.2 percent.  If anyone thinks this is a good thing, just remember:  most imports are business imports.  And given that the multi-national sector is probably holding up well, this indicates that indigenous business is coming under even more pressure.

 

Just to note:  the investment category is not as bad as it appears.  In the first quarter, investment jumped 26 percent, but this was primarily on the back of one sector – aircraft leasing.  Averaged out over the two quarters and investment fell by far less; but it fell nonetheless. 

Another indicator, GNP, shows an increase of 4.3 percent.  But, again, look below the headline and see a reason which has nothing to do with the health of the domestic economy.  GNP is arrived at by subtracting the flows of money out of the economy, a large part of which are repatriated profits.  In the second quarter, there was less money flowing out than in the first quarter.  If it had been the same, GNP growth would have been 1.5 percent – a growth facilitated by the fall in imports (Seamus Coffey has a good discussion of GNP here).

Anywhere you look there are few silver linings – with the exception of the growth in Industry.  But the multi-national dominated Industry makes up only a quarter of total output and its rise couldn’t make up for the fall in all the other sectors. 

The above compares the quarterly results.  Year-on-year comparisons suggest that we are, at best, stuck in a trough.

 

The domestic indicators are all going south.  GDP is lower than it was this time last year.  What’s holding up overall GDP is the growth in exports with a fall in imports of 1.1 percent. 

And it’s not like there hasn’t been other portentous news in September.  The Exchequer returns showed that for the second month in a row, tax receipts fell behind last year’s level for the second month in a row – indicating that public finances are weakening.  That, too, was worthy of some discussion.

But no. What we get is non-stop, wall-to-wall demands that the Government cut €75 million in public sector allowances, regardless of how many (if not most) are wholly legitimate by any measurement in the private or public sector.   And if the Government did cut this money?  How much would it save on the deficit, as a % of GDP?  0.032136%.

Yet, over the last six months 1,200 jobs are being lost a week while €899 million has been wiped off domestic demand resulting in weakening public finances and even more misery in society.

We are invited to chase after mice while the elephants, which get only cameo parts in the debate, trash the house.  Oh, well, I guess it’s more fun chasing the mice.  Unfortunately, by the time we catch them we won’t have a house to live in. 

 

 

Q1 20,193 6,372 4,463 33 40,652 -32,744 39,124 -7,485 31,575

Grim Gets Grimmer

In the final quarter of last year there was a glimmer of hope.  Employment rose, suggesting that the labour market was ‘bottoming-out’ and maybe, just maybe, we could start to see a continuous rise in the number of people at work.  That glimmer has been squashed, for the time being anyway.  The latest Quarterly National Household Survey shows employment falling and falling again. 

Late last year there was a rise of 9,000, albeit after a horrendous drop in the autumn.  Since, then, however, there has been a fall of 24,000 people at work in the last six months, with the trend heading in the wrong direction.  But with full-time employment, it gets worse.

The pattern is similar.  An increase late last year but in the last six months a substantial fall.  There are 33,000 fewer full-time jobs in the economy than late last year – and the recent fall is the highest since 2010.

Unemployment over the last year has been on the wrong side of 300,000.  But it could be worse.  The labour force has shrunk by 30,000 over the last year (read: emigration) while there are 10,000 more people on ‘labour activation’ programmes (made up mostly of new participants on Jobsbridge and TUS).   Without these, the unemployment figures would be much higher than the official rate of 14.8 percent.

But there are other measurements that do not get the attention they deserve.  These come from the ‘Indicators of Potential Labour Supply’.  This is how they compare with the official unemployment rate:

• Unemployment Rate:  14.8 percent

• Unemployment + discouraged workers (S1):   15.4 percent

• Unemployment + discouraged workers + marginally attached to the labour force (S2):  18.3 percent

• Unemployment + underemployment (those working part-time but want to work full-time – S3):  25.2 percent

Over a quarter of the labour force are either unemployment or under-employed.  Combine that with the EU Commission finding that there are approximately 28 unemployed per job vacancy, and you have a real crisis.

Since the Government came into office, employment has fallen by 33,000 while unemployment has crept up from 14.3 to 14.8 percent.  Let’s first state:  it would be unrealistic to expect a new government to come into office and, presto, the job situation dramatically improves.  Unemployment is like a ship heading in the wrong direction in narrow waters.  First you have to bring it to a stop.  Then you have to turn it around.  Then you have to start going in the right direction, accepting it will take time to accelerate.  Let’s grant that.

But there’s accepting a difficult situation; then there’s refusing to assess if what you are doing is producing the results.  Since coming into office we have had the Jobs Initiative, a ‘jobs-friendly’ budget and the Action Plan for Jobs.  How do we know what effect these are having?  How do we know if they are working?  Is the Government measuring this?  Do they have the tools to measure this?  What if this is as good as it gets? 

And what’s even more unnerving, how do we know there’s a captain on the bridge?

The Minister Goes on Safari

Minister Brian Hayes is on safari, looking for big game to hunt down.  Who does he have in his sights?

 ‘I think we need to realise that the one group of people in this country who have come through this crash and still have their incomes intact are pensioners.’

The one group?  Pensioners?  We’ll come back to that below. 

Brian may have been looking at the EU Survey on Income and Living Conditions findings that show households headed by a retired person saw their income rise by 3.6 percent between 2008 and 2010 whereas the national average saw a fall of 11.6 percent.  Of course, this fall was driven by unemployment – a phenomenon which doesn’t directly affect retirement income.

If Brian was looking at this data, he should look harder.

A household headed by a retired person, on average, takes in approximately €700 a week.  This is 15 percent below the average household income in the latest year we have data for.  In households headed by someone over 75 years, weekly income was 40 percent below the national average. 

Of course, averages cover up huge variations.  The median figures give us a further insight.

• 50 percent of households headed by a retired person, received less than €540 in weekly income
• 50 percent of households headed by a person 65 years and over received less than €455 in weekly income
• 50 percent of households headed by a person 75 years and over received less than €425 in weekly income

And as Older and Bolder’s Patricia Conboy pointed out – it’s not like elderly households have escaped the austerity measures.  Not only was there the recent cut of €12.5 million to home care services, there have been other measures.  According to Patricia:

‘Older people have been affected by: the loss of the Christmas bonus, implementation of Universal Social Charge, prescription charges, electricity levy, introduction of household charge, reduction in the Fuel Allowance from 32 to 26 weeks, increased tax on home heating fuel, reduction in medical card cover for dentistry, increases in Vat and Dirt (tax on savings), cuts in frontline health and social care services, rising costs of medical insurance; and they will be affected by planned water and carbon tax charges.'

To be fair to Brian, he did say he wasn’t talking about pensioners solely dependent on the state pension.  The problem is that most elderly are dependent solely or in the main on the state pension.  So Brian is not talking about many pensioners who are on ‘high’ earnings, nor does he specify what is ‘high’.

Brian is hunting for big game in the economic forest.  May I suggest another target?  For whatever about pensioners, there is definitely one group which has come through this crash with their incomes intact and then some:  management and professionals, particularly in the industrial sector.

In the first quarter of 2008, management and professionals in the industrial sector received a weekly income of €1,284.  In the first quarter of 2011, their weekly income increased to €1,430.  That’s not just coming through ‘intact’.  That’s an increase of over 11 percent.  Others in the industrial sector didn’t come out so well. 

• Clerical and sales staff experienced a cut of 1.1 percent in weekly income
• Production, craft and transport workers receive a cut of 3.6 percent

On an annualised basis, this is how these three categories fared.

Management grades saw their income increase by €7,600 a year.  Production workers – which make up 60 percent of all employees in the industrial sector – saw their income fall by nearly €1,200.

Of course, this doesn’t mean that everyone in the managerial grades received an 11 percent income.  Much of this can be accounted for by compositional changes.  A number of lower-paid traditional companies have gone out of business, leaving more modern companies in place.  The average would be influenced by this.  But if this were the case, we should see upward changes in clerical and production grades as well.  We don’t.  All we are left with is a widening gap between management and workers’ income in the industrial sector.

If Brian wants to go after big game – the type whose income is high and growing – might I suggest he change his sights?  Going after households whose income is well below the average is neither equitable nor economically rational.  There’s bigger game in the economic forest.

Shake It 'Til the Facts Spill Out

Sometimes you just want to pick up the radio and shake it until the tiny little people inside start talking sense.  Take Minister Frances Fitzgerald on the Pat Kenny show yesterday:

Minister:   The country is broke.   The path back for every citizen in this country is going to be so tough.   And yet we’re the fourth highest in the OECD when it comes to spending on public services.  That’s often forgotten. 

Never mind the country-is-broke lark (we’re not too broke to pay over €3 billion a year on a non-existent bank).  Nor the ‘path back’ reference (easy for some, harder for others).  But the fourth highest spender on public services in the industrialised world?  Huh?  Not only should it be forgotten, it shouldn’t even be remembered because it is simply not the case.

Eurostat provides a comprehensive database on spending on public services, or Government final consumption expenditure.  They provide total spending, percentage of GDP, per capita and spending in power purchase parities (PPPs which factor in living costs).  It should be noted that this doesn’t count spending on social transfers (pensions, unemployment payments, family income supports, etc.).

Here is the spending per capita on public services in the EU-15.

Ireland doesn’t rank as a large spender on public services.  We rank 9^th in the EU-15 league, ahead of the UK, Germany and, not surprisingly, the Mediterranean countries.  We spend 16 percent below the average of the other EU-15 countries. 

• We would have to spend an additional €5.5 billion on public services just to reach the average of other EU countries. 

• We would have to spend an additional €8.7 billion on public services just to reach the average of other EU countries not in bail-out (excluding Portugal and Greece).

We’d have to spend an awful lot more money to be like an average EU country (though, yes, spending more money is not a guarantee of improved output).

Maybe the Minister was referring to public spending measured in PPPs to factor in the cost of living.  High cost countries need to spend more to get the same value as low cost countries.  So how do we stack up in this measurement?

In this measurement, Ireland shares 11^th place in the standings with Germany.  Now, we’re only ahead of the Mediterranean countries.

Was the Minister referring to spending on public services as measured by percentage of GDP?  I don’t think so.  The other EU-15 countries spend an average 22.3 percent of their GDP on public services; in Ireland, it is 18.3 percent.  We would need to increase spending by €6.3 billion just to reach the average on this measurement.

Eurostat also estimates the spend, as a percentage of GDP, for the years 2012 and 2013.  These estimates show that Ireland would have to increase spending on public services by €7.1 billion in 2012 and €7.9 billion in 2013 just to reach the average of other EU-15 countries.  This shouldn’t be surprising as the Government intends to cut public services up to 2015 at least.

Of course, some will raise the issue of military spending.  Unlike other EU countries, especially the UK and Greece, we don’t spend a lot on military (neither should the UK or Greece).  This, say some, skewers the spending figures. 

So what happens if we subtract spending on military services?  Not a whole lot.  Ireland would still need to spend an extra €4.9 billion to reach the average of other EU-15 countries in 2011.  This figure would still rise in 2012 and 2013 if the Eurostat estimates hold.

There are other arguments.  For instance, other countries have a higher elderly population which require more expenditure on health and other age-related services.  This is true.  But Ireland has a higher youth demographic which requires a higher spend on education and youth-related services (justice, recreation & leisure, etc.).  Further, Ireland has a much lower population density than other EU-15 countries with the exception of Sweden and Finland.  There are 65 people per square kilometre in Ireland; the average of the other EU-15 countries is 171 while in the Netherlands it is 492.  Thin density means that public services (health, education, water, energy, security, etc.) have to be spread out, making it difficult to reach the scale that can be obtained in highly urban societies.

However you spin it, the Minister is wrong.  There is no measurement which can come even close to justifying her claim that we are one of the highest spenders on public services in the industrialised world.  The truth is that we’d have to spend billions just to reach the average of other EU-15 countries.  We are a low-low spend economy when it comes to public services.

If people want to argue that fiscal consolidation based on spending cuts is superior to a tax-based fiscal consolidation, fine.  If people want to argue that much of our spending on public services is inefficient, fine.  Let’s test the evidence, let’s come up with proposals to increase efficiency.

But first and foremost, lets’ start with the facts.  Let’s describe the situation as it really is.  If we don’t, the debate becomes degraded and reality becomes anything you want it to be.  

Scraping the Bottom of a Broken Barrel

It’s open season on the Croke Park Agreement and public sector workers in particular.  It should be scrapped, torn-up, renegotiated, whatever – just cut wages.  Some of the arguments are Pythonesque.  Dr Eddie Molloy, in particular, tries to co-opt Jim Larkin into his proposals to cut workers’ wages (here and here).  I suppose now we’ll get someone co-opting William Martin Murphy into the argument for raising the corporate income tax.

Dr Eddie claims the Government should plead inability to pay, citing deterioration in the economy and public finances that were not foreseen at the time the agreement was made.  Strangely, he fails to connect the dots – or even admit there are dots to connect:

· Pension levy · Budget 2010 pay cut · reduction of public sector employment · real pay cuts under the Croke Park Agreement (after inflation) · economic and fiscal deterioration

We’ve had pay cuts, we’ve had downsizing and we are still in a mess.  One might expect a consultant to go back and see if there is some connection, a cause and effect, and ask that most fundamental question -Is what we’re doing producing the effect we desire.  Instead, Dr Eddie, seeing the tired old horse stumbling to the ground, demands that we whip harder.

If Dr Eddie can’t or won’t ask those fundamental questions, we can.  His contention that economic deterioration is making things harder is correct.  What would happen if we cut public sector pay by, let’s say, €1 billion (7 percent across the board cut)?

The impact on the domestic economy would be considerable.  In the first year alone, over half a billion Euros would be wiped out.  Over the three year period, nearly € 2 billion would be wiped out.  It is noteworthy that Dr Eddie, when describing the deteriorating situation, points out that:

‘ . . . growth projections for the economy have not materialised . . .’

Yet, he proposes a policy that will ensure that growth will fall even further.  Why would he do that?  This is a classic example of proposing a course of action without thinking through the impact.

I’m sure Dr Eddie would support proposals to increase employment.  After all, rising employment means more tax revenue, lower unemployment costs, and greater economic activity.  However, according to the ESRI, there will be private sector job losses if public sector wages are cut.  Keeping with the proposal to cut €1 billion in wages they estimate that up to 4,000 jobs will be lost by 2015 – but we should remember that this estimate comes from 2010 against a background of projected growth.  Given the deteriorating situation since then, we could expect this job loss figure to be higher.  Again, why would Dr Eddie propose a policy that will cut more jobs out of the economy?

How many businesses will go out of businesses arising from a public sector pay cut?  This is a difficult to quantify.  But we can measure the impact in consumer spending.

In 2013, €734 million in consumer spending will be lost by a cut in public sector wages.  This rises to nearly a billion Euros by 2015.  Over the three years, €2.5 billion will cut out of consumer spending.  This means less sales, turnover and revenue for business.  How many will go under?  Dr Eddie doesn’t refer to this, even though it is obvious that if you cut people’s disposable income, there will be a drop in consumer spending – especially with so many households grappling with debt.

Ok, so growth will be cut, private sector jobs will be lost, and consumer spending will fall, threatening more businesses.  But Dr Eddie, like so many others who demand we take ‘tough’ decisions, may say that this is the pain we must take to reduce the deficit.  This raises the question: how much deficit will be reduced by cutting public sector pay by €1 billion?  The answer is, not much.

In the first year, the borrowing requirement will fall by €677 million.  However, as the deflationary impact of the cuts become embedded in the economy, the reduction in the borrowing requirement falls to €479 million by 2015.  In other words, the ‘savings’ to the Exchequer is less than 50 percent of the headline cut.

Let’s put this into perspective.  Between 2012 and 2015 the Government is hoping to reduce the borrowing requirement by €11.9 billion.  Cutting public sector pay will reduce that amount by €479 million.  4 percent.  Dr Eddie’s proposal will have the effect of cutting the borrowing requirement by 4 percent of the amount needed.  Growth will be cut, private sector jobs will be lost, consumer spending will put domestic businesses under even more pressure – but at least we have reduced the borrowing requirement by 4 percent.  Is this ‘tough’ decision either efficient or effective?

But we don’t have to go through charts and graphs to figure this out.  Cutting people’s wages – whether private or public sector – during a domestic demand recession is not likely to turn out well.  We can get a better sense of this by looking at the range of income groups that will be hit.

Over 60 percent of public sector workers earn less than €50,000 a year – and this doesn’t take into account the impact of the pension levy.  There are less than 15 percent on higher incomes (above €70,000) and a minute 2 percent in six figures. 

To cut into low and average workers’ wages, regardless of who their employer is, is to invite all manner of problems – and not just those listed above.  Cutting wages could see a rise in social protection payments, in particular Family Income Supplement.  For instance, a worker on €28,000 with one child experiencing a 7 percent wage cut will end up costing the Department of Social Protection an additional €800 per year in FIS payments. 

Cutting wages could also see a rise in mortgage arrears, which will rebound on the Exchequer if this contributes to a growing destabilisation of bank finances, resulting in higher capitalisation payments or less credit in the economy.

These are just two instances of perverse consequences which will undermine deficit reduction – and which those who claim to be taking touch decisions just ignore or unaware of.

Ultimately, we’re back to the same old barrel, scraping and scraping until the barrel is unfit for purpose, leaking all over the productive economy.  We have had cuts in both public and private sector pay.  And, as they say, we are where we are.  The problem is that few people ask that fundamental question – why is it that after all the cuts of past, we still are here. 

Of course, if we did ask that might lead to new thinking – innovative, strategic thinking – that will ensure that what we are doing is producing the results we desire.  That might lead us away from the policies of cuts and austerity.

And we dare not to do that.  So, keep to the programme, steady-on, there is no alternative.  All we have to do is whip harder.

All is Well, Really Really Well

The Exchequer figures are out.  And they are not good.  Coming into this year, the Government had a strong wind at its back, with €1 billion being carried forward from Budget 2011.  That wind has blown itself out and the Government is looking at a deteriorating situation.

The best way to compare tax returns is not necessarily with targets.  Targets can be moulded in ways to show all manner of results; for instance, set low targets that you know will be achieved .and voila, you have succeeded.  A better way is to compare with last year.  In that way, we can see how the economy is performing.

As seen, in the first two months of the year, tax revenue was significantly higher than in the same period last year.  This reflected the carry-forward of mentioned above.  However, since then, returns have been disappointing.  Falling in March and April, it rose again in May.  However, since then it has been downhill.  Tax revenue in July and August was below the tax returns of last year.  Dan O’Brien points out:

‘In the June-August period, tax revenue was below the same period last year. This is the first time since 2010 that a year-on-year decline in revenue has been registered for a three-month period.’

There is another important note:  not only did the Government benefit from a €1 billion carry-forward, it also increase taxes.  Approximately €1 billion in additional tax revenue was pencilled in for 2012.  However, not all that will accrue to the Exchequer and, so, will not appear in the Exchequer numbers (increase in PRSI payments go the Social Insurance Fund while the Household Charge is a Departmental receipt).  Still, with a €1 billion carry-forward from last year and hundreds of millions more in new tax measures, tax receipts are starting to decline over last year.

When we turn to income tax/USC receipts we see the same trend.

The big boost in the first two months reflects the €1 billion carry-forward.  Afterwards income tax/USC remained steady.  However, in the last two months we have seen a considerable fall.  But as always with Exchequer returns, there are small caveats.  Some of this revenue should actually be earmarked for the Social Insurance Fund (being PRSI receipts).  The above, therefore, slightly flatters revenue figures.  Whereas to the end of August, the Exchequer figures show income tax/USC revenue to by 12.9 percent higher than last year, in the Information Note the Department of Finance admits that the figure is below 10 percent. 

With regards to VAT, receipts are €208 million, or 3.1 percent higher than last year up to the end of August.  The Government is hoping VAT will bring in €254 million more than last year by the end of December, or a 2.6 percent increase.  However, we should remember that the Government estimated that the VAT increase would yield €560 million.  The discrepancy can be put down to lower consumer spending.  The VAT increase would have contributed to this lower spending.  The point here is that an adjustment of €560 million will actually only yield an increase of less than half that amount. 

It may well be that things will improve later this year – especially with the self-employed receipts.  However, at this stage, Exchequer returns are deteriorating.  Seamus Coffey shows, that when you strip away bank capitalisations and once-off payments, the current budget deficit is getting worse (this measures all current expenditure). 

‘All told, in the first eight months of 2012 the overall current budget deficit is €429 million bigger than it was last year.’

So tax revenue is falling off, the current account deficit is growing.  And the €130 million in health cuts is just the start; there is more, much more, in store for us.

But hey, don’t worry, we’re hitting our targets.  Go back to sleep, Ireland.  All is well. 

The High-Tax, Low-Tax Conundrum

It is commonly asserted by progressives that Ireland is a ‘low-tax’ regime.  Therefore, goes the argument, we should focus on tax increases rather than spending cuts – if we aspire to European level of public services and investment.  This doesn’t tell the full story, though.  Yes, government revenue is low by European standards.  However, Ireland is an average taxed economy.   The problem is that we are a woefully low-insured economy.  This should alert us to more sophisticated strategies in the run-up to this and subsequent budgets.  Let’s take a quick survey and see what lessons we might draw.  

Overview

In any comparison we come to the question of the benchmark.  Some use GDP whereas others prefer GNP.  This debate can become almost scholastic and I don’t propose to settle this here.  So let’s use another benchmark – tax revenue per person employed.  After all, income tax, PRSI, etc. is a function of how much those at work pay in taxes.  I’m not suggesting it is a superior measurement; just a different perspective.  We will use Eurostat’s Trends in Taxation which takes us up to 2010.  We will further use the EU-12 excluding Luxembourg, Greece and Portugal.  The small duchy produces outlier results as it contains a significant number of non-resident workers while the latter two are extremely poor in comparison with other EU-15 countries. 

  Overall, government tax and social insurance revenue is well below the EU core-average. 

Ireland would have to increase tax/social insurance revenue by 24 percent in 2010 – or €10.7 billion – to reach the average of the other countries.  Clearly this gives strong evidence for the ‘low-tax’ argument.  However, from here on in it gets more complex.