Notes On The Front

Promising the Irresponsible

The Finance Minister needs to buy the Taoiseach an abacus.  It would also be helpful if he would brief him on certain economic realities.  For the Taoiseach has been both promising and mispricing the irresponsible.

At the Fine Gael Ard Fheis last weekend the Taoiseach trotted out his tax cut proposal – raising the standard rate tax threshold.

‘Over the next five years, we will increase the point at which people pay the higher rate of tax to €50,000 for a single person and €100,000 for a couple.’

This would be a substantial rise on the current €35,300 (€70,600 for a couple) tax threshold.  This proposal is not new.  The Taoiseach came out with this last November.  What is new is the Taoiseach’s claim that this tax cut would be relatively cheap.  

Back in November it was generally conceded that this proposal would cost €3 billion.  And for good reason. That’s the price tag the Revenue Commissioners put on the proposal.  Each increase of €1,000 in the standard rate tax band costs €206 million.  However, the Taoiseach went on to say:

‘Let me tell you how we’ll pay for it.   Because there are more people working every year, and people are earning more, we’ll take in about €1.8 billion extra in income tax. I want to give about half of that back to you, taxpayers and pensioners.’

So now this €3 billion tax cut will only cost €900 million (and is he including pension increases in that?).  How did this happen?  I have no idea.  I wonder if the Taoiseach does. 

Apart from mispricing, the Taoiseach’s proposal couldn’t be more irresponsible.  This is all the more the case given the ESRI’s modelling of the potential impact of Brexit.  This Cabinet was briefed on this paper before it was published, so the Taoiseach was aware of its findings before his speech at the Ard Fheis. 

The ESRI found the impact of Brexit could be substantial.  In the worst case scenario – a chaotic, no-deal Brexit – the ESRI estimates that over the next five years

• 20 percent could be knocked off of real GDP
• Employment could be about 50,000 lower
• Real wages and personal disposable income will fall while consumer prices rise

All this will, of course, throw public finances off course with the deficit rising by approximately €2 billion.

Even in a ‘deal-done’ Brexit – where the UK makes an orderly agreed exit from the EU involving a transition period up to 2020, and a free trade agreement with the EU thereafter – the economy will still be hit:  up to €10 billion could be knocked off GDP while employment could be 20,000 – 25,000 lower.  Wages and incomes would still go south while prices would still head north.

While the impact of a done-deal Brexit would be less than a disorderly affair, it only looks good by comparison.  On its own, it still represents a significant negative impact on the economy.

If this wasn’t bad enough, our major trading partners are in serious trouble.  The Eurozone is flirting with yet another recession while in the US, the Trump tax cuts are wearing off with growth slowing down.

In this highly uncertain, potentially volatile environment – not even taking into account the substantial fines for missing our EU climate change targets (have these even been factored into medium-term government projections?), the downside impact of any change in international taxation and the eventual rise in interest rates  - why would the Taoiseach make such a proposal?

Here are some explanations.

• Escalation of commitment:  the Taoiseach made a promise before a Fine Gael audience last November. Rather than step-back in the face of growing uncertainties, he is irrationally doubling down because to do otherwise might suggest he was wrong to make the proposal in the first place.
• Cynical: the Taoiseach knows he cannot fulfil this promise but maintains it as a ‘flagship’ policy.  If external events intervene to prevent it, he can always blame the Brits.
• It’s What We Do:  just like Fianna Fail, who cut every tax possible prior to the crash (egged on by Fine Gael), cutting taxes is in the genes regardless of what economic reality tells us. The scorpion can’t help being a scorpion.

Even without the negative impact, the proposed tax cuts are highly inequitable.  In a previous post we saw that the Government intends to cut public services and social protection in real terms over the medium-term.  In effect, the Taoiseach’s tax cuts proposals will not be financed by ‘more people working and earning more’ as he put it.  It will be financed by real spending cuts.

Now add in Brexit – even a done-deal one – and see what will happen.

In truth, none of this is sustainable.  The Taoiseach must surely have some sense of this.  But his determination to hoover up votes with the promise of tax cuts (which didn’t get Fine Gael very far in the last election) trumps reality.

Progressives will no doubt highlight the inequity of his proposed tax cuts and they would be correct.  But there is another prize – painting the Government as being fiscally irresponsible, a mirror-image of the Fianna Fail’s reckless pre-crash policies.  Even the Irish Fiscal Advisory Council doesn’t believe the Government: 

‘ . . . the medium-term budgetary plans are not credible . . . ’

Ultimately, the Taoiseach’s proposed tax cuts are fiscally irresponsible.  Fianna Fail has no alternative.  It is time the Left step up with a credible path forward.  And if that means challenging some of their own proposals and analysis, all the better.  Do it publicly, invite people into the debate over the process of building a productive economy that can withstand the shocks of uncertain events.

That is proper leadership.  And, boy, do we need some that now.

This Over-Worked Working Life

There is a growing interest in reducing the working week – usually expressed as a four-day week.  Numerous ad hoc examples of private and public sector companies and agencies appear in the media while, here in Ireland, Forsa recently held a conference dedicated to reducing the working week. 

The arguments for a shorter working week range from greater work/life balance, productivity, stress reduction, preparing for the impact of automation, etc.  As part of that debate below is some information on how many hours per year people work in Ireland in comparison with our EU peer group (other high-income economies). 

This data focuses on full-time employees but it should be noted that full-time is defined as approximately 30 hours by the CSO with possible different definitions in other countries.    Further, this looks at the private sector as this is where the introduction of a shorter working week on the same rate of pay will be the most challenging.

The Private Sector Economy

Irish employees work more hours than most other peer group countries.  The UK and the Netherlands report higher annual working hours.  The Netherlands is an interesting case.  It has the highest level of part-time workers with 50 percent of all employees working part-time compared to an average of less than 25 percent in other countries.

Annual working hours can be reduced in many ways – not just a though a shorter working week. For instance, public holidays, statutory annual holidays and additional holiday hours resulting from collective agreements in the workplace can reduce annual hours worked.

In total, Irish employees work the equivalent of 2.7 weeks more than our peer-group average, assuming a basic 39-hour working week (the UK is not included in our EU peer group for obvious reasons; Eurostat is already removing the UK from EU averages).  We don’t work the most, but we work more than most in our peer group.

Working Hours by Sector

The following looks at sectoral breakdowns.  Let’s start with the high working-hour sectors.

• Irish construction employees work more hours than any other sector, and 15 percent more than our peer group average - 248 hours annually, or the equivalent of 6.4 weeks more per year.  A possible contributor to this high level of working could be the emerging labour shortage in the sector.
• Irish manufacturing employees work 11 percent more than our peer group – 175 hours annually, or the equivalent of 4.5 weeks more per year.

Turning to medium-high working-hour sectors we find the following.

• Irish transport employees work 8 percent more than our peer group – 132 hours annually, or the equivalent of 3.4 weeks more per year.
• Irish wholesale/retail employees work 6 percent more than our peer group – 106 hours annually, or the equivalent of 2.7 weeks more per year.
• Irish communication and information employees work 2 percent more than our peer group – 37 hours annually, or the equivalent of nearly one week per year.
• Irish financial services employees work 5 percent more than our peer group – 76 hours annually, or the equivalent of nearly two weeks per year.

Finally, let’s look at relatively low working-hour sectors.

• Irish professional and technical employees work 1 percent more than our peer group – 11 hours annually, or the equivalent of less than two days per year.
• Irish administrative service employees work marginally less than our peer group – less than half-a-day per year.
• Irish hospitality employees work 3 percent less than our peer group – 53 hours less, or the equivalent of 1.4 weeks per year.

It should be noted that the hospitality sector is likely to have high levels of precariousness.  The problem here may be that full-time employees don’t get enough work.

It’s bad enough that we are over-worked compared to our peer group.  But we also get fewer paid days off.

Annually, Irish workers get 88 fewer hours paid without working than our peer group average.   That’s the equivalent of 2.3 weeks fewer paid public holidays, annual  holiday leave, etc.

Some might say this is the price we must pay to have a strong economy.  However, other economies with far fewer working days and more paid days off have just as strong economies.

Belgium, which has the lowest annual hours worked and the highest number of paid days off, has the highest GDP per person employed (factoring in living costs).  On the other hand, the UK has the highest working hours and the fewest paid days off.  Yet they are at the bottom.  Ireland, while ranking third, is clumped together with a number of other countries which have fewer working hours and more paid days off. 

In short, working more doesn’t guarantee higher output.

Hopefully the debate over the future of the working week will gather pace.

But one thing is for sure.  Irish workers are already over-worked.  What we need is fewer working hours and more paid time off.

Now.

It Begins - And Continues

It was only a matter of time.  Finance Minister Paschal Donohoe brought a new report to Cabinet last week containing estimates of the damage a no-deal Brexit could do to the Irish economy.  These new estimates paint an even more pessimistic picture than previous reports.  The upshot, according to last week’s Sunday Business Post (paywall):

‘The results of the report will feed into Donohoe’s growth forecasts for the annual stability programme update next month, which could reduce the spending available for the next budget.’

‘Could’ is one of those softening-up words.  The Government will have the advantage that any reduction in public spending that appears in the Stability Programme Update will be buried in rows of numbers in the annex.  By the time analysts unearth the trends, the 24/7 news cycle will have moved on. 

Even if a no-deal Brexit is avoided, anything that leads Britain out of the customs union and the single market will have a negative impact on the Irish economy.  The concern is that any reduction in public spending will be on top of current Government projections that already show depressed public expenditure growth.  For instance, the projections from the last budget show the following increases up to 2023:

• Social Protection: 8 percent
• Public Services: 9 percent
• Investment: 1 percent
• Total Primary Spending (excluding interest payments): 0 percent

These categories – which make up approximately 90 percent of total spending - are all in the positive zone though still tight, especially the marginal increase in public services.

However, by 2023 there will be more people and higher prices.  When we factor these in, the situation changes dramatically.  And not for the better.

When inflation and population growth are factored in, we see that the major categories in public spending are all being cut, with the exception of public investment.  Total primary spending will fall by nearly 7 percent in real terms per capita.

Social protection is being cut.  Pensions make up nearly 40 percent of all social protection expenditure and this proportion will rise over the years.   Ireland has the fastest growing elderly demographic in the EU.  This will have to be catered for, so what about the rest of the programmes?  Falling unemployment won’t help because according to Government projections, it has nearly bottomed out. 

Public services will really be hit.  With costs rising (again, the additional costs owing to a rising elderly demographic), what services will be squeezed?   Implementing Slaintecare will require upfront investment.  And we lag behind our EU peer group in education spending.  One can argue for greater efficiencies – but what efficiencies can drive quality while recouping nearly one-in-ten Euros in productivity gains?  We’re just as likely to be doing less with less.

There are a couple of important caveats.  First, the Government has allowed itself an unallocated sum of €3.6 billion in 2023.  This will give some manoeuvrability.  However, the inclusion of this still means total primary spending will fall in real per capita terms (approximately three percent).

Second, the Government might have some leeway over the surplus it intends to run by 2023: 1.4 percent.  This surplus exceeds what the Fiscal Rules require.  However, will the fiscal hawks relent, even in a downturn? 

We are experiencing the legacy of austerity – the embedding of austerity into our fiscal foundations.  This doesn’t mean actual cuts; it means ‘below-the-radar’ cuts – in real terms lagging population growth.    The failure to estimate the amount of pent-up demand on spending stored up during the recession, combined with increasing demand from a growing population, could help explain the Irish Fiscal Advisory Council’s observation that

‘ . . . the [Government’s] medium-term budgetary plans are not credible . . . ‘

Progressives will have to work hard to gain traction in this debate, to come up with a credible alternative to creeping deflation.  We can’t rely on some pot of Euros at the end of the tax rainbow (though additional taxation on unproductive capital and passive income wouldn’t go amiss).  Instead, we need to think outside the fiscal box to help put our fiscal house in order.

A good starting point would be to promote the wages of low and average income earners through a radical extension of collective bargaining.  This would generate greater tax revenue for the state and more activity for domestic businesses (more sales), while reducing subsidies to low-wage employers.

And if we combined that with greater worker involvement in workplace decisions which boosts productivity at the firm and economy-wide level (higher output for relatively lower input), we could further increase the gains from collective bargaining.

Taxation and expenditure are not the only ways to address fiscal problems, though of course they play a vital role.  The issue is ultimately an economic one.  And the productive economy starts with the producers of goods and services; that is, the workers.  This won’t fully protect us from a no-deal or poor-deal Brexit but it will certainly help.

Blaming it on Workers (Again)

In recent days employers have claimed that rising construction wages are a significant contributor to high prices in the residential and infrastructural sectors.  Not only do these claims not hold up, they are crude attempts to divert attention from the real drivers of prices.

On the front page of the Sunday Business Post (paywall) there was a claim that:

‘The last pay rise of 10 percent for construction workers in October 2017 was cited as one of the reasons why the cost of the National Children’s Hospital had increased from €980 million to €1.7 billion.’

This is groundless.  The Construction Industry Federation (CIF) states that labour makes up 40 percent of the overall costs of construction (we will see below this is highly contestable).  So if labour made up 40 percent of the original estimate of €980 million – that would come to €392 million.  A 10 percent pay increase would add €39.2 million. 

However, the cost of the project ballooned by over €700 million.  The pay increase made up only a fraction of the project increase – 5 percent.  So where did the other 95 percent come from? 

Now that construction workers have lodged a pay claim for a four percent annual increase over the next three years, the CIF is at it again.

‘An increase in labour costs would add to the cost of construction for a house builder . . . This in turn would result in an increase in the cost of the house to the purchaser. Driving up the cost of housing at this time would only serve to exacerbate the current housing crisis.’

It’s hard to know where to start in de-constructing this assertion.  So let’s start with some comparisons.

European Comparisons

Employee compensation in the Irish construction sector is low by comparison with our peer group in the EU. 

Irish construction compensation would have to rise by 17 percent to reach our peer group average, and a lot more to reach the table leaders.

Recently, Irish compensation has been increasing faster than our peer group (after a long period of stagnation).  In 2018, Irish construction compensation rose by 4.1 percent; our peer group rose by 3.1 percent.  But our employer class shouldn’t worry too much.  At this rate, Irish compensation won’t catch up to the average until 2033.

Wages and Prices

The CIF worries that higher wages will fuel higher house prices.  But wages make up only a small proportion of the cost of residential and commercial construction.  There are two ways to measure this:  the production value approach (compensation as a percentage of production) and the value-added approach (compensation as a percentage of combined non-labour and labour costs).  In both measurements, Irish proportions are much smaller than our peer group – meaning wage increases would have a smaller impact.

Not only is Irish employee compensation in the bottom half of the table in both measurements, this shows that employee compensation is between 16 and 22 percent of costs.  The difference is that the production value includes value-added (that is, both wages and profits).  This is a far cry from the CIF’s claim that wages make up 40 percent of costs.

A four percent pay increase would represent less than one percent of total costs in either measurement.  Even if we took the CIF’s claim that employee compensation makes up 40 percent of the costs, a four percent increase would still have a minor knock-on effect:  1.6 percent of production costs.

That’s if you believe there is a relationship between wages, costs and prices.

A Sector Detached From Costs

Irish house prices long ago detached themselves from costs and wages.  Prices operate on a different plane.

In the decade prior to the crash, the construction cost index rose by 68 percent.  During that same period new house prices rose by 214 percent – more than three times the rate of costs.  Not much of a relationship. 

Between 2007 and 2012 – when new house prices bottomed out – construction costs rose by one percent; new house prices fell by 30 percent.  Not much of a relationship there, either.

So what’s been happening recently? 

Here we go again.  Between August 2012 and August 2017 (the last month we have data for construction costs), new house prices rose by 59 percent; construction costs rose by 4 percent.  One more piece of evidence that house prices and construction costs don’t relate to each other.

Here’s something provocative.  The Labour Costs Index shows that construction wages rose by four percent in 2018.  National new house prices rose by less than one percent; Dublin new house prices actually fell by four percent.  I won’t suggest that if we increase Dublin building workers’ wages, Dublin prices will fall further.  Instead, we see no relationship.

Of course there is no relationship.  As Orla Hegarty, Lorcan Sirr and Mel Reynolds (this is one Troika I would like to see take over government housing policy) have consistently shown, house prices are determined by the interaction of a number of factors – land prices, developer margins, credit availability and cost, planning and design, etc.  And profits.

Profits

There is some data that the CIF are reluctant to highlight. 

Value-added is made up of two components – profits (gross operating surplus) and employee compensation.  The higher the profit percentage, the lower the wage percentage:  it’s a zero-sum relationship.  And profits in the Irish construction sector are doing quite well.  40 percent of value-added is captured by profits.  This is lower than the UK – where low wages and bogus self-employment are even more than here – but much higher than a number of other countries.

Another way to measure profits is as a percentage of turnover, or sales. 

This measurement – Gross Operating Rate – shows profit as a percentage of turnover. Again, we see Ireland at the top (bar the UK) and well above many other peer-group countries.

Employers will point out that this represents a catching up, that profits were on the floor during the recession.  It is true that profits crashed in the years following the crash.  This was just as unsustainable as the white heat frenzy prior to the crash.  But there’s catching up, then there’s overtaking by a wide margin.

* * *

So what have we found?

• Irish construction wages trail our peer group average by a significant amount and on current trends will take well over a decade to reach that average.
• Wage increases have only a fractional impact – whether that’s measured as a percentage of production costs or of the non-value-added component.
• There is no relationship between wages and costs, and new house prices. There hasn’t been one for a long, long time.
• Irish profits in the construction sector are much higher than all other countries in our peer group, bar the UK.

In short, the CIF is making disingenuous arguments about costs and ignoring the real drivers in prices.  But there is a wider lesson here; namely, that government policy must focus on establishing a long-term relationship between house prices and construction costs.  If prices mirrored construction costs since 1997, the average national house price in 2016 would have been €177,000 instead of the actual price - €314,000.

If we don’t link prices with costs, we’ll continue to suffer the roller-coaster of booms-and-busts in the construction sector – with all the damage to the economy that we know only too well.

The Great Public Sector Pay Debate (Again)

Commentators are increasingly turning to the subject of public sector pay – in large part, to warn against pay increases or increased employment.  In some cases history is being re-written.  Let’s go through some of the arguments – focusing on a recent article by Irish Times’ columnist and managing editor Cliff Taylor.  Not that he got everything wrong – he is a serious commentator.  And what we need is a serious and evidence-based debate.  Note:  Quotes in bold below come from Cliff Taylor’s article.

‘The increase in numbers and, more lately, in pay will this year put the public pay bill back above its previous 2008 peak. It is due to hit €18.1 billion this year, more than 6 per cent above its previous high.’

True, but it doesn’t get us very far.  Public employee compensation (which includes pensions and social insurance) may have retuned to 2008 levels, but the economy has moved on. 

Public employee compensation fell from 13.5 percent of GNI* in 2008 to 11.2 percent in 2018.  This may seem small but if the public sector pay bill were to return to 2008 levels, it would need to rise by €4.6 billion, or 21 percent.  We are a long way from a decade ago. 

‘Remember, the build up in public spending in the 2000-2008 period, based on a shaky tax base, left the exchequer finances exposed and filling the resulting gap contributed to a massive jump in the national debt during the crisis.  The result: this year the Irish taxpayer will pay €5.3 billion in interest on the State’s debt.’

What exposed Exchequer finances?  Let’s not avoid the historical elephant in the room.

Exchequer finances were exposed by banks recklessly over-extending themselves, exploiting a speculative property sector. 

When the crash came jobs melted away.  Between 2007 (when construction employment started falling as property prices topped out) and 2010, 150,000 building employees lost their jobs – half of the fall in total employment.  And that doesn’t include all property-related employment (building materials manufacturing, transport, property-related finance, home furnishing retail, professional services such as architects, etc.). 

This was further compounded by Fianna Fail’s fiscal policy that tied tax revenue to property-related tax receipts while cutting every possible tax (corporation, inheritance and capital gains, income, stamp duties, etc.)  resulting in what Cliff Taylor rightly refers to as a ‘shaky tax base’. In a mere two-year period – 2007 – 2009 – revenue collapsed by €15 billion or 21 percent. 

It is hard to attribute reckless bank balance-sheets, property speculation, the collapse in tax revenue and the destruction of property-related jobs to the growth in public spending, public services or the public sector payroll.

And interest rates?  There is the little matter of the bank bail-outs.  Between 2008 and 2011, the state was hit with a €42 billion bank debt bill, primarily due to Anglo Irish and Irish Nationwide (the bailouts of the systemic banks – Bank of Ireland and AIB – were categorised as ‘investments’ and were paid out of the National Pension Reserve Fund).   This, too, could hardly be laid at the door of the public sector pay bill.

Public, household and corporate finances became seriously unbalanced in the pre-crash period as people, companies and the government chased an over-heating economy.  In 1998, Irish consumer prices were 3 percent above the EU average; by 2008 they were 27 percent above the EU average.  And this doesn’t factor in mortgages and house prices.

Any analysis of the pre-crash period that doesn’t start with the speculative-based fiscal policies and bank balance sheets is likely to miss the point by a wide margin.

‘Public sector numbers – and particularly pay – ballooned in the run-up to the crisis . . .’

This, again, is true and, again, misses a larger point.  In the decade up to 2008 the public sector pay bill (both pay and employment) grew by an average 16.2 percent annually.  All wages in the economy grew by 14.9 percent.   When we drill down further into average compensation per employee, we find that between 1998 and 2008 there was an annual average increase of 8.2 percent in the public sector compared to 7.3 percent in the total economy – or less than 1 percent annually.  This could hardly be considered extravagant. 

But how much of this was due to a compositional effect?  We can drill down even further courtesy of the CSO.  2007 is the last year in many of the CSO series covering the pre-crash period (here and here and here).

Average annual growth narrowed even further.  The story here is that (a) public sector wages (the CSO excludes health) increased only slight faster than industrial wages; and (b) both industrial and public sector wages rose faster than service sector wages.  If we had the health sector data it would have depressed the public sector average given that in 2008, health sector weekly income was 7.5 percent below average. 

To restate:  there was a lot of ballooning but the toxic air came from a speculative-driven economy and a fiscal policy tied to property interests.  The comparisons between the public and private sector show similar patterns.

‘Average public sector salaries here are 40 per cent ahead of the private sector.  However, public servants are generally older and better educated, factors that have been used to justify higher pay levels.  A CSO study which tried to adjust for this element suggests that at lower to medium levels, public pay is ahead of the private sector, though the position may be reversed at higher levels.’

The CSO did more than that.  It showed that public and private sector employees earned the same on a like-for-like basis (though prior to the crash there was a public sector premium). 

In 2014, male public sector workers were paid 7 percent below their private sector counterparts.  Women still held an advantage but that is due to a lower gender pay gap in the public sector (9.6 percent compared to 19.7 percent in the private sector).

 ‘International comparisons are more complex and vary from sector to sector. In general the percentage of public resources going to pay here is generally at or above the EU norm, though the numbers employed in the public sector here are lower than in many other EU countries.’

True, it is complex – made even more so by the lack of an internationally-agreed definition of ‘public sector’ employee.  For instance, employee compensation in the health sector is not comparable across EU countries.  Many countries deliver their public health services through ‘non-governmental corporations’ such as social insurance-based occupational funds, or purchase them in the market.  These are public in every sense of the word, but health employees are not categorised as ‘public’. 

For instance, employee compensation makes up only four to six percent of the total health budget in countries such Germany, Belgium and the Netherlands, compared to tax-financed systems where employee compensation makes up over 40 percent of the health budget (UK, Sweden, Ireland).  Other countries have hybrid systems.  Comparing pay in the public health sector is not possible.

So let’s compare public sector pay excluding the health sector.  This still comprises 80 percent of public sector pay. 

Ireland, based on GNI*, comes in at the bottom of the Eurozone, bar Germany.  If we were to reach the Eurozone average we could employ over 40,000 additional public sector workers.

* * *

None of this is to say that everything is fine in the public or private sector. And this is certainly not a full picture.   There are important issues of fiscal management and productivity that we need to get right.  And who is best placed to lead sound management and improved efficiency?  Ellen Rosen was writing about the public sector but her focus on worker empowerment is just as applicable to the private sector.

‘It is the [public sector] workers who discover that things are not working as it was assumed they would, who first encounter the unexpected difficulties, and who are the first to hear from the clients about needs that the program is not meeting.  In short, workers know the operations most intimately and are in the most immediate contact with the clientele. Workers are not only the natural source of feedback on how things are going, but also the natural source of ideas and insights into the specifics of operations.’

We can have a shouting match over public sector pay and efficiencies (Cliff Taylor never descends to that) with duelling stats and anecdotal evidence that can border on the hysterical – remember the Ministerial claim of a ‘civil war’ between public and private sector workers?

Or we can have a more productive and effective exploration of the issues involved. 

It shouldn’t be too difficult a choice. 

What Finland’s Universal Basic Income Experiment Can Tell Us

In 2017 the Finnish Government launched a two-year experiment in Universal Basic Income (UBI).  2,000 unemployed people were selected at random and paid an unconditional €560 per month (though, in the complex Finish social protection system, they still retained social assistance, housing and sickness allowance).  Even if they found work they continued to receive the €560 per month – as per the nature of UBI. The experiment is over and an initial report published.  The two main findings are:

• The experimental UBI didn’t increase employment among the recipients; however
• There was a marked increase in well-being

It is important to note this initial assessment only covers the first year of the experiment.  So we are looking at half-time results.  Things may have changed for recipients by the end of the second year.

The experiment has been criticised on the grounds that (a) the sample size was too small (it was originally intended to be 10,000); (b) only unemployed people were selected, whereas UBI would have benefits to those both in and out of work – for instance, the low-paid; (c) its design focussed almost exclusively on the impact on the labour market; i.e. whether it would increase employment among recipients. 

Regarding the last criticism, if UBI were to create jobs it would be due to a substantial redistribution to low and average income earners which would boost demand in the economy (though it could also increase inflationary pressures).  The limited experiment was not designed to test demand-boost so the employment result is not all that surprising.

Yes, a number of people felt better but is that worth the price?  There are identifiable fiscal benefits that come with this enhanced well-being.  For instance, in the experiment the UBI recipients claimed an average of €121 in sickness allowances compared with €216 for a control group of non-recipients.  That would yield significant savings if applied across the economy. 

So where does that leave the UBI debate in Ireland?  It seems stuck between proponents arguing for a fundamental systemic change, and those who have economic and social objections to UBI in principle as well as those who pragmatically oppose it on grounds of cost and unintended consequences.  In short, the debate is spinning its wheels.

This is unfortunate, because one does not have to be a proponent of a full-blown UBI to see the potential common sense in many aspects of it. 

Here is an example of a policy based on certain UBI principles but which could win support of UBI sceptics. 

The Government could transform personal tax credits into a basic or minimum guaranteed income for all.  Currently, everyone at work – except for those whose income is below the entry threshold – receives a cash payment of €63.50 per week through the tax system:  the combined personal and PAYE tax credit. 

If that were paid to everyone the benefit would be almost exclusively focused on low earners – in particular, those in low-paid precarious work. 

• No one in the tax net would benefit – after all, the ‘cash’ payment is only equal to what they get today in personal credits
• Social protection recipients wouldn’t receive any benefit either, as the cash payment would be absorbed into the current payment (which is not to say that social protection benefits shouldn’t be increased but that is a separate issue)

The only beneficiaries would be the low-paid who, if below the tax threshold, do not currently get the full benefit of the personal tax credits.  It would also guarantee a minimum payment for those on precarious hours regardless of how many hours they work. 

The cost would be substantially less than the Taoiseach’s promised tax cuts of €3 billion.  A back-of-the-envelope calculation suggests that, in 2016, paying everyone in work €63.50 per week would cost €9.6 billion.  There would be a saving of €8.0 billion in abolishing personal tax credits.  This would result in a net cost of €1.6 billion.  This should be considered an outer bound figure (other calculations put the net cost lower). 

But these are headline estimates.  There could be further costs and savings through the interaction of social protection, subsidies and work income depending on the range of personal circumstances. 

For instance, this new payment would replace most of the means-tested student grants and be available to all households (currently many average-income households are excluded).  This could happen with other programmes. 

€63.50 per week (€3,300 per year) sounds like a small amount and it is – but it would be an improvement for those on low pau and in precarious work.  For instance, someone who can only find work for 26 weeks of the year on the minimum wage would gain €1,260.  If this is shown to have social and economic benefits this minimum income floor could be raised over subsequent years. 

This is would not be a substitute for other measures to combat precariousness.  That will require a number of strategies - collective bargaining rights, statutory reforms and fiscal instruments such as outlined here.

Ultimately, the advantage of this approach is that one does not have to be a supporter of UBI to see the advantage of transforming personal tax credits into a minimum payment to all.  And if the benefits revealed so far by the Finnish experiment are replicated here, we would be promoting social well-being as well.

Not a bad day’s work for a little common sense.

Public Housing can Help us Avoid a Bad Brexit

With all the commentary understandably focused on a ‘hard border’ it is easy to forget that even in a soft Brexit, with a satisfactory outcome to the border, the hit to the economy could be substantial.  We need a progressive response to the issues – one that goes beyond merely throwing money at exposed companies in the hope that some of it will be used ‘smartly’.  The following outlines some proposals – but the most provocative one I’ve saved for last.

For a public housing drive can be of great assistance to softening the edges of a bad Brexit (and all Brexit outcomes, unless Britain remains in the custom union, are not good).

1.    Sectoral Partnership Schemes

A number of manufacturing and service sectors have been identified as being relatively or highly dependent on the British market and, so exposed to a bad Brexit:  food & beverages, traditional and materials manufacturing, printing, some pharmaceuticals.  Further, financial, communication and IT sectors could also be affected. 

A Sectoral Partnership Scheme would direct state aid to sectors and companies to help them adapt.  This could be through goods and market diversification, niche marketing in the UK, production efficiencies, finance accessing, R&D and innovation initiatives, etc.

Sectoral committees (based on specific sectors such as food, printing, etc.) would be established with employer, employee and government representatives who would oversee these supports.  All stakeholders would be involved in the design, implementation and monitoring of public supports.  Employee participation in particular, through representative agencies such as trade unions, makes common sense since employees are the largest group of stakeholders affected.  With input from employees, firm and sectoral strategies are likely to be improved.

2.    Short-Time Working Scheme

The Government should introduce a short-time working scheme (similar to ICTU’s proposals re:  the construction sector in 2009).  Germany used this approach during the early part of the last recession.  This would help ensure that workers remain in work.  Where there is a fall in firm output owing to a Brexit-caused market hit, instead of laying people off, working hours would be reduced with the state subsidising the employer/employee for the wage loss.  This would operate for a temporary period but it would give time for firms to adjust (e.g. for instance, under the proposed SPS above) or for job creation agencies to develop alternative employment in the area affected.

3.    Strengthen Automatic Stabilisers – Introduce Pay-Related Unemployment Benefit

Unemployment Benefit acts as an automatic stabiliser when unemployment rises.  Income from social benefit replaces income from work so that consumer demand can be maintained and the household’s income loss is ameliorated.  However, Ireland’s automatic stabilisers - unemployment benefit – are weak.  In other EU countries, unemployment benefit is pay-related – up to 80 percent of previous wage for a period of time; in Ireland, it is flat-rate and represents less than 25 percent of an average full-time employee’s previous wage.

Unemployment Benefit should be reformed to introduce a pay-related element (e.g. 75 percent of previous wage for a minimum of nine months).  In the event of job losses arising this measure would help maintain consumer demand and, so, ensure that further job losses don’t occur because of educed consumer spending.  It would also cushion the job-loss impact on household’s finances.

4.    Public Housing

Public housing can be an important instrument in both resolving the housing crisis and reducing the hit from a bad Brexit; namely, a dedicated and substantial drive to construct public housing that can meet the housing needs of people both in and out of work.

There are two issues here.  First, if we enter a downturn (not necessarily a recession) with a housing crisis, it is likely to be exacerbated and, so, cost even more to resolve on the other side of the downturn.  In this instance, a public housing drive can be seen as cost-reducing measure over the medium-term.

More importantly, a public housing drive can replace the reduced growth arising out of a bad Brexit.  Let us assume that national income gets hit (GDP or GNI or GNI*).  Consumer spending, domestic investment and employment are reduced with negative consequences for public finances:  falling tax revenue, increased public spending through rising unemployment payments, etc.

A recent study from the Irish Fiscal Advisory Council provides evidence that a public housing construction drive could drive up GDP in the short-term. 

What this graph – taken from the Fiscal Council data – shows is that for every increase in investment equal to 1 percent of the domestic economy, the benefits will be nearly doubled in the short to medium-term in terms of domestic economy growth.  Model 3 is lower because this measures the entire economy – both domestic and foreign-owned.  The foreign-owned sector is unlikely to benefit from any such increases as they rely on foreign demand.

Over the long-term, the benefits disappear as is usual with once-off increases.  But the issue here is to ameliorate any damage in the short-term from a bad Brexit.  We can expect to see GDP/GNI* rise along with tax revenue; expenditure will fall given that more jobs are being created by the investment.

There are further, secondary, gains from a public housing drive that these multipliers wouldn’t pick up.  For instance, more public housing would reduce expenditure on Housing Assistance Payments (HAP) and other subsidies to the private sector.  Secondly, if cost-rental housing is rolled-out, then the savings on rents for tenants (which could come to hundreds of Euros a month) would be redirected back into the productive economy, increasing spending on goods and services.

What all this points to is the need for substantial and cooperative intervention to counter an external threat; substantial in terms of state resources, and cooperative in terms of employee involvement.  That this can help resolve a pressing social need – housing for those in need – shows how a progressive response can lead the national response to a crisis manufactured in Britain. 

Well-Being is a Political Issue

Colin Murphy has a provocative column in the Sunday Business Post (January 27 - firewalled) about measuring our economy and national well-being.  The traditional measure is GDP.  The traditional yardstick is the higher the GDP per capita, the more prosperous the society.  Maybe. 

Even the originator of GDP, Simon Kuznets, had his doubts about that, as Colin points out:

‘Kuznet argued that spending that did not further the welfare of society – such as on armaments – should not be included but he was overruled.  And he consistently warned against the over-interpretation of the data.  National income and GDP were not measures of economic welfare, he stressed:  to understand welfare you would need to know not merely what income amounted to but how it was distributed. ‘

And now the illegal narcotics trade and prostitution are included in GDP.  How does that fit in with ‘economic welfare’? 

A number of economists, sociologists, statisticians and activists have tried to come up with an alternative set of data to reveal a more effective picture of a nation’s wellbeing but the range is so extensive, the interactions complex and the permutations voluminous. Unsurprisingly, there is no consensus on how to do this.

The OECD has devised an interesting Better Life Index comprising housing, income, employment, community, education, environment, civic engagement, health, life satisfaction, safety, and work-life balance.  But there are other indexes that have over a hundred measurements and it is difficult to come up with a single number that can compete with GDP.

For instance, someone in country A may have a higher income than someone in country B.  But people in country B pay less on rent and receive free healthcare – benefiting from lower costs and security.  Though income-poorer they may be better off than people in country A.

Another problem is that well-being can be a subjective matter.  It’s not just about how objectively we compare, it’s how we feel about our situation.

In this spirit of exploring the different indicators I’d like to draw attention to three particular measurements that don’t get much airing.  These are not conclusive tests or even the best indicators.  But they do tell us something about people’s well-being.

Inability to Make Ends Meet

This is a subjective measurement contained in the EU Survey of Living Conditions that asks people how well they can make ends meet – that is, meet every day expenses.  There are five responses:   ‘with great difficulty’, ‘difficulty’, ‘some difficulty’, ‘fairly easily’ and ‘easily’.

Combining ‘great difficulty’, ‘difficulty’, and ‘some difficulty’ we find Ireland at the top of the EU high-income league.  61 percent expressed some type of difficulty in making ends meet – compared to a 32 percent average among other EU high-income countries.  Irish households are nearly twice as likely to experience difficulty making ends and nearly four times the German rate.  [It is worth noting the high French levels – could this be a contributing factor to the emergence of the gilet jaune protests?]

There is a difference, though, between ‘some’ difficulty and ‘great’ difficulty.  How does Ireland fare in the specific difficulty categories?

Ireland leads the most difficult categories – more than twice the ‘great difficulty’ average.  With ‘some difficulty’ Ireland ranks second behind France.

The only bright spot in these depressing numbers is that difficulty experiences are falling from even higher rates that were generated during the recession / austerity period.

Households experiencing ‘great ‘difficulty have halved since the peak in 2012/13 and are back to 2007 levels.  Those experiencing difficulty has also fallen since the 2013 high and is nearly back to pre-crash levels.  However, those experiencing ‘some’ difficulty are still close to the recession high and still significantly above pre-crash levels.

It should also be noted that had we returned to pre-crash levels (54.3) we would still be well above the EU high-income country average.

Unable to Meet Unexpected Expenses

The EU Survey on Living Conditions also asks households their ability to meet unexpected expenses.  This differs from making ends meet as it refers to meeting a substantial cost such as replacing a broken cooker, boiler, fridge or car; or some other expense of equal  value that is unexpected (a hole in the roof is another example).

Again, Ireland fares poorly.

We are the league leaders – four out of ten households are unable to meet unexpected expenses.  This is considerably above the average of other EU high-income countries and more than twice the rate of Sweden that has the lowest level.

At least we are improving.  A decade ago – in 2007 – the rate was 39.1 percent and rose to a recession / austerity high of 56.4 percent in 2012.  However, even if we were to return to pre-crash levels we would still well above the average. 

Living Standards:  Actual Individual Consumption

Actual Individual Consumption (AIC) is used by the EU as a proxy for living standards.  It combines consumer spending per capita and Government spending on goods and services for households (this includes services that the Government offers free or at below market-rates).  It is adjusted for inflation and the purchasing power standard (PPS).

Ireland is at the bottom – far behind the average but also far behind the next lowest country, France.  Ireland would have to increase AIC (real consumer spending and Government services) by 23 percent to reach the average.  In fact, so poor do we rate in this measurement that we are behind Italy and not that much higher than Spain or Lithuania. 

And we are still quite a bit away from the pre-crash level.  In 2007, Irish AIC was 21,600 PPS.  This fell to a recession low of 18,800 PPS in 2010.  In 2017 this this has risen to 20,500 PPS but we still have a ways to get back to where we started a decade ago. 

The one drawback with this measurement is that we shouldn’t assume that high consumer or social spending equates to well-being.  Consumer spending may be poorly distributed (i.e. more spending by a small group at the top) and social spending may be inefficient.   There is some co-relation with this graph and inability to make ends meet:  France and Ireland are low in the AIC table and high in the making ends meet table.  Germany is reverse.  But for other countries there are slightly contrasting stories.

* * *

What do we do about this?  We can make reasonable assumptions about why people are finding it hard to make ends meet:  lack of income and low-pay, high rents, medical bills, cost of raising children, mortgage arrears, etc.  However, we can make a more forensic analysis.  Quite simply, we should ask people why they are finding it hard to make ends meet and what they need to make their situation better.

The CSO could be provided the resources to conduct this in-depth survey (and the resources would be minuscule).  The results should give rise to a national debate, for clearly a significant proportion of households suffer inability to make ends meet and to meet unexpected expenses. 

That doesn’t mean we have to wait for such results.  We should start addressing the housing crisis in and of its own right.  We should start giving employees greater collective rights in the workplace to increase enterprise efficiency and combat low-pay.  We should go much, much further to combat precarious work.

However, rather than just assuming what people need, we ask the people themselves.  This is the first step in getting people socially and economically engaged.  It’s when people start determining the policy responses that substantial progress can be made.

In short:  well-being is a political issue.

Where Did All the Big Tech Firms Go?

Everyone is aware that Irish GDP figures are highly inflated and largely irrelevant.  Ditto for Gross National Income.  That’s why the CSO devised their Modified Gross National Income (or GNI*) measurement. They removed all that multi-national noise; in particular Intellectual Property.

Capital investment data is also pretty skewered save for Government investment.  In 2017, capital investment totalled €69 billion under the standard measurement.  But under the CSO’s modified measurement, capital investment falls to €40.5 billion. 

Productivity in the multi-national sector is also unusable.  In the pharmaceutical sector, each Irish employee produced €900,000 in value-added; the figure for most other high-income EU countries was less than €200,000.  In the chemical sector, the Irish figure is €650,000; all other high-income EU countries are €200,000 or below.  In 2015 – the year a new EU accounting method was introduced – labour productivity in the foreign-owned sector nearly doubled. 

All was not lost.  At least with indigenous-owned enterprises (save for the aircraft leasing sector) we had fairly reliable data.  Until now.

Eurostat data (which is collected by the CSO) shows that between 2010 and 2015 there was an average of 34,000 employed in the foreign-controlled Information & Communication sector.  Then, suddenly, in 2016 this figure falls to a mere 750.

So what happened?  Did the big tech firms – like Google and Facebook – slink away unnoticed to be replaced by domestic usurpers?  Were these foreign firms nationalised?

No, they’re still here.  And expanding.  All that has changed is the ‘nationality’.  A number of multi-nationals have headquartered here – either by transferring from their home countries or establishing new companies.  Under the reporting rules, they have re-classified as ‘domestic-controlled’.  Is Facebook controlled within Ireland?  Discuss. 

This doesn’t just affect one sector.  Throughout the market economy, official data shows the numbers employed in the foreign-owned sector has fallen by nearly 200,000 between 2014 and 2016?  Of course, this didn’t happen – it was just a matter of reclassifying.

This makes a mockery of enterprise data.  We are all familiar with the fact that key information (productivity, value-added, profits) in the foreign-controlled sector is well-nigh unusable given the accountancy practices of multi-nationals.  But at least we could work with indigenous sector data. 

Not anymore – at least in the Information & Communication sector (and the aircraft leasing sector).  But it also casts doubt on data from other sectors.  For instance, did we really lose 2,000 jobs in the multi-national food sector in 2016?  Or were they just re-categorised as ‘indigenous’.  And there are so many sub-sectors where the data is not published for confidentiality reasons.

Why does all this matter – beyond wonky number-grubbing?   If we want to map our economy, identify the strengths and weaknesses of, in particular, our indigenous sector (where most employment occurs) and compare our performance with other EU countries, we need reliable data.

For instance, in 2015 over 30 percent of employees in the indigenous market sector worked in retail and hospitality – relatively low-value added and low-wage sectors.  In the EU the figure is less than 23 percent.  There is higher manufacturing content to other countries indigenous make-up – meaning higher wages, greater value-added and potentially more exports.  In this regard, Ireland lags.

But we can’t even make this calculation for 2016 since the indigenous retail sector is blacked out for confidentiality reasons (?!). 

Once again, we must call on the CSO to save us.  Just as they devised a modified GNI figure to filter out the noise of multi-national activity that is largely irrelevant to the economy, we need them to do the same for enterprise data.  One dataset that is helpful is the Annual Business Survey of Economic Impact published by the Department of Business, Enterprise and Innovation.   There is none of the disruption and reclassification in the indigenous and multi-national sectors that Eurostat suffers from.  But this data is limited as it deals only with export-facing companies.  We need reliable information for the entire economy.

Otherwise, we’ll be working with data that no longer reflects our reality.

Follow-Up to the Far Right's Problems with Immigration Data

A brief follow-up to my post on the Far Right's problems with immigration data.  I came in for some criticism for using the citizen / non-citizen measurement rather than the 'born outside the state' data.   Some commentators suggested this might be intentional since if I used the data for Irish residents born outside the state, the figures would be different and confirm their assertions about 'excessive' immigration.

The reason I didn't use Eurostat's data for those born outside the state is that Irish data on the particular location outside the state (e.g. Africa, Asia) only goes up to 2011.  So let's look at CSO data - without European comparison.

In 2016, there were 809,000 residents born outside the state.  That's 17.3 percent of all residents born outside the state (as opposed to 11.9 percent non-citizens).  Doe this give some credence to the Far Right's claim that we are being inundated with non-nationals?  No.  Let's look at the nationality of those born outside the state.

Oh.  Yes, there are over 800,000 residents born outside the state - but over 300,000 of them are Irish nationals.  That's nearly 40 percent of all those born outside the state. 

This shouldn't be too surprising.  Irish nationals go abroad to work, study or just hang out (UK, US, Australia, other countries).  They have children and return home (or the child comes to Ireland when they become an adult). 

Indeed, since the recession trough, the number of Irish nationals born abroad now residing here has increased substantially - 27.8 percent since 2011. 

How many 'non-nationals' born abroad now reside in Ireland?  10.7 percent.  That's lower than the number of non-citizens that I used in my previous post (11.9 percent).  And the number of non-nationals born abroad is declining.

We can run these numbers in any direction, turn them upside down and right side up again but they tell a different story to that of the Far Right.  Because they are not interested in the reality; they are only interested in stoking up confusion, fear and racism. 

That's the difference.

The Far Right’s Problem with Immigration Facts

The far Right and their allies may not yet be a significant political force in Ireland but they are proliferating on a number of internet platforms, with the constant threat this could spill out into the mainstream debate.  Working under the cover of extremist hashtags (e.g. New World Order, George Soros, Cultural Marxist, Globalist, One World Government and variations on these and similar themes) one of their weapons is to distort data to give their claims some credence.

Claims that Ireland has a high level of non-citizens, that we are being inundated with asylum-seekers, that immigrants come here to live off our ‘generous’ social welfare payments dominate the far Right discourse.  One might be tempted to ignore them since to date, they are a tiny force.  But, as we have seen with the suspected arson attacks on proposed direct provision centres in Moville and Rooskey, their claims can feed into dangerous results.  So let’s go through their assertions.

Non-Citizens in Ireland and the EU

Ireland has a higher proportion of non-citizens than the EU high-income countries average – with nearly one-in-eight Irish residents being citizens of another country.  But when we look under the hood, we find something interesting about the composition of Irish non-citizens.

Nearly one-in-five of non-citizens living in Ireland are UK citizens.  In the EU high-income countries, UK citizens make up less than 2.5 percent.  This is not surprising.  Nor is the level of non-citizens from other English-speaking countries.

US, Canadian, Australian and New Zealand citizens make up twice the proportion of non-citizens living in Ireland as compared to other high-income EU countries.  There is no data for France and the UK across these groups – though US citizens made up 2.5 percent of all non-citizens living in the UK; the comparable figure for Ireland is 2.2 percent.

Maybe the Far Right is concerned about all those English, Scots, Welsh and even Northern Irish (Eurostat categorises them as non-citizens) living here.  Or similarly with Yanks, Aussies, etc.  I suspect, however, that what agitates the Far Right are all those ‘others’ - Asians, Africans, South Americans and people from the Middle East.

These are small numbers.  And when the Irish Far Right gets in their ‘Islamophobia’ mode they are getting worked up over really small numbers.  Of course, they might reply the situation is ‘getting worse’.  Translation: there are more and more of these folk pouring in here, tsunami-like.

But no, there is almost no growth in the population of these non-citizen groups in Ireland. 

Immigrants and the Labour Market

Another feature of the Far Right discourse is that immigrants come here to ‘live off the state’ (like senior creditors of banks, I suppose).  So let’s examine the unemployment rates among non-citizens  in the high-income EU countries.  The labour market gives us a sense of alleged ‘sponging’.  It is also an indicator of integration – work being that social space where people from everywhere come together to contribute to the economy and society.

The following looks at the unemployment rate among citizens and non-citizens and the resulting ratio. Unfortunately, this database doesn’t break down unemployment by the countries of non-citizens.  The higher the ratio, the greater unemployment is among the non-citizen group; the lower the ratio the higher the level of integration.

Let’s walk through this table.  The unemployment rate here among Irish citizens was 6.6 percent in 2017; among non-EU citizens it was 8.9 percent.  This results in a ratio of 1.3.  This is the best result among the high-income EU countries.  Other countries are struggling to integrate non EU-citizens into their labour markets.  For instance, in Sweden, while unemployment among Swedish citizens was 5 percent, among non-EU citizens it was a staggering 29 percent – a ratio of 5.4.  Germany, Austria and Belgium are similarly struggling – though it should be pointed out that over the recent past these countries welcomed a large number of people fleeing wars and deprivation.  It will take time to integrate these people into the domestic labour market.

The point here is that the claims that people come here to sponge off the state are ill-founded.  We have one of the best records of integrating non-EU citizens into our labour market.

Asylum Seekers

A third trope of the Far Right is that we are being overrun with asylum-seekers or, as some would have it, ‘bogus’ asylum-seekers.  Again, the data doesn’t bear this out.

Along with the UK (which puts their Brexit/immigration debate into some context), Ireland had the lowest level of asylum applications in the period between 2015 and 2017 - the years of the European migrant crisis.  Over the three-year period there were 8,400 asylum applications in Ireland.  If the applications were at the high-income EU average, this would have meant 39,000 (if at the level of table-topper Sweden, it would have been 96,000). 

And lest some would argue that we have a lax regime, that anyone who applies for asylum is granted it, the fact is that Ireland is rather tough.

Only 39 percent of asylum applications are met with a positive decision here. The average for high-income countries is 55 percent.

* * *

Let’s summarise:

• Ireland has a relatively high level of non-citizens in its population. But this is down to the high level of UK citizens and citizens from other English-speaking countries (US, Canada, Australia and New Zealand).
• Ireland has significantly fewer non-citizens from outside the English-speaking world than high-income EU countries.
• The proportion of non-citizens has remained stable over the last 10 years (i.e. there is no ‘surge’).
• Non-citizens in Ireland are more integrated into the labour market than any other high-income EU country – that is, there is lower unemployment among non-citizens. So much for the ‘sponging-off-the-state’ argument.
• We have had far fewer asylum-seekers and we grant asylum to far fewer than most other high-income EU countries.

The claims of the Far Right and their allies collapse when we look to reality. 

There are many who get taken in by the Far Right and not because they are racist or anti-immigrant.  Many are confused, hurting, looking for answers.  Progressives must engage with this constituency with empathy, pointing out the reality and providing a better alternative for them, their families and their communities. 

As to the Far Right and their allies, I am loathe to use the label ‘racist’.  However, their manipulation of information can legitimately lead one to conclude that many, if not most, are either conviction-racists or instrumental-racists (i.e. they are not racist themselves but use racist arguments in pursuit of their agenda).  I’m not sure there is any objective difference.

But progressives should not be content to point out the failings of the other side.  Throughout Europe, the issue of immigration has divided the Left.  Its complexity – culturally, economically – means there are no simple answers.  It is imperative we create a space to hear a range of progressive viewpoints.   We don’t have to agree – indeed, we can disagree robustly – with different propositions and analysis.  However, to curtain-off the debate over migration-management leaves us with fewer tools to construct an alternative.

The Far Right – through its extremism and manipulation of facts – is trying to poison the immigration debate in order to polarise positions.  In reality, the Far Right doesn’t want an informed debate on immigration.  They want a shouting match.  They hope, in this atmosphere, to make gains.  We shouldn’t allow them that oxygen.  We should challenge them at every turn.

And engage in an inclusive dialogue throughout society that can win people over to a positive message – about the economic, social and cultural benefits of immigration and the immigrants themselves.

It's Fat Cat Wednesday

Today, just six working days into the New Year, the average remuneration for CEO’s in the top 26 Irish companies (which represent 95 percent of the market value of the Irish Stock Exchange), has already exceeded the average yearly pay for a full-time employee.  The rest of the year is cream.

ICTU has release their latest survey of CEO compensation. They found that in the top 26 Irish companies CEO pay – basic pay, bonuses, long-term investment plans, benefits-in-kind and pensions – now averages €2.3 million.  This compares to annual compensation for a full-time employee of €53,800 (including employers’ social insurance and other in-work benefits).

Starting at the top we find the CEOs in CRH, Kerry Group, DCC, Tullow Oil, Paddy Powers and Ryanair all had compensation packages in excess of €3 million.

In 20 of the 26 companies, CEO pay exceeded €1 million.

Not only is the level of CEO remuneration high, the rate of growth has also been high.  Between 2009 and 2015 – the years when we were all supposed to be tightening our belts – the average increase in CEO remuneration was 75 percent, or €890,000.  Average employee compensation for full-time employees increased by 1.6 percent, or approximately €850.

In 2017, this upward trend continued though at a slightly slower pace.  Average CEO pay increased by 6 percent.  This compares to an increase for full-time employees of 1.7 percent.

CEO compensation is made up of a number of components.

Basic pay makes 33 percent of total compensation.  Long Term Incentive Plans (generally share options) make up another third with bonuses making up a quarter.

Some may argue that CEOs earn their level of remuneration.  However, there is no consensus among scholars regarding a link between CEO pay and firm performance.   Indeed, there are links between high pay and negative economic and enterprise impacts.  Chris Dillow’s post here refers to a number of studies that show high pay can lead to lower productivity, perverse incentives, and a disproportionate focus on short-term indicators at the expense of long-term outcomes such as investment. 

Further, we should remember that CEO pay is not set by the ‘market’ but rather by remuneration committees; in other words, the CEO’s peer group.  The purpose of these committees is to provide a robust criteria and company comparisons in order to set CEO pay.  But as TASC’s report, Mapping the Golden Circle, points out, there can be an incestuous relationship between, CEOs, Board Directors and members of remuneration committees.  The latter sit on the boards of companies and board directors can be CEOs or senior executives of other companies:

‘ . . . executive compensation in large publicly traded firms often is excessive because of the feeble incentives of boards of directors to police compensation … Directors are often CEOs of other companies and naturally think that CEOs should be well paid. And often they are picked by the CEO.’

To put it another way, what would be the reaction if we proposed that workers set the wage of other workers in comparable firms by committee? 

If high CEO pay has negative economic and firm consequences, along with offending our more egalitarian instincts, what can be done?  ICTU has a number of suggestions:

• Require companies to set objective criteria for CEO pay including factors such as employee welfare and environmental protection as well as financial performance
• Expand the remit of the Low Pay Commission to monitor the relationship between highest and lowest pay
• Report on the use of temporary agency workers and sole traders (which in many cases are used to drive down payroll expenses)
• Make shareholders’ decisions on executive pay binding rather than advisory (yes, the ‘owners’ of the company do not have an automatic right to collectively set pay – so much for ‘ownership’)
• A higher tax on very high incomes (e.g. in excess of €1 million). 

However, if high executive pay is part of a larger picture, we need broader economic and social strategies to address the problem of the widening gap.  There isn’t the space to go into that here but as a start I would propose the extension and deepening of collective bargaining.  As the OECD pointed out – and discussed here – the top 1 percent have a lower share of income in economics where more workers are covered by collective bargaining.  This makes sense: collective bargaining puts upward pressure on low and average incomes and, so, puts downward pressure on higher incomes – whether in the firm or the economy. 

There is no magic bullet in all this.  ICTU continues to do the debate a service in providing annual information on CEO pay.   Hopefully, this will provoke greater public, political and academic interest in the subject.  Excessive gaps in income and high levels of inequality are socially corrosive and economically inefficient. 

If we’re not careful, every day in the future will be a day for fat cats.

A Carbon Dividend

There can be no doubting the urgency required to address climate change and there’s no doubting Ireland’s sluggish response.  Here is an opportunity for progressives to take the lead on this issue, rather than reacting to Government proposals (or lack of).  A Carbon Dividend could be a significant feature.

Carbon tax is levied on the carbon content of fuels which produces CO₂, a greenhouse gas.  This is intended to incentivise consumers (households, businesses) to reduce their consumption and/or switch to more climate-friendly energy products.

A problem with the carbon tax is that it drives up prices on all products and services with an energy content – from production to transport.  And it is highly regressive – impacting disproportionately on low-average income households.  We can see this from a highly informative paper  from Kelly de Bruin and Aykut Mert Yakut at the ESRI.

The lowest 10 percent income group spend 3.6 percent of their budget on electricity.  This falls to 1.3 percent for the highest 10 percent income group – even though this group consumes more electricity.  All energy-related products (except diesel) exhibit this same trend. A carbon tax would penalise lower-income groups and has the potential to increase fuel poverty.  This can hardly be called a Just Transition.

Many have argued that climate change is a systemic crisis.  People shouldn’t have to pay for the failure of Governments (and the EU) to drive a Green New Deal which would result in an epochal-shift in energy production. Nor should they have to pay for the 500 companies responsible for over 70 percent of global emissions.   A carbon tax passes on the cost of political failure and corporate negligence on to households. 

There is much in this argument.  However, to fully move to renewable energy-production will take time. A carbon-neutral economy is decades away.  There is a need to reduce consumption now, urgently, and incentivise better environmental behaviour through market signals.  Taxation can do that.

The ESRI – using a new model to assess the impact of taxation on consumption – came up with some startling findings.  To meet our EU targets, we may need to increase carbon taxes by 10 to 15-fold – a massive increase that will impact on economic activity and household income.  We are faced with a massive environmental, economic and social challenge. 

So how can we square this circle – the need to act urgently while protecting people’s living standards; all in the context of political acceptability?  We should consider a carbon dividend. 

Put simply, all the revenue raised by a carbon tax would be returned to people. It would not be a revenue-raising tax; it would be revenue neutral.   British Columbia has one example of this.  In Ireland, we can get a sense of the amounts involved from a Parliamentary Question put by Michael McGrath, TD.

Currently, the carbon tax rate is €20 per tonne of CO₂.  The table shows the revenue yield from increasing the tax to €100 per tonne over five years.  By the 5^th year the tax would raise over €2.1 billion.  The dividend per capita – every adult and child – would rise to €416; for a family of four it would be over €1,600.

The idea would be that low/average incomes would be compensated while high income groups (the highest energy consumers) would be net losers.  The intention would be to incentivise reduced consumption and switching to less carbon-content activity.

There are problems with this:  a high-income household may be able to afford an electric car or retrofit their home in order to reduce their carbon tax liability – something low and average income households couldn’t.  There would also be a higher impact on rural dwellers who are reliant on private transport.  And high-energy consumption export sectors (e.g. pharmaceuticals) may be negatively impacted.   

A carbon tax is not a magic bullet.  Other initiatives – including those to remove any inequities from the carbon tax – will need to be implemented.

• The Government should organise a sector-wide consortium of public enterprises, private companies, universities and suppliers to fast-forward a shift to marine renewables (wave, tidal, ocean, off-shore wind).  This can’t be left to market forces – this is as important as the electrification of Ireland in the last century. 
• New buildings to be covered by stringent regulations regarding insulation with mandatory retrofitting to the highest possible BER rating on the transfer of any residential or commercial building.
• The state to act as a wholesaler for hybrid and electric cars, buying in bulk and selling them on to households and businesses with repayments linked to income.  This would include rolling out the needed infrastructure (recharging points) with rural households being targeted first.  We should look to Norway’s example where over 30 percent of new car registrations are now hybrid or electric.

These and other initiatives (a major public transport programme in urban and town areas, for instance) are needed to supplement a carbon tax – so that people have the option of a lower carbon consumption alternative.

Progressives should not allow themselves to be side-lined in this debate, confined to reacting to Government initiatives or fall into the ‘something-must-be-done’ syndrome.  We need to be out front on this issue and face down the inevitable opposition coming from closet climate-change deniers. 

On this issue – the future of the planet – the stakes couldn’t be higher.

Low Pay is a Moral Issue

In their EU peer group, the Irish low-paid are some of the lowest paid, according to recently published Eurostat data.

In the overall economy, Irish employees are paid less than their peer group – other high-income EU economies (essentially, the EU-15 excluding the poorer Mediterranean counties and, very shortly, the UK).

Eurostat estimates employee compensation (including labour costs which make up a fraction of the total) for firms employing 10 workers or more.  Public Administration is excluded as many countries do not report this.

Ireland is at the bottom of the table, above only low-paid UK.  On average, Irish employees would need an 18 percent increase in compensation to reach the mean average of our peer group.  It should be noted that the average is mean; another measurement would be the weighted average but Eurostat does not provide this.  However, the weighted average would, in most cases, be somewhere between German and French levels since they dominate this grouping.  This would still leave Irish workers requiring a 13 percent increase. 

Let’s turn to the Irish low-paid sectors in the market economy (essentially the private sector), which for the purposes here are calculated at 2/3 of the Irish average.   There are eight sub-sectors below this benchmark:  retail, hotels, restaurants, waste collection, security, building services (cleaners and gardeners), and wearing apparel and furniture manufacture. There are 315,000 people employed in these sectors, or one-third of market economy employment.

The largest sub-sector is the retail sector with over 153,000 employees.  Ireland is at the very bottom, even below low-paid UK.  Irish retail workers would need a 43 percent increase in compensation (a 33 percent increase if we use our short-cut weighted average; that is, half the difference between Germany and France).  The gap between Irish and average peer-group pay is more than twice as much as the national gap.

The next two biggest sectors are in the hospitality industry:  hotels and restaurants.

If anything, the situation is worse for the 128,000 Irish hospitality employees – with a larger gap with their peer-group than retail workers have.  In fact, compensation is so low in these sectors that they fall below Italian hospitality compensation levels, even though Irish national income is more than a fifth higher.

There are two other low-paid service areas:  private security personnel and building service workers (primarily cleaners and gardeners). 

The 27,000 Irish workers in these sectors also see their compensation trailing significantly.

The story is much the same for the other sectors.  The small manufacturing sectors of furniture and wearing apparel also find themselves well behind their peer-group.

There is one last group:  the waste collection sector.  These are the workers – 3,500 of them - who pick up, treat, recycle and dispose of our rubbish. 

Irish waste workers would need a nearly 60 percent compensation increase to reach their peer-groups mean average.  Even taking the short-cut weighted measure, they would need a 42 percent increase, but this probably understates this measurement given the high compensation levels pertaining in other countries.

None of the above factors in inflation (purchasing power parities).  If we did that we would find the gap with the mean average shrinking but, when using a weighted average, it would widen (largely because Germany is low-inflation economy). 

It should be further noted that employee compensation includes both the direct wage (paid directly to the employee) and the social wage (paid to a Social Insurance Fund).  Through the social wage, employees in continental Europe can access free (or low-cost) health care, subsidised prescription medicine, and in-work income supports (pay-related sick benefit, maternity and paternity leave, etc.).  Further, in many countries the social wage – apart from social insurance - subsidises public transport (e.g. Paris) and generous family supports (e.g. Austria).

Even when you exclude the social wage, Irish wages are low – with retail workers needing a 22 percent increase just to reach their peer group mean average (or 15 percent when inflation is factored in).  Add in all those costs Irish workers bear that workers in other countries get subsidised through the social wage, and we now we see why Irish living standards are relatively low.

Getting a pay rise is only one aspect of correcting this situation.  There is a need to increase the social wage (employers’ social insurance) so that workers can consume more public services and supports collectively. 

We need to focus on the lowest-paid in society.  It is scandalous that so many are left behind on such low wages.  We need to focus on employees’ rights in the workplace (e.g. collective bargaining), bargaining across sectors and, just as importantly, a social-cultural transformation that no longer tolerates such grim conditions.    These are the people – our neighbours, friends, family members, and fellow residents – who serve our meals, clean up after us, secure our buildings, assist us in the shops, pick up our rubbish and manufacture the goods we use.

Maybe it’s a bit passé or old-fashioned to say that this is a moral issue. But given the level of low pay, hopefully not.

Getting on the Fiscal Pitch

The Irish Fiscal Advisory Council has provided the Left an open goal.  If we shoot, we score.  But first we have to get on the pitch.  And right now the Left has not even put on their jerseys. 

In their latest Fiscal Assessment Report, the Fiscal Council got more than a bit tetchy with the Government’s handling of the public finances.  They used some undiplomatic language:

‘ . . . the medium-term budgetary plans are not credible . . . ‘

Ouch.  The Fiscal Council’s critique of the Government’s fiscal policy boils down to (a) failing to drive a budgetary surplus in the good times; (b) leaving the debt at an elevated level;  (c) stimulating an economy to the point of over-heating; and (d) failing to factor in the downsides in future projections.  All of this is leaving us badly exposed of the inevitable slowing down of the economy, never mind the damage Brexit, changes international taxation and trade wars could do. 

In short, Fine Gael is squandering the recovery.  Put this together with Fianna Fail’s reckless pre-crash policies (never mind the equally reckless austerity measures both parties pursued) and the Left has a good starting narrative:  you can’t trust the Right to manage our public finances.

This doesn’t mean people will automatically trust the Left, which to date has had little to say about the issues of debt, over-heating, deficits, etc.  This allows the Taoiseach to get away with deflecting the debate away from the Fiscal Council’s criticism:

‘[The Taoiseach] insisted the Government’s spending was modest compared to the constant demands of the left-wing Opposition for increased spending . . . if people listened to that kind of left-wing rhetoric the economy would plummet very quickly.’

The Left’s silence allows our opponents to monopolise the issue and distort its position. 

So let’s start engaging the debate.  Here are some ideas.  These are not comprehensive or necessarily authoritative.  But hopefully it will get things started.

Stick with the Fiscal Rules. Never thought I’d write that but for now the Fiscal Rules are a practical defence against more orthodox policies.  Sticking with the Rules’ deficit target will allow us more space than Government spending projections.  We can still critique the Rules’ faults, though:  the treatment of investment, the inapplicability of the Rules’ methodology to a small, open economy; their deflationary bias, etc.

Strengthen Automatic Stabilisers. There are two key stabilisers:

• Unemployment Benefit: In the event of a slowdown higher unemployment benefits will help maintain domestic demand.  In our EU peer group, unemployment benefit is far stronger - over €300 and €400 a week; in Ireland, it is only €193.  Increase unemployment benefit with a small increase in Employers’ social insurance. 
• Employment Subsidy: It is important to maintain employment in downturns.  Therefore, rather than job losses, employers would reduce workers’ hours with the state subsidising workers’ income to prevent loss in take-home pay.  This programme was pursued by Germany during the last downturn with considerable success.  This would be less costly than growing the dole queues.

Underpin the Productive Economy. There are three main areas: 

• Introduce cost-rental housing to substantially reduce rent levels. This would increase spending on goods and services and reduce unnecessary upward pressure on wages. 
• A new financial model for childcare: current policies are not working (last year, the Government handed over €1,000 in cash subsidies to childcare providers– and fees still increased).  Reducing fees would, again, allow for higher expenditure on goods and services, and reduce entry costs into the labour market.
• Human capital, education, and innovation capacity: to see us through the medium and long-term, increase resources into education, innovation, and basic and applied research (Ireland compares poorly to other EU countries), switch away from tax credits to grants for SMEs, increase links between state, universities and  progressive enterprises, etc.

Collective Bargaining Rights for Workers: optimising our response to any downturn requires employees to be part of the solution, part of the decision-making process at firm-level.  Further, sectoral committees should be set up in those sectors most at risk of Brexit or other-related slowdowns with full employee participation.  Collective bargaining has two significant benefits:

• It tends to favour those on low and average incomes – the groups that have a higher propensity to spend during a downturn
• It tends to reduce precarious contracts which currently exclude people from fully participating in the consumer economy (that is, they are forced to save during those weeks they have less work or no work at all).

Keep Public Banks Public: notably, AIB.  Banks are notoriously counter-cyclical; when the economy goes into downturn banks withhold lending.  A public bank can act differently since it is not beholden to short-term shareholder interests.  It can continue to support viable companies, which might not otherwise be able to access credit.

Engage in Real Public Services Reform: we need to ensure efficiency and productivity in our public services.  So why not bring in the actual producers of public services; namely, the employees.  Employee-driven innovation is a feature in many other EU countries.  It is employees who are best placed to know why something isn’t working and how it can be put right.

Unleash Public Enterprises: public enterprises are essentially investment-driven businesses.  This will be all the more needed in the rough periods ahead.  During the last recession, public enterprises maintained investment.  Currently, the top six public enterprises invest the equivalent of 40 percent of the state’s capital budget. 

* * *

It might seem curious this hasn’t focused on tax issues.  Budgets, however, merely reflect the state of the economy so we must first look to economic policies.  You will increase revenue if you raise the wage floor, end precarious contracts, drive investment, strengthen stabilisers, reduce rents and childcare fees, and support innovation. 

Measures that put the economy on a more sustainable footing can then be complemented by tax measures – in particular, taxation on property, assets and passive income.  Two short-term measures would be to introduce a net assets (wealth) tax and substantially increase inheritance tax.  And, of course, stop Fine Gael from introducing its €3 billion tax cut bonanza.

However the debate evolves, whatever other and better measures are proposed, the key thing is to resolve in the New Year to enter the fiscal debate.  Let’s put on our jerseys and get on the pitch.

An open goal awaits us.

Looking Under the Hood of the Jobs Bonanza

Since the crash bottomed out in 2012, employment growth has been substantial – 377,000 according to the CSO.  This is a strong performance by any standard.  But there is some confusion as to where the growth is coming from and what it says about the economy.  Let’s run through some numbers focussing on employees or wage-employment (excluding self-employed) and the market economy, which excludes the mostly public sectors such as public administration, health and education.

In the period of 2012 to 2018 (2^nd quarter), the number of employees in the market economy grew by 268,000, or 28 percent (in the non-market sectors employment growth was lower reflecting the Government’s hiring freeze – 72,000 or 14 percent). 

 

Construction employment nearly doubled in the last five years; not surprising given the collapse of building work during the crash.  The next biggest increase came from Administrative and Support Services (a category that includes high-paid aircraft leasing employees and low-paid cleaners and security guards).  Coming third was the hospitality sector.  Notably, while tech companies are usually associated with high employment growth, the increase in the Information and Communication sector was below the market economy average (though being high-income their consumer spending will help create jobs in other areas).

From what sectors did these 268,000 jobs come from?

 

Nearly one-in-four jobs came from the hospitality sector – a low value-added, low-wage sector.  Employment increased by over 60,000.  The next largest sector was construction, bouncing back from the crash.  This sector grew by 53,000.  Combined, hospitality and construction made up over 42 percent of all employee growth in the market economy.  Growth rates appear to be concentrated in these two sectors. 

Let’s look further under the hood.  Administrative and Support services had the second highest growth rate.  Eurostat tells us that 75 percent of this growth came from ‘employment agencies’ – primarily, agency workers.  While we can’t necessarily apply this calculation to the CSO data (different methodologies may be at work), it is indicative and is confirmed by Eurostat’s finding that the number of temporary agency workers has more than doubled between 2012 and 2017.

Another potentially worrying trend is the rise of temporary employment or fixed-term contracts in the latter part of the last five years.  Temporary employment is considered at high risk of precariousness. 

 

The trends over the last five years show that the total number of employees increased by 23 percent while temporary employment increased by 13 percent.  However, the data shows a sharp rise in temporary employment in the last 15 months - 66 percent of the increase in wage-employment was temporary contracts.  We should be cautious about this, as the data has a couple of breaks in the time series which means that there was a change in methodology (e.g. different questions which could alter survey responses on precariousness).   Nonetheless, it is consistent with the increases we saw above with temporary agency workers.

While the above refers to the market economy, there is one interesting insight from the non-market sector.  Health wage-employment increased by 19,000 between 2012 and 2018.  However, only 30 percent of that growth came from the public sector.  Public sector wage employment makes up only 56 percent of total health wage employment – and it is falling.  Is this particular stat trying to tell us a story about the slow privatisation of our health sector?

The Irish Times’ Cantillon observed:

‘The rapid return to near full employment here is undeniably a good thing, but it highlights a remarkable volatility at the heart of the Irish economy that allows us go from boom to bust to boom again in barely 10 years. Stability is not what we do here.’

Too true; one has only to look at the boom-bust-emerging-boom in construction employment.  This chart includes the self-employed.

 

At the very end of the boom in 2007 nearly one-in-six people employed in the market economy were in the construction sector, and this doesn’t count other property-related jobs.  While we are still a way from that peak, we should expect construction employment to climb as residential and commercial building increases.  Are we on another incline on the roller-coaster that is our construction sector?

The headline story for employment growth is good.  However, when we look under the hood we find some worrying trends – growth in low-wage and precarious job creation along with the strong growth in the volatile construction sector. 

It’s a good story but not without downsides.

One Graph for a New Model

Is there an argument for a new housing market model?

 

The data from the CSO and Eurostat shows that between 1997 and 2016:

• Average wages grew by 86 percent
• House construction costs (which includes wages and building materials) rose by 73 percent
• New House Prices rose by 208 percent

In that 19 year period, new house prices grew at 2 ½ to nearly 3 times the rate of construction costs and wages.  There are three distinct periods in the graph:

• Pre-crash 1997 - 2007: house prices rose by 210 percent – more than three times the rate of construction costs (68 percent) and average wages (70 percent).
• Post-crash 2007 – 2012: new house prices fell by 30 percent while construction costs and average wages were relative stable.
• Recovery 2012 – 2016: new house prices started rising again during this period – by 41 percent while construction costs grew by a mere 2 percent and average wages, less than 10 percent.

It is clear that new house prices operate to a ‘law’ detached from the rest of the economy (again, since 1997 inflation – measured by the GDP deflator – increased by only 49 percent).  What would new house prices be today if they grew at the same rate as construction costs, average wages and inflation since 1997?

 

New house prices would be less than half what they are today if they grew by the rate of inflation; would be 56 percent of new house prices if they grew at the rate of construction costs and 60 percent if they matched average wage growth;  In other words, affordable.

High and rising property prices – both house purchase and rents – are a drain on the productive economy and can have serious environmental impacts (e.g. when people have to move further away from work to afford to buy or rent an accommodation).  We need a new model of housing not only to move the burden of costs on households but to promote the productive economy. 

Fortunately, such a model exists.  The National Economic and Social Council and the Nevin Economic Research Institute have both outlined cost-rental models.  These are being put into practice – at St. Michael’s Estate in Inchicore and by the Ó Cualann Cohousing Alliance.

 Rents and house purchases at the cost of building the home – this model could revolutionise the housing ‘market’ and put downward pressure on for-profit housing costs.  Further, it would obliterate the distinction between the current ‘public housing for the poor’ and ‘housing for the rest’.  Regardless of income or employment status, everyone could avail of non-profit, cost-rental or cost-purchase housing.  This is what public housing for all is about.

Of course, there are issues beyond construction costs:  land prices, availability of credit, removal of speculative activity.  But with considerable land banks in the ownership of local authorities and public agencies, we don’t have to wait to cross every T.  We can start now the process of building affordable homes while reforming the remainder of the market.

The only thing stopping us is ideological entrenchment and bureaucratic inertia.  

Breaking the Consensus on Multi-national Taxation

Deputy Brendan Howlin made a surprising announcement during his leader’s speech to the Labour Party conference last weekend:  Labour will support the EU’s digital services tax.   Labour is the first parliamentary party to break the green-jersey consensus to support this tax.  The Workers’ Party has also come out in support of this measure (these are the only parties I know that are doing so; if I am mistaken I gladly stand corrected). 

The digital services tax is a proposal from the European Commission to allow EU countries to impose a levy on the sales of digital services made in their own jurisdiction by large companies.  It has been described – especially by Irish detractors - as a tax on turnover as opposed to the traditional tax on profits but that is not the full story.  As the EU Commission puts it:

‘In the digital economy, value is often created from a combination of algorithms, user data, sales functions and knowledge. For example, a user contributes to value creation by sharing his/her preferences (e.g. liking a page) on a social media forum. This data will later be used and monetised for targeted advertising. The profits are not necessarily taxed in the country of the user (and viewer of the advert), but rather in the country where the advertising algorithms has been developed, for example. This means that the user contribution to the profits is not taken into account when the company is taxed.’

In one respect, this is probably a rationalisation, though that doesn’t make it any less valid.  A key driving force is the fact that digital companies are guilty of some of the most aggressive tax planning among multi-national companies, using sophisticated accounting and company formation strategies to drive down their tax payments.  This, and the prospect that some EU countries will unilaterally introduce their own digital levies, has prompted the EU Commission to make this proposal.

This levy has been widely criticised in Ireland as a ‘tax-grab’ by larger economies; as infringing ‘sovereignty’ over tax; and as he EU is ganging up on small countries.  However, these criticisms don’t stand up to close scrutiny.  Either we let large digital companies decide where they pay tax (and how much) or we subject them to some type of democratic accountability.  For all its many faults, the EU represents a public response. 

Rather than undermining Irish ‘tax sovereignty’, the tax-avoidance practices of many multi-nationals, including digital companies, are eroding the tax base of other countries and, so, their sovereignty.  The digital services tax actually helps restore countries’ control over their tax base.

And if Ireland is being ‘ganged-up’ on, it is due to its key role in the global tax avoidance chain. 

Another criticism is that this would undermine Ireland’s attractiveness to foreign capital.  However, we are not relatively worse off given that this is an EU-wide measure.  And foreign companies will still retain sufficient taxable income here and enjoy our low tax rates.

But supporting tax accountability over multi-nationals raises a number of other issues.  There is no doubt this would reduce Ireland’s corporate tax take.  The Revenue Commissioners estimate a loss of €160 million from the digital services tax, but international tax experts I have spoken to suggest the figure could be much higher.   This will have to be made up with higher taxation in other areas; if not, we would have to resort to spending cuts.

Some commentators have said that the digital services tax – and other EU measures designed to counter aggressive tax planning – would undermine Ireland’s business model.  If that means a model based on tax incentives that facilitate global tax avoidance, then that is a good thing.  But what comes after that?  What policies do we need to attract foreign direct investment on a sustainable basis while building an internationally-competitive indigenous sector?  We need to start that debate now – and any new model shouldn’t start with tax breaks.

At the end of the day, even if international tax justice doesn’t float your boat, supporting measures like the digital services tax can be based on a hard-headed pragmatism.  The game is up.  The Government knows this, the Department of Finance knows this, even the Big Four accounting firms know this.  We need to get ahead of the curve on this so that we can cut the best deal possible.  Claiming that there is nothing to see here is no longer sufficient.

So Labour’s position is welcome.  It certainly marks a policy change in matters relating to multi-national taxation, given their recent support for the Government’s decision to appeal the Apple tax ruling.  The logical extension of supporting the digital service tax – and the logical position of progressive politics in general – should be to support the principle of the Common Consolidated Corporate Tax Base and the Financial Transactions Tax.  These are, after all, part of a long journey with the goal of imposing democratic accountability on multi-national companies and finance capital.

Supporting the digital services tax is a good first step.

The Anti-Politics

The worrying thing about Peter Casey’s campaign was that it was unplanned.  Having spent weeks hovering around two percent, he stumbled into his controversy on the Travelling community.  Such was the outcry he temporarily withdrew from the contest.  However, he apparently received enough that he came out of isolation to talk about the hard-working Irish, paying for everything and getting nothing in return, the alarm-clock people, the culture of entitlement and welfare-dependency – all in the last few days.  He ended up with over 23 percent.

Now imagine if all this was planned from the very beginning, that his starting platform encompassed these issues and more.  Imagine if went on about how we were forced to pay for banks, how we had to ‘control’ immigration, how the EU is taking power from the people (insert your favourite complaint here).  What might his support have been?

There’s been a lot of commentary deconstructing this vote – what it represents (racism?), who it represents, its long-term political impact.  There’s been exaggeration and dismissal.  One Minister called Casey voters moaners.  However, with nearly one-in-four voters supporting Casey, dismissal and name-calling doesn’t help us understand.

We can describe Casey’s vote as anti-politics – the rejection of traditional politics, institutions and discourse.  Hence, the epigrammatic ‘he speaks the language of the people’; ‘he connects with ordinary folk’, ‘he’s not afraid to say what people think.’

This rejection emerges out of the de-politicisation of public space:

‘The New Right Project of the last few decades – neoliberalism – has attacked the public domain in the name of free markets and market discipline.  Public choice theorists have positioned politicians and civil servants as self-interested rent-seekers.  Deregulation, privatisation, and audit have removed power and responsibility from public actors.  Why should people engage with formal politics when those involved are not to be trusted and no longer powerful?’

Therefore, in a contest for a ceremonial office in which the winner was already known, people could vote with few consequences.  And many used it to express a frustration at a stifling political consensus, crystallised in a supply-and-confidence agreement between the two largest parties playing out a mock battle of Government and Opposition. 

Anti-politics defies neat ideological categorisation.  Casey can go on RTE radio and attack the greed of the one percent and even describe himself as a socialist-capitalist symbiosis.  We can call it a right-wing vote, even a far-right vote, but there were not insignificant strands of anti-politics in the anti-austerity demonstrations a few years ago.  What ties all this together is an inchoate ‘anti-establishmentism’:  the juxtaposition of a corrupt elite (liberal establishment, the rich, cosmopolitans) who exploit a ‘pure’ people.  Ironically, Casey victimised the Travelling community but many people who voted for Casey see themselves as victims. 

It’s not that Casey’s vote will result in a new party or movement – though Gemma O’Doherty is already calling on people to organise ‘anti-corruption’ candidates for the next locals and Europeans. It’s that it may infect political culture in subtle, indirect and subterranean ways, awaiting a clever, opportunistic leader to exploit people’s legitimate concerns.  And that’s when the danger would become real.

Currently, the Left is incapable of meeting this challenge – whether to channel people’s understandable frustrations into a more positive politics or to challenge the more reactionary elements it contains.  The Presidential campaign was one more example of that.

Michael D. Higgins showed that a life-long politician of the Left, a principled proponent of progressive causes, thoughtful, intelligent and capable of reaching a broad range of the population in all social constituencies, can win national office not just once, but twice - the latter in handsome fashion. 

What does that say for the fragmented Left, stagnating in the polls?  Some supported the President, some opposed him and others abstained.   President Higgins is holding up a mirror to us:  what is it that he can do that we seemingly can’t?  What is it that he is saying that we’re not?  More importantly, how is it that he instils confidence in the majority of people and we don’t?

Hopefully the Presidential election will force progressives and the broad Left to seriously reflect on the nature of anti-politics – both its symbols and its underlying narrative.  But just as importantly, we need to begin constructing a politics that can convince people, inspire their confidence, and seriously challenge for power – to persuade them that politics itself has the power to resolve problems collectively, and reverse the marketisation of people’s economic and social relationships.

A big ask but at least we have one important asset – for the next seven years we have a President who understands these issues.

Why I am Supporting President Michael D. Higgins

Many people will have many reasons for supporting President Higgins.  I would like to highlight one small example which, for me, encapsulates the President’s service to the country – a service that stretches back decades.

At Concern’s Worldwide 50^th Anniversary Conference in Dublin in September of this year, the President addressed the issue of the arms trade.  And without equivocation he identified the drivers of this immoral activity.

 ‘ . . . Permanent Members of the Security Council [have embarked] on a new arms race, and the arms industry now exports weapons of death and destruction for use in Syria, the Democratic Republic of Congo and Yemen . . . the five Permanent Members of the Security Council, entrusted with the maintenance of international peace and security, today account for three-quarters of the worlds arms exports.

‘ . . . 22 million Yemenis are now in desperate need of humanitarian aid and protection. Yet even as the United Nations seeks a peaceful political solution, the conflict in Yemen is actively sustained by the sale of arms and by the support of some members of the Security Council. It is a stark example of the triumph of the diplomacy of transaction, and of narrow national interest, over the diplomacy of the common good embodied by the Charter of the United Nations.’

It is not so much what he said, which every right-thinking inhabitant of this planet would applaud loudly.  Nor is it that he could have played it safe in front of the audience he was addressing – focusing on the work of Concern.  There is a more provocative context.

The Irish government launched its campaign for one of the revolving seats on the UN Security Council in the summer – only a few weeks before the President’s comments above.  It is difficult to know what the substance of that campaign is, what platform the Government is putting forward, how it will work for a peaceful and democratic world.  The Irish Times was a bit dubious:

'What [the Government] should not do is fall back on style over substance. With that in mind, the decision to launch the bid in New York this week by inviting every ambassador at the UN to a free U2 gig will raise some eyebrows.'

Regardless, the President did not tailor his comments to fit in with a nebulous government campaign.  He was direct and unequivocal – it is the UN Security Council’s Permanent Members themselves that are spreading war and devastation despite the Charter they are nominally committed to upholding.  I wonder what the reaction in Government circles was. 

And this leads to another interesting issue.  The Presidency is highly circumscribed and not only in its constitutional powers.  The Taoiseach’s department must approve the President’s every speech; he or she is accompanied on every trip by a governmental official.  So how did President Higgins get away with his condemnation of the UN Security Council members at the very same time that the Government is trying to win the support of those same members for a seat?  Here are two theories:

• First, the Government minders don’t quite get it.  Just as dissident writers resorted to code-words, metaphors, and allusions to get their works past the censors in authoritarian countries, it may be that some people in Government circles don’t get what the President is saying (maybe they don’t quite get the powerful juxtaposition  of ‘diplomacy of transaction’ and ‘diplomacy of the common good’). 
• Or, second, they dare not attempt to thwart a popular and highly-respected President.

Whatever the reason, President Higgins was attacking austerity and neo-liberal policies even as the Government was pursuing these same policies; he has brought attention to the ecological peril the planet faces even as the Government is failing to meet its climate change targets (failing badly); the President has championed the homeless even as homelessness rises under the Government’s ill-conceived Rebuilding Ireland programme.

Whatever the reason, the public get the President and it is clear they want more.

The President’s comment about the arms trade occurred only a few weeks ago.  If I were to go back through all the similar initiatives he has undertaken over his first term I’d have to write 24/7 up to polling day and beyond.  This is just one example of a President that shows no sign of slowing down.

That is why President Michael D. Higgins deserves to be re-elected on October 26^th.

The Budget in Three Charts

After all the post-budget commentary – the articles, interviews, studio debates – I’ll attempt to summarise the broad direction of the budget with three charts based on the detailed tables at the end of the budget’s Economic and Fiscal Outlook.  These are the Government spending projections.  I have used the GDP deflator for inflation and the IMF’s population projections.

Capital Investment

After the slashing and burning of public investment during the austerity years the projected increase in capital spending is welcome.

Investment is projected to increase by nearly 50 percent in real (i.e. after inflation) terms per capita out to 2023.  Of course, we still need a debate over the best use of that money but the large envelope is certainly what the economy needs.

Public Services

Projected spending on public services (Government consumption), however, tells a far different story.

The Government’s projection will result in a real cut of nearly 8 percent in spending on public services per capita.  This will occur at a time when a rising age demographic will require even more age-related expenditure.

Social Protection

Social protection payments will experience a similar trend as spending on public services.

Like public services, the Government’s projection will see total social protection payments cut in real terms per capita.  This includes both cash transfers and benefits-in-kind.  Again, this is taking place against rising pension payments.

* * *

The story is simple.  The increase in capital spending is being funded by real cuts in public services and social protection.  We should note, however, that the Government has given itself some wriggle room.  They have pencilled in €3.6 billion in ‘unallocated’ spending in 2023.  But even if this were to be divided between public services and social protection, they would still experience real cuts.

And the Government still has fiscal space that it doesn’t intend to use.  But dipping into that could undermine their plans to run strong surpluses.

So these are just projections.  And there is always the danger of external shocks.  Even a ‘soft-Brexit’ could see revenue decline and spending rise (through business closures and job losses).  In the event of a ‘hard’ or ‘no-deal’ Brexit, all bets are off.

The point here is that the Government’s starting point is to squeeze public services and social protection to pay for increases in public investment.  That’s their strategy.  It may not finally come to that. 

But it won’t be for want of planning for it.

 

Taking on the Fiscal Fight

The orthodoxy is running loose, we are being frog-marched into another round of depressed spending and progressives are nowhere to be seen. 

Fiscal policy can put a lot of people to sleep, especially as it is presented in numbers, ratios and sometime dubious historical parallels.  But it is one of the key foundation stones in the area of public expenditure, investment, taxation and, most of all, macro-economic stability.  Lately we have been treated to a barrage of calls to ‘run a budgetary surplus’, ‘rein in our high debt levels’, ‘prepare for Brexit’ and ‘avoiding over-heating’.  Each of these is contestable and has profound implications for social and investment policy.  For the most part, the Left is silent and the debate has the sound of one-hand clapping.

We are in danger of a repeating the experience during the austerity period when the orthodoxy set the (narrow) parameters of the debate and the Left failed to develop a common policy response.  Let’s go through some of these issues (in the next post we’ll discuss the overall debt).

Turning the Golden Rule into Rust

Ministers, the Department of Finance, the Central Bank, the ESRI and the Irish Fiscal Advisory Council are all calling on the government tighten up on spending so as to create a surplus – that is, to ensure that government revenue exceeds government expenditure.  The bases on which they are making these calls, however, are flawed.

Traditionally, the benchmark for fiscal policy is the Golden Rule.  This states that over the medium-term, the Government should borrow only to invest and not to fund current – or day-to-day - spending.  The rationale behind this is that current spending benefits today’s taxpayers; investment benefits tomorrow’s taxpayers. 

Of course, there are ups and downs.  During a recession current spending will go up with increased unemployment benefits while tax revenue will fall as business activity declines.  When the economy recovers, a prudent Government will run a surplus on current spending to make up for the deficits in the recession; hence, over the medium-term deficits and surpluses balance out.

This was the rationale behind the original Maastricht guidelines – which permitted a three percent deficit.  This allowed for borrowing for investment purposes while requiring that current spending was in balance or even in slight surplus.

The Golden Rule was undermined by the Fiscal Rule which stated there must only be a 0.5 percent deficit (one percent for those countries with an overall debt level below 60 percent of GDP).  This means that Governments are not allowed to borrow to invest.  They must fund most of investment out of current income.  This is irrational for two reasons:

• What would happen if households had to fund major investments out of current income – house purchase, retro-fitting, new car, etc? Central Bank rules require households to pay 10 percent of the house price (investment) up front.  Imagine if those rules required households to pay 70 or 80 percent of the house price:  house purchases would collapse along with the building sector.
• Why would you not borrow for investment when interest rates are on the floor?

But now it is getting worse.  By demanding that the entire budget be in surplus many commentators are going beyond even the restrictive fiscal rules, tuning the Golden Rule into rust.  They are demanding that not only should all investment be paid out of current revenue but that there be an additional large surplus. This is despite our many infrastructural deficits. 

How Do We Compare?

In an attempt to frog-march us into this depressed future all manner of numbers and ratios are used, most of which miss the Golden Rule mark.  How does our current budget balance compare to the rest of the Eurozone?

Not only does Ireland have a very high surplus on current, or day-to-day, spending compared to the Eurozone; it is rising much faster.  The Government intends to drive this up even higher in 2020 and 2021.  This is not only unnecessary in terms of the fiscal rules; it deprives the productive economy of badly needed resources.   

If we enter the next downturn, slump or recession with a housing crisis, an unaffordable and poorly paid childcare system, low levels of R&D and per student expenditure we will find an economy struggling to return to growth.  On the other side of the downturn it will cost even more to repair the economic and social damage, repeating the same mistakes we made coming out of the last recession. 

A Progressive Starting Point

What should progressives be proposing?  First, we should argue adherence to the Fiscal Rules, that is, a 0.5 percent deficit.  This can be adjusted quite easily using the GNI* rather than our inflated GDP but it should be remembered that GNI* does not measure the economy’s full income-generating capacity.  This would facilitate economic and social investment.  The Government’s Summer Economic Statement gave us a table showing what additional expenditure – above Government projections – would be allowable under the Fiscal Rules.

Over the next three years we would be allowed to spend over €4.1 billion above what the Government intends.  This is a sizeable amount available for investment.  Of course, this doesn’t tell us where to spend the money – that is another debate to be had (for my money it would be housing, childcare, education, R&D and primary healthcare). Nor does it include additional resources from (a) diverting proposed tax cuts into spending, and (b) new taxation measures.

Second, progressives should use the European elections to argue, on the basis of a common platform, to exclude investment from the fiscal rules.  This would return fiscal policy back to the Golden Rule.  The EU Commission has already taken small steps in this direction.

Third, progressives should challenge orthodox assertions regarding debt, deficits, growth, investment and over-heating.  Evidence-based arguments should be put forward along with common-sense explanations. 

In short, progressives should get back into the debate over fiscal policy – by proposing an alternative medium-term framework.  In doing this, though, we should also confront the real dangers that lie ahead – and do so in open and honest manner:  Inflated revenue levels due to multi-national accounting practices; rising interest rates – probably starting in 2019; Brexit; a global slowdown due to the next downturn, fueled by tariffs and trade wars, etc.

This is no easy task.  The orthodoxy can put forward its arguments based on simplistic and static budgetary arithmetic that overlooks the negative economic and social impacts which ultimately undermines a prudent fiscal policy.

We must argue an alternative framework that promotes investment in the productive economy.   For it is the strength of the productive economy that will see us through the troubles ahead – and provide a pathway to sustainable growth and increasing prosperity on the other side.

Taking a Break

Will be taking a break over the next couple of weeks.  But will be back by mid-September.  

Taxing Wealth - A Common Sense Proposal

We need to broaden our tax base, keep taxes on the productive economy as low as possible and shift taxation on to unproductive capital, unearned income and environmentally-degrading activities.That’s why Dr. Tom McDonnell’s proposed net wealth tax (A Household Net Wealth Tax in the Republic of Ireland: Some Considerations) is so welcome.  It ticks all these boxes.  During the recession and austerity years, the wealth tax featured as a proposal.  Since then, it has disappeared from the public debate.  Now is the time to put it back on the agenda.

There are a couple of starting points to this discussion:

• A wealth tax is merely an extension of the property tax to all property – both real and financial property. The exemption of financial property from the current property tax is a significant subsidy to high-income groups.
• There isn’t a pot-of-gold in a wealth tax. It can raise significant sums (see below) but it is only one piece of a broad tax mosaic. 

What kind of wealth is held in Ireland?  The ESRI report - Scenarios and Distributional Implications of a Household Wealth Tax in Ireland - reproduces data from the CSO:

 

Nearly 60 percent of all wealth is held in land, buildings or other real assets, excluding farms.  Financial assets are in blue and make up 12 of the total.  In total, there was over €480 billion in gross assets in 2013.  A net wealth tax, however, would tax wealth after debts are deducted.  Debts made up 25 percent of gross wealth.

What would a net wealth tax look like?  Tom proposes a high threshold, a minimum of exemptions and reliefs and a low, single rate tax.  An example of this would be a threshold of €1 million net assets (only the value of assets above this amount would be taxed); no exemptions except for pension rights; and a net wealth tax rate of 0.5 percent. 

A rate of 0.5 percent may seem low but a government would have to balance the desire to increase revenue with the danger of capital flight / tax avoidance (though capital flight is less of a danger than in the past given the cooperation of taxing authorities in the EU and beyond).  0.5 percent is not high enough to frighten the tax-avoidance horses.

How much would such a tax raise?  It depends on the design.  The ESRI provides nine scenarios based on different thresholds, exemptions and rates.  I don’t intend to go through all of these (they are on page 24 of the ESRI report, link provided above).  There are two scenarios that are close to the above design: 

• First, a threshold of €1 million (double if married) with additional relief for children and a tax rate of 1 percent with few exemptions. This would have generated €248 million in 2013 and affected just 1.5% of households.
• Second, a threshold of €500,000 (double if married) with additional relief for children. With few exemptions and a tax rate of 1 percent, this would have generated €622 million in 2013 and affected 6% of households. In both cases

In both scenarios, a 0.5 percent tax rate would halve the projected revenue.

We would need to introduce a mechanism to protect cash-poor, asset-rich households.  This is usually done by ensuring that the wealth tax does not exceed x amount of income.  This can either be exempted or postponed until such time as payment can be made out of the sale or disposition of the asset (e.g. inheritance). 

In short, we are looking at somewhere between €125 and €300 million in revenue for a net wealth tax of 0.5 percent.  However, it should be noted that this is based on 2013 data.  Since then the Central Bank has estimated that net household wealth has increased by a massive two-thirds.  So revenue would be higher today.

A net wealth tax is not the answer to all our problems.  But it can make a small contribution to equality.  The top 10 percent income group takes 26 percent of all income, including social transfers. However, the top 10 percent owns over 50 percent of all wealth.  Wealth is far more unevenly distributed than income.

And there is one further advantage.  A net wealth tax can create a new audit trail for the Revenue Commissioners who can use this to compare other tax receipts from high-net individuals.

This should not be seen as a stand-alone tax (though it is an extension of the current property tax).  It should be part of a drive to increase taxation on assets and unearned income:  increasing inheritance and gift tax, higher taxes on unproductive capital activity (currency speculation, property transactions) – leading to the ultimate goal of treating income from capital and labour equally for tax purposes.

Budget 2019 could be that start.

Poorer and Deeper in Debt

Last year the CSO introduced an innovative measure of national output in order to remove the distorting effects of multi-national activity (re-domiciled companies, R&D and aircraft leasing).  It was called modified Gross National Income or GNI*.  Now they have modified the modified GNI.  And our level of output has been revised downwards.

The recent modification reduced our national output by 10 percent.  In other words, we find ourselves 10 percent poorer than we thought.

We have also found ourselves deeper in debt.  When measured against GDP, our general government debt was 68 percent last year – below the Eurozone average.  However, when measured against the old GNI* our debt level went up to 100 percent.  Now we find that our public debt is 111 percent of the new GNI*.

So, poorer and deeper in debt; and now we may find ourselves on the wrong side of the economic cycle.  In the years since the end of the recession / stagnation, all our indicators have been in fast growth.  This was never going to last; it was a result of pent-up demand and foreign direct investment.  Eventually it would settle down.  But we may be settling down earlier than we thought – and at a lower level than we thought.  Let’s look at two indicators that are fairly detached from multi-national activities:  personal consumption (consumer spending) and employment.

Personal Consumption

Personal consumption grew at a steady pace but the increase fell off significantly in 2017.

Consume spending reached 4 percent in 2016.  However, growth suddenly cooled off at 1.6 percent.  This was not anticipated.  Early last year:

• The Government anticipated consumer spending to fall off by a marginal 0.2 percentage points in 2017
• The ESRI expected consumer spending to marginally increase over the 2016 level
• The Central Bank did expect consumer spending to fall off – by 0.9 percentage points. But this was more optimistic than the actual 2.6 percentage point fall. 

It should be noted that in the first quarter of 2018, consumer spending actually fell on the previous quarter: 

Employment

We see a similar fall-off in growth in employment.  The following measures annual increase up to the first quarter. 

We find that total employment growth fell off in the year up to the first quarter in 2018.  However, the fall-off was significant in the market economy (essentially the private sector, this excludes public administration, education, health and agriculture).   Growth fell by more than half.  And if we exclude construction, the fall-off was even more marked. 

Again, only the Central Bank expected a fall-off close to this magnitude.

* * *

What does all this mean?

• Growth rates immediately coming out of the recession and stagnation were never going to be maintained. They should ease off to more sustainable levels.   However, there are signs that the levelling off is occurring earlier than expected and potentially at lower levels than projected. 
• The easing off of consumer spending and employment could be blips that will correct themselves this year. The Central Bank, while expressing surprise at the low levels of consumer spending last year, is nonetheless confident that it will rise again this year. We will have to wait and see whether the confidence is justified.
• What happens if and when all those ‘known unknowns’ come down on us? Brexit, corporate tax reform (coming from the EU and the US), interest rate increases, a looming deficit in the Social Insurance Fund, trade wars, climate change, housing shortages, over-heating, concentration of tax/production in a few multi-nationals, etc.

Then there’s the ‘unknown unknowns’.  We can’t break this down because, well, they’re unknown.

There is a fear, understandable given our recent experience, that any of these factors could lead to another recession.  However, it doesn’t have to be as dramatic as that.  We could enter a period of low-growth – so low that it feels recessionary.  In the 1980s it certainly felt like a recession but in actual fact the economy grew during most of that period – it just didn’t grow much. 

So let’s look at the Government’s per capita projection for the next three years.

By 2021, real per capita growth will be 1.6 percent.  It wouldn’t take much to knock those numbers downwards.

The challenges are considerable.  Future fiscal policy will need to engage in debt-reduction, drive investment, close the deficits in our social infrastructure (housing, education, health, etc.), and avoid over-heating – all the while keeping within fiscal rules which even the Department of Finance believes are ‘dangerous’.  What a balancing act.

Progressives and trade unionists need to seriously debate the Government's fiscal policy.  If we don’t, then we may find them using the same or similar deflationary tools that gave us austerity.  And given our experience of that, it wouldn’t be good for vast swathes of working people.

Turning Ploughshares into Swords

What great fun following President Donald Trump’s global tutorial on how to win friends and influence people.  Particularly intriguing is Trump’s claim that European members of NATO are not spending enough on ‘defence’ and that they should fast-forward their commitment to increase defence spending to 2 percent of GDP immediately, and even double this target to 4 percent. Throw in a bit of German-bashing and Euro-trashing and it was a great summit. 

But this Trump-watching fun masks the dismal fact that global military spending is crowding out the investment necessary to create international stability and security.  All the countries of the world spend $1.7 trillion on their militaries (or approximately €1.5 trillion).  The US accounts for 35 percent of that spending (it’s expensive maintaining an empire), while Europe accounts for another 20 percent.  The world spends 2.2 percent of its GDP on the military – up from 1.6 percent in 2007.  In short, these are obscene numbers.

And now the EU is getting involved in this growing military-mania with PESCO:  Permanent Structured Cooperation, as in European security and defence.  This issue got an outing some time ago in the Dail when TDs debated joining.  Proponents sought to present the issue as one of voluntary cooperation on a range of issues, including peace-keeping missions with opt-outs available, while opponents raised important concerns over neutrality and Ireland’s global role.

One doesn’t have to be a fully signed-up peacenik to be concerned about rising military spending in Europe.  While PESCO imposes no binding target for total defence spending, there is the NATO target of 2 percent and the institutional entanglement between the two: 

‘Enhanced defence capabilities of EU Member States will also benefit NATO . . . A long term vision of PESCO could be to arrive at a coherent full spectrum force package - in complementarity with NATO, which will continue to be the cornerstone of collective defence for its members.’

And then there’s this commitment among signed-up PESCO members:

"Participating Member States subscribe to the following commitments: (1) Regularly increasing defence budgets in real terms, in order to reach agreed objectives."

Of the 20 commitments in the Notification on Permanent Structured Cooperation, increasing military spending is the very first. 

To reach 2 percent of GDP spending EU-wide would require a considerable amount of redirecting resources and opportunity costs.  There are only three countries that currently spend this amount on the military and one of them – the UK – soon won’t be with us. 

Though the Government was quick to point out that signing up to PESCO doesn’t mean that Ireland has to increase it’s spending to 2 percent, we shouldn’t be surprised if pressure is put on individual national defence budgets.  Joining PESCO with the commitment to the triple-lock (Government and Dail approval, and UN authorisation before Irish involvement in overseas missions) may seem to provide some cover, but we should be prepared for militarisation-drift.  Already, Fine Gael MEPs have called for Ireland to fully join the EU Defence Union. 

So what would a 2 percent military spending level mean for the EU as a whole?  In 2016, it would have meant and increase of €100 billion, or 50 percent.  That is a significant sum.

What about other urgent priorities within the EU?

• To return public investment spending to pre-crash levels would require an additional €77 billion; and to make up for the lost years in recession, the increase would be multiples of that.
• There are 118 million people in the EU who are at-risk of poverty or social exclusion, with 80 million experiencing deprivation
• There are 21 million people unemployed in the EU, of whom 8 million are long-term unemployed

These are just a few of the urgent economic and social priorities that should be addressed, priorities that would be undermined if greater resources are devoted to military spending.

Ireland is seeking a seat on the Security Council.  What it wants to do with it is still a bit of a mystery.  Here are a couple of ideas:

• Put nuclear disarmament and the elimination of all weapons of mass destruction back on the agenda – these are terror weapons that have no place in any country’s armoury
• Launch a drive to reduce military spending – in the long- term to 1 percent in each country and re-direct the savings into international social, environmental and economic programmes under the auspices of the UN

Ireland would speak with some authority. .  It recently won the Arms Control Person of the Year. 

Reducing military expenditure is, of course, dependent on resolving the myriad conflicts throughout the world – Palestine, Yemen, Syria, Sudan, Kashmir, Kurdish-Turkish conflict, Armenian–Azerbaijani conflicts, Afghanistan, Pakistan-India hostility, Korea; and the list goes on. It is also about limiting the capabilities of imperialist powers and ventures.   In other words, it is about re-establishing the UN, for all its faults, as the driver of peace, conciliation and stability.

But it goes beyond governments and armies.  Civil society has a key role in driving change and public opinion.  Peace movements have recently been struggling to mobilise social forces:  in the US, UK, Israel, Germany, etc.  An exception is Japan where there has been mobilisation of support for the de-militarised constitution.

Here, Irish civil society organisations can play a role, based on our historical neutrality, in promoting a new anti-militarisation drive in Europe.  There are peace movements throughout Europe and the potential of a pan-European peace initiative - centred on demands to remove WMDs from European soil, to redirect military spending to social programmes, and to pursue non-offensive defence strategies – could help mobilise public opinion away from militarisation.

The future is up for grabs.  We can slide further into the agenda of the military industrial complex as President Dwight D. Eisenhower warned against (yes, a US President and Head of Armed Forces):

‘In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes.’

Or we can re-start and re-animate a politics and economics of peace.

For the world desperately needs fewer and smaller armies.

A Small Step Towards a Big Goal

Billy Kelleher, TD, has done a service by asking each Minister the cost of implementing a living wage of €11.90 per hour for all employees directly employed in his/her Department, including agencies funded by the Department.  And thanks to the ever vigilant Tomboktu (@Tomboktu) for bringing this to our attention (working through his/her concerns over the recently designed Oireachtas website).

Here are the Ministerial responses.

 

The Departments of Education & Skills and Children & Youth Affairs reported no one in their departments earning below the Living Wage.  The Department of Transport, Tourism & Sport is still collating the answer.

In total, it would cost €5.7 million to implement the Living Wage in Government departments.  That the figure is higher for some departments is not due to different pay treatment (they are all covered under the same pay agreements) but, rather, due to the number employed in different grades.

The response to Deputy Kelleher’s question on public agencies funded by the various Departments was patchy, with almost all Ministers stating that they would respond to him directly when they get the information.  Hopefully, the Deputy will publish this data when he receives it.  However, Public Expenditure & Reform did respond:  the cost of implementing the Living Wage in the Public Appointments Service, State Labs, the Office of the Ombudsman and the Office of Government Procurement is €308,000.

The Irish Times reports that just under 1,000 civil servants are paid below the Living Wage.  It further states that 6 percent of all public sector workers – 19,000 – are paid less than €25,000 per year.  The annual Living Wage for 2018 was €24,200 – so not all those workers would be below the Living Wage.

This raises three points.  First, the cost of implementing the Living Wage for the employees covered under the Parliamentary Questions would be a fraction of a fraction (less than 0.1 percent of the public sector payroll).  To bring all public sector employees up to the Living Wage would cost €38 million and probably less (assuming an average of €2,000 per year for the 19,000).   Bringing all employees in Government departments and agencies above the Living Wage could provide an example to the private sector – what is called the ‘demonstration effect’.

Second, this shows the benefit of collective bargaining and negotiated wages.  Wage inequality in those sectors which are covered by collective bargaining is less than sectors where employers refuse to acknowledge workers’ desire to bargain together. Indeed, that relative few employees in the public sector are currently below the Living Wage and the cost of addressing this would be so minimal is a testament to that (back in 2013 NERI estimated 26 percent of the total in work earned below the Living Wage).  And recent examples of this egalitarian approach are the flat-rate pay increases public sector unions negotiated in pursuit of pay restoration.  Such strategies provide extra benefit to those on low-pay.  

Third, if we had a strong cross-party Living Wage campaign (the Living Wage Technical Group is not a campaigning group; they focus on calculating the Living Wage), a short-term focus would be the wider public sector and publicly subsidised organisations – departments, local authorities, public agencies, hospitals, schools, subsidised organisations.   This could also be extended to companies that contract with the Government – public sector procurement.  This is how many Living Wage campaigns got off the ground in the US.  The advantage here is that there is more accountability in these organisations and, again, would provide a demonstration effect to the private sector.

This would be a small but important step in implementing the Living Wage.  And the more success we have with each small step, the stronger we will be in pursuing a Living Wage for all employees.

Hoping for an Evidence-Based Tax Debate

Put the cat out, pop the popcorn and pull up a chair:  the great pre-budget tax debate is commencing.  For the past few years we have heard that our income taxes are high, very high, too high and this is creating all sorts of economic havoc.  Enjoy the show.

One example of this is the claim that Irish taxpayers enter the top rate of tax earlier than any other EU country (bar Denmark).  This is true – but the claim that this shows Ireland has high income taxes ignores two issues.

First, in many EU countries low-paid workers pay a much higher marginal tax rate (marginal tax rate is the tax you pay on the next Euro you earn; it is not the effective tax rate – that is, the tax paid as a percentage of income):  For example, at €30,000, Austrians pay 35 percent marginal income tax rate while Belgians pay 40 percent; and this doesn’t include much higher social insurance (PRSI) rates.  In Ireland, taxpayers pay only 25.5 percent.    So, yes, Irish taxpayers enter the top rate of tax earlier than Austria and Belgium – but they pay much lower marginal tax rates on lower income.

A second issue is that most other EU countries have more than two tax rates; therefore, their taxpayers progress through a number of tax rates before reaching the top.  Ireland has only two rates (discounting USC):  20 and 40 percent.  For instance:

• Austria has six tax rates – from 25 percent at entry level to 50 percent at the top
• Belgium has five tax rates – again, from 25 to 50 percent
• France has four tax rates – from 14 to 45 percent
• Netherlands has four rates – from 8.9 to 52 percent

Luxembourg tops them all – with 18 tax rates from 8 to 38 percent.  The point here is that the reason Irish taxpayers enter the top rate of tax early is that there are no intermediate rates between entry and top level.

But you won’t hear any of this in the debate.  You’ll get sound-bites and ‘oh, isn’t this terrible’; but an analysis of comparative tax structures will be lacking.

Fortunately, we can make relatively robust comparisons between Irish personal tax levels and other EU countries courtesy of Eurostat’s informative Taxation Trends in the European Union.  The two ways of measuring this tell similar stories.

First, we look at employees’ personal tax (including social insurance and sur-taxes like the USC) as a percentage of gross, or aggregate, wages.

We find that personal taxation on Irish employees is slightly higher than our peer-group average.  It ranks 4^th and is ahead of ‘high-tax’ Sweden (which surprises many).  When we look at employees’ personal tax as a percentage of national income we see a similar story.

In this measurement we see Ireland (using the CSO’s special GNI*) falling below our peer-group average – but only marginally so.  These measurements do not speak to the progressivity of different tax systems – they just take the total amount of personal tax revenue as a proportion of wages and national income. 

In essence, both these measurements show that Irish employees’ personal taxation is approximately average. 

We will still hear arguments – about how the Irish personal taxation system is a disincentive to employment creation.  The broad parameters of the tax system have not changed in the last four years, although there has been a slight reduction in marginal tax rates with the cuts to USC.  And yet during that period employment has increased by 270,000, or 14 percent.  That doesn’t look like much of a disincentive.

Or your will hear that our tax system is a disincentive to earning more.  Yet, in the last four years we see the weekly income of managers and professionals – who are likely to be in the top tax rate – rise by 11 percent compared to an economy-wide average of five percent.  Again, the tax system doesn’t seem to be a disincentive to top rate taxpayers.

Could we devise a more efficient taxation system?  Yes, of course.  Is personal taxation a priority in this budget?  No.  We are an average personal–taxed economy, and clearly our structure is not a disincentive to employment creation and wage increases.

The priorities lie in housing, childcare and education; in infrastructural deficits; in the quality of our public services and in a social protection system that can provide security to everyone – including those in the workforce.

Next up:  the ‘we-spend-too-much’ show.  Let’s get some more popcorn.

Making the Living Wage a Living Fact

The Living Wage Technical Group has today produced the hourly Living Wage for 2018:  €11.90 - a 20 cents rise over last year.  Since the Living Wage was first launched in 2014, it has increased from €11.45 – a 4 percent increase.  What has been driving this increase?

One word:  housing.

The Living Wage is constructed on the work of the Vincentians’ Minimum Essential Standard of Living with some variations introduced by the Technical Group.  This is a comprehensive and detailed breakdown of the cost of all goods and services that go into a minimum living standard.  When we separate out housing costs from the rest of the expenditure (food, transport, health, utilities, etc.) we can see the issue.

In the four years, housing costs increased by 37 percent.  All other costs fell by -4 percent. 

This leads us to a particular insight:  if general pay increases in the economy are merely going to pay higher rents or higher house prices, then employers are essentially subsidising economic rents, whether to a landlord or developers / financial institution.  This is a drain on the productive economy and leaves many people’s living standards no better off except that they may have kept pace with housing costs.

For many people the solution is to increase the minimum wage to the level of the Living Wage.  This would require an hourly increase of €2.35 or 25 percent.  Leave aside the issue of whether this would be feasible without employment or working time loss (just to note: the ESRI found that the 50 cents increase in the minimum wage in 2016 had no negative impact on employment).  The Living Wage, while expressed in an hourly payment, is actually based on a full-time worker (39 hours per week).  Therefore, the Living Wage is:

• Weekly: €469
• Annual: €24,444

Anything less than those benchmarks and workers fall below the Living Wage.  So someone may be paid, on an hourly basis, above the Living Wage.  But if they only work 35 hours, they may be below the weekly and annual Living Wage. 

This is important because there is evidence from the US that businesses facing substantial increases in the minimum wage are cutting back hours and forcing more work on to employees.  In this way, firms can ease the increase in overall payroll. 

When the minimum wage in Ireland jumped by 50 cents in 2016 there was anecdotal evidence that in the hospitality sector some workers faced higher targets (mattress changing, room cleaning).  All this to say that without strong labour protection some employers may attempt to clawback minimum wage increases by sweating labour.

This suggests that we need a broader, multi-pronged strategy in order make the Living Wage a living fact.  I would suggest three areas:

First, reduce high living costs which would reduce the Living Wage.  For instance, if rents increased by just half the pace they did over the last four years the Living Wage would be lower.  There are other living costs that could be reduced:

• Public transport fares: we have one of the least subsidised public transport systems in Europe, resulting in high fares and a poorer service.  Increased subventions would mean lower fares.
• Healthcare: reduce insurance, GP and prescription medicine costs – through a free, universal health service. 
• Communications: yes, Ireland is a high-cost country.  Consumer prices are 17 percent higher than EU-15 levels.  But why is communication 24 percent higher?  It would be helpful if the Government commissioned a study into all prices to get a real handle on the reason for our high living costs – rather than assume that current market pricing is somehow ‘natural’.

Second, provide for collective bargaining at company and sectoral level.  The Irish private sector is generally low-paid compared to our EU peer-group.  It also has much lower collective bargaining coverage.  This is especially so  in the low-paid sectors – retail and hospitality – where Irish pay and collective bargaining levels are even further down the EU table.  By providing workers with the tools to bargain together, they can drive up wages consistent with the company’s ability to pay and, so, bring workers closer to the Living Wage.  Further, workers can better protect themselves collectively if employers try to claw back wage increases by degrading working conditions.

Third, the minimum wage does have a role but what is needed is a more robust approach.  For example, minimum wage increases could be linked to overall wage increases in the private sector but instead of expressing them in percentage terms, they could be expressed in terms of a flat-rate pay increase or a combination of the two.  This would use general wage increases as parameters but express the increase in terms of an egalitarian calculation.  In this way, the minimum wage would rise as a proportion of the average or median wage.

This three-pronged approach would help bring workers above the Living Wage while reducing living costs, which would be a benefit to all workers and the productive economy. 

In short, the drive to achieve the Living Wage for all workers must take place at a social level (living costs), in the workplace (stronger workers’ rights) – both combined with a solidarity minimum wage strategy.

This broad-based strategy can help make the Living Wage a living fact.

Paying for Investment by Squeezing Public Services

The Government in its Summer Economic Statement has confirmed what they set out in the National Development Plan – a substantial increase in public investment.   The Government intends to increase capital spending from €5.8 billion in 2017 to €9.4 billion by 2021.  This is substantial.  That’s the good news.  The bad news is that people will end up paying for it through squeezed public services.  Essentially, between now and 2021, there will be no real increase in public service expenditure.

Ireland was never a great spender when it comes to public services. 

 

Irish spending on public services never reached the average of our peer group, never mind the average of other small open economies – even during the go-go boom days.    In 2017 public spending on public services would have to

·         Increase by 21 percent, or €7.6 billion to reach the average of our EU peer-group

·         Increase by 34 percent or a staggering €11.9 billion

If anything, the next few years will be worse.  Between 2017 and 2019, Irish public services spending will fall from 17.6 percent of GNI* to 16.8 percent; in our EU-peer group spending will remain constant at just above 22 percent.  And out to 2021, the Government is projecting a further fall – to 16 percent of GNI*.

What does this mean in actual Euros and cents?  The headline figures show an actual increase in public services spending:  €3.6 billion or 10 percent between 2017 and 2021.  However, factor in the projected 5.5 percent inflation rate (GDP deflator) and, according to the IMF, a 4 percent population increase (nearly 200,000) – and the real increase becomes almost non-existent.   

 

These are just projections and the Government has considerable resources (see here) to increase public service spending over the next three years; therefore, annual expenditure might be smoothed out on the upside.  So this could be treated as a base-line.  If so, then it is a desultory base-line.

Between 2017 and 2021, real (after inflation) spending will rise by €34 per person.  In effect, spending will stagnate.

And it will stagnate at a time of increasing demographic pressure.  The number of pensioners is rising fast – in fact, Ireland has the fastest growing over- 65 years demographic in our peer group, though starting from a low base.

 

As well, we have the fastest rising youth demographic. 

Combined, we will need additional age-related expenditure (health for elderly people, education for children) just to stand still.  As it stands now, we are falling backwards.   And going further, establishing public services on a par with other European countries is not even on the agenda.

There is a consensus that we need to boost public investment.  And, yes, economics is about the art (not science, never science) of allocating scarce resources efficiently.  So we might get the argument that the priority is investment and, unfortunately, public services will have to wait. 

However, this misunderstands the relationship between public services and the productive economy.  We need to boost spending on education and R&D – human capital. We need affordable, quality and professional childcare – drive labour force participation.  We need fair public transport fares as part of an ambition to move away from private transport – mobility, climate change.  And we need an efficient and effective healthcare system – illness and injury play hell with productivity (never mind life quality).

So it is not so easy to distinguish between capital investment and current expenditure in terms of its impact on the productive economy.  But it is very easy to understand the impact of stagnating and sub-optimal public services on living standards.

The Government is attempting to pay for public investment, in order to boost living standards and the productive economy, by squeezing public services and, so, living standards and the productive economy.

It’s a bad trade-off.