Notes On The Front

Profits Driving Inflation

With inflation rising unexpectedly in February (and at one of the fastest monthly rates since the beginning of the crisis) the question being increasingly asked is:  are profits driving inflation?  And the evidence increasingly suggests yes.

It’s certainly not wages.  The IMF’s historical study of the relationship between wages and prices (79 periods of rising inflation, including Ireland’s experience in the 1970s) found almost no evidence of a wage-price spiral – an alleged phenomenon used to justify rising interest rates and wage ‘moderation’ (i.e. real wage cuts).

‘Wage-price spirals, at least defined as a sustained acceleration of prices and wages, are hard to find in the recent historical record . . .’

This is confirmed by Ireland’s recent experience.  In 2022, inflation rose by 7.8 percent.  Wages rose by 3.4 percent.  No wage price spiral there.  If anything, wages have had a disinflationary effect.  But what about profits?

• In the US, the Economic Policy Institute found that in the 18-month period between mid-2020 and the end of 2021, profits made up 54 percent of the increase in prices; wages made up only 8 percent.

• In the UK, Unite the Union reported similar findings in the six-month period between October 2021 and March 2022: 59 percent of price rises due to increased profits; 8 percent for wages.  The further found companies with increasing profits well above pre-covid levels.

• The Australia Institute argued that the economy was experiencing a ‘price-profit spiral’ with wages contributing only 15 percent to higher prices.

The Financial Times recently looked at this phenomenon in an article headlined, ‘Unchecked corporate pricing power is a factor in US inflation,’ (behind a paywall).  They published this graph on the front page.  It shows after-tax profit margins in the US rising higher than at any time since 1945.

The ECB has acknowledged this phenomenon.  Isabelle Schnabel, a member of the Executive Board of the European Central Bank, stated:

‘. . . on average, profits have recently been a key contributor to total domestic inflation, above their historical contribution . . . To put it more provocatively, many euro area firms, though by no means all, have gained from the recent surge in inflation . . . Poorer households are often hit particularly hard – not only do they suffer from historically high inflation reducing their real incomes, they also do not benefit from higher profits through stock holdings or other types of participation.’

And staying with the ECB, Reuters reported that at a recent retreat in Finland for the ECB’s Governing Board:

‘Data articulated in more than two dozen slides presented to the 26 policymakers showed that company profit margins have been increasing rather than shrinking, as might be expected when input costs rise so sharply . . . An ECB spokesperson declined to comment for this story.’

The Irish Times’ Cantillon notes:

‘Some of the surprise stickiness in inflation was coming from goods inflation.  This should have come down with the reopening of supply chains but has remained stubbornly elevated, a trend he (Philip Lane, ECB chief economist) associated with increased corporate profits.  Yesterday his boss Christine Lagarde also raised the notion of companies profiteering on the back of inflation . . . ‘

Eurostat’s quarterly sector accounts gives us an aerial view of profits and wages in the non-financial sector.  Focusing on our EU peer-group (other high-income countries) over the last two years up to the 3^rd quarter in 2022 we find that:

• Profits increased by 25.9 percent
• Employee Compensation increased by 12.8 percent

Profits over this period increased at twice the pace as wages.  We find a similar pattern if we go back over three years – starting in the pre-covid period of 2019.

What about Ireland?  Irish profits data can be as unreliable as Irish GDP.  It incorporates income that is produced in other jurisdictions but booked here to take advantage of our low tax. 

The Central Bank has helpfully published data on prices and profits for the domestic sector (excluding multi-nationals).

These measure year-on-year averages.  On average, profit margins made up over 60 percent of prices.  It should be emphasised that this data relates to the domestically-owned sector – it doesn’t factor in multi-national profits. 

However, it is certainly the case that the multi-national sector is more profitable than our domestic sector.  And if we use corporate tax revenue as a proxy, we find that it has more than doubled between 2019 and 2022, implying that multi-national profits have more than doubled. 

* * *

This price-profit spiral raises a number of questions for policy.  If prices are not being driven by wage-fuelled demand, what is the point of ECB’s interest rate increases?  The Reuters report went on to quote Paul Donovan, chief economist at UBS Global Wealth Management:

’It's clear that profit expansion has played a larger role in the European inflation story in the last six months or so.  The ECB has failed to justify what it's doing [increasing interest rates] in the context of a more profit-focused inflation story.’

It is important to note that rising profits are not uniform across the board.  We have less insight into the sectoral breakdown of profits than we have wages.  The ECB’s Schnabel noted that it is larger, export-oriented firms that are benefitting the most with many smaller firm – in particular, in contact-intensive services (retail. Hospitality, transport, entertainment, etc.) - still struggling.

But there’s a more fundamental question: what is the point of profits?  If profits are being direct into increasing dividends and senior executive pay, rather than its social utility (investment), then economies are suffering from a double whammy:  profit-fuelled price increases and ECB interest rate increases.

Answering that question, however, calls for a far more radical review of how we run our economies.  But the quicker we start that review, the quicker we can begin addressing a myriad of problems, including profit-fuelled inflation.

Policy without Evidence, Strategy without Goals

‘Facts are meaningless.  You can use facts to prove anything that’s remotely true.  Facts schmacts.’ (Homer Simpson)

Fact:  private rental accommodation supply is falling.  Between 2016 and 2021, the number of private tenancy registrations fell by 44,000, or 14 percent.  However, this fact doesn’t tell us why supply is falling. 

Is it falling because the number of landlords leaving the market is accelerating?  Or is the number leaving remaining steady, its' just that new entrants are not keeping pace?  Is there data on churn?

Is it falling because of tenant-protection legislation such as rent control?  The picture is not so clear.  We can get some insight from the Rental Sector Surveys conducted by the Residential Tenancies Board (RTB).  One relevant response from landlords is their future intentions to sell.

16 percent and 28 percent of small and medium landlords respectively are likely to sell the rental properties with three years.  That is not an insignificant proportion.  However, the overwhelming majority of landlords do not intend to sell over the next three years; though it should be noted this survey was published in mid-2021 so intentions may have changed.  And even if they sell, they might do so to other landlords who will maintain the rental stock.

Of the minority that are likely to leave, what are the reasons?  Again, the RTB asked this question.

There are various reasons for landlords leaving the market.  For mid-sized landlords, retiring is the biggest.  A significant number cite reasons related to the value of the house.  The regulatory environment doe not appear to be a major reason.  However, some of those who claim they don’t want to be a landlord anymore might be reflecting a more difficult ‘market’ to operate in (though it might also reflect ‘accidental’ landlords who didn’t want to be in the market in the first place) while ‘high’ taxation is another reason.

In short, there is no simple reason or set of reasons as to why landlords are leaving.  To attribute it solely to tenant-protection measures would be a misrepresentation. 

It also suggests that some measures to incentivise landlords to stay in the market – such as tax cuts – might miss the mark.  if most landlords do not intend to leave in the short to medium-term then tax cuts will come with a high deadweight cost - subsidising most landlords to do something they intended to do anyway without the tax cuts.  If landlords are leaving because they are retiring and want to cash in for their pension, cutting taxes may not have much impact.

The Government is rationalising the decision to end the eviction ban on the basis that continuing the ban would lead to a further loss of supply.  What is the evidence for this?  Ministers and Government TDs keep repeating the fact that private tenancies are falling (true) but assume without much evidence that this is due to regulation.  Could the eviction ban increase the tendency for landlords to leave?  Yes, possibly.  By how much?  We don’t know.  If we get rid of the eviction ban will that help incentivise landlords to stay in the market?  Maybe not as many are leaving because of other reasons.  The whole thing is a fog.

At times, the options available to a government all have downsides.  The skill (the ‘art of politics’) is to pursue the least damaging option while taking steps to ameliorate the next damaging option.  It’s hard to imagine anything more damaging than homelessness.  And if the government is confident that the measures to compensate for the removal of the eviction ban would protect tenants from homelessness, then – on the balance of probabilities – they should wait until such measures are on stream. 

Ultimately, we have two problems.  First, a clear lack of evidence to guide housing policy.  It is so bad we don’t even have robust measurements of how many houses we build each year as Lorcan Sirr and Mel Reynolds recently pointed out.  As such, what few facts there are can be manipulated to support unsubstantiated assertions and poor policy choices.

More crucially, we don’t have a policy destination.  What is the long-term plan for the private rental sector?  Where is the capital going to come from to provide truly affordable rental accommodation?  What is the delivery agency?  Institutional investment may divert to a more ‘profitable’ bond market (and, in any event, they veer towards the upper-end of the market).  Small and medium-sized landlords may struggle to generate the income needed to invest in new-build rental units.  The Government has ultra-modest proposals for cost-rental which still may not be affordable.

We have a relatively short window.  While most landlords don’t intend to sell in the next three years, a high number see it as likely over the medium to long-term.

It is long past time to stop treating rental accommodation as a ‘market’ and start treating it as ‘public good’.  The Nevin Economic and Research Institute’s proposals for a unitary ‘network’ in rental accommodation remains the most proactive and potentially transformative model. Such a model could incorporate private landlords, providing them with a real incentive to remain in the market while at the same time as expanding rental units through public intervention.

In the meantime, there is the danger that policy will be supported with little evidence, and strategies will fail to resolve the crisis for lack of direction or goal. 

And in that situation, facts can become meaningless.

The Next Government

It is two years to the next election.  What are the potential alternatives to the current coalition?  What are the chances of the first government led by some other party other than Fianna Fail or Fine Gael?  What are the possibilities for a progressive breakthrough?  This will be the first election where there is a realistic prospect that neither Fianna Fail nor Fine Gael will lead the government. 

With the help of a great website – Ireland Political Indicator, maintained by Tom Louwerse and Stefan Müller. - we can chart governmental possibilities using opinion poll surveys.

Current Government

The current coalition started out well, mostly due to a strong performance from Fine Gael coming off the handling of the early part of the Covid crisis while it led a caretaker government.

Support for the combined three government parties fell from a high of 53 percent to 40 percent in the summer of last year.  Since then, support has been rising, boosted by a generally favourable response to the budget measures, bouncing back to 44.7 percent.  The Government parties are still falling short of their 2020 election result (50.2 percent) but they may be happy the decline has been reversed. 

Alternative Governments

There are other possible governments.

(a)         Left Leaning

This would involve a coalition of Sinn Fein, Labour, Social Democrats and S-PBP. 

In the last election the combined percentage vote for Sinn Fein, Labour, Social Democrats and Solidarity-People Before Profit was 34.4 percent. This has risen to 42 percent; but this is due to Sinn Fein’s performance – seeing their support increase from 24 percent to 33 percent. The other three progressive parties – individually and collectively - have stagnated, bouncing between 9 and 11 percent (in 2020 they received 10 percent).

Ending the year at 42 percent, we can be hopeful – though this support is trending downwards as Government support increases.  The problem, apart from all parties’ willingness to forge a coalition, is that support is fragmented among four parties.   Seat totals could suffer without a strong transfer rate between the parties.  Any seat dividend going to Sinn Fein could come at the expense of other progressive parties.

A progressive government could be boosted by the inclusion of the Greens.  This would, however, require a five-party coalition.  The only Irish government to have that many parties was the inter-party government of 1948-51. 

(b)         Centrist-leaning

Another alternative government would be Sinn Fein and Fianna Fail. 

Support for Sinn Fein-Fianna Fail combined has remained above 50 percent since autumn 2021, though, it has fallen back recently.  The big question is how realistic this coalition option is.  Stephen Collins notes that data from the recent Ipsos poll (October 2022) showed that 71 percent of Fianna Fail voters supported the arrangement with Fine Gael, while only 8 percent chose a new arrangement with Sinn Fein.  Of course, this can change dramatically in post-election coalition negotiations (e.g. Fianna Fail and the PDs in 1989, Labour and Fianna Fail in 1992).  Nonetheless, it raises a warning sign about the potential of splits, breakaways or loss of support.

(c)          Right-wing Led Minority Government

There is a coalition that isn’t quite on the agenda, but could be depending on future trends; namely a Fine Gael or Fianna Fail-led minority government including Labour, Social Democrats and the Greens.

At this stage, such coalitions would result in a minority government, with a Fine Gael-led coalition ending 2022 at 34 percent while a Fianna Fail arrangement was at 29 percent.  it would seem a tall order for either combination to put together a majority in the Dáil.  But both parties have shown themselves capable of putting together fragmented governments in the past.  Recently, the 2016 government saw three independent cabinet ministers reflecting the nine independent TDs who voted for the Fine Gael Taoiseach nominee.  But it relied on a supply-and-confidence relationship with Fianna Fail, an option that may not be available in the future.

The Taoiseach-Makers

Both the Greens and the independents could have a key role in the composition of the next government. 

Support for both these forces has remained steady.  The Greens are running at between 4 and 5 percent while the Independents and others (including Aontu) have remained around the 13 percent mark.   These two parties could play pivotal roles in government formation.  The Greens, with their focus on environmental issues, have considerably flexibility in negotiating with a range of parties and alternative coalition arrangements.

The independents and others are largely drawn from either gene-pool or parochial politics.  The three technical groups – Regional, Rural and Independent – have a total of 21 deputies.  Of these, only three are identifiably progressive:  Catherine Connolly, Thomas Pringle and Joan Collins.  To the extent that ideologically-compatible TDs can negotiate collectively, they could have influence on both a government programme and cabinet membership. And this could bolster the chances of a return of the current government or a right-wing led minority government.

What do Progressives Want?

What does all this mean for progressives?  It depends on what they want.  For Sinn Fein, that question is easier answered: they want to lead the next government.  Their preference may be for a left-leaning coalition but this will depend, first, on whether other parties will enter such a coalition and, second, whether it can achieve a Dáil majority; neither of which is guaranteed.

What about Labour, Social Democrats and the S-PBP?  The first issue they must confront is marginalisation.  With such low poll numbers, the potential for significant losses with a small movement of first preferences or transfers is high.  Nearly half of the TDs elected in the three parties did not achieve a quota in the last election (8 out of 17).  In some cases where a quota was achieved, there was a heavy reliance on Sinn Fein transfers.  In Dublin South Central, Brid Smith saw 55 percent of her final vote come from Sinn Fein transfers.  A second Sinn Fein candidate in the constituency will put pressure on that seat.

The second issue is what kind of government will allow the smaller progressive parties the maximum opportunity to implement their policies?  Of the potential four formations, two lead to participation in government – one led by either Fine Gael or Fianna Fail, and one led by Sinn Fein. It is highly likely the latter that provides such an opportunity.  Of course, one or two of the progressive parties could help put together essentially a repeat of the current government. But their influence would be severely limited.   

The danger is that parties, pursuing post-election manoeuvrability, seek refuge in electoral non-speak; for example, ‘we campaign on an independent basis and then we negotiate whatever the electoral result is.’  This position avoids providing leadership on that most vital of issues – what will the next government look like.  It leaves open the possibility of lining up behind conservative forces.  Most of all, it won’t work.  During elections, debate rarely focusses on the issues.  It will be one long question with variations on a theme: will you go in with this party, will you go in with that party? 

It is understandable that smaller parties are wary of arrangements in which they can be subsumed.  Interestingly, we have recently seen innovations in government formation.  2016 saw the first confidence-and-supply arrangement between political parties that sustained a minority Government for four years.  2020 saw the first rotating Taoisigh.  Further innovations could be promoted to protect the legitimate interests of all parties in a multi-party coalition.

But more importantly, the party (or parties or forces) that will lead a progressive government will not be based solely on the number of TDs.  It will be those who lead the policy debate – innovative, imaginative and common-sense policies that can challenge the conservative consensus that dominates so much of government policy.  The progressive programme has yet to be written.  We will need more than just ‘spend more’ policies (though we will have to spend more and increase tax revenue in tandem).  Who will write them?  The ones who do will be the leaders, regardless of party size.

Ultimately, all progressives – in political parties, trade unions, civil society groups – have to ask:  do they want to be part of a historic re-setting of electoral competition in Ireland.  In the 1980s, Fianna Fail and Fine Gael took over 80 percent of the vote together.  In 2022 they averaged 40 percent in poll surveys.  We now have the opportunity to finally break this conservative domination and open up a new, more progressive chapter in political history.  While there will be debates over policies and priorities, over the shape of the coalition, the question comes back to what kind of government do we want.

We have two years to make up our minds.

 

Time to Consider Universal Basic Energy

Everyone should be guaranteed a minimum amount of energy, either free or at below-market rates.  This is the principle behind ‘Universal Basic Energy’.  By redistributing costs from lower to higher income groups It has the potential to significantly reduce fuel poverty while incentivising energy efficient investment among groups who can afford it.

The Government, having resisted price controls to date, appear to be curious.  The Business Post reports:

‘The Government has tasked the Economic and Social Research Institute with modelling possible price guarantees which, in theory, would see household and some businesses allowed a portion of their average monthly energy consumption at a guaranteed price per unit of energy.  Anything exceeding the allowed level would be charged at the market rate.’

There are any number of ways this could work.  The New Economics Foundation has done good work on Universal Basic Energy. How would this work in Ireland?

• The Utilities Regulator estimates that average annual consumption of electricity per household is 4,200 kWh (kilowatts per hour). The following assumes that low consumption is related to income-poorer households consume less electricity than higher-income households (smaller homes, fewer appliances, etc.).

• In the absence of a decile breakdown of energy consumption in Ireland (i.e. how much energy is consumed by the lowest 10 percent, the next 10 percent, etc.) the following uses a UK breakdown. The standard price comes from Electricity Ireland via Bonkers.ie.

If 2,000 kWh – nearly half of the average consumption – were provided free to households, with the excess amount charged at the market rate so that energy retailers don’t lose out or require a state subsidy, the following estimates the gains and losses per decile.  It should be emphasised that, given the patchy and missing data, this is for indicative purposes only.

Under this formulation, the price per kWh would rise from the current 43 cent per unit to 83 cent per unit – a near doubling.  However, combined with the free allowance, the lowest income group could see their electricity cut by half, saving nearly €600 per year.  At the highest end, electricity bills could rise by nearly €700, or 27 percent.

This would help meet the two criteria – providing relief to lower income groups while incentivising higher income groups to reduce electricity.

Using the SILC data for weekly income, electricity expenditure for the lowest 10 percent under the current tariff regime is approaching 10 percent of income, falling to less than 2 percent for the highest 10 percent.  With a Universal Basic Energy Free Allowance, electricity costs fall to less than 5 percent for low-income households, with a slight increase at the highest end. In many respects, the free energy allowance would operate like the income tax system which applies a tax-free allowance, or credit, on earnings.

The above is just an exercise.  The ESRI will have access to better consumption and price data, including distributional data.  So the numbers and percentages above would change if consumption patterns are different, but the redistributive dynamic would be broadly similar.  Were the state to subsidise the price, tariffs could be further reduced. 

* * *

There are any number of variations on this model.  The free allowance could be reduced to 1,000 kWh (or even increased).  Instead of a free allowance, it could be charged at below-market rates.  For instance, the first 2,000 kWh could be charged at 10 cents or 20 cents, compared to the current 43 cents market rate.  There are also other considerations.

• The standing charge: the inherently regressive flat-rate charge imposed on electricity consumers regardless of the amount they consume could be capped at a much lower rate (our Electricity Ireland tariff charges €278 per year).  This could be reduced to €50, bringing significant relief to low-income groups.

• A European-style social tariff could be introduced, a means-tested programme that provides subsidies to low-income households to ensure that energy costs don’t exceed the fuel poverty benchmark. This would be helpful to low-income households that may require higher electricity consumption (e.g. households with all day occupancy due to age, disability, caring). 

• A similar free allowance could be introduced for gas and heating oil consumers.

This programme could be introduced on a temporary basis, for the duration of the cost-of-living crisis (though Cliff Taylor argues that high energy prices are here to stay).  However, it could also become a permanent feature to eliminate fuel poverty and incentivise investment in energy efficiencies.

Such a programme requires a substantial public intervention in price-setting mechanisms with an activist Utilities Regulator to ensure there is no profit-gouging.  If energy is a ‘public good’, then the pricing structure is not something to be left exclusively to market operators.

Universal Basic Energy is a example of how markets – in this instance, energy retail markets – can be reformed to achieve social and environmental goals, becoming more democratically accountable and socially fit-for-purpose.

What Do People Want? More Democracy

A couple of months ago, the UK’s High Pay Centre  and abrdn Financial Fairness Trust, published ‘Worker voice in corporate governance: how to bring perspectives from the workforce into the boardroom.’  This is a useful contribution to what can be called the ‘democratisation of the business model’, or workplace democracy. 

Particularly useful is a survey of public opinion on what kind of business sector people want.  This is a survey of UK opinion (carried out by Survation polling) but Irish opinion is unlikely to be qualitatively different.  What do the polling numbers show?

People’s Priorities for Business

Survey interviewees were asked to select three issues from a list of possible business objectives that they felt businesses should care about the most.  They were then asked what they think businesses actually do care about. The results show substantial discrepancies between the public’s priorities and their perception of businesses’ priorities.

There is a large discrepancy between what people want and what they perceive business (owners / managers) want.  At the extremes:

• 58 percent want better pay and working conditions to be the top priority for business. Yet only 18 percent believe that this is actually a business priority.

• Only 10 percent want higher profits for shareholders. Yet, 54 percent believe this is actually business’s top priority.

For people, other priorities include paying a fair amount of tax, delivering value for money for consumers and protecting the environment. 

This is a progressive agenda – living standards, good citizenship (paying tax), delivering value for money (a necessity for business resilience in any event) and environmental protection.  People’s low priority for innovating new products – which are necessary to deliver higher pay and value – can be understood in the context that people may see such innovation as benefiting shareholders, not employees or customers.

Owners and Trade Unions

The survey asked people their perceptions of the contributions that management/owners and trade unions make to economic development and social benefit.

Half of survey respondents believed that trade unions actually stimulate the economy with only a third of people disagreeing.  Nearly 50 percent do not believe businesses (management / owners) behave in a way that is beneficial to society.

In respect of economic development and social benefit, trade unions are considered to make a better contribution than owners and managers.

Workplace Democracy

A number of questions were asked concerning the impact of greater democracy in the workplace.  To the question of ‘How important, if at all, do you think it is that workers have a greater say in the running of the companies that they work in?’ the response was:

• Very or Somewhat Important: 79 percent
• Not Very Important or Not at All: 16 percent
• Don’t Know: 5 percent

This is an overwhelming endorsement of the proposition that employees should have a greater say in the decision-making process in the workplace.

In a follow-up to this question people were asked: ‘If workers were given more of a say in the running of the companies that they work in, what kind of impact do you think it would have on the following?’

The response to the impact of greater workplace democracy is overwhelming – overwhelmingly positive.

• Unsurprisingly, people believe that greater democracy would have a positive impact on pay and conditions, and job satisfaction (70 and 73 percent respectively)

• Investment in sills and training is also high up the list at 67 percent

• The highest percentages for a negative impact are on business-decision making and economic performance - but these come in at 11 percent each (with positive percentages at 53 and 59 percent respectively)

There is one more issue:  worker-directors.  The survey put two statements to people.

Over half of the respondents believe that directors selected by the workforce should sit on the boards of the largest companies, with less than a third disagreeing.

* * *

As stated, this is a UK poll.  However, an Irish poll would probably come up with similar numbers.  Given that in the UK there is a very strong and very loud lobby – comprising media outlets, commentators, and politicians – that have been attacking trade unions and employee rights for decades, one might have expected a larger cohort of anti-democratic views.  In Ireland, however, such an influential lobby is lacking.  That’s not to say that there aren’t hostile forces to trade unions and workers here; just that they don’t match the viciousness that comes out across the water.   

Irish progressives and trade unionists can take some comfort in these numbers – and could even sponsor their own survey to get a specific read on the Irish public (though such comprehensive surveys can be quite expensive).  The comfort is this:  a campaign for greater workplace democracy would have public support. 

We need to figure out how to leverage that support.  After all, its not like workplace democracy is at the top or near the top of the public policy agenda.

Therefore, one of the many tasks for 2023 is to put workplace democracy and a democratic business model at the heart of the public debate and challenge the anti-democratic vested interests that dominate the economy.  The majority of people are on our side. 

What Irish Business Really Needs

Owners, and their representatives, have been highlighting the challenges to businesses.

• A poll of 250 SMEs reported that more than two-thirds of SMEs believe there is a “possibility” they will have to shut next year, while nearly half said it was at least a “moderate risk”.
• ISME warns that the minimum wage increases next year and the plan to move to 60 percent of the median wage by 2026 will have a ‘serious economic and social cost’.
• A recruitment agency has warned that implementing the Sick Pay Act (which provides all employees of three pay-related sick days next year) will lead to an acceleration of the number of companies falling into insolvency.

Sounds grim.  But we must distinguish between claims made by owners and the actual impacts on businesses.  It may well be that business can ‘afford’ wage increases and social benefits, but owners fear constrained profits; therefore, they use the rhetorical device of ‘business can’t afford it’ or ‘this will lead to job losses’.

But what owners and their lobby groups miss is the elephant in the room; namely that Irish consumer spending lags well behind our peer group – other high-income economies.

In the year before Covid, consumer spending (private consumption) in Ireland would have had to increase by 17 percent, or €17 billion, to reach the average of our peer group.  That would mean a lot more spending in businesses throughout the economy.  The main problem for Irish business is the relatively low level of consumer spending.

There are several explanations for this poor outcome; for instance, high savings – though this wasn’t the case in Ireland prior to Covid.

Low wages or purchasing power will also impact on the levels of spending.

Irish nominal wages are slightly below average.  However, when we factor in living costs, Ireland falls to the bottom, well behind all other peer-group countries.

There are other factors.  Chief among them, which is hard to rank, is high levels of personal expenditure on essential public services.  If we are spending more on rents (and mortgage interest which is the second highest in the EU), we’re spending less on market goods and services.  Ditto for childcare, health and education.  If we are saving more for fear of unemployment, illness, family caring and retirement, then we are spending less. The weakness of our public services and social protection system is costing business a considerable amount of turnover.

So what is in the best interests of Irish business (as distinct from owners)? 

First, higher wages and greater wage equality.  Higher ages mean higher spending (all things being equal).  And higher wages for low-income groups is better yet as these groups have a higher propensity to consume.  On this behchmark, Ireland has unfortunately a lot to do.  Our levels of wage inequality are quite high.

In our peer group Ireland has the highest level of wage inequality (the higher the number, the greater the ratio).

What is needed is a living wage and a strong legislative collective bargaining framework – both at the enterprise and sectoral level – to both drive up wages and to help equalise them.

Second, an expansion of the public sector so that it can provide essential services for free or at below-market rates.  This could redirect resources into the business economy.  For instance, the Government’s proposed reduction of childcare fees by 25 percent could result in savings up to €2,000 for full-time care.  This savings is now available to spend in market sectors.  Similarly, the Government’s elimination of schoolbook costs for households with primary school children is another example.  What is needed is an identification of other services which can be provided for free or at below-market rates in the health, education, public transport sectors to list a few.

Third, a strong social security system can help free up resources for spending.  If you believe you may become unemployed, you’ll likely reduce spending since unemployment benefit payments are so low.  A pay-related unemployment benefit (e.g. at 70 percent of your wage) could help maintain a higher level of consumer spending.  This holds for sick pay and family supports (e.g. maternity/paternity benefit, parental leave, etc.) and, in particular, old-age pensions.  A strong safety net protects households and business turnover. 

* * *

What does business need?  What should employers and their representatives be calling for?

• Higher and more equal wages – facilitated by universal wage-setting structures
• Expansion of free and affordable public services
• A strong social insurance system with pay-related benefits that can help maintain consumer spending

I await the sight of business owners marching behind an IBEC or ISME banner at a cost-of-living march chanting these demands.  They would be welcomed.

Progressives Should Champion the Tax Commission Report

The Commission on Taxation and Social Welfare’s recommendations should be at the centre of a progressive programme to increase resources for a strong social state.  While there will be disagreements over this or that proposal, the broad thrust of the Commission report is progressive and substantial.

The Irish Fiscal Advisory Council has estimated that the main recommendations could raise up to €15 billion though the range of revenue yield could vary considerably (they helpfully provide an excel sheet of their estimates here).  The Fiscal Council stated: 

‘In many cases, there are no ready-made costings available for the measures proposed by the Commission. The Commission also tends to give general guidance rather than suggested rates or other specifics.’

So these are not precise or final estimates.  However, they show the potential to transform the social state. 

Depending on how one interprets the recommendation, the estimates could be higher or lower.  But they do contain proposals which, however interpreted, could cause some controversy, even among progressives.  Let’s go through some leading recommendations.

(a)         Land and Property

There are two main proposals in this category.

• Site-Value Tax: this tax would be applied to all non-residential property and replace commercial rates.  It would raise €1.9 billion

• Local Property Tax: The Commission recommended a ‘material’ increase in the property tax.  The Fiscal Council interpreted this to mean raising the tax to one of the highest levels in the EU – nearly six-fold, raising €2.9 billion.  Whatever about the economic and fiscal efficiencies this could produce, Fiscal Council’s estimate is probably a political non-starter.  But we shouldn’t assume that a six-fold increase was what the Commission had in mind.  It could be significantly lower but still constitute a ‘material’

(b)         VAT

The Commission proposes increases in VAT rates. The Fiscal Council interpreted this as increasing goods and services that are currently zero-rated or taxed at 9 or 13.5 percent to 15 percent.  This would raise €2.5 billion.  Of course, one does not have to support increasing all such goods and services (e.g. food) and one could combine this with a reduction in the standard rate. 

Progressives would rightly point out that increasing VAT would be regressive, hitting the lowest income groups the hardest.  However, it should also be noted that many countries with much higher VAT rates have lower levels of poverty and deprivation.  That’s because they channel this revenue into income supports.  So a high VAT rate is not necessarily opposed to anti-poverty strategies.

(c)          Capital and Wealth

There are two big items here.

• Restrict or Remove the Exemption of the Sale of the Principal Private Residence from Capital Gains Tax: In short, if I sell my house (my home), any ‘profit’ I earn will not be subject to capital gains tax.  This is a major tax subsidy and has no basis in equity – not if one believes that all income, regardless of source, should be taxed.  The Fiscal Council estimates this could raise up to €1.1 billion, though estimates could vary significantly. 

• Inheritance Tax: a range of revenue-raising measures (transfer of assets subjected to capital gains tax, reducing tax-free thresholds, reduce tax reliefs) could yield up to €1.3 billion.

These measures are likely to be highly progressive.

(d)         Environmental Measures

This category includes measures which the Government is already committed to; increasing carbon tax, for instance.  Another large item in this heading is the removal of tax-based fossil-fuel subsidies over the long-term.  Given that Ireland has the second highest-level of fossil-fuel subsidies in the OECD, as noted by the Commission, means that this measure goes beyond the fiscal and cuts to the heart of strategies to achieve climate justice.

(e)         Social Insurance

It is well known that Ireland has a weak social insurance system compared other EU countries.  Driving up revenue from this source will be key to funding a strong social state. In this regard, the Commission proposals are a little disappointing.

• Currently, employees earning below €352 per week are not subject to the 4 percent employee PRSI contribution. However, once they exceed that threshold, their entire income is subject to PRSI.  The Commission recommends that a lower nominal rate (e.g. 2 percent) be applied on earnings below the €352 threshold. Yield:  €500 million.

This would impact exclusively on low-paid and part-time employees.  While there is an argument in terms of fiscal sustainability and reciprocity (employees don’t start paying PRSI until they reach €352 weekly earnings but they can access social insurance benefits upon reaching €38 per week), introducing a new contribution rate would be penal given Ireland’s low-pay status.  This recommendation can only be phased in when a new collective bargaining regime becomes operational – so that low-paid and part-time workers have the bargaining power to help maintain their net income.

The other big item is the increase in self-employed PRSI from the current 4 percent to the employers’ rate of 11.05 percent. This is in keeping with the recommendation from the Commission on Pensions.  This would yield €800 million.

However, it is disappointing that the Commission didn’t propose substantial increases in employers’ PRSI to finance a strengthening of social security measures such as in-work family supports, short-term unemployment, illness and disability supports.  To given an idea:  employers’ PRSI would have to double to reach the EU average – or about 10 percentage points.  While we may not need that level of revenue given the relatively low-level of pensioners, each percentage point increase would yield over €800 million.

(f)          Income and Corporate Tax

The Commission didn’t propose any substantial changes to income tax, apart from phasing out tax relief on private health insurance as Sláintecare is implemented.  This measure makes up over half of a relatively low level of revenue-raising measures. 

Another disappointment, however, is the Commission's failure to tackle some of the regressive and inefficient tax subsidies available to the corporate sector.  Leaving aside the vexed question of Ireland's low corporate tax rate, the Commission’s support for such subsidies are justified on neither economic or social grounds.  In this regard, NERI’s Dr. Tom McDonnell, a member of the Commission, refused to endorse the chapter on corporate subsidies, writing: 

“Chapter Nine ‘Promoting Enterprise’. . . set out a series of recommendations that endorse and support a range of very generous tax expenditures and low tax rates for enterprises and/or high earning individuals. While in some limited and special cases these types of reliefs may individually have an economic justification, they also breach the principles of vertical and horizontal equity, are highly regressive, reduce transparency, and are at odds with tax justice and solidarity principles. Individually they are problematic, albeit perhaps, in some cases, defensible. Collectively they undermine the approach taken in the rest of the Report. In my view, the overall balance between fairness and potential efficiency gains is not achieved. This imbalance is compounded by the recommended retention of other generous tax expenditures on capital transfers described elsewhere in the Report and also by a rate of employer PRSI that is low by Western European standards.”

When progressives are debating the Commission proposals, they should bear this dissent in mind.

* * *

The Commission proposals are challenging:  increases in property tax, VAT, PRSI on low-paid groups.  But there are considerable variations possible and the Fiscal Council’s estimates are only one interpretation.  However, the broad thrust of the Commission’s proposals is:

• Progressive: half of the proposals relate to capital, wealth, and property.

• Efficient: tax increases on capital, property and consumption have the least impact on economic performance.

Most of all, it puts to rest the idea that substantially increasing overall tax revenue would hit income taxes.  The Commission shows this is not the case.

There is a reason the Tánaiste was quick to rubbish the Commission’s proposals.  They would impact mostly on high-income, high-wealth households – a key constituency in Fine Gael’s political base.  It also showed that a high-tax economy is not necessarily a high income-tax economy, undermining an ill-informed criticism of a strong social state.

Progressives need to put their own ‘interpretation’ on the Commission’s recommendations, using the Fiscal Council estimates as a starting point.  But the debate will get ugly and, in many cases, downright dumb.  Fine Gael’s Cllr. John Kennedy wrote in the Irish Times:

“Throughout the report, there is a heavy emphasis on “redistribution” and in the case of the recommendation on capital acquisitions tax [inheritance tax], this sentiment borders on being an example of bona fide Marxism which is rare to see in such a commissioned report.”

Geez.

So let’s champion the Commission report, if only as a starting point.  Let’s debate the particulars.  Let’s improve on some of the recommendations.  Let’s address the omissions and shortcomings (in particular, employers’ PRSI and corporate subsidies).  But let’s not allow the report to be side-lined, gather dust, consigned to an historical waste-bin. 

It has the potential to build a strong social state in an economically efficient way.  Isn’t that what all progressives want?

It's Not Just Tech

Understandably, a lot of attention has been paid to the job losses and hiring freezes among tech companies, especially given the treatment of Twitter workers.   This is a high-profile and economically important sector.  However, we are in danger of overlooking a larger, potentially more dangerous development– the considerable reduction in employment throughout the economy in the last three months, most of which is impacting on low-paid sectors.

While there was strong growth in employee numbers up to April, between May and August, there has been a decline of 56,000 employees, or 2.4 percent.

So far the unemployment numbers has not matched this reduction.  The CSO’s monthly unemployment report shows an increase of only 4,700, or a 4.2 percent, in the numbers unemployed.  The Live Register isn’t picking up anything significant either.

However, there are a number of reasons why a decline in employee numbers doesn’t automatically translate into an increase in unemployment.  People could be leaving the labour market for caring duties, or education and training.  Others might be leaving the country – returning or leaving home.  Some might be taking up self-employed work.  In other instances, two part-time employees might leave and be replaced with a full-time worker; in this instance, the number employed falls but not the total hours worked. A fruther qualification is that recent months should be treated as provisional and subject to subsequent revision.

Whatever the explanations we should be alert to this potentially emerging trend, especially as to where it is impacting.

There are 33,000 fewer employees in the hospitality sector, followed by falls of 8,000 in the arts & entertainment, and distributive sectors.  The losses in these three low-paid sectors made up 87 percent of the entire economy-wide loss of employees.

There were no significant gains made in any sector bar the financial services sector.  There was a minor gain in the ICT sector but that is before the recent job loss announcements (which may not become evident in the data for a few months).  In short, almost all sectors suffered a loss of employees.

And as often happens, it is young people and women who take the first and significant hits.  While there was a 2.4 percent decline in employee numbers:

• Among 20–24 year-olds, the reduction was 7.7 percent
• Among 25-34 years-olds, the reduction was 3.1 percent

And women were more than twice as likely as men to suffer a reduction in employee numbers.

References to a potential recession are actually references to unemployment.  In some cases there is a limit to what a government can do in the short-term.  If there is a ‘correction’ in the tech or other multi-national dominated sectors (code word: job losses), Ministers can do little to influence what is a global process. However, governments can influence domestic economy.  And they can help mitigate the damage. 

This requires measures to ensure that demand, especially consumer demand, is maintained.  Boosting wage and income floors is one effective measure as these groups spend most of the additional income they receive; namely, the minimum wage and basic social protection rates.

Another helpful measure is to introduce a pay-related unemployment benefit.  This would help households maintain consumer spending in the short-term, rather than see their disposable income fall over a cliff, risking debt or significant cuts in their consumption.  Regarding this, the Government’s recent announcement that they will examine a pay-related element to unemployment benefit is good news. 

Unfortunately, this will take time (this should have been top of the agenda following the last recession).  In the intervening period, the Government could re-introduce the staggered payments under the pandemic unemployment payments which would provide some support.

Hopefully, this fall in employee numbers is only a blip with growth returning in the months ahead.   But we should prepare for the worst.  And the worst is that we are heading into a recession driven by job losses in both high-value and low-paid sectors.

It’s not like we haven’t been warned.

Wages are Falling - Profits are Rising

The share of wages in the economy is falling as profits are rising. While measuring wages (labour’s share) is difficult due to the distorting effects of multi-nationals, the CSO provides data for the domestic sector which is where 90 percent of work is done.

The share of wages in gross value-added (or net business income) has fallen significantly:  14 percent for the overall domestic economy and 31 percent for the domestic manufacturing sector since 2000.  In short, profits are gobbling up more and more of the net revenue that business is generating.

• In 2000, capital compensation (profits) took a 40 percent share in net business revenue.  This rose to over 48 percent by 2019.

• In 2019, the share of profits uin the domestic manufacturing sector rose from 43 percent share to over 60 percent during that same period.

One explanation could be that as economies modernise, more activity takes place in less labour -dense activities such as modern manufacturing or ICT.  However, the share of labour-dense activities has not changed over the 19-year period in the combined agriculture, distributive, hospitality and construction sectors.

One could also argue that higher profits are necessary to fund higher investment.  But with profits rising, has investment risen, too?  It doesn’t appear to be the case.  Using the CSO’s measurement of modified investment (excluding multi-national distortions) and excluding public investment we find:

• Private sector investment in 2000 was 23 percent of national income (GNI*); or16 percent if we exclude house construction

• By 2019 investment fell to 16 percent of GNI*; or 14 percent if we exclude house construction

It seems that rising profits have not resulted in higher investment though one has to be careful navigating the maze of modified measurements.

How do we compare with our peer group in the EU, other high-income economies?  Here we have to turn to net national income.  Our GNI* is not measured across European economies.  The best comparator is net national income which removes all capital depreciation.

Ireland is at the bottom of the table.  Wages (direct wages and/or employers’ social insurance) would have to rise by over 14 percent to reach our peer group average; and nearly 10 percent to reach the Eurozone average.

There is rarely a single explanation for complex economic interactions.  But the following must be a major contributing factor.

Trade union membership has fallen from 36 percent of all employees in 2000 to 25 percent in 2019 – a proportionate decline of 30 percent.  While there is some good news in recent years (it rose from a low of 23.4 percent in 2016), there is still a long way to go to return to 2000 levels.  And even further to reach the 80 percent benchmark established in the recent EU Directive on Adequate Wages.

This obviously poses a challenge for employees in the workplace – to organise through trade unions to capture a higher share of the net business revenue they generate. It poses a challenge to trade unions to reach out to those workers.  John Geary and Maria Belizon estimate that 44 percent of non-union member would vote yes to establish a union so there is an open door.

But this also poses a challenge to civil society groups who campaign on issues of poverty and social exclusion.  Can we really expect to build a strong social state in the context of capital taking more and more value-added? 

This makes trade unionists and anti-poverty activists natural allies in the struggle for higher wages (and so many other issues).  It’s time to pursue a common agenda. 

Ireland's High Living Costs

We all know that Ireland has a high level of living costs – second highest in the EU. 

Irish prices (living costs) are 40 percent above the EU average.  However, comparison with the EU average can be misleading.  High-income countries invariably have higher living costs.  In the graph above all countries in our peer group exceed the EU average.    So the better comparison is with other high-income countries and not the EU base-line.  Nonetheless, bar Denmark, we are well above price levels in those countries – even high-cost Sweden.

While there is an acknowledgement that Ireland is a high-cost country, there is less discussion over where those costs lie.

No one would be surprised that alcohol and tobacco are more than twice the price of EU levels, given our high excise levels.  Nor would many be surprised that housing and energy are nearly 90 percent higher than the EU average.  Health follows third.  At the other end, clothing and footwear, and household furnishings are at the EU average. 

While this tells us where particular categories stand in relation to the EU average, it doesn’t tell us what are the biggest contributors to Ireland’s high living costs.  For instance, communication prices – which includes both telecommunications goods and services, along with postal services – are 46 percent higher than the EU average.  But we only spend 3.4 percent of our income on communications.  So even if we were to reduce these prices to our peer group level, it wouldn’t make a significant impact on our overall living costs. 

So what are the biggest contributors to our high living costs?

Unsurprisingly, housing and energy leads the table.  Nearly a quarter of our living costs in excess of the EU average is due to this category.  Next up is alcohol & tobacco, hotels & restaurants, miscellaneous goods & services and health.  These five categories account for nearly 75 percent of our excess costs.  It is within these categories that we need to make progress if we are to lower living costs. 

It wasn't always like this - not to this degree.  Back in 1995 Irish prices were actually below the EU average.

Price rose quickly during the frist phase of the celtic tiger economy, rising to nearly 30 percent above the EU average by 2002.  It stayed at that level until a price drop following the financial crash.  But once the economy started to recover, so did prices.

There are other ways to measure the impact of high prices; in particular, from a life-cycle perspective.  For instance, young people will spend more on recreation and rents; those in their 30s and 40s will spend more on children (childcare, clothes, education-related costs); those in their 50s and 60s are likely to spend more on prescription medicine.  Capturing a life-cycle approach, combined with disposable income, would add to our understanding of the impact of living costs on households.

So why are prices high?  There are a number of potential contributory factors.  But let’s first rule out two commonly cited factors:  taxes on consumption and wages.

Our high prices can’t be put down to indirect taxation (VAT, Excise) as Ireland is below most of our peer group.  Similarly with wages – Ireland is at the bottom of the table in the market (i.e. private sector) economy.

So what might be the contributing factors?

• Periphery costs?  Given that we need to import – by sea or air – a number of our inputs or final products, this extra travel cost could add to prices.  However, we import most of our clothing and footwear – yet these prices are well below other high-income countries.
• Lack of competition?  This is the go-to explanation for many as ‘competition’ is viewed as a panacea for consumer prices and choice.  However, the restaurant sector is highly competitive (i.e. lots of enterprises) but prices remain high.  Non-alcoholic drinks are 39 percent higher than the EU average.  Can this be explained by lack of competition? 
• Lack of scale?  Economies of scale can reduce prices but our small domestic market can be a barrier to achieving this scale – hence, imports.  Are there some items higher priced because of market size or structural features?
• Lack of social spending?  Childcare fees are ultra-high, due to lack of state investment.  Ditto with GP services.  Public transport fees in Dublin are higher than in other European capitals.  How much of our high prices are due to Irish people having to pay on the private market what others throughout Europe consume through social markets – for free or at below-market rates?
• High Profits?  Are prices high because Irish business extracts higher profits?  In the domestic market sector Irish firms have a lower profit margin than most of their EU peer group countries – which is consistent with a poor performing domestic sector.  There might be exceptions in certain sectors.

We need to establish the reasons for our high prices.  We used to have a National Prices Commission.  This body monitored and regulated prices in the economy.  Businesses in many sectors would have to apply to the Commission in order to raise prices.  In this Parliamentary Question from 1978 we find the Commission giving price increase permission to products ranging from tinned strawberries to coal, cemetery charges, bread, confectionary, GP fees, energy, cheese and more.

I’m not suggesting going back to that regime.  It wouldn’t be possible (though we shouldn’t rule out temporary controls in key areas such as energy).  However, a new Prices Commission could be established to investigate the extent of high prices on key goods and services – especially in comparison with other European countries - the reasons for these high prices and what steps could be taken to lower prices would be extremely helpful in the debate.   There may be market reasons outside the control of the state.  But there may be a number of steps a government could take to tackle our high costs.  A new Price Commission could not only inform the debate, it could politicise prices and bring new light to old practices. 

Most of all, we shouldn’t be fatalistic about our high living costs.  On the other side of our inflation crisis we can intervene in a number of ways – provision of public services, taxation, import substitution, removal of barriers to competition, etc.  There is a way to bring prices under some sort of control.

It’s called politics.

Mind the Poverty Gap

The Government is digging itself or, more properly, hundreds of thousands of households, into a big hole.  By opting for significant once-off payments in Budget 2023, there is a danger of exposing people to significantly reduced living standards.  As the ESRI put it:

‘ . . . below forecast inflation increases to tax credits and welfare payments next year will mean many lower-income households will experience real terms cuts in living standards in the latter half of 2023 without a repeat of the welfare bonuses, lump-sum payments and household energy credits.’

Once the bonuses, lump-sum payments and energy credits are used up, social protection recipients will be receiving payments well below the rate of inflation.  This is a recipe for growing poverty and deprivation.

Let’s see how this works by indexing inflation and social protection payments from 2020.

Next year, basic social protection payments will rise to €220 per week (single person).  But had it been indexed to inflation, it should be €242 next year and, based on Government inflation projections, €248 in 2024.

Therefore, just to keep with inflation (i.e. no real increase), social protection payments will have to rise by €28 per week in Budget 2024.  But what chance of the Government doing that? 

[NOTE:  While basic social protection payments have increased by 8.4 percent since 2020, the standard rate tax band has increased by 13.3 percent. This gives an indication of the Government’s priority.]

Once-off payments have a role in fiscal policy in tiding households over a particular hump.  However, they need to be integrated into a medium-term framework that ensures that households at least maintain their link with inflation after the hump.  There is no evidence the Government is pursuing this strategy

Instead, once-off payments are being used – quite liberally – to ensure that permanent increases are kept at a minimum.  This will result in households’ living standards falling well behind inflation after the inflation hump.

Little Inflation Games

There is a poverty gap opening up between inflation-indexed and actual social protection payments.  There are similar interactions in secondary programmes. 

• Fuel Allowance: a once-off payment of €400 is being made to recipients of fuel allowance. However, the permanent payment is being frozen meaning a real cut of €66.

• Living Alone Allowance: another payment which get a once-off payment, worth €200.  However it, too, is being frozen resulting in a real cut of €81 for the year.   

• Child Benefit: this payment has been frozen since 2016.  Recipients will get a once-off double payment worth €140.  However, freezing the payment means a real cut of €119 for the year. 

So what the Government has given by way of once-off payments they have partially clawed back by freezing the permanent payments.  So what happens when these once-off payments have been spent?  Many household budgets will be holed the water line. 

A Progressive Framework

Currently, social protection and pension payments are increased (or not) on an ad hoc basis with short-termist fiscal and political rationalisations.  We need a framework that automatically indexes payments against a relevant economic indicator.  There are two questions:

First, what is the level of adequacy?  The Minimum Essential Standard of Living produced by the Vincentians shows that this year €249 per week is necessary for a single person to reach that standard, excluding housing costs.  The basic social protection payment this year is €208.

Save for a pensioner couple (both 66 years or more), all other categories are well below the minimum essential standard of living.

Second, what should social protection payments be indexed against in the future once adequacy has been achieved?  There are three options:

• Inflation
• Average Wages
• National Income (GNI*) per capita

It should be noted that, over the long-term, wages and national income per capita outstrip inflation.  If social protection payments were indexed to the latter, it would mean no real increase while the living standards for those on fixed incomes would fall behind the rest of society, widening inequality.

Such a framework would need to be flexible and be linked to housing payments.  But let’s be clear – it is unlikely that this Government has an interest in developing such a framework.

Fortunately, we have a considerable level of expertise and skills in the area of social policy.  Civil society activists, including trade unionists, should come together to establish a People’s, or Civll Society Commission to deal with just this issue:  what is the framework to achieve adequacy in social protection payments and what should these payments be linked to?  This would lead to a more rational system where poverty can be significantly reduced if not eliminated altogether.

And the first step is to show how we can close the poverty gap between payments and inflation. 

Recession Hangs Over Budget 2023

There were two major projections from the government on budget day that have not yet entered the public debate. 

First, the economy is projected to flat-line next year.  The government projects 0.4 percent growth in real GNI*.  This is the preferred measurement for assessing economic activity in the state.  0.4 percent is barely any growth at all and is only just above the recession zone.  The Finance Minister omitted this in his speech, instead focusing on the lesser known ‘modified domestic demand’:

‘ . . . my department has revised down its forecast for Modified Domestic Demand – the most appropriate measure of our domestic economy – to 1¼ per cent for next year.’

This is incorrect.  The most appropriate measure is GNI*. Referencing this, though, might have raised awkward questions.

We can get a sense of the deterioration in government projections by reviewing the Department of Finances’ revisions of the components of economic growth – from April (Stability Programme Update) to September (the budget).

The revisions downwards are quite significant, especially given that they occurred within five months.

• Consumer spending projection has been cut in half
• Modified investment (which factors out multinational distortions) has been revised downwards by nearly 2/3.
• GNI* has been slashed to nearly zero.

While employment growth is expected to moderate at 1.2 percent (down from a projected 2.1 percent in back in April), unemployment has not been revised upwards.

The government projects all this to be temporary.  GNI* and consumer spending is expected to bounce back in 2024, though investment will remain relatively muted.   Hopefully, this is the case.  But with such uncertainty in international markets it is difficult to project beyond a year. 

The second piece of bad news which hasn’t received enough attention is the inflation projection for next year.

In 2022 the government is projecting an inflation rate of 8.5 percent.  Next year it will remain high at 7.1 percent.  This is well above other estimates from the Central Bank, ESRI and NERI who projected inflation for next year at between 4 and 4.5 percent.  And it is well above what the government was projecting six months ago. 

This means that over this year and next inflation will run at 16.2 percent.  Incomes will have to rise by this amount over 2022 and 2023 just to stand still.  This wasn’t expected.

Continued high inflation will depress consumer spending which, in turn will impact on investment (businesses are reluctant to invest if consumer spending isn’t sufficient to produce a return on their investment).  The Government is projecting that inflation increases will moderate by 2024, rising by only 2.4 percent with energy prices rising be even less. But this should be treated with caution as no one knows how this current crisis will impact on the medium term.

So we have an economy flirting with recession within a high inflation environment.  The government is banking on the assumption that social transfers, especially the once-off component, will serve not only to protect living standards but also bolster consumer spending.  It is further hoping that their subsidies to the business sector will deter further price rises and maintain employment.

Let’s hope it comes right.  For if the Irish economy falls into a slump with high inflation rates (what is popularly known as stagflation) it will become extremely difficult to dig ourselves out.

A first step is to start highlighting all this in the public debate.  It would be bad enough to fall into recession.  But to pretend that the prospect doesn’t exist would be just as bad.

 

 

How Much Would Price Controls Cost

[The following post is a big number heavy – and others may have better estimates)

John Fitzgerald is pessimistic:

‘ . . these [energy’ price increases will probably drive the Irish economy, as well as the EU’s, into recession . . . We are looking at a possible 5 per cent loss of income and output, which could be enough to cause the rapidly growing Irish economy to reverse engines, with a serious negative impact on employment.’

I hope he’s wrong.  I fear he may not be.

The EU Commission recent proposals come up short of controlling energy prices.  At best, they recognise the profiteering occurring in some sectors of the energy market.  The thrust of their proposals is to levy windfall profit taxes in order to boost social transfers. 

The issue of energy price controls has gained some momentum since I first raised this last year.  Such price controls should be seen, for the time being, as temporary, tactical and forensic.  But even then, it will come at a price.  With the help of Eurostat and the CSO let’s do some relatively crude back-of-the-envelope estimates.

• In 2021, households spent €3.1 billion on electricity, gas and other domestic fuels (home heating oil, solid fuels, etc.). If we assume energy inflation running at 48.6 percent in the last year (to August), households will be spending on €4.6 billion this year. 

• In 2019, the business sector spent €4.7 billion. However, that includes €1.1 billion consumed by the power generation sector.  So that leaves €3.6 billion spent on energy inputs by non-utility businesses.  With energy inflation running at 62.5 percent over the three years we could expect business spend to rise by €2.2 billion.  This would mean the business sector could spend €5.8 billion on energy this year.

So in 2022 we could expect a total economic spend of €10.4 billion on energy.  However, the risk is to the upside with cost variations depending on the particular energy fuel being used.

Temporary and Tactical

A temporary, tactical approach would see price controls operating over the winter months.  That is the immediate challenge to ensure that people can stay warm at affordable rates, and businesses continue to operate.  The CSO shows that 69 percent of residential gas consumption occurred between October to March in 2021 – essentially quarter four and quarter one. Business consumption was 51 percent during this period.  I can’t find seasonal consumption patterns for electricity but we’ll assume it mirrors gas.

Therefore, spending over the six autumn / winter months is estimated to be €6.1 billion:  €3.2 billion for households and €2.9 billion for businesses.

Let’s look at the reduction in prices if we rolled back prices to August 2021.

Rolling back prices to August 2021 would result in a 33 percent reduction in prices, varying between 28 percent (electricity) and 42 percent (home heating oil).  It should be noted that rolling back prices to August 2021 brings us close to pre-pandemic levels. 

In terms of cost over the winter months (adding an additional 10 percent to help reduce upside risks) we could see the state spending

• For households: €1.2 billion
• For businesses: €1.1 billion
• Total cost: €2.3 billion

€2.3 billion to roll back prices to August 2021 levels for six months:  this is a significant cost. 

Forensic

Fortunately, this cost can be reduced through a number of targeting mechanisms. High-income, high-consumers don’t need the cut and are probably in a better position to reduce consumption.  A subsidised cut could be delivered through a tiered-tariff imposed by the Regulator over the six months:

• Standing Charge: the most regressive component of an inevitably regressive cost.  This could be eliminated during the target period.

• Tiered Tariff: just as with tax rates, energy charges could be reduced for the first 2,000 kWh (average household consumption is 4,400 kWh), with graduated bands above that. 

In this way, price controls could be directed toward low-average income households.

For businesses, a similar targeting could occur for energy-intensive firms.  For instance, the manufacturing sector makes up 33 percent of all business spend.  Further, we could also exclude data centres from subsidised price cuts.

Targeting the subsidised price cuts could reduce the total cost.  And it should be noted that the state would also save money – 15 percent of business spend comes from the public administration, health and education sectors.  This would save money for the Exchequer. 

Recouping the Cost

• A windfall profits tax should be levied. The Finance Minister recently told Ged Nash, TD, that raising the corporate tax rate on energy companies from 12.5 percent to 50 percent would yield €271 million.

• The price cap could be introduced on a cost-plus basis, acknowledging that most of the costs originate from outside the state (importing fossil-fuels). This would temporarily squeeze profit margins for companies. 

• Some of the cost could be returned to the state. For instance, a portion of the subsidised cost to business could be repaid over a ten-year period, linked to profitability.  A bank levy-type charge on energy companies could be introduced but one would have to look out for companies passing this on to the consumer.

• Costs could be further reduced through temporarily reduced network charges, putting the cost on public utilities.

All of the above would lead to tariffs being set by the Regulator.  For this emergency period, there would be limited competition between energy retail firm with profit levels frozen or rolled back to pre-covid levels on a cost-plus basis. 

This would require a sophisticated price control regime.  However, the benefits would be considerable. 

• For households, costs would be reduced before the Government’s energy-subsidy transfers. This could reduce the costs of transfers.  Further, it would mean relief for hard-to-target households who are just above social protection thresholds but wouldn’t benefit from tax cuts.

• For businesses, costs would be reduced in two ways: the direct cost of purchasing energy, and the reduced input costs where energy plays a significant role.  This is about reducing energy costs throughout the supply chains. 

The reduction in business costs could allow for higher wages – especially for low-average income groups (those with a high propensity to spend).  This would drive consumer spending and increase net business revenue.  The alternative would see the business sector facing rising costs and falling demand due to wage restraints. This would be a recipe for John Fitzgerald’s recession.

Temporary, tactical and forensic price controls can help us get through a potentially grim winter.  The issue of unwinding price controls following this period will be challenging.  However, we may find that having established a price control infrastructure (and improving it as it goes along), we may keep it.  Not only because it may be necessary.

But because we need to start treating energy a public good.

Ban SUVs

No one doubts we need to act urgently if we are to avoid climate armageddon.  While the debate has focused on sectoral targets, especially agriculture, we need to move to concrete proposals and implementation. Quickly.

While much of the debate takes place at a high level – off-shore wind, data centres, electric cars, retrofitting (with targets that are highly challenging) – moving towards climat ae justice will take a myriad of small steps.  And a key issue is whether we use tax incentives or regulation to help us along the way. 

Let’s look at one proposal in the area of transportation – banning Sports Utility Vehicles.  This is not a substitute for radical action to extend public transport or transition to electric vehicles.  However, it is one of a number of small steps that can help reduce greenhouse emissions.

Sports Utility Vehicles are, in climate terms, highly damaging.  The International Energy Agency made a finding that stunned even its own researchers.

‘SUVs were the second largest cause of the global rise in carbon dioxide emissions over the past decade, eclipsing all shipping, aviation, heavy industry and even trucks . . . ‘

If all SUV drivers banded together to form their own country, they would rank as the seventh largest emitter in the world.  According to Fatih Birol, executive director of the IEA:

‘The global rise of SUVs is challenging efforts to reduce emissions.’

Sebastian Castellanos, a researcher at the New Urban Mobility Alliance, stated:

‘To avert the worst of the climate catastrophe, the transport sector needs to be completely decarbonized . . . With the explosion in SUV sales, we are moving even farther away from our goal of decarbonizing the sector.’

Again, the New Scientist reports: 

‘The good news is that more people bought electric cars in 2020. The bad news is that SUVs continued to grow in popularity, too. The fall in oil consumption due to the first trend was completely cancelled out by the second, say Laura Cozzi and Apostolos Petropoulos at the International Energy Agency in France.  The growing popularity of SUVs is making it even harder to cut carbon dioxide emissions and meet climate goals. “Policy-makers need to find ways to persuade consumers to choose smaller and more efficient cars,” says Petropoulos.'

It should be noted that estimates of carbon dioxide emissions from SUVs do not factor in the manufacturing carbon cost.  As SUVs are heavier, their emissions would be higher still. 

It should be a no-brainer that we have to reduce the number of SUVs on the roads.  After all, there are ‘substitution’ goods; that is, there are less-damaging cars that can be purchased – including electric vehicles, though Jason Power warns that electric SUVs remain a bad idea. 

However, SUVs are highly popular.  Half of all new car purchases in the US are SUVs while they make up one-in-three purchases in the US.  Ireland is part of this trend.  Hannah Daly and Vera O'Riordan of UCC found that:

‘SUVs are also favoured by city-dwellers as much as country folk: nearly 19,000 were sold in Dublin last year, nearly half of new cars registered in that county.’

They put the issue in stark terms:

‘Ireland must rapidly reduce fossil fuel consumption to meet climate obligations. As one of the many changes needed, the prevalence of heavy, fuel-hungry SUVs on Irish roads should end. But instead, SUV sales are growing rapidly: 55,000 were sold in 2021 (nearly 55% of all new cars). By contrast, only 8,600 fully electric vehicles were sold that year. SUVs' greater weight and height mean that they emit around 20% more carbon dioxide than medium-sized cars, and far more than electric vehicles.’

Governments will be reluctant to interfere with people’s choice of cars, especially such a large cohort of people.  However, when we compare the challenge of reducing SUVs with other challenges – transitioning to renewables, retrofitting hundreds of thousands of buildings, expanding public transport – it is pretty small scale.

One issue is how we implement this reduction.  The usual route is through tax incentives; namely, increasing the tax on SUVs.  The logic of this is that the additional tax will direct purchases to cheaper and less environmentally damaging vehicles.  However, this still results in high income groups capable and willing to pay the additional tax, being able to continue engaging in environmentally damaging transport.  In short, they can buy their way out of responsible consumption.  And this impacts all of us.

A more direct and egalitarian policy approach would be to simply ban them.  This means that, regardless of one’s income, people will be required to purchase other, less carbon dioxide-intense vehicles.  Whatever about the issue of commercial vehicles - using SUVs for work purposes - the removal of fossil-fuel SUVs from our roads would help in decarbonisation. 

In the overall, this should not be a difficult issue but it requires a government intent on a robust strategy of climate justice and willing to win people over to that strategy.  This is just one small rung on the sustainability ladder that we will have to climb if we are serious about climate change and repair.

Now, who’s up for banning private jets?

Raise the Income Floors, Lower the Price Ceilings

With the Exchequer awash with revenue (much of it potentially unsustainable corporate tax revenue) there is no shortage of proposals for the upcoming ‘cost-of-living’ budget.  Social protection increases, tax cuts, once-off subsidies, public service supports – there’s something for everyone in the audience. So how do we decide what is the most economically efficient and socially equitable within all this noise? 

We can start with two principles:  first, raise the income floor; and second, lower the price ceiling. 

Income Floors

Raising the income floor directs resources to predominantly low-income groups.  This can be done in two ways: 

• Increase social protection payments (substantially)
• Increase the national minimum wage (substantially)

Not only is this socially equitable, it is efficient.  Lower income groups have a very high propensity to spend; that is, they spend most of any additional income they receive.  Given that one of the biggest recessionary threats is a reduction in consumer spending and, so, investment – increasing the income floor would help bolster consumption and business revenue. 

One flying kite doing the rounds is a €15 weekly increase in social protection payments, which  would cost €1.1 billion – though the Irish Times reports that this proposal is fading.   Even so, if the goal is to protect those on fixed incomes, this proposal would come up short. 

• The Central bank estimates inflation to be 12.2 percent in 2022 and 2023.

• A €15 weekly increase next year combined with the €5 increase this year would only raise social protection rates by 9.9 percent.

There’s also the finding by the CSO that inflation hits low-income groups harder than those higher up the income scale.

While the national headline rate was 6.7 percent, for the lowest income deciles inflation was higher than 7 percent while for the highest income deciles inflation was below the headline rate. 

 At a minimum, social protection rates should increase by €20 per week if protecting people’s living standards is the goal.  At that level, with additional supports (fuel allowance, electricity rebates), we could be successful in protecting those on fixed incomes.

A substantial minimum wage increase is also needed to increase the earnings floor.  The CSO’s latest data shows there were nearly 125,000 on the minimum wage.  However, increases in the minimum wage impact more than just those on the wage floor.  It affects all those being lifted up to the new wage.  And it impacts on people above the new rate as the increase pushes up wages.  Given that there are over 400,000 who are officially categorised as low-paid, a significant increase would directly and indirectly impact on a sizeable proportion.

Apart from protecting low-paid employees against inflation, a minimum wage increase would have other benefits.  First, it increases tax revenue which the Government can redirect into further social protection or public service supports.  Secondly, it would help bolster consumer demand.  The National Competitiveness and Productivity Council has warned of the danger to domestic SMEs from falling consumer spending as a result of uncertainty over inflation.  As low-income earners spend nearly all the additional income, this would end up being spent (ditto for social protection increases).  

These two measures – substantial increases in social protection rates and the minimum wage – could protect low-income groups from inflation, support the domestic economy, and help the Government ensure that targeted measures are not eaten up by price increases.

Lowering the Price Ceiling

Lowering price ceilings could come via energy price regulation.  This could, at the very least, limit the damage of any upward pressure on, especially, gas prices.  I’ve discussed this here and here.  There are a number of ways could this be done, apart from freezing prices through maximum price orders:

• Substantially reduce standing charges – they are effectively a flat-rate tax on energy consumption, totally detached from the amount of energy used. A single pensioner suffering energy poverty pays the same standing charge as a high-income household.

• Introduce temporary social tariffs – ensure that low-average income households pay no more than 5 percent of their income on energy. This would, of necessity, be a means-tested scheme.

• Require all energy suppliers to extend their lowest tariff to all customers.

Introducing a windfall profit tax would be a second-best option.  The Finance Minister recently told Ged Nash, TD, that raising the corporate tax rate on energy companies from 12.5 percent to 50 percent would yield €271 million.  That’s a decent enough haul.  However, it implies profits of over half-a-billion Euro.  Wouldn’t it be better just to require energy companies to reduce prices by that amount for a temporary period?  Investment in green alternatives could be protected by direct investment subsidies.

Former Prime Minister Gordon Brown has weighed in on the debate in the UK. 

‘ . . the government should pause any further increase in the cap; assess the actual costs of the energy supplies being sold to consumers; and, after reviewing the profit margins, and examining how to make standing charges and social tariffs more progressive, negotiate separate company agreements to keep prices down. And if the companies cannot meet these new requirements, we should consider all the options we used with the banks in 2009: guaranteed loans, equity financing and, if this fails, as a last resort, operate their essential services from the public sector until the crisis is over.’

Regulate and, where necessary, nationalise.  That is a serious progressive perspective.

* * *

Once these two principles have been established in policy, then we can assess the range of further options to assist households and businesses based on economic efficiency and social equity.   There is, quite naturally, demands to assist people and enterprises throughout the economy.  The Government will need to prioritise the most effective policies while minimising the inefficient, the inequitable. 

Raising the income floor and lowering the energy price ceiling is the foundation.

Time to Introduce Price Controls on Energy

It is beyond time to start implementing price controls on energy products.  We have a few months left before the winter and another big price increase.  To those who claim that ‘price controls don’t work’, look at France.

France has one of the lowest inflation rates in Europe:  5.8 percent annually up to May, compared to an EU average of 8.8 percent and an Irish rate of 8.3 percent.  A big explanation for this is a series of energy price controls they have introduced – on both electricity and gas.

France has been putting pressure on the EDF, the main electricity supplier (which is owned by the State) to keep price increases close to production costs.  In April they imposed a 4% price increase cap while freezing gas prices since November last year.  These benefit a high proportion of households and business.

Variations in pricing are not wholly down to price controls.  Other measures that reduce costs may also be at play (e.g. VAT reductions).  But price controls have played a key role.

• France is not the only country to intervene in the pricing of energy products. The OECD charts the range of measures that countries are taking.  These include price support measures:  price controls, reduced electricity charges and network fees, VAT and excise tax reductions, and compensation to distributors for selling energy products at reduced prices.
• Malta has mandated the state-owned provider to freeze prices at their 2014 level which means a 0 percent increase in electricity and gas prices over the last year. They compensate the provider for the losses the price cap has brought about.
• Portugal and Spain are introducing electricity caps which are estimated to cut electricity prices by 50 percent to about 40 percent of the population.
• In Hungary, electricity prices fell by 21 percent with gas prices falling by 17 percent owing to the introduction of price caps.

A number of other countries have intervened in the pricing of energy products through various mechanisms.   

In Ireland, there has been tentative discussions regarding price controls or caps.  Back in September of last year the Tánaiste addressed this issue:

‘Maximum price orders will be considered by Government to halt galloping gas and electricity costs, the Tánaiste has told the Dáil . . . Mr Varadkar said: “We’re not going to rule out using maximum price orders.” ‘

What is the follow-up to that ‘consideration’?  What did the Government conclude?  What study did they undertake?  Have they published it?  Will they publish their findings?

Apparently, the Minister for Finance has been looking into excess profits in the energy sector. 

‘I am aware that the European Commission has confirmed that EU member states can consider imposing temporary tax measures on windfall profits of energy providers and use the revenue generated to provide consumers with relief from high prices. Officials in my Department and the Department of the Environment, Climate and Communications are evaluating the potential for such a proposal.’

Of course, it would be far better to remove excess or windfall profits through price regulation rather than taxing it.  A tax allows companies to retain a large portion of the profit.

There are a number of forms price regulation could take. 

• The simplest way would be to introduce a price cap. However, this must be finely calculated; otherwise, retailers and generators could exit the market (though this threat can by over-played at times). 
• Reducing prices to the average profit margin prior to the crisis would allow for companies to maintain a profit but ensure that no one is benefitting beyond the historical norm.
• Reducing prices to the cost of production would mean that companies would have to temporarily forgo profits but, again, care must be taken that companies don’t suspend investment or be prevented from increasing employee wages.
• The price of electricity and gas could be standardised for the duration of this emergency (some companies offer the same product – electricity or gas - at price differentials of €400 per year, depending on the 'plan’).
• The Regulator could draw up a tariff schedule that benefits low-users of energy. For instance, the average household consumes 4,200 kWh per year of electricity.  Prices on the first 25 percent (or 1,000 kWh) consumed could be significantly reduced.  If consumption is related to income, this could benefit lower-income households.

Other measures could include reducing for a period transmission and distribution tariffs to the network, ensuring the savings is passed on to the consumer. 

If the state were to intervene in market pricing, it would need to be clear about its objectives.  It is not, in the long term, about suppressing fossil-fuel energy prices.   These prices will rise given the transition to renewable energy sources.  The objective is to smooth out spikes to provide certainty to consumers and protect them from high prices during periods of high demand. It is further intended to ensure that no one profiteers selling a public good. 

The first step is to acknowledge the principle that energy prices should be regulated (in Slovenia they are debating price controls on petrol); that energy is a public good, vital to the functioning of a productive economy and household welfare.

Once we have accepted this common-sense proposition, we can figure out the best way to achieve that.

And the great thing is that we don’t need an emergency budget to introduce price regulation.  So what’s the hold up? 

The Inflation Dividend

Public finances are, so far, holding up reasonably well.  Tax revenues are rising on the back of economic activity and higher prices.  For instance, as prices rise, so do indirect taxes.  This has been coupled with reduced expenditure – driven mainly by the withdrawal of pandemic supports and the continued fall in unemployment.

All this makes for an ‘inflation dividend’ – the unanticipated upturn in the Exchequer’s balance sheet. 

In April, the Government estimated that it would run a deficit of €1.9 billion this year.  The recent ESRI quarterly commentary now estimates the Government will actually have a €1.6 billion surplus.  Next year, the think tank estimates a surplus of €3.2 billion – nearly three times what the Government estimated.  There is also the Covid contingency fund which the government set up to meet potential ongoing pandemic costs.  This €4 billion fund has not been exhausted. 

We should be cautious about any estimate.  Such is the volatility in the economy and the potential for further disruptions, projections can swing significantly even within a few weeks.  However, whatever about the numbers, it is reasonable to conclude that public finances are moving into surplus much sooner than expected.

So what do we do with this extra money?  We could pay down debt but our debt levels are already average by Eurozone standards and interest rate increases won’t really start impacting the Government’s balance sheet until the end of the decade.

We could set up a rainy-day fund, especially given our fiscal over-reliance on a handful of multi-nationals.  However, we already have a rainy-day fund – in the form of cash balances held by the Government.  While much of this cash is used as a buffer for cash-flow purposes, we held €27 billion at the beginning of this year.   

Given the debilitating impact on households and businesses from the current inflation crisis, the €1.6 billion projected surplus should be treated as a ‘dividend’, to be paid out in anti-inflation measures.  That’s the budget for relief measures. 

This doesn’t tell us what are the most efficient and socially equitable measures to take but it gives us a price tag:

• Increased social transfers, including significant increases in the Working Family Payment thresholds. The Back-to-School Allowance could be extended to all households.  There could be a significant increase in prescription medicine subsidies, coupled with drug price controls.

• Resources to reduce the cost of public services would also play a role in this dividend. A reduction in public transport fares (why not try, even on a pilot basis, the German example where €9 per month gets you free access to all public transport), and a 50 percent cut in childcare fees (cheaper than you think) would be just two of many measures.

This dividend should be seen as additional to measures the Government would have implemented regardless of the crisis:  social protection and public service increases, inflation-indexing tax thresholds, public sector pay, etc.

For those who worry about the impact of a €1.6 billion anti-inflation package on public finances, they needn’t.  The €1.6 billion is just the gross cost.  Every expenditure drives up tax revenue.  For instance, an increase in social transfers increases income tax revenue (social insurance benefits are taxable) while boosting consumption taxes.  If we reduce childcare fees that money doesn’t go into a black hole.  Households will spend most of it in the rest of the economy, again driving tax revenue.  The cost to the Exchequer of a €1.6 anti-inflation package will, in net terms, be considerably less.

But we need a more invigorated debate on the current crisis.  It needs to go beyond just cash transfers, though that is an important element.  The role of wages, price controls and the transformation of public services into universal basic services should be part of any sophisticated, multi-prong and medium-term strategy. 

And that should start immediately and not wait for the October budget.

Modelling a New Collective Bargaining Framework

Here is a link to my presentation to the Nevin Economic Reserch Institute Labour Market Conference which was held on Tuesday, June 14th: Modelling a New Collective Bargaining Framework.

 

It argues for a new collective bargaining framework that can vindicate employees' right to collective bargaining. Using international examples it covers firm-level and sectoral collective bargaining proposals, along with Right to Organise measures. It can hopefully be used as a basis for a wider discussion among trade unionists and progressives regarding the democratic reforms needed to ensure employees have access to collective bargaining.

 

Don’t Lower Wage Expectations. Raise Them!

Ibec’s Danny McCoy stated:

‘The most catastrophic mistake would be to try to index wage increases to price increases.’

Why?  I suppose it has something to do with that wage-price spiral notion – the idea that wage increases to protect people from inflation will drive further inflation. There’s not much evidence for this, though.  Recently, a senior economist at the IMF dismissed the idea. 

‘A leading economist from the International Monetary Fund (IMF) has dismissed concerns that wage increases to help workers deal with rising living costs will spark a wage-price spiral.  Gita Gopinath, first deputy managing director at the IMF, said during a panel discussion at the World Economic Forum in Davos on Wednesday that it is possible that wages could rise without driving inflation higher, with company profits declining instead.’

Oh, so maybe it’s not about wages and prices at all.  Maybe its about profits.  That’s what Aiden Regan thinks.  Writing in the Business Post, Aiden explains.

‘. . . wages are not responsible for price increases today.  On the contrary: increased corporate profits are.  Big corporations with pricing power are taking advantage of supply chain bottlenecks and increasing prices over and above their labour and non-wage costs.  This corporate profiteering coupled with rising energy prices, is what’s mostly responsible for the price increases that have occurred in the post-pandemic recovery period.’

In the US, the Economic Policy Institute estimates that in the six quarters to the end of 2021, profits contributed 54 percent to unit price increases with non-labour costs contributing 38 percent.  Unit labour costs contributed only 8 percent.  Fortune, the business publication, headlined a recent article:

‘U.S. companies post their biggest profit growth in decades by jacking up prices during the pandemic’.

Is this happening here?  We don’t know. Irish data is not reliable due to multi-national accounting distortions (i.e. tax haven-type activities).  The data coming from our peer group in the EU (other high-income countries) can give us a better read. 

In the two years during the pandemic, profits in non-financial companies grew at nearly twice the rate as wages.  This was a turnaround from the preceding two years – 2017-2019 – when wage growth outstripped profits.   It is likely that Irish profit growth mirrors the wider European trend, if not exceeding it, given the weakness in Irish labour’s bargaining power. 

It certainly does appear that energy companies are benefitting.  Minister for Finance Paschal Donohoe stated that officials in his department ‘are evaluating the potential for such a proposal’ – that is, an excess profits tax.   A 10 per cent tax would generate €60 million, based on energy providers' 2020 tax returns. This implies that energy companies have pulled in €600 million in excess profits.  It would be interesting to make similar investigations throughout sectors where prices are also rising significantly.

There is, though, considerable pessimism regarding the possibility of obtaining wage increases to help off-set the impact of inflation.  The Central Bank recently published the results of a survey of people’s wage expectations over the next year.

Slightly over half expect wages to stay about the same.  While 31 percent expect a slight increase in earnings (with 2 percent expecting a lot) 14 percent expect a fall.  This pessimism is growing.  The same survey showed that only two months previously, in February, only 7.7 percent expected a decrease.

Wage falls and effective wage freezes will only exacerbate consumer spending in a high inflation environment.  And the National Competitiveness and Productivity Council warned about this impact on consumer spending. 

“Domestically focused SMEs can also be negatively impacted by lower discretionary consumer spending, as Irish individuals are forced to allocate more of their household budget to the essential goods and services whose prices have risen.”

So, pessimistic wage expectations and negative impacts arising from such pessimism.  Mark Paul makes some provocative comments: 

“Policymakers need to start coming up with better answers for workers than lumping responsibility on to their shoulders for a phenomenon — inflation — of which they are more victims than perpetrators . . . Some major corporate entities are pushing through price increases but also promising shareholders they will resume or increase dividends. It is increasingly difficult to preach pay restraint to workers when many captains of industry, and the investors for whom they work, remain so well paid . . . There is little evidence so far of any wage-price spirals in Ireland or anywhere in Europe. But there is plenty of evidence that profitable employers will have to get real on pay.”

So what should be the response?  Raise wage expectations.  Act on those expectations.  Join a union.  Make pay demands.  Wage increases will be good for the economy. 

The Government could kick start this by doing two things:  capping energy prices and providing a supplemental increase in the national minimum wage (France and Belgium did this a few months ago).  This would show the Government is attempting to get to grips with prices and living standards.

It’s not the only things they should do.  But it would be a good start.

The Emerging Transformation

There is an emerging transformation in the workplace.  Whether that transformation will be realised, even partially, cannot yet be determined. It is still early days. New trends, new demands, new expectations, many coming out of the pandemic experience, have the potential to significantly alter people’s relationship with and within the workplace, substantially improving life quality and opportunity.

There are at least five new trends and demands: 

• The Living Wage
• Remote working
• The 4-day working week,
• The social wage
• Collective bargaining

Let’s go through each of these to find out where they stand now.

Living Wage

The momentum towards a Living Wage appears irresistible.  During the pandemic, low-paid workers were popularly seen as the bulwark of the productive economy.  In the Programme for Government, the coalition parties committed to moving towards a Living Wage over the lifetime of the current Dail.  Recently, the Tánaiste reiterated this commitment:

‘The Irish Government will be among the early movers in adopting a national, mandatory living wage. I intend to honour the Programme for Government commitment that we should do so.’

He further announced that he had received recommendations from the Low Pay Commission regarding the implementation of the Living Wage and that he would bring specific proposals to government before the summer recess.

But before we assume that the national minimum wage will increase from €10.50 per hour to €12.90, in line with the Living Wage Technical Group’s estimate, there are some complexities in setting and implementing a Living Wage.

The Tánaiste recognised this when he outlined two approaches.  One is the basket of goods and services approach, similar to the Living Wage Technical Group’s, whereby necessary items are priced to ensure an agreed standard of living.  The second is the fixed threshold approach - setting a statutory floor as a percentage of the median wage.  And then there’s the issue of phasing in the new wage floor.  We should know what approach the Government intends to adopt in a few weeks.

But be prepared for considerable resistance from owner-management interests.  For a Living Wage challenges the exploitative business model that exists in many sectors.  This will require us to challenge assertions that ‘business can’t afford it’, that it will undermine competitiveness, or other such self-serving claims.  Progressives and trade unionists need to fully enter this debate – not just on the basis of rights and living standards, but on the increased business efficiency which a Living Wage would promote.

Remote Working

During the pandemic remote working was not only a necessity to keep sectors and enterprises functioning, it became hugely popular.  Prior to the pandemic only 8 percent worked remotely.  This increased to nearly 40 percent in 2020/21.  Unsurprisingly, over 90 percent of people working remotely – fully or in hybrid arrangements involving home, hub and office – claimed they were satisfied or very satisfied.

With workplaces re-opening, the issue is now asserting the right to hybrid working – partially working from home, from the workplace, and/or from a work hub.

However, the Government’s first attempt to introduce a statutory right to remote/hybrid working was widely ridiculed.  ICTU stated:

‘. . . the proposed legislation published by Government is fundamentally flawed and stacked in favour of the employer. It is in clear conflict with national policy to facilitate remote working and current labour market realities.’

A major sticking point is the numerous grounds on which employers can deny a request for remote working (13) and the lack of an appeals process.  Some called the government’s legislation ‘the right to be refused remote working’.  The Government beat a tactical retreat, stressing that it will be open to amendments and changes to the legislation. 

A set of proposals worth examining has come from Niamh Egleston and Alan Eustace of TCD.  They propose (here and here and here):

• Employees may request flexible working arrangements of any kind without penalisation nor discrimination

• In particular, employees are entitled to take up to 150 days working from home per annum, provided they give at least 48 hours’ notice

• Employers may refuse to allow an employee to work from home on any given day, provided they give the employee specified reasons for this refusal

• Employees are entitled to challenge the refusal to an independent statutory agency, in which circumstances the burden on justifying the refusal lies on the employer

This would give people an entitlement of approximately three days a week remote working with the burden of explaining their decision resting on the employer.

The 4-Day Working Week

There is growing interest in the 4-day working week.  In Ireland, a pilot of 17 companies is commencing while internationally the number of state or company-sponsored trials is increasing.  Every week there is news of a new and successful experiment in 4-day working.

The 4-day working week is shorthand for reduction in working hours without loss of pay.  More precisely, campaigners use the formulation 100:80:100:  100 percent of the pay for 80 percent of the hours with 100 percent of the output. There are two key points here.

• First, the reduction of hours should not result in a loss of productivity. To date, studies have shown that reduced hours have led to an increase in ‘per-unit’ productivity.  However, this doesn’t mean that enterprises can maintain the overall level of productivity with hours being reduced by 20 percent.

• Second, a reduction of working hours will impact companies and sectors in different ways. A ‘4-day working week’ does not necessarily mean a three-day weekend for every worker.  It could mean reducing full-time hours from eight to six hours a day; longer holidays; flexible rota and shift work.

However, the results are coming in.  The ILO states:

‘. . . shorter working hours are positively associated with higher labour productivity per hour due to reduced fatigue, increased worker motivation, decreased absenteeism, lower risks of mistakes and accidents at work, and reduced employee turnover. Shorter working hours are also likely to reduce occupational health problems and associated health-care costs and to improve workers’ work–life balance, especially for those workers working excessively long hours. A reduction in working hours, such as a shorter full-time workweek, would also directly address the issue of “time poverty” . . . ‘

A shorter working week could make a significant contribution to reducing the impact of climate change.  The Guardian reported a study in the UK that estimated that

‘. . . moving to a four-day week by 2025 would shrink the UK’s emissions by 127m tonnes, a reduction of more than 20% and equivalent to taking the country’s entire private car fleet off the road.’

The Government has made a minimal contribution to the debate over a reduced working week.  The Department of the Environment is seeking proposals on the feasibility and implications of moving its staff to a four-day working week.  Along with the Department of Enterprise it will fund research into the economic, social and environmental impact of a four-day working week in the Irish economy. 

What is needed is a clear policy objective of reducing working hours consistent with the campaign’s 100:80:100.  This needs to be followed up by a significant state-sponsored trial of how this might work in all the sectors of the economy, with a post-trial assessment of productivity, firm performance, employee health and life satisfaction, carbon reduction and all the elements that a four-day working week would impact.

The Social Wage

The Social Wage refers to the in-work benefits that employees receive; namely, PRSI benefits.  In many instances, employees will receive company- specific benefits (sick pay scheme, maternity pay top-ups, etc.).  However, these are usually associated with high-income companies in the ICT, financial, professional and modern manufacturing sectors.  For example, some companies offer a sick-pay scheme, but most private sector employees don’t have access to such a scheme.    The Social Wage refers to benefits that all employees receive arising from their PRSI contributions. 

 A comprehensive reform of the Social Wage would see a range of in-work benefits converted to pay-related benefits.  In its submission to the Commission on Taxation and Social Welfare SIPTU put forward a range of proposals:

• Jobseekers’ Benefit to become pay-related - 70 per cent of previous earnings

• The Government is introducing pay-related sick-pay but only for 10 days per year and at 70 percent of earnings. This should be extended, in line with other EU countries to 100 per cent of earnings for four weeks within each year. Following the first four weeks, Illness Benefit should be 70 per cent of earnings for up to one year.

• Maternity and Paternity Benefit to be paid at 100 per cent of earnings. A First Year Benefit would allow a parent to take leave for the remainder of the year at 50 per cent of previous earnings. Parent’s Benefit to be paid at 50 per cent of previous earnings for the entire period of leave for Parents’ and Parental Leave.

• All benefits for those unable to work (e.g. Invalidity Pension), should be paid at 70 per cent of previous earnings.

This would provide security for employees during periods of temporary unemployment, illness, family formation, and disability and injury.  There is already movement in some of these areas:  the Government’s new sick-pay scheme referred to above; moves to introduce some type of pay-related element to unemployment benefit; and additional days of parental leave (but unpaid). 

A more comprehensive reform would strengthen the safety net in the workplace and provide security for people in-work.

Collective Bargaining

Last, but certainly not least, is collective bargaining.  Indeed, collective bargaining is the foundation for all the trends and proposals above.  It would help protect the low-paid from work intensification and loss of benefits during the drive to a Living Wage and help prevent employers from issuing frivolous rejections of remote working.  Further, through negotiations, collective bargaining can help ensure that the transition to a 4-day working week and a higher social wage is phased in as efficiently and equitably as possible with the least disruption. 

A key issue is the treatment of gig, or platform, workers along with bogus self-employed.  Though legislation will be necessary, there is much that collective bargaining – especially at the sectoral level – can achieve in promoting the rights, income certainty and living standards of these workers.

We have already seen the benefits of campaigning trade unionism in the example of the Financial Services Union demands for the ‘right to disconnect’.  It led to the introduction of a Code of Practice.  However, it also shows the need for collective representation and agreements to ensure that the code is properly implemented in the workplace.

An overwhelming majority of people believe employees should have the right to collective bargaining.  In a poll commissioned by the Financial Services Union and carried out by Ireland Thinks, the following question was put:

‘Currently employers are not legally obliged to negotiate with the trade unions of their employees. Should employers be legally required to negotiate with their trade unions if employees wish them to do so?’

74 percent agreed that employers should be legally required to negotiate with employees with only 17 percent disagreeing.  This is a substantial majority.

In a recent UCD survey of attitudes towards trade unions in the workplace, people who were not members of a trade union were asked if a vote to establish a union was held in their organisation, would they vote to establish a union.  44 percent said yes.  That’s in addition to the 28 percent who are already members of a union and 16 percent who used to be. 

What was interesting in this survey is that 51 percent of women non-members would vote to establish a union.  More interesting, two-thirds of young people (16-24 years) would support a union in their workplace.

The recent Citizen’s Assembly on Gender Equality called on the Government to establish:

‘. . . a legal right to collective bargaining to improve wages, working conditions and rights in all sectors.’

And the EU Directive on Minimum Wages will require governments to develop specific and concrete policies to raise collective bargaining coverage to between 70 and 80 percent of all employees (only 30 percent of employees are currently covered by a collective agreement).

Not only is there a clear majority for a statutory right to collective bargaining; there is also a desire among people to be represented by unions in their workplace.  The question is whether this government will vindicate that right or whether we will have to wait for another, progressive government to do this

 ***

Were the above reforms implemented in full, it would transform the workplace:  the elimination of low pay, greater work-life balance through remote working and the 4-day working week, greater security through a robust social wage, and greater power to influence decisions in the workplace through collective bargaining.

To realise this transformation, we need three things:

• First, a road map: if we are to achieve these demands, we need a roadmap of action over the next few years to show how they can be implemented. Any one reform would test the adaptability of our enterprise base; implementing them all together would be even more challenging.  All stakeholders – employees, employers and the government – will need to know what to expect and how, together, the reforms can be embedded into a new model of work.

• Second, we need to show how each of these reforms will actually boost economic and enterprise performance. For instance, the National Competitiveness and Productivity Council referred to studies showing that remote working improves productivity in the right policy context. A Living Wage can reduce staff-turnover, recruitment and retention costs while promoting output per the Fair Wage-Effort thesis.  The National Centre for Partnership and Performance shows the productivity enhancements of collective bargaining and greater employee participation in decision-making at firm level.

• Third, we need a new and inclusive narrative. Some of the reforms will appeal to different employees:  Living Wage for low-paid workers; remote working for those whose work can facilitate that; a 4-day working week for full-time employees with many part-time workers wanting more hours (nearly 80,000 part-time workers are under-employed, while over 200,000 would like to work but are not counted in our unemployment stats).

The trade union movement should lead this new narrative as it can develop a platform of different demands that can appeal to the widest alliance of workers.

This is one of the key challenges of the decade – to transform the workplace into a space that provides a decent living standard, greater work-life balance and more personal time; ensures a higher level of security; and empowers employees to exert more influence over what happens in the workplace.

But let’s not assume that ‘common sense’ will propel these transformations.  We can marshal all the arguments but ultimately this is about power in the workplace.  Owners and management have historically shown that they are willing to sacrifice the interests of the enterprise in order to maintain their power.

The momentum is with us – for the time being.   While history can, from time to time, open up windows, these openings may not last long before inertia or powerful antagonistic forces close them again. So we need to act now and climb through the windows before the shutters come down.

Why We Don't Need More Elon Musks

Greg Bensinger has some strong words.

‘Twitter’s board of directors [decision] to accept a takeover bid from Elon Musk means the company thinks the social media company would be best served by the ownership of a man who uses the platform to slime his critics, body-shame people, defy securities laws and relentlessly hawk cryptocurrencies.’

He goes on to highlight Musk’s corporate track record.  During the pandemic and lockdowns, Musk forced Tesla workers back to work, violating local health regulation.  The same company has been the subject of allegations of racist abuse, discrimination, and sexual harassment.  Similar allegations occurred among SpaceX employees.  A California regulator sued the company over reports of racial discrimination against hundreds of employees [Musk told the workers to be ‘thick-skinned’].  Is anyone surprised that Musk was found guilty of threatening people – even illegally firing one – for attempting to organise a union at Tesla?

But, hey, isn’t our Elon an ‘entrepreneur’ – mercurial, maybe; but a visionary, an example of what the private sector can do if only those darn government regulators would get off its and his back? 

No. 

The classic definition of entrepreneur, first formulated by Kerry-born economist Richard Cantillon in the 18^th century, is someone who organises and risks their own money pursuing a business venture.   

This is not what Elon Musk does.   He has built a career living off other people’s money; notably, the US taxpayer.  He is a sponge capitalist, soaking up whatever public subsidy is going.  His reliance on government handouts is chronic and long-standing.  There’s just one twist:  the public pays the money and he keeps the profit.

[Note:  sponge capitalism should not be confused with SpongeBob SquarePants which apparently contains many anti-capitalist messages.]

Let’s start with the now famous Los Angeles Times investigation into Musk’s financing. 

‘Elon Musk has built a multibillion-dollar fortune running companies that make electric cars, sell solar panels and launch rockets into space.  And he’s built those companies with the help of billions in government subsidies.’

Jerry Hirsch compiled data showing that, by 2015, Tesla, SolarCity and Space X received nearly $5 billion government (US) subsidies.  This included grants, tax breaks, factory construction, discounted loans, and environmental credits and rebates.  Some of these are subsidies are particularly remarkable.  Again, according to Hirsch writing in 2015:

‘New York state is spending $750 million to build a solar panel factory in Buffalo for SolarCity. The San Mateo, Calif.-based company will lease the plant for $1 a year. It will not pay property taxes for a decade, which would otherwise total an estimated $260 million.’

A $1 lease and no property tax.  And Nevada agreed to provide Tesla with $1.3 billion in incentives to help build a massive battery factory near Reno.

And none of this accounts for the $5 billion-plus in public procurement contracts Musk’s companies received.  No wonder a hedge fund manager stated:

‘Government support is a theme of [Musk’s] companies, and without it none of them would be around’.

All that comes from a 2015 investigation.  What has our Elon been up to since then?  Old habits are hard to break. Business Insider points out that Musk received a public sector contract last year from NASA worth $2.9 billion to bring "commercial" humans to the moon.  He got another contract worth $653 million from the US Air Force in 2020.  And while Tesla was grabbing some of the stimulus corporate grants during the pandemic in 2020, Musk tweeted that a government stimulus is not in the best interests of people. 

Jacob Silverman identifies more public subsides:

‘[A government] program designed to spur new investment in impoverished areas has done little of the sort, instead providing tax breaks for space-travel moguls like Musk, Jeff Bezos, and Richard Branson. The Qualified Opportunity Zones program has been criticized for doling out its benefits to huge businesses seeking the latest tax advantage, rather than the scrappy local entrepreneurs it was supposed to help . . .  By moving to Texas and pushing more of his money into opportunity-zone ventures, Elon Musk may save billions in taxes.’

Silverman also doubts Musk’s entrepreneurial foundation:

‘It’s entirely possible that this carnival barker of a CEO will continue finding crafty ways to extract tax breaks and favorable contracts from government entities for the rest of his career. But we should be alive to the ways in which Musk’s reputation is built on a faulty foundation of borrowed money and worker exploitation . . . For all his supposed brilliance in developing electric vehicles and rockets, this may be his greatest talent: grifting the government.’

What lessons can we draw from all this?  Going beyond Musk-bashing, there are three issues.

First, if investors should be rewarded for the proportion of resources they put into a venture (a simple business maxim), this should be applied to taxpayers’ money.  If a public agency provides a subsidy - either through direct grants, tax breaks or an in-kind contribution – they should receive a proportionate amount of equity or stake in the company or venture.  This is a simple business maxim.  We wouldn’t expect the private sector to invest without any stake.  Why do we allow this to happen with the public sector?

Second, public procurement contracts should come with clauses regulating best-practice behaviour. How can public agencies award contracts to businesses that are being sued by public agencies for discrimination, that break labour laws, and whose executives conduct themselves publicly in shameless attacks on individuals?  Public procurement should be a tool to create high-road, efficient and socially-responsible companies that are democratically accountable.

Third, yes, we need entrepreneurship (however that is defined) and entrepreneurs.  That is why we need greater democracy in the workplace and more employee involvement in the firm-level decision-making process.  We need to mobilise the ideas and contributions of people working across the economy – something that doesn’t happen now because capital, not labour, is privileged; companies are organised around top-down hierarchical structures; and people are just treated as just another commodity or input.  Instead of celebrating publicly-subsidised, bonus-soaked CEOs and owners, we should be acclaiming the entrepreneurial abilities of all workers, and pursuing policies that promote them.   

We need direct returns on public investment, more efficient and socially-responsible companies, we need more entrepreneurs.

That’s why we don’t need more Elon Musks.

Public Sector Pay and Facts of Life

Pat Leahy, in describing the ‘intricate dance of the pay deal’ (referring to the upcoming negotiations over a new public sector pay deal), refers to the ‘hefty public sector (pay) premium’:

‘When it comes to average rates of pay it’s a fact of life that public sector workers are better paid than their private sector counterparts . . . ‘

Better paid?  A fact of life?  Hardly.  This particular fact is not a fact at all. 

The CSO publishes average rates of private and public sector pay from its Labour Force Survey (Table EHQ08). 

Pre-pandemic, public sector pay was 35.4 percent higher than private sector pay, while last year this gap was closed to 30.5 percent (though pandemic wage volatility may not have fully washed out).  So does this prove the ‘fact of life’?  No.

The most fundamental rule of comparisons is that they must be done on a like-for-like basis – otherwise, you could end up with apples, oranges and mangoes.  For instance, in the public sector there are no occupations comparable to hospitality and retail.  Conversely, there are no equivalent occupations such as Gardai and defence forces in the private sector. 

Mr. Leahy seems to get some of this. He points out that large enterprises pay more than small ones, and that there is a premium associated with trade union membership – things that characterise the public sector.  Fortunately, we don’t have to rely on anecdote or intuition.

The CSO has done (on three occasions) a like-for-like comparison between public and private sector pay.  

In 2018, public sector pay was, on average, nearly 4 percent below private sector pay.  There was a public sector premium back in 2011 but at 3 percent, it could hardly be described as ‘hefty’.  The ‘fact of life’ that public sector pay is higher than private sector pay hasn’t effectively been a ‘fact’ for years.

Why the difference between the straight comparison between public and private sector pay and the like-for-like comparison?  In producing the latter, the CSO does a deep-dive into the variables that impact on the differential:

• Gender
• Nationality
• Age
• Full-time/Part-time status
• Supervisor status
• Temporary/Permanent status
• Shift work status
• Usual Hours worked
• Overtime Hours
• Length of service with current employer
• Union Membership Status
• Occupation
• Size of Enterprise

While overall public sector workers earn nearly 4 percent below their like-for-like counterparts in the private sector, the gaps widen when we focus on gender.

• Males in the public sector earn 10.3 percent less than their private sector counterparts
• Females in the public sector earn 3.3 percent more

For males, that is quite a gap.  For females, the public sector still retains a small (not hefty) premium but this may be due to the fact that the public sector has been more successful in reducing the gender pay gap. 

• Total gender pay gap throughout the economy: 3 percent
• Private sector gender pay gap: 0 percent
• Public sector gender pay gap: 1 percent

A contributing factor to the low (but still too high) gender pay gap in the public sector is collective bargaining – something that exists throughout the public sector but which private sector workers are largely denied.  It should also be noted that the gender pay gap in the Irish public sector is the 6^th lowest in the EU.   However, the Irish private sector pay gap is the 8^th highest. 

The latest like-for-like data we have is from 2018.  What’s happened since then?  We have to be careful regarding data for 2020 and 2021 given the pandemic-impact on the composition of the labour market.

Private sector pay has increased at nearly twice the rate of the public sector.  However, some of this increase could be compositional change (e.g. fewer hospitality workers would slightly increase the overall percentage increase in the private sector).  However, we can safely say that public sector weekly earnings are, on average, not keeping up with private sector earnings.

* * *

None of the above is intended to suggest what pay increase either public or private sector workers should receive this year or next.  It is only intended to show that the so-called ‘fact of life’ – namely, that public sector workers earn more than private sector workers – is clearly and demonstrably wrong. 

It is imperative that commentators and analysts should, when making public statements, attempt to accurately describe the context.  This doesn’t mean we will all agree on the optimal policy position.  However, misstatements of facts skewer and degrade the public debate, and can potentially lead to socially inequitable and economically inefficient outcomes.

The remedy?  Do a little research.

Cutting VAT Will Be Regressive

The Government is proposing to reduce the VAT rate on domestic energy products.  This is likely to lead to more cash handouts to higher income groups as energy consumption increases as household income increases.

This data comes from the 2015/16 Household Budget Survey.  The nominal amounts will have changed.  However, the ratios are likely to be similar today.  The highest income decile spends, on average, nearly a third more than the average and nearly twice as much as the lowest decile.

Since VAT is a tax on spending, it will rise with the level of consumption.  Therefore, a cut in VAT will reflect that consumption structure.  Let’s get a sense of this by selecting some examples from Bonkers.ie based on the Regulator’s estimate of median household consumption.  In these examples, we estimate the annual cash benefit to households.

The regulator estimates that the median level of electricity consumption is 3,500 kWh annually.  50 percent of households consume less than this, 50 percent consume more.  Reducing the VAT rate from 13.5 percent to 9 percent would mean an average savings of €54 per year.  For those consuming lower amounts (e.g. 2/3 of the median), the savings would be €40.  But for those with higher consumption, the savings could rise to €94 and up to €134 for very high consumers.

We can do the same exercise with gas.

Again, using the regulator’s gas average consumption estimate, we get the same ratios.

Overall, combining the savings from cutting VAT on electricity and gas from 13.5 percent to 9 percent, we find:

• Average consumers will benefit by €110 annually
• High consuming households will benefit by €196
• Very high consuming household will benefit by €284
• Low consuming households, however, will benefit by €78.

These should be treated indicatively as savings will vary with provider and the energy plan a household is on.  However, this is the broad ballpark.

It shouldn’t be surprising.  The more you consume, the more VAT you pay.  Therefore, a reduction in VAT (equivalent to a cut of a third in the VAT rate) is likely to benefit higher consumption.

This is hardly equitable.  A better course – if one is determined distribute resources to households via this method - is to distribute an equal amount to each household.  This would be similar to the way the Government credited energy bills in their first round of reliefs.  A credit of approximately €110 to each household would be more progressive – giving extra benefit to half of all households (those consuming below the median), with no additional benefit because a household consumes more.

This course, while being more progressive, would cost approximately the same as cutting VAT for the full year. 

Of course, an even better way would be for the Government to regulate energy prices as discussed here, or set a wage increase target as discussed here.  Instead of reducing the tax yield as a VAT cut would do, a wage increase would increase tax revenue – revenue which the Government could use to help focus resources on fixed-income households (social protection and pensions).  Further, even a small wage increase such as 1 percent would benefit low and average-income earners far more than a VAT cut.

Understandably, the Government wants to be seen as being pro-active, helping out households.  The optics of cutting VAT can look positive. And it can be done quickly.  However, when we look under the hood, we find that cutting VAT could be regressive in cash terms.

We need a better, more progressive and fiscally efficient approach.

Wages are Part of the Solution

Unsurprisingly, wages are struggling to keep up with inflation.  Despite pay rises over the last year, inflation is running so high that, after inflation, wages are falling.  This is called real wages – the real meaning ‘after inflation’.

Between the last quarter of 2020 and the last quarter of 2021, hourly wages rose by 2.6 percent.  However, inflation during this period ran at 5.4 percent.  This means that, in real terms, wages fell by 2.8 percent.

Wage rises differ from sector to sector.  Average real hourly wages fell by nearly 11 percent in the utilities sector (electricity, gas, water and waste) while mining workers managed a marginal increase.  However, sectoral breakdowns have to be treated cautiously.

• Utility workers didn’t’ actually receive real wage cuts of 11 percent. More likely the composition between highly paid energy workers and low-paid waste workers changed.  

• Public Administration workers saw their nominal wages (before inflation) rise by nearly 5 percent. Again, we may be seeing compositional changes at work within higher and lower paid workers.

• Hospitality wages could still be impacted by pandemic volatility.

Despite the caveats at sectoral level, at national level the differences should wash out.  And that shows, on average, a real wage cut of 2.8 percent.

Another way of measuring the impact of inflation on wage income is to look at weekly earnings.

This tells a similar story.  On average, real weekly wages fell by 3.4 percent in real terms, indicating a marginal fall in the hours worked per week.  Arts & Recreation along with Administrative Services experienced a real wage increase but this was due to an increase in hours worked. 

Back in January the Tánaiste stated that workers should receive pay rises from companies to help deal with the rising cost of living, calling it ‘part of the solution’.  This is welcomed.  However, others have warned against wage increases feeding into a price spiral.  The Central Bank is apparently looking out for 'damaging wage increases’. 

Is there a risk that wage increases could fuel inflation?  Not for the most part.  There are two reasons:

First, we have supply-side inflation, caused by interruptions in production and supply chains throughout the world, now exacerbated by the war in Ukraine.  Increasing or cutting wages won’t produce more oil or wind (energy), steel (construction), fertilizer (agriculture), or reduce shipping costs.  The main drivers of inflation are not due to domestic demand.  That’s why inflation is going up everywhere.

Second, we have been here before.  Back in 2000 the ‘social partners’ negotiated the Programme for Prosperity and Fairness (PPF) which provided a pay increase of 5.5 percent in 2000 and again in 2001, followed by a 4 percent increase the following year.  However, inflation unexpectedly spiked at nearly 7 percent in October 2000.  Unions demanded a re-negotiation and received an additional 2 percent in 2001 and a further 1 percent in 2002.  Did this ‘fuel’ inflation?  No. 

In October 2001 inflation fell to 4.3 percent and by October 2003 it fell to a normal 2.3 percent.  The combined additional 3 percent pay rises didn’t fuel inflation.  Inflation fell regardless of the pay increases.  This doesn’t mean that the same thing would happen today.  Inflationary experiences are different.  However, there is no automatic relationship between a pay rise and inflation.

Heavy Lifting

Wage increases can do the heavy lifting in terms of protecting people from inflation.  A one percent increase for an employee on median earnings (approximately €40,500) will net a single worker €206 after tax.  For an employee with an adult dependent, this would rise to €286.  Let’s compare that to the impact of tax cuts.  Note:  the tax cuts are based on average energy consumption for Electric Ireland, calculated from Bonkers.ie

An additional 1 percent pay increase would be of far more benefit than reducing the VAT rate on electricity or suspending the entire carbon tax on gas bills (some parties referring to carbon tax are only calling for the increase this year to be suspended, not the entire amount).

For low-paid workers (2/3 of median earnings), the pay increase would equal €190.  A VAT cut would save €35 while suspending all carbon tax would save €50 (assuming consumption at 75 percent of average).

One could include the impact of VAT and Carbon Tax cuts on petrol though there are, for many, substitution goods (e.g. public transport, use reduction), unlike domestic energy.  And there is the impact on oil-based heating; though why prices should vary so much – between €560 and €880 per 500 litres of oil – is worth asking.

Increasing pay would allow the Government to focus on those not in work such as pensioners.  It would raise revenue for the Government through higher tax receipts.  It would also raise business income as low-average income earners would likely spend the additional income.

The Government could take the lead on this, and call for a 5 percent pay increase across the economy.  This would incorporate any pay increases that were coming in any event.  Or it could call for a 2 percent increase above what was already planned by businesses.  This is what is described as a ‘pay norm’.   This would, of course, be easier to negotiate for workers under collective bargaining.

Many companies would not be able to afford this hike, but could manage some of it.  In such circumstances the Government could call for low and average-paid workers to get most of whatever benefit is available.

And if the Government fails to do this, it is always up to the opposition parties in the Dail to combine behind a private members’ motion stating that it is the will of parliament that wages rise to help alleviate the currently inflation emergency. 

Increasing wages, increasing workers’ portion of the value-added that they generate, is just one way to help get us through this crisis. It, therefore, requires an official policy to promote it.

Neither Washington Nor Moscow

(I’m stealing this title from Gavan Titley’s thoughtful contribution on the Ukrainian crisis)

At times, the debate over the Russian invasion of Ukraine reaches the bottom of the rhetorical barrel.  Some commentators portray an informed and intelligent discussion as an apology for one side or the other.  If you criticise NATO policy over the last two decades, you are a tool of Putin.  If you criticise Putin, you accept the many US-led abuses.  It is reminiscent of Albert Camus’ observation:  when I criticise Franco, I’m called a communist; when I criticise the invasion of Hungary, I’m called a stooge of Western powers.

This simplistic either/or way of looking at the world can only degrade discourse.

Smearing the Left

Some of the debate has been hijacked to score domestic political points; namely, attacking the Left for being ‘soft’ on Putin (and that’s one of the milder accusations).  Lucinda Creighton, writing in the Sunday Business Post (pay-walled) takes this point-scoring to the extreme:

‘How the left manages to excuse the egregiously indefensible [the Russian invasion}, while attributing every bad deed in the world to the US and Nato is mystifying.’

I’m sure that members of the Labour Party and Social Democrats (never mind other progressive parties) will be surprised to learn that they are Putin apologists.  But it gets worse.

‘ . . . last week the Irish People Before Profit party was protesting outside Dail Eireann against Nato.  Mick Barry, one of the party’s TDs, called for Nato to be withdrawn from eastern Europe, rather any united effort to remove Putin and his 100,000 troops from Ukraine . . . ‘

Mick Barry is more than capable of addressing this claim, but the accusation goes to the heart of debased political discourse.  One can listen to Mick’s speech in front of the Dail in a video put up on Twitter, entitled: ‘No to the Putin regime's invasion of Ukraine!’.  These are his first lines:

‘The first point that I would like to make is that we stand here as ordinary people living in Ireland, as workers and young people, as socialists and anti-war activists, and we want to express our solidarity with the workers, young people and ordinary people of Ukraine.  We stand in solidarity against what you are being put under, and your families and your friends.  The second point I want to make is that with no hesitation, no qualification whatsoever, we completely and absolutely condemn the invasion of Ukraine, the Putin regime and what they have been doing today and over the last while . . . absolutely, completely. 100 percent condemn Putin and the invasion of Ukraine.’

I don’t know how much clearer you can get.  Yet. Creighton wants to twist this into making excuses for Putin and the invasion. 

International Politics and Crazy

What irks many commentators is the idea that we should explore all the contributing factors leading up to the invasion, factors that go back years.  Jonathan Steele, writing in the Irish Times and Guardian, is worth quoting at length. He suggests that to end the crisis we must first understand Putin’s mindset: 

What happened this week is that Putin lost his patience, and his temper . . .To those who say Nato is entitled to invite any state to join, Putin argues that the “open door” policy is conditioned by a second principle, which Nato states have accepted: namely that the enhancement of a state’s security should not be to the detriment of the security of other states (such as Russia). Barack Obama put his signature to the principle at a summit of the Organisation for Security and Co-operation in Europe (OSCE). The summit’s declaration includes a wonderfully idealistic ambition: “We recommit ourselves to the vision of a free, democratic, common and indivisible Euro-Atlantic and Eurasian security community stretching from Vancouver to Vladivostok”. This echoes Mikhail Gorbachev’s plea, when the cold war division of Europe ended, for Russia and other European states to live together in a “common European home”. We now suffer in the shadow of the thwarting of that dream.

‘For Putin the OSCE statement is proof of the hypocrisy that goes back to earlier US presidents, who showed the dishonesty of Nato’s “open door” policy by rejecting Russia’s repeated feelers about joining the alliance. In his speech this week, the Russian leader said he had asked Bill Clinton about the possibility of membership but was fobbed off with the argument that Russia was too big. In 2000, during his first weeks as president, Putin was asked by David Frost on the BBC if it was possible Russia could join Nato. He replied: “I would not rule such a possibility out, if and when Russia’s views are taken into account as those of an equal partner.”

Steele is right.  We are living in the shadow of missed opportunities and geo-political manoeuvring. There was a window following the collapse of the Warsaw Pact in which a new security framework could have been devised encompassing the US, the EU and Russia.  That failure resonates today.  Yet, according to some, we should not attempt to understand the rationale of Russian state policy – a policy that goes back to Tsarist days. Instead, we are required to discuss Russian state policy in terms of Putin’s ‘madness’, ‘insanity’ ‘megalomania’. 

And here it gets worse again.  Creighton writes:

‘The truth is there is no such thing as Nato expansionism.  It is a fiction.  To claim its existence is to impose the imperialistic ambitions of Vladimir Putin on a voluntary alliance of democratic sovereign states.’

Oh.  Now we’re supposed to reject simple geographical and chronological facts.  Nato was established in 1949 with 12 members.  Three more joined in the 1950s.  But since 1955, with the exception of Spain, there was no expansion of Nato membership.  However, starting in 1999 we have seen a near doubling of membership – almost all to the east.  Prior to 1999, only one NATO country bordered Russia – Norway (and that only a slip of land below the Arctic, hardly a tactical concern).  Now there are five.  Were Ukraine to join, it would have the longest NATO border with Russia.

This is not a fiction.  But to state this is to invite the charge that we are rationalising Putin’s ‘imperialistic ambitions’. 

A Dangerous World

So where should progressives situate themselves in this debate?  Where we should always be:  supporting human rights, peace and the rule of international law, democracy and cooperation.  This leads us to utterly condemn the invasion of Ukraine and to support the strongest economic and political sanctions against the Putin regime, even to the point of the EU providing arms to the Ukrainian forces. While this may not be palatable to many (understandably), Russia will not come to the negotiating table with a view to a cease-fire and ultimate withdrawal unless Ukrainian forces can thwart the Russian military’s strategic goals.  Ireland’s role in this is to provide humanitarian and non-lethal aid to Ukraine, open our borders to refugees and give assistance to those countries bordering Ukraine who are taking in refugees, especially Poland.

But as Peter Beinart rightly puts it, because we reject Putin’s lies doesn’t mean we have to buy into the half-truths of others (and vice-versa, I might add).    This becomes important given that more and more voices are being raised in favour of Ireland joining Nato or at least evolving a closer relationship.   Beinart states:

‘Saying the US stands with Ukraine because America is committed to democracy and the “rules-based international order” is at best a half-truth. The US helps dictatorships like Saudi Arabia and the United Arab Emirates commit war crimes in Yemen, employs economic sanctions that deny people from Iran to Venezuela to Syria life-saving medicines, rips up international agreements like the Iran nuclear deal and Paris climate accords, and threatens the international criminal court if it investigates the US or Israel.’

And this is a highly abridged list.

It is a dangerous world.  While joining Nato is a legitimate position to debate, it is wholly wrong.  The US and Nato are destabilising forces in international affairs.  So is Russia.  China has so far refrained from overt military expansion (though the militarisation of the South China Seas and the threats to the people of Taiwan suggest a worrying trajectory), but their record on human rights is dismal. 

Progressives must be tribunes for people – for the Uyghurs, the Palestinians, the Rohingyas, African Americans, and so many more.  We must oppose the war machines in Yemen and the military build-ups throughout the world. We must support trade unionists and civil society activists in their struggles against oppression. We must campaign for a Europe free from weapons of mass destruction and the extension of the International Court of Justice to all countries. 

Most of all, we must argue for a new European security framework.  Ireland can help lead this debate as a ‘neutral’ country.  If, on the other side of this conflict, we return to the status quo, we only leave Russian political culture open to nationalist and militaristic influences, even after Putin.  We return to the situation that got us here today. 

Aligning with this super-power or that cannot help advance this agenda; aligning with one or other destabiliser of the international order only compromises a better mission.  That we will, depending on the issue, end up making the same arguments and engaging in temporary, tactical relationships is inevitable in a complex and dangerous world. Yesterday, Russia opposed the illegal Iraq invasion; today, the US opposes the illegal Ukraine invasion.  What should mark Ireland out is that we are consistently and, in principle, supportive of an international rule of law – something that the current regimes in US and Russia are not.    

So, neither Moscow or Washington, neither this super-power nor that; for a new European security framework from the Atlantic to the Urals and beyond – one that transcends NATO and Russian militarism. 

And the challenge today is to use all the tools at our disposal to end the invasion, to bring about a cease-fire and a withdrawal of the Russian military from Ukraine.

End the war, establish peace and implement the principle that one country cannot enhance their security at the expense of another country – something that both NATO and Russian militarism have violated.

Confronting a Higher Inflation Future

With inflation projected to climb to 4.5 percent next year, and continuing at levels in excess of pre-pandemic trends, it is time to assess the varying impacts on income groups.  Inflation affects households in different ways, depending on income and consumption patterns.  But generally low-income households will fare the worst.   Let’s see if we can estimate it.

Across the Board

The following stylised estimate comes with explanations.  First, this is not an attempt to measure inflation by income group, but rather the impact of higher prices on income levels.  Second, income and expenditure data comes from the 2016 Household Budget Survey so this data is a little out of date.  Third, this takes the 5.5 percent headline inflation rate (12 months to December) and applies it to total expenditure regardless of the composition of that spending.  Finally, the additional expenditure arising from inflation is measured against total disposable income.

This is what we find.

For the lowest-income group, inflation over the last year represents 8.5 percent of their income.  At the highest end, it represents 4.2 percent of income – or less than half the impact on the lowest income group.

This should be treated indicatively.  However, this regressive trend shouldn’t surprise us.  It is a function of higher savings at the upper levels.  For instance, a household whose expenditure is equal to revenue (i.e. they don’t save) will face the full impact of inflation as a percentage of income.  However, households that save will experience inflation as a smaller proportion of income.  For instance:

• In the highest income group, households spend 76 percent of their income

• In the 9^th decile, households spend 89 percent of their income

This doesn’t factor in income rises over the year.  And as income and spending data dates from 2016, there could be a change in the gap between highest and lowest income groups.  The CSO’s Survey on Income and Living Conditions shows that the ratio between the highest and lowest income fell.  But we should also be mindful that, were all households impacted equally, living standards for low-income households would end up worse as they would have to reduce their spending (e.g. turn off the heat in the house, consume less food) or go into debt.  Higher income households just save slightly less.

Factoring in Energy Inflation

Let’s wade a little further into the data pond and factor in the impact of domestic energy prices.  While inflation averaged 5.5 percent, energy prices (gas, electricity, other fuels) experienced a 27 percent rise.  All other goods and services rose by 3.6 percent.

If lower income groups disproportionately spend more (as a percentage of their income) on energy, then the regressive trends we saw above could be exacerbated.  And that’s exactly what happens when we factor in energy prices.

Inflation is even higher in the lowest income group, while at the highest level the impact of inflation on revenue falls.  Why does this happen?  In the lowest decile, spending on energy makes up over 9 percent of total expenditure; at the highest end this figure is 3 percent.   Therefore, we shouldn’t be surprised that inflation rises even higher for low-income groups given the level of spending on light and fuel.

However, there is a major health warning in starting a decomposition of average inflation rates.  For instance, lower income groups spend a higher proportion on food.  Food inflation over the last year has been well below the average (1.2 percent compared to an average 5.5 percent).  So if we were to factor in food inflation, we would probably see the gap between the lowest and highest income groups narrow.

[NOTE:  while over the year food inflation has been below average, in December it exceeded the average on a month-to-month basis.  If food inflation continues to trend above the average, it could be even more damaging to low-income living standards.]

* * *

Where does all this leave us? 

• First, the above is just a crude approximation.  It would be extremely helpful if the CSO disaggregated inflation by deciles and other categories (age, housing tenure, etc.) so that we could get a more informed perspective on the impact of inflation.  The ESRI could also assist using their SWITCH model.  It was only after researching this blog post that I came across this Twitter thread from Pearse Doherty, TD, who has written to the CSO seeking such an inflation breakdown. 
• Second, we will need to rethink how we redistribute income, moving away from the annual ‘here’s a fiver’ approach to social protection payments.  Even linking such payments to average inflation doesn’t take into account of the fact that inflation could be above-average for households reliant on social protection.
• Third, among households that are in formal employment, we are likely to see that inflation is higher for the low-paid.  This calls for wage and income strategies that benefit the lower-paid.
• Fourth, we need to address the structural factors in prices; otherwise we’re in danger of cash subsidies chasing prices.  Treating energy as a ‘public good’ with price regulation could help smooth out energy price cycles.  Targeting free, upfront retrofits – especially for older households and old buildings – can reduce energy consumption and, so, costs.  Reducing the costs of public services would also help drive down costs (e.g. public transport fares, as would tackling housing costs (e.g. rent freeze).

Through a range of redistribution and regulatory measures we can start to meet the challenge of a higher inflation environment. 

A good start is to get a robust analysis of inflation and living costs throughout all the different sectors of society.

* * *

NOTE:  All inflation and Household Budget data taken from CSO. I find it difficult to link individual tables within the CSO's databank.  Any suggestions would be welcome.

Anything We Can Actually Do, We Can Afford

Let’s begin 2022 on a positive, even outrageously optimistic, note. 

Yes, there’s inflation, pandemic disrepair, geo-political instability, low wages, precarious work, social deficits and increasing demands on under-funded public services.  But there will be time to depress ourselves over these.  Let’s start with a hopeful analysis.  And who better to go to than John Maynard Keynes, who said,

‘Anything we can actually do, we can afford’.

All the dire predictions of the fiscal pessimists are swept aside like so many budget begrudgeries.  Finance is an instrument, not a master.   Policy is determined by our own capacities, not by our pockets. 

‘Anything we can actually do, we can afford’ is the watchword(s) of the new political economy.

Keynes made this statement in a 1942 lecture on BBC radio.  Here is the context.

‘Let us not submit to the vile doctrine of the nineteenth century that every enterprise must justify itself in pounds, shillings and pence of cash income … Why should we not add in every substantial city the dignity of an ancient university or a European capital … an ample theater, a concert hall, a dance hall, a gallery, cafes, and so forth. Assuredly we can afford this and so much more. Anything we can actually do, we can afford . . . Yet these must be only the trimmings on the more solid, urgent and necessary outgoings on housing the people, on reconstructing industry and transport and on replanning the environment of our daily life. Not only shall we come to possess these excellent things. With a big programme carried out at a regulated pace we can hope to keep employment good for many years to come. We shall, in fact, have built our New Jerusalem . . .’

Keynes’ dictum has gained new currency during the pandemic.  Who would have thought in 2019 that we would be able to spend billions on subsidising people in work and out of work? Who would have thought that billions spent on business subsidies would not only be possible but desirable?  Who would have predicted essentially free health services and the takeover of private hospitals? 

Had you predicted  any of this in 2019 you would have been laughed out of the media studios.

‘How could we afford this?’ would have been the refrain.  And, yet, we did.

Of course, there are caveats and conditions.  Inflation is a key constraint. Keynes wrote:

‘The . . . task is to prevent a demand in excess of the physical possibilities of supply, which is the proper meaning of inflation. For the physical possibilities of supply are very far from unlimited . . . Having prepared our blue-prints, covering the whole field of our requirements and not building alone—and these can be as ambitious and glorious as the minds of our engineers and architects and social planners can conceive—those in charge must then concentrate on the vital task of central management, the pace at which the programme is put into operation, neither so slow as to cause unemployment nor so rapid as to cause inflation.‘

This has lessons for our housing programme.  The first issue is not the money but the capacity.  Do we have the labour, the supply chains, efficient public procurement rules, the land?  How does this balance with other demands for retro-fitting and other building and infrastructural projects?  And at what point does the programme start ‘over-heating’, with investment chasing prices rather than completing housing?  This should lead us to emphasise quality and long-term sustainability over setting tenuous targets.

This is about changing the debate from ‘can we afford it’ (yes, we can) to ‘can we actually do it’?  Most days I walk past St. Mary’s Mansions, a social housing estate in Dublin’s North Inner City.  It underwent a massive regeneration which resulted in the highest energy rating, new communal spaces (play areas, etc.) and new units, housing more – all for the price of €23 million; essentially pennies behind the sofa which will be recouped in the years ahead.  This could serve not only as a template for social housing, but all housing.  Dr. Rory Hearne highlights the challenges and benefits of bringing the vast number of empty and derelict housing units back into use.

The real driver of doing and affording, however, is somewhat out of our control.   The EU Commission is currently reviewing the Fiscal Rules.  A return to the old normal or a withdrawal of the ECB backstop to sovereign debt would undermine attempts to finance what is necessary.  That’s why it is imperative the Irish government support the arguments that investment – especially green investment – be exempt from deficit and debt calculations; that productive investment be central bank-financed.   It is imperative that opposition parties hold the government to account on this. Sensible fiscal rules and central bank support for investment would help ensure that what we can do, we can afford.

Even without this, the Irish government can still increase resources under the current rules (always remembering inflationary pressures), investing billions more by 2025 than what is currently projected.  Keeping growth ahead of borrowing still reduces debt, but more importantly can reduce economic inefficiency and social need. The only limitation is capacity.

This requires a different dialogue.  It requires – again, relying on Keynes – a managed 'quasi-boom', a macro-economic policy that the current Government would find difficult given their ideological blinkers (and given the main coalition parties’ track record, I’m not sure I’d like to see them try).  To meet the challenges – from post-pandemic repair, to climate chaos, automation and a low-growth future – we will need to do things differently. 

And the good news is that what we can actually do, we can afford.

Energy is a Public Good

It is time to treat energy as a public good, not a market commodity.  There are better ways to provide economic and social relief from rising energy costs than subsidising prices through fuel allowances and VAT reductions (which we all will pay for).  Regulating energy prices is the first step towards a ‘public good’ status for energy. 

Energy costs; they have spiralled upwards with further increases likely.  This is due to a range of factors largely outside the control of actors within the state. Though we are assured this spike in prices is temporary, it will be of little consolation to households and businesses facing into higher bills over the winter – especially low-income groups who pay a much larger percentage of their incomes for heat and light.

The political debate has so far revolved around subsidies through social protection payments and a temporary suspension of VAT on energy products.  While these measures would provide immediate relief, and are therefore better than nothing, they amount to subsidies to the energy companies.  When subsidies start chasing prices, costs can escalate.

The alternative is to cap energy prices.  The Government, through the Energy Regulator, could impose price ceilings on electricity and gas prices.  In this scenario, energy companies would absorb the cost of reducing energy bills to the state, households and businesses.  The Tánaiste claims this option will be considered:

‘Maximum price orders will be considered by Government to halt galloping gas and electricity costs, the Tánaiste has told the Dáil.  However, Leo Varadkar warned that energy companies were going out of business because of price caps in the UK . . . Mr Varadkar said: “We’re not going to rule out using maximum price orders.” ‘

Spain is introducing such caps while the UK has operated price ceilings since 2019.  And the cause of energy companies going out of business is not, ultimately, because of price caps but rather the long-term effect of privatising the UK energy market.   

In May of last year, the Minister for Enterprise at that time, Heather Humphreys, stated this in relation to maximum price orders for handwash and sanitiser products:

‘The power for Government . . . to fix by order the maximum price at which a product can be supplied to consumers applies only where an emergency order is in force in relation to that product . . .  if the Government are of the opinion that abnormal circumstances prevail or are likely to prevail in relation to the supply of a product, the Government may by order declare that a state of emergency affecting the supply of that product exists.’

‘Abnormal circumstances’ adequately describes the current energy market. 

If the state were to intervene in market pricing, it would need to be clear about what its objectives are.  It is not, in the long term, about suppressing fossil-fuel energy prices.   These prices will rise over the long term with the transition to renewable energy sources.  The objective is to smooth out spikes to provide certainty to consumers and protect them from high prices during  periods of high demand.  Under a price control system, price spikes are temporarily blunted and increases postponed until normal supply chains are restored and demand is reduced (e.g. into the Spring). 

This simple measure, though, begs larger questions which go beyond managing the market.   Energy – electricity, gas, petrol – is a vital public good, necessary to the very functioning of economies and societies.  Given this, there is a strong argument that the generation and distribution of energy products should be publicly managed,  if not brought into public ownership.  In the former, private ownership would continue but would operate along democratically accountable lines – not just in pricing but in investment decisions (all the more urgent given climate justice and Just Transition) and stakeholder relations. 

Michael Davies-Venn writes in the European context:

‘The urgency of decarbonising Europe requires policy consistency, not ad hoc reactions . . .  the European Council [should consider] an unorthodox solution—removing electricity as a private commodity from a liberalised market and treating it as a public good . . . The commission should allow states to (re)nationalise electricity companies, which would remove a driver of energy poverty.’

Price regulation can help reduce fuel poverty.  The Regulator could require all companies to provide the first X amount of energy (gas or electricity) free or at greatly reduced prices.  Companies could make up the difference with higher rates on energy consumption above this amount.  In this way, energy consumption would operate like the tax system,  with its tax-free credit and reduced tax rate on low incomes.  

In the long term we will experience more of these spikes and disruptive events.  With policy dictating a move away from fossil-fuel production, long-term investment will be wound down.  Winding down and shutting these plants could have severe consequences on energy supply if we don’t ensure equivalent amounts of consistent renewable energy coming on stream.  This can’t be left to market forces and market signals.  This needs to be planned. 

Ultimately, we need to see energy as a public good.  Price regulation is preferable to subsidising energy costs, though in the short term we may have to use subsidies while we establish a robust regulatory regime.

As Joseph Baines and Sandy Hager write in the UK context:

‘ . . . bringing the energy sector back under public control will redress many of the failures of privatisation. Public ownership won’t solve the problem of rising wholesale gas prices, but it would bring much-needed stability to an energy market racked by the chaos of failing private suppliers. And since public suppliers are not beholden to shareholders and pressures to pay dividends, they are better positioned to provide effective subsidies to reduce household energy bills and meaningfully invest in the renewable energy infrastructure the UK urgently needs.’

This is the destination.

Controlling Inflation

Inflation exceeded 5 percent last month according to the CSO – the highest annual rate since 2007.  What are we to make of this and what are we to do?  While high rates of inflation can be economically corrosive and usually result in real pay cuts, the primary instrument to rein in inflation – interest rates – can undermine economic growth, business activity and household living standards.  The wrong use of interest rates can prolong a recession, as happened when the ECB increased interest rates in 2011, or can even brutalise a country such as what happened in the US in the 1970s.  So before we get into a conversation around what we do about inflation, we need to discuss what we are to make of this latest data.

Inflation, until last year, was stable and low.

Between 2012 and 2016 inflation was flat.  It picked up until 2019 but only by 2 percent which was notable given the growth in employment and wages.  It fell in 2020 owing to the impact of the pandemic.  But in the last year inflation has shot up by 5.1 percent.

However, we should view the 2021 outcome with the 2020 downturn – to see if we are in a bounce-back territory.  Between 2019 and 2021 inflation rose by 3.6 percent.  This averages out at 1.8 percent over the two years.  While this is high when with the average annual increase between 2016 and 2019 (0.7 percent) it is not, yet, crisis territory.

So what has been driving inflation in the last year?  Is it sector specific or more generalised?  Here is a breakdown of the largest contributors to inflation over the last year.

Over 70 percent of inflation over the last two years has been driven by transport and energy products – essentially, fossil fuels.   Energy products and diesel increased by 26 percent last year.  But food and miscellaneous services increased by less than 0.5 percent.  Restaurants and hotels increased by 4.4 percent but we could be seeing businesses trying to recoup some of their pandemic losses. 

Are the increases in inflation – especially in energy products and transport – permanent or temporary?  Forecasting is not a science but both the Irish Central Bank and the ECB are confident it is only temporary, a perfect storm of energy supply issues, disrupted supply chains and a bounce-back after a deflationary 2020.

And we should be thankful for their confidence.  The last thing we need is for central bankers to start contemplating an interest rate rise.  This could derail recovery.  It should be remembered that just prior to the pandemic the Eurozone was flirting with another recession (Eurozone growth fell from 3.1 percent in 2017 4^th quarter to 1.2 percent on 2019 4^th quarter) while Irish growth was slowing down. 

Nonetheless, the rise in energy products is particularly concerning coming into the winter, with its impact on low-average income earners as well as the business sector.  Are we powerless in the face of this inflationary spike? 

The usual macro-economic tools to counter inflation take demand out of the economy.  This can be achieved through higher interest rates, increased taxation or reduced public spending.  In such circumstances, unemployment results.  This is the usual orthodox perspective:  trading off inflation with unemployment.   However, it is difficult to see any of these working with an inflation that is driven by energy products.  In any event, these can be highly inefficient tools resulting in considerable economic and social damage.

No, we are not powerless.  It is time we consider price controls and to start treating energy as a public good.  This will be the subject of the next post.

 

No, We are Not Becoming a 'Big State'

‘Big state’ is all the rhetorical rage.  Ireland is a ‘big state’, is becoming a ‘bigger state’, how are we going to pay for this ‘big state’, etc. etc.  The idea that spending is so large we are becoming (if we haven’t already become) a ‘big state’ has already embedded itself in the public debate. My favourite headline comes from last year:

‘How are we going to pay for the Irish big state utopia?’

The problem is that this is completely wrong.  We are not becoming a big state.  The Government is intent on maintaining our historical low-tax, low-spend, low-service model. 

There are two ways to test this ‘big state’ thesis.  First, by looking at our historical levels of tax and spend.  This shows we are returning to pre-crash levels.

In terms of spending on public services, we’re pretty much back to pre-crash levels.  Between 1995 and 2007, spending on public services averaged 18.4 percent of GNI*.  The Government is projecting public service expenditure to be 18.8 percent in 2025. In fact, the Government’s 2025 projection will put public service spending below the pre-pandemic level of 2019 which was 19.7 percent.

[Note:  the spike during the recession / austerity period does not indicate an increase in spending on public services.  During that period public service spending was cut.  The reason for the spike was that national income fell even faster.]

When it comes to primary spending (total spending excluding interest payments), again we’re pretty much back to where we started in 1995, with the same caveat about the spike during the recession/austerity period.  Spending in 2025 is projected to be lower than in 2019, the year before the pandemic hit.

When we turn to taxation, we find a similar pattern.

Once again we see that government revenue reverts back to 1995, with the 2025 projection coming in below 2019 levels.

So if we are to look at this historically, we do not find a ‘big state’ nor are we ‘becoming a big state’.  It’s the same ol’ low-tax, low-spend state that we have been mired in for decades.

The second way to test the ‘big state’ thesis is to compare our spending and taxation levels with other EU countries; specifically, our peer group in the EU – other high income economies.  In this test, while we have Irish government projections out to 2025, we don’t have projections for other EU governments.  I have used the average spend (as a percentage of GDP) between 2014 and 2019 for EU countries and assigned that to 2025. Therefore, this should be treated indicatively.

Ireland comes at the bottom of the table of our EU peer group, lagging well behind average. But as has been pointed out, Ireland doesn’t need to spend as much as other EU countries (and, so, doesn’t need to raise as much revenue) due to a lower number of pensioners.  Factoring this in would reduce the gap between Ireland and the EU peer group average by about two-thirds. Therefore: 

• For total government spending to reach the average of our EU peer group, we would have to spend an additional €9.3 billion in 2025

• For total government revenue to reach the average of our EU peer group, we’d have to increase taxes by €8.7 billion

In gross terms we would need to increase spending on public services by €9 billion in 2025 to reach our EU peer group average.  The impact of an older demographic would be balanced by the need to spend additional money on education given our youth demographic.

Whichever way you cut this, we fall well behind our peer group average.  Compared to that benchmark, we remain a low-spend, low-tax, low-service economy.

No, we are not a big state.  We are not becoming a big state.  Indeed, if the trends continue beyond 2025, we are getting smaller and smaller. 

Big state Ireland is just a myth.