Notes On The Front

Taking a Break

That time of year to take a break.  Season's best to all readers.  Will be back first thing in the New Year.

Shut Up, Sit Down and Act Like Fianna Fail

It didn’t take long.  Patrick Nulty, TD voted against the budget on Tuesday night.  Suddenly, on Thursday morning an op-ed appears in the Irish Times attacking the young TD.  And not just ‘attacking’ – it is one of the most vicious attacks on an individual TD you’ll read on an issue of policy.  After all, Nulty is not a Michael Lowry or an Ivor Callely.  He took a political position, regardless of whether one agrees with it or not.  It is incredible that the Irish Times would give space to such a rant.

And an ill-informed, confused rant at that.  Here I just want to examine the economic issues that the author raises.   

Billy Linehan claims that ‘ideology is for yesterday’.  Now when you hear something like that you should ready yourself for an ideological onslaught.  And Linehan doesn’t disappoint.  What does he demand?

‘Why isn’t he (Pat Nulty) addressing the salaries above EU norms paid to doctors, nurses and teachers? Or the bizarre issues of increments in the public service or the featherbedding of staff salaries in the ESB and other semi-States?’

Notice how Linehan doesn’t demand that Pat address unemployment (projected to rise next year by the ESRI).  Or the growing levels of deprivation as measured by the CSO (affecting nearly one-in-four).  Or that workers are, on average, are trying to get by on €693 a week.

No, Linehan fixates on public sector pay – which he claims is above EU norms.  Maybe he should read the OECD’s Government at a Glance which shows public sector pay in the largest categories to be below the EU norm.  Clerical workers would need a 10 percent increase just to reach the average pay advance economies– and that’s before the pay cut in Budget 2010.

Or from the same source – that nurses pay is average by ‘EU norms’; and that’s before both the pension levy and the Budget 2010 pay cut.

Or that utility labour costs are below the EU-15 average; as are education labour costs.

It is surprising that someone described as a ‘management consultant’ would not be familiar with basic facts that so many managers are acquainted with.  Ignoring such basic facts is so ‘yesterday’.

But Linehan goes on.  Instead of asking hard questions and assessing whether policies are working, individual representatives should start:

‘ . . . telling the unpalatable truth to constituents – that we spend more than we earn as a nation – with the result that service restrictions and cutbacks are inevitable.’

Where has our management consultant been for the last three years?  That’s exactly what Government backbenchers have been saying since the crisis has begun.  ‘Spend more than we earn’ . . . ‘cutbacks are inevitable’.  What Linehan actually wants is for individual representatives not to face up to the unpalatable truth – that austerity policies are not working.  He doesn’t want individual representatives to reflect on this.

See a pattern?  As growth projections fall, the level of debt rises (notably after the April projections, when the public finances should have benefitted from the reduction in EU-IMF borrowing costs).  Linehan doesn’t want individual representatives to reflect on the relationship between falling growth and rising debt, between austerity and depressed growth; between rising debt and austerity.  Linehan doesn’t want individual representatives to reflect on any of that.  He just wants them to sit down and shut up.

Linehan claims that:

‘Fianna Fáil set up a national economic model which has failed. It cannot pay for itself. Is this the economic standard that Nutty supports?’

This is rather amusing for Linehan demands that individual representatives say the same thing as Fianna Fail backbenchers were required to repeat, to follow the same policies as the Fianna Fail government put forward (cut spending on public services and social protection, increase tax on low income earners, deflate the economy). 

At the end of the day, Linehan wants Labour backbenchers to act like Fianna Fail backbenchers.  And woes betide if they don’t – they will be accused of opportunism and puppy-beating.

Of course, in the broader politics, this is not just an attack on Pat Nulty or, by implication, Tommy Broughan.  This is a warning to any Labour backbencher who is even thinking of stepping out of line.  If you do, you will be subjected to a virulent attack in the pages of the Irish Times and other fora.

Dissent will not be tolerated, there is no vacancy for independent thought, whippings will continue until loyalty is resumed.  I know this because I read it in the paper.

We Will Crush Your Dreams . . . and Here's €1.88 for Your Trouble

Act two of the budget:  increased taxation on capital and property amounts to a quarter of the cuts in social protection alone (never mind education and health).  The takes took €15 million off those holding on to legacy property tax reliefs (out of a total of €435 million they gain in relief).  Lone parents are going to be hit for €112 million.  The scales are not very balanced.

This is a budget that will destroy up to 20,000 jobs.  This is a budget that raises over €600 million in regressive VAT rise.  And €160 million in a flat-rate household charge.  And large families could lose up to €50 per month and more in real income supports.  Strange, hard world.

We are, if the ESRI and the EU Commission projections hold, heading back into a domestic recession with falling consumer spending, falling employment, rising unemployment and falling wages and incomes.  And this budget, on the Government’s own estimate, will cut nearly €2 billion out of growth.  Curious, curious.

But . . . but . . . the Government has given relief for low-income earners under the Universal Social Charge.  The exemption threshold, currently €4,000, has been raised to €10,000.  Let’s do some numbers.

This is the latest income distribution I could find.

This is an extrapolation to identify the earners in the €4,000 to €10,000 cohort – those part-timers who will benefit from raising the USC threshold income.  Previously, they were hit with a two percent charge.  Now they won’t.  What shouldn’t have been done last year with the introduction of the USC has been reversed.  This is good. 

On average what does it mean?  €1.88 per week.   Small – but for people taking home this amount, nothing to sniff at.  The maximum benefit – for those earning €10,000 – will be €3.84 per week.  The problem is that, for a significant number of people, the remainder of the budget takes this relief away and turns many part-timers into net losers.

A big culprit is the reduced social protection payment for part-time workers.    This was done by reducing payment entitlement on a five- day week rather than the current six-day week where a person is working for part of a week.  While there are a number of conditions, the basic premise is that if your working week is reduced to two days, you would get four days of Jobseekers’ Benefit (that is the 6-day rule).  This has been reduced to a five-day rule.  The difference in take-home income is not insignificant:

• Previous:  Working two days, receiving four day JS Benefit:  €125.33 weekly
• New:  Working two day, receive three days JS Benefit: €112.80 weekly

For part-timers, their benefit will be cut by €12.53 per week – swallowing up the average €1.88 gain. In a similar fashion, the reduction in the earnings disregard for Lone Parents will operate to claw-back the USC gain.

We must remember that not everyone earning below €10,000 receives part-time social protection payment; nor does everyone receiving such payment earn below €10,000.  So there is only a partial overlap.  But there are over 132,000 part-time and casual workers on the Live Register – a substantial number receiving the benefit of the USC cut will find it immediately taken away by the social protection cut.  One clue:  the USC cut will cost the Government €47 million, but they will claw back €27 million in reduced social protection payments to part-timers.

However, this isn’t the only ‘claw-back’ people will face:  there is the VAT rise, the Household Charge and, as we saw with Child Benefit, our old friend inflation. For many, the USC cut will melt away before it even hits their pocket - like a snowflake hitting warm tarmac.

This is not to dismiss the USC cut.  However, the entire thrust of the budget is to put a disproportionate amount of the burden of the fiscal adjustments on the shoulders of the low-paid, social protection recipients and part-timers.  Some will gain, some will gain but not by nearly as much as the headline rate suggests, some will lost out slightly, some will lose out significantly.

And in the context of a jobs-destroying budget with a domestic economy heading south and unemployment heading north (and guess who bears the brunt of this), the USC cut can become almost tokenistic.  If Government back-benchers expect the part-time masses to welcome the budget on the basis of this cut, they will be disappointed.

To give back €2 a week (much less after all these claw-backs) may have been considered ‘politically’ smart when it was on the drawing board.  But it only serves to sugar-coat a bitter agenda; and a very thin coat at that.

 

In the Real World All Child Benefit Payments will be Cut

When we move from the numbers in the budget papers out into the real world we find that Child Benefit and child income support has been cut again – not only for larger families but for all families.  The instrument for this cut is that most effective stealth tax of all:  inflation. If I have €100 and inflation goes up by 5 percent – in ‘real’ terms, that €100 is reduced by €5.  I can now buy only €95 worth of goods and services.  Inflation cuts income as surely as Government spending cuts and tax increases cut income. 

So let’s go into the real world and see what will happen in real terms (that is, after inflation).  We have two recent projections on inflation (using the EU’s Harmonised Index of Consumer Prices).  The Government projects that inflation will rise by 1.2 percent while the ESRI projects 1.9 percent.  The ESRI figure is higher because they have included the impact of the prospective VAT rise on prices. 

Let’s first turn to the impact on families on the standard Child Benefit rate (families with two children) and Child Dependency Allowances – payment made to households on social protection income. 

For all households with two children there will be cuts in real child income support.  For those in work with two children, the Child Benefit cuts will range from €3 to €5 per month.

For those on social protection income, the cut will be worse – as they rely on both Child Benefit and Child Dependency Allowances.  These cover over 260,000 families. These real cuts will range from €6 to €10 per month.

When we turn to larger families, however, the situation is worse as there have been cuts in the headline rate along with the cuts produced by inflation.  The supplement for the third and fourth child has been cut by €19 and €17 respectively. This will affect nearly 25 percent of all families in receipt of Child Benefit – or over 136,000 families and some 60,000 families on social protection income.

Families with three children are facing substantial monthly cuts.  For those with working income, the cuts could range between €25 and €27 per month. For those on social protection income the cuts will increase to between €29 and €35 per month.

Families with four children will, of course, be hit even harder.  For those on working income, the cuts will range between €43 and €48 per month while those on social protection income will hit be hit by a substantial €50 to €58 in cuts per month.

There are two sides to this desultory coin.  First, people will be able to purchase less with their child income support; this will reduce living standards at a time when real wages and incomes (taking into account our old friend, inflation) will continue falling next year.

There will also be an impact on domestic businesses.  These households, with falling real incomes and real cuts in child income support will reduce their spending.  This means less turnover in businesses throughout the country.  This will impact on employment in those firms – either in terms of reduced wages, reduced working hours or reduced jobs.

To conclude, we should treat claims that Child Benefit and child income support have been spared sceptically.  This may be true for numbers on the budget papers.  But once families take that income support into the real world they will find that the value will be cut – and in some cases, substantially.

No wonder a lot of people will find their living standards cut in 2012 – a long slow bleed.

The Jobs Destruction Budget (Part 1)

Despite the Taoiseach’s 17 references to jobs in his national address last night, the budget presented this afternoon will cut out between 15,000 and 20,000 jobs from the economy next year.  In other words, there would be between 15,000 and 20,000 more people at work next year were it not for the budgetary measures announced this afternoon.  This is, by any definition, a jobs destruction budget.   

Let’s go through the four main elements that will lead to this job destruction.

First, capital spending cuts will on average, according to the Department of Finance, cut 7,500 direct jobs from the economy next year.  These jobs are directly employed on construction, maintenance and repair work.  In addition, there are ‘downstream’ jobs created as a result of the activity created by capital spending (sourcing and transporting materials, demand created by the employment, etc.).  Conservatively, this would mean an extra 1,000 to 1,500 jobs.  In this area along, between 8,500 and 9,000 jobs lost.

Second, the Government announced it would reduce public sector employment by a massive 6,000.  Taking this amount of jobs out of an economy where unemployment is expected to rise is simply irrational.  It will do little to cut the deficit but it will drive unemployment one-for-one basis, while substantially reducing consumer demand – thus, hitting businesses and private sector employment dependent on that demand.

These measures alone will cut out 15,000 jobs out of the economy.  But there’s more.

Third, a large part of spending on public services goes on procurement from the private sector.  While there is no data in the recent Government’s 4-year plan, the April Stability Programme Update estimated that expenditure on contracts from the private sector would be reduced by approximately €500 to €600 million next year.

It is not possible to assess the employment impact of this cutback. But there is little doubt that companies providing goods and services to the Government will be hit by the loss or reduction of contracts.  This in turn will impact on wages and employment in these companies.

Fourth, the social protection budget will have to be examined in detail but the full-year impact is substantial – over €800 million.  Most of this will reduce payments to current social protection recipients and, as such, will hit demand.  We can assume that the full year impact will reduce consumer demand well over €600 million.  This will lead to further pressure on domestic businesses and employment.

All in all, this will lead to job losses of well over 15,000.  This, at a time when the ESRI has projected the domestic economy will return to recession next year, with rising unemployment, falling real wages (after inflation) and a continuing decline in consumer spending.

Don’t mind the rhetoric, watch the action.  Employment will fall and this budget will be a major contributor. 

Can’t wait for part two tomorrow.

Enda Could Steal a few Lines (and Policies)

The Taoiseach is to speak to the nation - apparently on Sunday when we will all be huddled around televisions, radios and computers.  In the spirit of being helpful, the Taoiseach - and his speech writers - could do worse than read President Franklin Roosevelt's fireside addresses to the American people.  I reproduce an abridged version of Roosevelt's second address to the nation - only a few weeks after he became President (the full text can be read here).

* * *

President Roosevelt: 

'Two months ago we were facing serious problems. The country was dying by inches. It was dying because trade and commerce had declined to dangerously low levels; prices for basic commodities were such as to destroy the value of the assets of national institutions such as banks, savings banks, insurance companies, and others. These institutions, because of their great needs, were foreclosing mortgages, calling loans, refusing credit. Thus there was actually in process of destruction the property of millions of people who had borrowed money on that property in terms of dollars which had had an entirely different value from the level of March, 1933. That situation in that crisis did not call for any complicated consideration of economic panaceas or fancy plans. We were faced by a condition and not a theory.

There were just two alternatives: The first was to allow the foreclosures to continue, credit to be withheld and money to go into hiding, and thus forcing liquidation and bankruptcy of banks, railroads and insurance companies and a recapitalizing of all business and all property on a lower level. This alternative meant a continuation of what is loosely called "deflation", the net result of which would have been extraordinary hardship on all persons working for wages through an increase in unemployment and a further reduction of the wage scale.

It is easy to see that the result of this course would have not only economic effects of a very serious nature but social results that might bring incalculable harm. Even before I was inaugurated I came to the conclusion that such a policy was too much to ask the American people to bear. It involved not only a further loss of homes, farms, savings and wages but also a loss of spiritual values -- the loss of that sense of security for the present and the future so necessary to the peace and contentment of the individual and of his family. When you destroy these things you will find it difficult to establish confidence of any sort in the future.

It was clear that mere appeals for confidence and the mere lending of more money to shaky institutions could not stop this downward course. A prompt program applied as quickly as possible seemed to me not only justified but imperative to our national security.

The legislation which has been passed or in the process of enactment can properly be considered as part of a well-grounded plan.

First, we are giving opportunity of employment to one-quarter of a million of the unemployed, especially the young men who have dependents, to go into the forestry and flood prevention work. In creating this civilian conservation corps we are killing two birds with one stone. We are clearly enhancing the value of our natural resources and second, we are relieving an appreciable amount of actual distress. This great group of men have entered upon their work on a purely voluntary basis, we are conserving not only our natural resources but our human resources.

Second, I have requested the Congress and have secured action upon a proposal to put the great properties owned by our Government to work after long years of wasteful inaction, and with this a broad plan for the improvement of a vast area in the Tennessee Valley. It will add to the comfort and happiness of hundreds of thousands of people and the incident benefits will reach the entire nation.

Next, the Congress is about to pass legislation that will greatly ease the mortgage distress among the farmers and the home owners of the nation, by providing for the easing of the burden of debt now bearing so heavily upon millions of our people.

Our next step in seeking immediate relief is a grant of half a billion dollars to help the states, counties and municipalities in their duty to care for those who need direct and Immediate relief.

We are planning to ask the Congress for legislation to enable the Government to undertake public works, thus stimulating directly and indirectly the employment of many others in well-considered projects.

Well-considered measures will likewise be proposed which will attempt to give to the industrial workers of the country a more fair wage return, prevent cut-throat competition and unduly long hours for labor.

Today we have reason to believe that things are a little better than they were two months ago. Industry has picked up, railroads are carrying more freight, farm prices are better, but I am not going to indulge in issuing proclamations of overenthusiastic assurance. We cannot bally-ho ourselves back to prosperity. I am going to be honest at all times with the people of the country.

I do not want the people of this country to take the foolish course of letting this improvement come back on another speculative wave. I do not want the people to believe that because of unjustified optimism we can resume the ruinous practice of increasing our crop output and our factory output in the hope that a kind providence will find buyers at high prices. Such a course may bring us immediate and false prosperity but it will be the kind of prosperity that will lead us into another tailspin. It is wholly wrong to call the measure that we have taken Government control of farming, control of industry, and control of transportation. It is rather a partnership between Government and farming and industry and transportation, - a partnership in planning and partnership to see that the plans are carried out.

We are working toward a definite goal, which is to prevent the return of conditions which came very close to destroying what we call modern civilization. The actual accomplishment of our purpose cannot be attained in a day.

I know that the people of this country will understand this and will also understand the spirit in which we are undertaking this policy. I do not deny that we may make mistakes of procedure as we carry out the policy. I have no expectation of making a hit every time I come to bat. What I seek is the highest possible batting average, not only for myself but for the team. Theodore Roosevelt once said to me: "If I can be right 75 per cent of the time I shall come up to the fullest measure of my hopes."

To you, the people of this country, all of us, the Members of the Congress and the members of this Administration owe a profound debt of gratitude. Throughout the depression you have been patient. You have granted us wide powers, you have encouraged us with a wide-spread approval of our purposes. Every ounce of strength and every resource at our command we have devoted to the end of justifying your confidence. We are encouraged to believe that a wise and sensible beginning has been made. In the present spirit of mutual confidence and mutual encouragement we go forward.'

Holidaying with Leo

According to the CSO, there is a growing number of people experiencing deprivation (read here and here for a full discussion of this on Progressive-Economy). In fact, nearly one-in-four of the population suffer two or more instances of deprivation. But that doesn’t stop our man, Minister Leo Varadkar, from assuring all those folk that, hey, the budget is going to be easy and everyone will have enough money for a holiday next year.  Indeed, Leo has come up with some holiday tips for the really hard-pressed.

For the 20 percent of the population that can’t afford to replace worn-out furniture.

Leo advises: ‘It’s hard to get a good deal in Ireland on furniture.  I recommend you go antiquing in Barcelona.  Passeig de Gracia in the Eixample area is a good spot to start.  You can find some great bargains – I picked up a sweet 19th century miniature mahogany fall front bureau there recently.  And at €800 it was a steal.’

For the 19 percent of the population that can’t afford a morning, afternoon or evening out in the last fortnight.

Leo advises: ‘I’m not surprised.  Even with all this deflation prices are still high (though my colleague Minister Bruton is trying to slash hospitality wages, so things could improve).  In the meantime, I can’t think of a better place to go for coffee than this little place in Montmarte next to the Sacré-Cœur Basilica I came across once in my bohemian days.  They have a wide range of coffee beans that they actually ground at your table!  My favourite is a rich dark Sumatra (but I like to pump the caffeine – ha, ha).  I won’t recommend any of the dinner places because . . . well . . you’re poor and  . . . well . . . you know.’

For the 15 percent of the population that can’t afford to have family or friends for a drink or meal once a month:

Leo advises:  ‘You know me, I’m a straight talking guy.  If you can’t afford to have family or friends over you probably live in a dive and your friends (my friends, anyway) wouldn’t want to come over.  But they’ll be beating down the door of your crib if you rent a lovely villa.  After a hard week at work I like to retire to the Borgo Sette Tigli near Montepulciano in Tuscany.  These villas have a swimming pool, tennis, satellite TV, a laundry and its even wheelchair accessible!  I have a permanent account there.  You rent that and your friends (and even mine) will be queuing up to come over for some mussels and authentic Gnocchi.’ 

For the 11 percent who can’t afford heating all year around.

Leo advises: ‘ For god’s sake, man – don’t sit around the gaff freezing your tushy off.  Head over to Lisbon.  You can crash in the Costa da Prata north of Lisbon.  Warm swimming and tasty barbequed sardines.  The great thing about this spot is that tourists haven’t copped on to the place – and there’s nothing worse than going to a place only to find it over-run with foreigners.  Just mention me to Guilherme over at the São Gabriel and he’ll russle you up a great seafood medley.  Whenever I drop in, Guilherme and I stay up all hours drinking new Alentejo wines and talking about the horses.  And warm?  Get outta here.’

Yes, our Leo has a holiday destination tailored just for your deprivation experience.  Unable to afford new clothes?  You’ll find some real bargains in the markets in Garmisch-Partenkirchen in the German Alps. Unable to afford a roast once a week?  Not to worry, you can order Jamón Iberico de Montanera over the counter in San Sebastian (that’s free-range, acorn-fed ham – no need to scrimp on holidays). Unable to afford two pairs of strong shoes?  Hand-crafted leather sandals are all the rage in Genoa. 

So don't be shy.  Leo is waiting for you to get in touch. Just contact him at Fine Gael’s branch office in Saint-Tropez between the hours of 10:30 and 12:30.  Otherwise, wander down to the pier where you’re sure to find him.