Notes On The Front

Breaking from our American Dependency Model

Fair dues to the Taoiseach – escaping the White House badger pit without getting mauled.  This still leaves the outstanding question:  is our over-reliance on US multi-national investment in the long-term interests of the Irish economy?  

The first rule of investment is to spread your risk.  If you put your proverbial eggs in one basket, and that basket goes up in flames (or develops egg-sized holes) – well, it can ruin your day. 

We have a lot of eggs in the American basket.  For a long time, many of us benefitted from this – well-paying jobs, exports, tax revenue.  Now there is considerable concern over the future of that basket.   That leads us to the second rule:  things go well until they don’t.  Hence, the need to abide by the first rule.

Much attention has been paid to our trade deficit with the US.  Here is another measurement to consider:  our dependency on US multi-national investment.  This comes from Eurostat’s data on what is called ‘investment in tangible assets’.  This is primarily made up of buildings, machinery and equipment, land, etc. – things that are ‘tangible’.  It’s not the whole Foreign Direct Investment (FDI) story but, as we saw in a previous post, the CSO suggested that 76 percent of total FDI had no impact on the real economy. 

 In 2022:

• Total multi-national investment in Ireland made up 8 percent of national income (GNI*)
• Total multi-national investment in other EU small open economies made up 2.4 percent of GDP

We are often told that small open economies are necessarily reliant on foreign investment.  Yes, but there’s a small reliance and a big reliance.  Ireland is the latter.  The key point is that being a small open economy does not necessarily require a high level of multi-national investment to prosper.

Looking at where foreign investment comes from, we find that Ireland is massively over-reliant on US multinationals.

Nearly 80 percent of all multi-national investment in the Irish economy comes from the US, with only 7 percent coming from other EU countries. It’s completely different for other European small open economies:  investment from the US makes up only 16 percent while nearly 60 percent of multi-national investment comes from other EU countries.

We constantly refer to our FDI model as if it was unique.  Clearly, our extra-ordinary reliance on the US is.  But what does our model look like when we exclude US investment?

When we exclude US multi-national investment, we see that Ireland’s FDI model is not unique.  In fact, it’s not all that substantial.  Non-US multi-national investment in Ireland represents 1.7 percent of GNI*, less than the average of our peer group.

This reinforces the notion that Ireland’s FDI model is an American dependency model.

There is one more perspective.  The following examines total investment in the economy (i.e. Eurostat’s tangible assets) – both foreign and domestic. 

When we look at total investment – combining foreign and domestic – we see that we are still over-reliant on US capital.  However, investment from domestic companies is poor, making up only a third of total investment.  Among our peer group, domestic investment makes up nearly three-quarters. 

This is not a healthy balance:  a high level of dependency on one country – the US – combined with a poor level of domestic investment.  These structural flaws have been present for a long time.  So what do we need to do?

• First, Irish policy needs to spread the sources of foreign investment so that we are not reliant on one country. 

There are some who may be hoping that, if we can weather this Trump-storm for four years, normalcy will return.  There is absolutely no guarantee of this.  And even if saner heads prevail in elections four year hence, there is no guarantee that things will return to pre-Trump policies. 

• Second, we have to find ways to get our domestic capitalist class to start investing. 

This is far easier said than done.  Sean Lemass spent decades trying to get our native class to invest, expand, grow and export – and only met with limited success.

None of this can be done in the short-term.  It took a long-time to end our over-reliance on the UK market and our struggle with domestic investment is a constant.

But this is where the debate should start.  Over the long-term we need to break from our American dependency model or be prepared to be broken. In truth, we may have no choice.  Sparks are already coming from the basket.

 

Deregulating the Public Interest

The Government intends to launch a drive to ‘de-regulate’ business activity which could put the public interest at risk.  The Programme for Government is filled with commitments: 

‘. . . [reduce] the cost and regulatory burden on business . . . eliminate unnecessary bureaucracy [to]facilitate business operations . . . identify regulations that are now redundant to reduce unnecessary red tape. . . Reduce where possible the regulatory burden simplifying EU rules for the SME and farming sectors.’

With the EU Commission leading the de-regulation charge, all the chatter is about burdens, red tape, paperwork, market barriers, and so on.  Here at home the argument is that Irish business is hamstrung by over-regulation.  Remove those road-blocks and business will flourish and innovate, creating jobs and value-added. 

How likely is that?  According to Alberto Alemanno, Jean Monnet Professor of European Union Law & Policy at HEC Paris, not much – at least at a European level.

‘. . . the commission’s deregulatory turn could undermine investor confidence and regulatory stability. . . effective regulation has driven economic and social progress and bolstered the bloc’s global influence.  Massive deregulation could prove to be a self-inflicted debacle that impedes the EU’s ability to protect Europeans and severely undermine what remains of its credibility as a rule-maker. The EU’s simplification effort . . .  aims to enhance Europe’s competitiveness, but is bound to have the opposite effect.’

Nonetheless, our own Government seems to have bought into the assumption that culling regulations will boost productivity and competitiveness.  There’s just one problem with this narrative.

• Ireland already has one of the least regulated economies in the EU.

The OECD measures the regulatory impact on economies through its Product Market Regulation Database.  This covers administrative ‘burdens’, state-induced distortions, barriers to domestic and foreign entry, barriers to investment and setting up businesses costs, etc.  The following table ranks Ireland in two indicators:  overall product market regulation, and ‘Administrative Requirements for Limited Liability Companies and Personally-owned Enterprises’.  The higher the value the stronger the regulatory regime.

Ireland ranks at the bottom of administrative requirements for companies and self-employed businesses.  In terms of the overall product regulation, Ireland ranks second to the bottom. Indeed, the US – which is held up as a pro-innovative, regulation-free zone – has a stronger regulatory regime than Ireland and all other high-income EU countries, bar Luxembourg.

This hardly suggests Ireland is ‘over-regulated’.

Question:  if a ‘light’ regulatory regime produces higher productivity, why does the Irish domestic sector have such poor productivity while other small open EU economies have both stronger regulations and higher productivity?

The battleground in all this will be extremely opaque.  There are numerous regulations across a variety of dimensions, many of which impact on very detailed aspects of production, distribution, consumption, marketing, transparency.   The EU economy commissioner Valdis Dombrovskis stated:

‘Reducing unnecessarily complex EU rules is a vital part of our plan to make Europe more competitive.  This simplification agenda is not about deregulation. It is about achieving our goals in a smarter and less burdensome way.’

Who could argue with that?  However, in pursuit of ‘simplification’ we have seen in the last few weeks:

• The European Commission is seeking to remove 80 per cent of firms — around 40,000 — from an annual requirement to disclose their climate risks.

• The Commission is getting rid of mandatory penalties for companies that fail to prevent human rights or environmental abuses in their supply chain in the corporate due diligence directive. It intends further restrictions which could render the directive relatively toothless.

• The Commission intends to remove a couple of hundred thousand companies from the new carbon border tax which will now apply only to major buyers of iron, steel, aluminium, cement and fertilisers, or those importing 50 tonnes or more per year.

This is not about ‘simplification’ or ‘reducing complexity’.  This is about abolishing regulations, using exemptions and thresholds to achieve this.  The Commission estimate savings to European companies of €4 to €6 billion which, while it sounds a lot, only comes to 0.03 percent of turnover for large EU companies.  And the ‘savings’ rarely includes the cost of abolishing regulations – environmental costs, workplace abuses, etc.

Why should this matter?  Regulations operate to protect the public interest:  environment, labour conditions, workplace health and safety, consumer safety, financial transparency, and so much more.  Deregulation (or, if you prefer, ‘simplification’) could end up putting these interests at risk.

This is not about competitiveness.  It is about subordinating the public interest to corporate and oligarchical agendas. 

And if that were to happen, it would be one more bad day for democracy. 

Trump's Tariff Tantrums and Ireland's FDI Model

So Donal Trump blinked.  After all the tariff threats to Mexico and Canada, he came up with a ‘deal’ that merely repackages the status quo.  And the alleged main purpose of the tariffs – to address the US trade deficits – didn’t get a mention.  Why did Trump retreat at the last-minute retreat:   consternation from the corporate world (the Wall Street Journal called it the ‘dumbest trade war in history”); the potential impact on US inflation; the speed at which Canada and Mexico announced retaliatory measures; lack of consensus even from within the White House?

Whatever the reason, the EU Commission and the Irish government are probably feeling a little more optimistic regarding US tariff threats.  That doesn’t mean it won’t happen.  Or that the price Trump will exact won’t be onerous and dangerous.  Watch out for demands to water down the EU’s Digital Services Act and / or prohibit individual EU countries from imposing digital taxes.  But a key lesson is that, regardless of the vehemence (and in some cases unhinged) rhetoric, Trump stood down.

There is also a key lesson for Ireland.  The Irish Government is right to step up lobbying initiatives in the US.  Ireland is particularly exposed in any US-EU trade war and, with little leverage of its own, will need to work within the EU for a forceful EU response – to frighten off any US move.

But just as importantly, this should provoke a fundamental re-evaluation of our current Foreign Direct Investment (FDI) model.  Even before Trump’s tariff tantrums, analysts were warning of the challenges to our current FDI model:  slowing global growth and trade, de-globalisation, climate change, competition from other low-tax jurisdictions, international tax competition, etc.

This has now been compounded by a reckless US Presidency that has threatened Canada, Mexico, Colombia, and, in the case of China enacted, tariffs; threatened to invade Greenland and Panama; threatening ethnic cleansing in Gaza.  And if people say, well, if we can just survive the next four years, we can hopefully get back to ‘normal’; well, that didn’t work out too well when the same thing was said eight years ago.  We cannot afford the luxury of treating Trumpism as an aberration. 

A good place to start this re-evaluation is to assess how much of our current FDI is fake or ‘phantom’.  Ireland is often feted as being a giant in the FDI stakes.  In 2022, FDI made up 254 percent of GDP – four times the average EU rate.  However, the CSO found that much of this is a ‘phantom’. 

“More than a third of foreign direct investment (FDI), equating to €312 billion, is so-called "phantom" capital, passing through the jurisdiction to finance operations elsewhere, according to the Central Statistics Office.”

It gets worse. 

“When pass-through [i.e. phantom] investment, reverse investment (involving subsidiaries making payments back to the parent company), intellectual property (IP) and aircraft-leasing assets are removed, the “remaining inward FDI” accounted for €212 billion or 24 per cent of total value of FDI in 2018.”

This suggests that 76 percent of FDI coming into Ireland had almost no impact on our domestic economy.

Further, another CSO report noted that more than two-thirds (68 percent) of FDI came from just 25 multinationals, mirroring our over-reliance on corporate tax receipts.  

We need to examine the concertation of FDI.  Using Eurostat’s more realistic measurement of multi-national investment – focussing on ‘tangible assets’ (i.e. physical assets such as building, machinery, equipment) - we find:

• Multinational investment in Ireland makes up approximately 8 percent of GNI*, compared to a little over 2 percent of GDP in the EU

However, there is considerable and potentially worrying concentration.

• In the EU, 18 percent of total multinational investment comes from the US
• In Ireland, US investment makes up 79 percent

And of this massive proportion of US investment, more than two-thirds goes into the Big Tech sector. 

* * *

All this should be subject to public debate.

First, a large part of our FDI could be phantom, or fake investment.  And nearly 75 percent of FDI may have no discernible impact on the domestic economy.

Second, Ireland still receives a high level of ‘tangible’ foreign investment.  But it is highly concentrated, with US investment making up 79 percent.  And within that US envelope, more than two-thirds go to Big Tech.

Given that the US is fast becoming a highly unreliable trading, investment and international partner, this is not a good place to be.  Disentangling ourselves from this concentration, however, will not be easy. It is the product of decades of past policy, deeply embedded in our industrial policy infrastructure, with a domestic sector unable to make up but a little of that slack. 

Ireland, like other advanced market economies, will continue to need a steady flow of inward investment.  But future FDI will need to be balanced and sustainable, avoiding over-reliance on one market.  Further, FDI will need to support crucial social objectives; in particular decarbonisation and a more democratic labour market.  And it will need to be capable of developing supply chain linkages with the domestic economy rather than acting as an ‘enclave’ as the IMF once described Ireland’s FDI model.

This debate should start now.  But a crucial first step is the development of a genuine measurement of ‘real’ FDI, a kind of FDI* similar to our GNI* which removes the distorting effects of multinational legal and accounting practices.

Otherwise, the debate will be informed and tainted by headline figures that are full of phantoms and spectres.

Wage Inequality is High and Still Rising

Wage inequality in Ireland is one of the highest in the EU.  And it is rising. 

Eurostat’s Structure of Earnings Survey measures the ratio of hourly earnings between the 9^th decile (high-income) to the 1^st decile (the lowest).  Ireland has the highest wage inequality among its peer group – other high-income economies.  Within the EU, Ireland ranks the fourth most unequal, after Cyprus, Bulgaria and Latvia. 

This is not a result of the Covid / cost-of-living interventions.  High wage inequality is a chronic feature of the Irish economy.

Fo the last 20 years Irish wage inequality has been 4.0 or higher – always near the top of the inequality table.  We see wage inequality rising in 2022 to the highest since 2002.

Why does this occur?  One explanation is that because of the presence of the presence of multi-nationals in high value-added sectors such as pharmaceuticals and big Tech, we have a large share of high-waged occupations.  This explains some of this.  Ireland has the highest earnings in the 9^th decile.  But it is at the low end in the 1^st decile.  So we have high pay and low pay at the same time.

Another explanation, however, is the lack of collective bargaining rights for employees.  Collective bargaining has the effect of raising wage floors and shrinking the wage gap between the highest and lowest paid in a firm and across sectors.  Without collective bargaining, higher income groups (senior management, professionals) can secure higher earnings at the cost of lower and average paid.

Why should this matter and become a central issue on the Government’s agenda?  Because it is economically inefficient and harmful to enterprise productivity.  At the macro-economic level, low pay undermines wage-led private consumption (consumer spending).  Simply, put if low-average income groups have less income, they spend less.  However, money flowing upwards the income scale ends up in savings, benefitting the saver but not necessarily the economy; especially if the savings contributes to asset inflation (e.g. housing).  The goal of efficient macro-economic management should be greater wage equality. 

Second, large wage gaps can negatively impact productivity.  Policardo, et al. find that wage inequality leads to lower productivity while Hutter finds that structural inequality shocks have a negative impact on hours, productivity and wages. In a survey of 31 European countries Bağlıtaş estimates that a 1 percent increase in wage inequality reduces labour productivity by 0.16 percent.

The Government is committed to publishing an Action Plan for Competitiveness and Productivity within 12 months.  In that Action Plan, reducing wage inequality through greater workplace democracy (i.e. collective bargaining) should play a central role. 

Greater wage and social equality are key to growing the productive economy. 

It remains to be seen if it will be key to the Government’s Action Plan.

 

Corporatocracy Rules OK

Look up the word ‘corporatocracy’ in the dictionary and you’ll find a link to the new Programme for Government:  a government heavily influenced by the interests of corporate owners.

The new Programme for Government (PfG) makes it clear that employers will be welcomed into every Government department; their demands will be acted on; and only the best china will be brought out.

All this will be done under the cover of supporting struggling SMEs (small-medium enterprises).  However, the term SMEs is an artifice.  SMEs make up 99.8 percent of all enterprises.  So when the term SME is used, it effectively means all business, and all employers. 

We can see this emergent corporatocracy in three areas:  corporate welfare, deregulation and labour market-policy retrenchment.

Corporate Welfare

The biggest single corporate welfare handout is likely to be cuts in VAT, PRSI and ‘other measures’ for the retail and hospitality sectors.  The PfG is silent on the actual details but negotiators have been briefing the media. Cutting VAT for hospitality alone could cost up to €700 million and that’s before we get into PRSI, other measures and the  retail sector.

However, it’s the mood music of the PfG that provides the best insight:

• Cost of Business Advisory Forum will be set up to review ‘all business taxes’
• ‘Review and simplify the current Business and Enterprise Tax system’
• ‘Implement a pro-enterprise tax policy’ (as if we didn’t have the lowest corporate tax and employers’ PRSI in the EU already)
• ‘Bring forward taxation measures to help contain energy costs, including with regard to VAT’
• ‘Publish an Action Plan for Competitiveness and Productivity . . . this action plan will include tax policy . . . ‘

The above doesn’t include the sectoral-specific references in the PfG to review tax measures (e.g. agriculture, private transport, R&D tax credits, etc.).  Nor does it include increased ‘resources’, or grant-aids to business sectors which are prolific throughout the PfG.

This ‘throw-money-at-businesses’ approach could prove quite costly.  And without any underlying analysis of our low domestic productivity, it could prove quite wasteful.  But it will boost profits and that appears to be the intention.

Deregulation

Deregulation is becoming a buzz policy, promoted by the EU Commission and the Draghi Report, and taken up by the PfG.  The argument is that the business sector is over-regulated; that regulation is strangling innovation and business flexibility.  Yet, in the UN’s Ease of Doing Business series, we rank 8^th in the EU-27.  This doesn’t suggest that regulations are a barrier to successful enterprises.  Nonetheless, the PfG commits to:

• ‘Rigorously implement the SME test to scrutinise every new piece of legislation and regulation for its impact on SMEs’ (that is, all businesses)
• Simplify and modernise our regulatory framework
• Government Action Plan for Competitiveness and Productivity with a key focus on reducing the cost and regulatory burden on business
• Reduce where possible the regulatory burden, simplifying EU rules for the SME and Farming sectors
• Identify regulations that are now redundant to reduce unnecessary red tape, with each government department and regulatory agency to submit a list of such regulations.
• Attract private market investment into the economy through an enhanced regulatory framework
• Work with EU partners to eliminate unnecessary bureaucracy in EU Directives and Regulations to facilitate business operations.

No one would object to a more efficient operation of administrative requirements for businesses.  If there is duplication or redundancy, then address these.  However, regulations cover a range of crucial public interest activities:  environment, labour rights, workplace health and safety, consumer safety, financial transparency, and so much more.  What is happening has been described at the EU level as deregulatory zeal and corporate-friendly deregulation in disguise. 

It will be imperative that trade unions, environmental and civil society NGOs monitor Irish deregulation closely, requiring the Government to justify any actions that puts public interests at risk. 

Labour Market Policy Retrenchment

This is probably the most unnerving part of the Government’s corporatocracy agenda.  It is encapsulated in the following commitment.

‘Assess all elements of labour market policy that impact on the viability of SMEs’ (i.e. all businesses)

This has the potential to subject all labour market policies to the overriding needs of corporate interests.  The PfG makes a start by failing to mention the Living Wage or the last government’s policy to increase the minimum wage to 60 percent of the median wage.  Instead, it substitutes the following formulation:

‘(ensure) fair wages whilst also supporting the viability of small and medium-sized enterprises.’

Further, the PfG is silent on progressing with statutory sick pay.  And it is silent on the establishment of sectoral taskforces which was referred to in the PfG of the last government (though never acted on).

But there are other worrying references; in particular:

‘Publish an Action Plan for Competitiveness and Productivity within 12 months . . . This action plan will include wage policy . . . ‘

Wage policy?  What could this possible mean? 

There is no recognition that Irish employees suffer from chronically high levels of low pay, one of the highest levels of wage inequality in the EU, a massive gender pay gap in the private sector, or high levels of precariousness.  There is no recognition that these lead to a poorly performing indigenous sector - reducing demand, increasing costly staff turnover, and suppressing productivity. 

There is, to be fair, a number of proposals that will attempt to bring people with disabilities into the formal workforce – a welcome emphasis, especially as ‘Ireland has worst rate in Europe of employing people with disabilities’.  And there’s a helpful commitment to extend pay-related benefits to parents benefits.

But on the crucial issue of workplace democracy, the PfG is hardly reassuring: 

‘Publish an Action Plan for collective bargaining in 2025 in line with our commitments under the EU Directive.’

This can mean anything and given the overall narrative of the PfG it probably means little.  The last government stated that there were no statutory interventions needed (‘commitments’) under the Directive.  So don’t expect employees’ right to bargaining collectively to be introduced into law anytime soon.

* * *

No doubt, the Government will justify these and other commitments as a ‘pro-enterprise’ policy, increasing competitiveness and productivity.  But they are no such thing.  Enterprise is not promoted by heaping no-strings-attached subsidies on employers, is not improved by reducing regulations that protect the public interest, is not progressed by miring the economy in low pay and poor employment quality.

We need a new business model, a re-imagining of what a productive economy is, of how economic efficiency, social equity and democracy are intertwined and mutually re-enforcing.

Whatever that might look like, it won’t look like this Programme for Government.

We’re Not Really all that ‘Rich’

A common complaint heard, especially during the recent election campaign, is that while we are a ‘rich country’, there are a lot of people not feeling it.  This is certainly the case - a lot of people not feeling it.  But what if the premise is wrong?  What if we’re actually not all that rich; at least, not households.

Adjusted gross household disposable income is a bit of a mouthful.  This measures the amount of money flowing into households on a per capita basis, factoring in living costs and in-kind public service benefits (e.g. health, education, childcare, etc.).   So how do we rank in the EU?

We are below the Eurozone (and the EU) average.  Our ranking in the EU is middling and well below what we might expect.  To reach the Eurozone average in 2023, households would need an increase in income of 11 percent.  In Euros and cents, this would mean an increase of €4,300 for every woman, man and child.  With that kind of increase, more and more people would start ‘feeling it’.

There are a number of factors involved in this disappointing outcome.

• First, we have one of the highest living costs in the EU which degrades household income.  In nominal terms, without factoring in living costs, we are over 20 percent higher than the Eurozone average.  However, living costs reduces this advantage to such an extent that, when adjusted, we fall to nearly 10 percent below that average.  We have the veneer of high income but that’s all – a veneer, an inflationary-fuelled mirage.
• Second, wages are the main components of household income but over the long-term wages have fallen behind productivity.  And given that we have one of the highest levels of wage inequality, a lot of people are getting a fair share of the value they are producing.
• Third, Irish public services play less of a role in supporting household income than in other EU countries.  This is about more than just social protection payments.  The above adjusts for free services or services delivered at below market-rate such as health, education, childcare, public transport are factored in.  This plays a two-fold role:  increasing resources to households and reducing living costs. 

Therefore, raising Irish household income to average EU levels means not only increasing wages and social protection payments, but reducing living costs and expanding free public services.  

It will be interesting to see how, or even if, the new Programme for Government addresses this.  But first we have to acknowledge there’s a problem – that despite the dizzying numbers produced around GDP, GIN*, Modified Domestic Demand, etc., Irish households are poorer than the Eurozone and EU average. 

What is the incoming government going to do about that?

Negotiating Childcare

As the main parties resume their negotiations for a new government, what are the options for a new policy approach to childcare?  The option of direct provision of childcare services through the public sector was raised during the election campaign.  Fine Gael, for instance, committed to creating 30,000 public places in early education and childcare services.  Other parties made similar commitments. 

A key backdrop to all this is high levels of profits being generated in the childcare sector – private profits being generated in what is basically a public services.  A look at these profits levels should help focus the government negotiations.

The following tracks the fortunes of the top 10 private childcare providers in the sector.  The financial data comes from the Companies Registration Office, provided by the private sector providers themselves.

Two things stand out:

• First, over the five years, €59 million in profit was generated by the top childcare providers.

• Second, the covid years were highly profitable for the top providers – with €27 million generated in 2021 alone.

That’s a considerable amount of private money being generated from a highly subsidised public service. The Department of Children estimate that 69 percent of income to early years providers comes from state subsidies; only 30 percent comes from parent fees. 

Profits are not the only way for owners to extract value from companies.  Another source of revenue is directors’ remuneration – payments made to directors.

Over the five years, directors at the top 10 private childcare providers have taken over €11 million in directors’ remuneration.  Given that there are usually only two to four directors in a company that is, again, a significant amount of mostly public subsidised money going into the pockets of a handful of people.

And, again, directors’ used the covid / lockdown years (e.g. 2021) to pay themselves well over the annual average for the five years.

The owners of childcare companies can use their profits, cash holdings and borrowing facilities for activities that have nothing to do with childcare.  My favourite example comes from a company, among other things, diverting resources to invest in luxury property.  From Links childcare 2021 accounts:

“The company advanced an initial loan of €1,500,000 to connected undertaking P. Kelly Villas Limited in a previous financial year and has advanced further loan funding in the current financial year. The loan balance receivable by the company at the financial year end amounts to €3,064,667 (31 October 2020 - €1,500,000) . . . P. Kelly Villas Limited is a company which is registered in Republic of Ireland and is a connected party by virtue of common shareholders and directors.”

Kelly Villas specialises in luxury property rentals in places such as Florida, Lanzarote, Marbella, etc.

Extracting profits, remunerating directors, funding expansions in the childcare sectors (and sometimes in Lanzarote luxury villas) does not sit easily with a public service.  In fact, it shouldn’t sit at all.

Further, the idea that the provision of quality early years’ services to parents in any part of the country should be based on ‘market’ considerations (i.e. is there enough money to be made in Carlow or Mayo or North Dublin?) is one that should play no part in any childcare policy that emerges from the Government talks.

So what should emerge?  A commitment to rolling out direct public provision.  Where to start? 

• First, where there is growing demand but limited supply;

• Second, where National Development Plan money is being spent on new childcare facilities (these shouldn’t be gifted to private interests); and

• Third, where a provider is closing down (sometimes for understandable reasons such as owner retirement) – the public agency managing childcare provision should have first call to purchase the ‘business’; so as to turn it into a public service.

A complementary policy of having the Government pay the wages of workers throughout the entire sector would also be key.  Employees are still experiencing low wages and the sector is suffering from high staff turnover and an ability to attract employees.  Only the state has the resources to invest in professional wages in addition to skills, training and career development.   And the great advantage of this approach for households is that direct state payment of wages will relieve providers of that expenditure and, so, enable fees to fall by up to two-thirds (e.g. fees could fall to €50 to €60 per week).

This is the pathway to an affordable, accessible and quality early years’ service.

Hopefully, the government negotiators will start walking that path.

* * *

NOTE:  the accounts of the following childcare companies were surveyed:  Giraffe, Sherpa Kids / Sunago, Davencrest / Kids Inc., Park Academy, Cocoon, Safari, Grovelands, Little Rainbows-Monica Campbell and Tiger Time.

 

 

Forest for the Trees: Debating Educational Expenditure

Sometimes the debate gets stuck on a small item and ignores the larger issue; that is, it can’t see the forest for the trees.  Take the debate over the mobile phone pouches.  While not downplaying the issue of protecting children from public health threats, the debate has been over €9 million.  Yet, when compared to other European countries, Ireland significantly under-invests on education.  A lot of debate on the former, none on the latter – forest for the trees.

Take primary education: Ireland would have to spend hundreds of millions more just at the primary level to match the investment by other high-income EU countries.

Ireland is at the bottom of the table, bar France.  To reach Austrian, Swedish and Danish levels, Irish spending on primary education would have to increase by nearly 40 percent, or a massive €1.7 billion.  To reach Finland, who is just ahead of us in the table, spending would have to increase by 11 percent, or approximately €500 million.

These are significant sums and helps explain why so many schools are forced to rely on household ‘voluntary’ contributions. Even the parsimonious Germans spend more than we do – 16 percent more.

In fact, Ireland spends less on primary education than some mid-income economies.  Slovenia, Cyprus, Italy, and Malta all spend more than Ireland, while we are only marginally ahead of much poorer economies such as Poland and Estonia.

This story is not confined to primary levels.  Ireland lags behind most other high-income European countries in secondary and third level educational investment.  In the early years sector, while the Government has ramped up investment over the last few years, we still trail the EU average spend of 0.7 percent of GDP.  In 2025, Irish investment in early years’ education and care will be approximately 0.4 percent of GNI*.  We’d have to increase investment in this area by over €900 million to reach the EU average; never mind UNICEF’s target spend of 1 percent of national income.

We are paying for decades of under-investment in our educational sectors.  And none of this factors in related programmes such R&D, adult education and in-work training.  Yet, we spend considerable time debating a relatively minor piece of expenditure such as mobile pouches.

Low educational expenditure can have a deleterious effect on people’s life-chances and living standards into adulthood.   This makes it a key social issue.  But it is also a key economic issue.  How curious, then, when all the talk is about ‘competitiveness’, there is little time spent discussing our low educational investment.  In the future, ‘human capital’ will be vital as economic growth will come to depend more and more on innovation – not only what we produce, but how we produce it.  An innovative economy, as well as a progressive society, will need skilled workers, and continuous education and training throughout people’s entire lives. 

The Minister for Finance described the budget as ‘transformational’:

“Today’s Budget is . . .  unique in the opportunity it presents to plan, transform and deliver for the future. And that future is not just about next month, next year or the next decade, it is about ensuring that the children born today in Ireland and every day from here on can live prosperous and fulfilled lives. They will enjoy better healthcare, live longer, have better education, more housing and significant infrastructure improvements as a result of the decisions made today.”

Hopefully.  But we are doing ourselves considerable damage, socially and economically, both today and into the future, by under-investing in education. The first step in a truly transformational strategy is to acknowledge the real deficits we face today and, in this case, our relatively low levels of educational investment. 

That means being focused on the forest, regardless of the individual trees.

It Feels Like 2006 All Over Again

Back in 2006 the Government cut taxes and increased spending.  It balanced the books by relying on the tax receipts of property related activity.  When the property market crashed, everything went south – in particular, the public finances.

Fast forward to 2024 and the Government is cutting taxes and increasing spending.  This time they are balancing the books (at least on paper) by relying on ‘windfall’ or ‘transitory’ corporate tax receipts.  If something goes wrong with these receipts, we’ll be heading south again.

It feels like 2006 all over again.

Governments led by Fianna or Fine Gael have subjected the Irish economy to a series of reckless fiscal policies.  Prior to the crash, Fianna Fail-led governments stimulated an already over-heating economy.  When the property market crashed, first Fianna Fail and then Fine Gael-led governments pursued reckless fiscal contraction policies, extending and deepening the recession.

These were boom-and-bust pro-cyclical policies, best captured by Finance Minister Charlie McCreevy’s famous statement - ‘when I have it, I spend it’.  And now the current government, is preparing to deliver another round of pro-cyclicality based on unreliable tax receipts which they describe as ‘transitory’.

This matters because persistent pro-cyclical policies undermine long-term economic stability and the productive economy.  If we are creating the conditions where the economy goes up and down like a roller-coaster then long-term planning becomes moot, leaving us exposed when we need resources in an inevitable downturn.  As ICTU’s Owen Reidy pointed out:

‘. . . cutting taxes (today) will mean larger tax increases in the future.’

The government will claim they are taking this into account by setting up long-term saving funds in which the ‘windfall’ tax receipts will be placed.  They further they state:

‘The Government cannot, and will not, use these transitory receipts to fund permanent increases in public expenditure.’

But this is exactly what the Government is doing  According to the Fiscal Council:

‘. . . the Government is saving just half of its corporation tax windfalls and pumping the rest into the economy.’

The Government appears to be spending nearly half of the transitory corporate tax receipts, contradicting its statement that it couldn’t and wouldn’t do so. They are splashing the cash in order to win seats in marginal Dail constituencies. 

No, we’re not staring into a repeat of the crash.  If there is a negative impact on these receipts it is more likely to be a long-term whimper rather than a short-term bang.  However, just three companies make up a third of all corporate tax receipts. Falling sales, new tax avoidance strategies, market decline, competition from other low-tax countries – all these could come into play.  Nothing is certain; just ask Germany and Poland. Intel has paused the construction of two new chip factories (a significant investment) due to ‘liquidity’ problems. 

So if the downside is a long-term whimper, what’s the harm of using corporate tax receipts in the budgetary short-term?  Maybe little, all things being equal and sustainable.  However, with the economy at full capacity and near full employment, such expenditure could further embed inflation in our productive base.  Indeed, this is kindergarten economics.  The Central Bank and the Fiscal Council have estimated that expansionary budgets have fuelled domestically-sourced prices even as overall price increases are slowing due to lower energy costs. 

The Government is targeting particular constituencies who will experience short-term gain, but at the cost of higher prices in the future.  50 percent of people want Budget 2025 to help with the cost-of-living.  The Government response will be to fuel unnecessary price increases. And this in an economy which already has the highest living costs in the EU.

But this is not new.  Fuelling demand through the Help to Buy and First Home schemes may help the particular recipients but at the cost of higher house prices for everyone else.  Splashing the cash means we all get wet with no dry clothes to change into.

This should be an open goal for progressives.  Fine Gael and Fianna Fail cannot be trusted with the public finances; history and current practice shows that.  But we can only press this case if we propose an alternative fiscal framework that excises pro-cyclicality and excess corporate tax receipts out of budgetary policy; that uses transitory or once-off funds (including the Apple money) in a sustainable and innovative manner (e.g. equity financing for a publicly-owned construction company which can build scale in the market); which drives increased investment in public services and social protection through tax increases on capital, assets and wealth as per the Commission on Taxation proposals; which prioritises productivity gains in the poorly performing indigenous sector.

If we can do that, we can open a new front in the economic debate.

We can show that public finances are only safe with progressives. 

After all, prudence is a socialist virtue.

 

 

Inheritance Tax Cuts a Strange Priority

It seems almost certain that inheritance tax (Capital Acquisition Tax, or CAT) will be cut in the next budget, most likely through an increase in the tax-free threshold.  This would be highly regressive.  It would equate to a €21,000 tax cut for those receiving large inheritances. At a minimum, progressives should oppose any cuts in the tax rate (33 percent) and any increase in the tax threshold. 

First, inheritances and gifts are ‘unearned income’.  Put simply, unearned income is any money you earn by doing nothing. If I receive an inheritance – from a parent, an aunt or a stranger – I haven’t done anything for it. 

Let’s compare two households.

• Household A receives a €335,000 inheritance from their parents. They will pay no tax as all inheritances and gift below that amount are tax free.

• Their neighbour, Household B, ‘earns’ €42,000 per year. Over eight years, this will equal €335,000 – the same amount as the inheritance tax-free threshold.  However, they will pay €58,000 in income tax, USC and PRSI over the 8 years.

Question:  where is the equity or the logic in a situation where someone pays no tax on unearned income, while paying tax on earned income – either as a PAYE worker or self-employed?  If anything, unearned income should be taxed more.

Second, according to David McWilliams: 

‘In Ireland, wealth has become increasingly concentrated in the hands of those at the very top.’

He goes on to estimate that the top 1 per cent of households own about 15 per cent of the nation’s wealth; the top 10 per cent of households hold over half of the wealth; while the top 30 per cent owning close to 80 per cent of the nation’s wealth.

Third, if the inheritance tax-free threshold is increased from €335,000 to €400,000 (which seems to be the consensus), this will result in a €21,450 tax cut for all those with inheritances of over €400,000.  This is a massive and unjustified tax cut for those receiving high levels of unearned income.

Fourth, a major argument in the inheritance tax-cut debate is the treatment of houses.  Minister Richmond argued:

‘The CAT threshold is clearly not keeping pace with house values. An increase of the threshold at which children start to pay inheritance tax would send a clear message that Ireland is a place where work is valued and where people can stay in the family home if they so choose.’

This is a peculiar statement.  CAT has nothing to do with ‘valuing work’ – it is a tax on unearned income.  But it’s the housing issue which is being pushed out.

• Most inheritance recipients pay no tax as their inheritance is too small to attract a liability.

• Many inheritance recipients already own their home. Receiving another home is merely adding to their assets – either to rent out or sell in the market.

• Many inheritance recipients may be renting. Getting a house through inheritance means they substantially reduce their housing costs; namely, they stop paying rent (which in Dublin averages about €18,000 a year).  That is a considerable saving.

Regarding the Minister’s ‘people can stay in the family home’ reference, there is already provision for a daughter / son who is living in the family home being able to inherit the house tax-free.  There are conditions attached:  they must have lived in the house as their main home for the three years immediately before the inheritance; they must not own another house; and the house must continue to be the main home for six years after the inheritance.  However, I am aware that some parents are worried their child may not be able to inherit their home tax-free despite the fact they comply with all the above conditions.

Of course, in many (most?) cases, two, three or more children receive the inheritance.  Therefore, a house valued at €750,000 bequeathed to three children will not attract a tax.  This suggests that the increase in the threshold is merely a subsidy to high-wealth, high-income households.

So at a minimum, progressives should strongly oppose any increase in the inheritance tax thresholds or any cut in the already low tax rate (33 percent).  However, we can go further – and turn inheritance tax into a vehicle for greater equity, generating increased resources for reinvestment in public services and social protection.

The Commission on Taxation made a number of proposals regarding inheritance tax.

• The tax-free threshold for children should be ‘materially reduced’. In other words, instead of increasing tax-free thresholds, the Commission recommends they be cut, thereby exposing more inheritances to tax. 

• The level of Agricultural and Business Relief available for CAT should be reduced.

• A small, general charge should be introduced for all inheritances, to broaden the tax base.

These recommendations are going in the opposite direction to the tax-cut chorus.

The Irish Fiscal Advisory Council estimated that the Government could raise €400 million by implementing the Commission on Taxation’s proposals regarding inheritance and gift tax – though this is on the high side, requiring a dramatic reduction in thresholds.  In Budget 2025, €100 million in revenue would be a more realistic target – as a first step in implementing the Commission’s proposals.

An increase in rates would also be practical.  The marginal tax rate for CAT is 33 percent; for an average earner, the marginal tax rate is 48 percent.  Raising the CAT rate would start to bring it line with average earned income.

According to the Irish Times:

“Unfairness” and “anomalies” relating to inheritance tax are issues that deserve to be considered in advance of the budget, Taoiseach Simon Harris has said. The Fine Gael leader made the remarks when asked about discussion within his party as to cuts to the tax in the budget.’

If there are anomalies, fix them.  But that’s not a justification for a highly regressive tax cut.  For instance, the Commission on Taxation proposed that foster children be treated equally with other children.  The Tax Strategy Group recommends that all gifts and inheritances should be reported to the Revenue Commissioners, to ensure tax compliance.  Partners should be treated in the same manner as married couples.  And the issue of a child living in the family home being able to inherit the house tax-free as per the conditions listed above, should be clarified.

Increases in the inheritance tax should be part of a long-term drive to tax capital on the same basis as labour.  Let’s leave the last word with TCD’s Barra Roantree:

‘Government is about choices. At a time when public services are stretched, infrastructure is creaking and average incomes are stagnating, cutting the tax paid by the children of wealthy families represents a strange set of priorities.’

Towards a Progressive Government

‘We do have to focus on that now and be ready, because the key thing I think is we really do need a change of government’ - Ivanna Bacik, TD

‘We need a change of government and we need a government that will act in the interests of working people . . .’ - Mick Barry, TD

‘It is now clearer to me than ever that a change of government cannot come soon enough’ – Holly Cairns, TD

‘This is a time for fresh leadership, a time for change; not just a change of Taoiseach, but a change of Government and a change of direction’ – Mary Lou McDonald, TD

It was not a good day for progressive politics.  Though there were bright spots for individual parties – Social Democrats doubling their local election seats, Labour electing a MEP and Sinn Fein electing two – the larger narrative is one of stagnation if local election results are any guide.

What is striking is that over 20 years – from boom years, through recession, economic recovery, Covid and up to the cost-of-living crisis – the progressive vote has remained remarkably stable.  There have been changes in the composition with Labour hitting its high point in 2009 while Sinn Fein’s high point was in 2014.  However, the overall result is depressingly steady.

Focussing on 2024:

• Sinn Fein increased its support but it was below recent national polls and below expectations. Most notably, it is still well off its 2014 performance. 
• Labour continued to slide from a high point of nearly 15 percent in 2009. Their 2024 result was their worst performance since at least 1967 (and probably before but the data is more difficult to access). 
• Despite doubling their seats, the Social Democrats’ vote is highly concentrated: nearly 30 percent of their seats come from just one council (Dublin City) with low organisational breadth outside the capital.
• In addition, the Green wave of 2019 washed out while the radical vote (PbP-Sol) fell back slightly from a very small base.

No, not the best of days. 

Pat Leahy, in a pre-election analysis that missed the mark on a number of issues, nonetheless asked a valid question:

‘You’d wonder what it would take for politicians on the left to stand up and articulate a set of common values that could form the basis for a governing bloc.’

Indeed, what would it take and what would it look like?  Actually, we have the outlines of a template from France.  In the immediate aftermath of parliamentary elections called by President Macron, France’s four main leftwing parties – socialists, communists, radicals and greens - agreed to form a ‘New Popular Front’ (NPF) and campaign on a common platform.  That this was done in quick time among parties which have had, at times, a toxic relationship (e.g. the Socialist Party and Melenchon’s France Unbound) is a credit to their political seriousness and serious ambition.  This seriousness and ambition should be a lesson to Irish progressives.

Of course, the NPF is an urgent response to the possibility of the far-right National Rally winning a parliamentary majority.  That particular urgency is not current in Ireland at this point (but watch this space).  Irish progressives, though, have other urgencies; namely, relevance and long-term domination by right-wing parties (notice how I didn’t use the phrase ‘centrist parties’).  Irish progressive parties need to confront certain realities and ask difficult questions.

• For Sinn Fein, it needs to reassess the prospect of coalescing with Fianna Fail. Is that a realistic possibility now?  Is it desirable?   For Sinn Fein, it may be the best – and possibly only – option to look to Left and green parties if it wants to enter government.  If so, what are the policy implications of a more progressive orientation?

• Labour and the Social Democrats need to ask themselves – is their only destiny to compete with one another to become the third short leg in the Fine Gael/Fianna Fail stool? Do they have an ambition to drive a parliamentary majority for a progressive government?

• Fair dues to People before Profit for publishing ‘The Case for a Left Government’. It shows that some people are thinking about an alternative.   But their approach is to exclude, rather than include.  They need to ask whether they will engage positively with a potential progressive alignment (which is not necessarily ‘Left’) with a view to participation.

• The Greens have participated in two right-wing led governments in the last 15 years. Thie first time didn’t end too well (they lost all their Dail seats).  This second time around – after losing more than half their local authority seats and both European seats – doesn’t look a whole lot better.  Wouldn’t a stronger, greener future be had in a progressive government?  Clearly their voters believe that – in the European elections, more Green transfers went to progressive candidates than Fianna Fail and Fine Gael combined.

We will probably need to walk before starting to run.  At the very least parties committed to a progressive government could:

    (a)  Commit to working together post-election to put together a progressive government; and

    (b)  Promote transfers between the parties committed to a progressive government

This minimalist arrangement allows for considerable manoeuvrability.  Parties would still be independent, campaigning on an independent programme with issues concerning a government programme to be negotiated following the election. Similarly, the issue of who would lead this progressive bloc would be settled only after the election. 

And if the parliamentary majority is not there post-election, individual parties are free to do what they want; though, hopefully, the experience of working together – and benefitting from extra votes and seats – would dissuade them from entering into an arrangement with the Right.

Unfortunately, there are more reasons not to work together, too many to address here.  Many would be legitimate; others, merely sectarian.  The most common objection centres around the argument that it would be better to campaign on an ‘independent’ basis, and see what the electorate throws up.  However, a progressive government is such a sea-change that it will need to be fought for, need to be argued for. You don’t do this after the election.  Waiting until the election results suggests that a progressive government is something you stumble into through a fortunate arithmetic.

Imagine, however, the impact of even a minimalist cooperation platform.  No longer are activists and supporters campaigning to get an extra few seats for their party.  They would be campaigning for power, to actually lead a government.  No longer is media coverage consumed with the question of coalition composition (who will go in with Fianna Fail or Fine Gael?); rather, it is about which bloc will win.  The story changes dramatically.  Progressive parties are no longer small parties.  They have the same equivalence as the larger right-sing parties. 

In truth, even cooperating, it would be an uphill climb for progressives (what’s new?).  But even running the right-wing bloc close would change the political dynamic. The recent national polls prior to the locals and European elections, showed that the progressive vote, excluding the Greens, was still competitive at 35 percent, compared to the combined right-wing vote at 39 percent.  Add in the Greends to the progressive bloc and its a dead heat. 

Most of all, the next general election would be a contest, not just between a number of parties but between two visions of a future Ireland – a progressive vision or ‘more of the same’. 

In such a contest, anything could happen.

The Political Economy of the Far Right

While much focus is on the far right’s racist and often violent agenda, little attention has been paid to the potential impact of their demands on the economy.  These demands, if met, would have the capacity to drive the economy into long-term stagnation, suppress business activity, penalise older people, and undermine public services.  In short, their political programme will result in a poorer society with less capacity to provide jobs, decent wages and public services.

Brexit Ireland

The Far right – and much of the debate - conflates immigrants, asylum seekers / international protection applicants and refuges under the overall rubric of ‘immigration’.  They promise to ‘limit’ immigration and, at the extreme, to stop it altogether under the slogan ‘Ireland is full’.  The following focuses on immigration; namely, labour force immigration, or migrant workers.

Non-Irish citizens make up nearly 20 percent of total employment with more than half, or 56 percent, coming from the EU and the UK.  The European Union and the Common Travel Area (CTA) with the UK guarantee free movement of labour. In short, there is nothing a future Far right government could do about most immigration in the labour force.

Unless, of course, they want to annul free movement of labour.  That’s what the Irish Freedom Party and its President, Herman Kelly and candidate in the European elections, want:  withdrawal from the EU, or an Irexit.    While other parties and candidates might not be as upfront about their agenda, a strong current of anti-EU politics runs through the Far right, with their claims to fight ‘globalisation’ and ‘EU federalism’, flirting with quasi-Brexit positions.  The point here is that without withdrawal from the EU and / or the CTA, there is nothing the Far right could do about most labour force immigration.

Immigration from the Rest of the World

Therefore, the far right would need to focus their anti-immigration policies on non-EU countries (excluding the UK) if they were to make good their promises to limit migrants coming here to work.   Currently, there are more than a quarter of a million non-EU immigrants working in the Irish economy.  For the most part non-EU immigrants require work permits which can only be issued where there are no Irish or EU citizens available, able and willing to take up the job (the Labour Market Needs Test). Many people assume they come to Ireland and do jobs that Irish won’t (for instance, low-paid manual work) but this is mistaken.

Non-EU/UK immigrants work across the economy.

• Over 50,000 – or 22 percent of all non-EU citizens – work in the health sector: doctors, nurses, healthcare assistants, porters, administrative staff.

• A further 68,000 – or nearly 30 percent – work in the high-income sectors: Information & Communication, Professional & Scientific and Financial services.

• Over 24,000 work in industry, primarily manufacturing

• 55,000 – or 23 percent - work in the lower value-added sectors: hospitality, distributive and administrative services.

Unfortunately, the CSO doesn’t have a number for workers in the agriculture sector, but we can reasonably assume that a significant proportion of ‘all other sectors’ is made up of agricultural workers.

Let’s focus on two of these sectors. 

First, the high-waged Information & Communication (CT) sector: Ireland has the highest share of ICT employment in the EU.  Whatever about the international tax strategies of the big tech companies, there is real productivity here – real jobs, real incomes, real spending power, and real tax revenue. 

However, growth is based almost entirely on non-EU employment.  CSO data only goes back to the first quarter 2021 but in the last nearly three years, non-EU workers made up 70 percent of the increase in all ICT employment.  Without these workers, jobs would be left unfilled and business activity reduced, moving elsewhere to access labour. This would see a reduction in investment with a danger of dis-investment.   Reduced employment, consumer and tax revenue – that is a likely scenario resulting from far right policies to limit immigration.

Second, non-EU workers made up 42 percent of employment growth in the health sector over the last three years.  Without this employment, fewer older people and those with disabilities would be cared for at home, fewer people would be cared for in nursing homes, fewer patients would be seen in A&E departments.  A recent leaflet from a far right local election candidate demanded:

‘Limit legal immigration to relieve pressure on public services.’

However, without non-EU immigration, health services would be put under incredible pressure as rising vacancies and unfilled positions would reduce care for those in need.  This would especially impact older people.  Just at the point when we need to ramp employment in the caring professions to provide assistance to older people, the far right would be cutting it.

Of course, far right activists could say they would allow immigration to fill high-skilled, high-income posts and similar positions in the public services, but otherwise they would limit immigration.  However, this is likely to have a similar economically-debilitating impact.

In the hospitality sector there are 24,000 non-EU workers employed, or more than one-in-eight.  Notably, the employment increase since mid-2021 has been filled by non-EU labour.  Without access to immigrants, many hotels and restaurants would have to close or reduce opening hours, resulting in higher unemployment, under-employment and reduced earnings for workers regardless of their citizenship.

The above points to the need to not only maintain immigration into Ireland, but to increase it if we are to continue expanding business activity, investment and economic growth.  Reducing immigration will result in business closures, reduced public services and lower incomes.

But are They Working?

Another part of the far right narrative is that people come to Ireland to live ‘off the state’.  However, like so many of their claims, this has no basis in reality.

Three-quarters of non-EU citizens of working age here in Ireland are employed, compared to 60 percent among Irish citizens (though many would be categorised as students).  There is only a marginal difference in the unemployment rate.  The fact is that non-EU citizens come here to work, study and contribute to the economy and society.

* * *

If the far right ever came to power the result would be socio-economic degradation and, at worst, isolation if they tried to wrench Ireland out of the EU and the CTA.

The above focuses on labour market migration.  Clearly, the issues regarding the housing and processing of asylum-seekers are causing considerable disquiet and unrest.  The Government is continuing to fail those seeking international protection and wider society.  Better, more urgent, policy options could have been (and still could be) pursued – as Dr. Lorcan Sirr points out here.  However, the far right has staked its policy programme on reducing immigration.  That’s what has been discussed here.

To satisfy its racist agenda, the far right would gladly see the economy stagnate, with fewer jobs, lower wages and investment, reduced entrepreneurial opportunities and less ability to provide the public services necessary to sustain high living standards.  Foreign investment would move to other countries and indigenous start-ups would be cancelled.  Ironically, the far right starts off by calling for an end to immigration and end up with a policy platform that would drive up emigration, as young Irish look elsewhere to fulfil their life opportunities. 

Many far right activists claim that they only want a debate on immigration.  If so, then they should admit from the outset that they cannot do anything about most labour force immigration (unless we withdraw from the EU and / or CTA).  And if their programme is to target non-EU workers, they should be honest about the consequences for all of our living standards.  But they won’t be.

Economic and social impoverishment goes hand-in-hand with racism.  That’s all the far right can offer.

Spinning a Manufactured Crisis

There’s a dismal rule in public debate:  if you don’t have evidence to substantiate your claim, make it up – or spin whatever you can get your hands on. 

Employer organisations claim that domestic sectors – hospitality and retail, especially – are close to closing down because of government measures to raise the minimum wage (to 60 percent of the median wage) and expand in-work benefits such sick pay and parental leave.  As I point out here and here, there is little evidence of this.  Indeed, what evidence there is shows low business failure rates, high employment growth and increasing profits in these sectors.  There is further analysis to be found in ICTU’s excellent deconstruction of employer claims. 

NOTE:  this might seem abstract but just note – current Government policy would see the minimum wage increase to approximately €15.00 per hour – an increase of €2.30 over the next two years.  If employer organisations get their way, this increase would be reduced to 55 cents which would mean no increase after inflation.  For the lowest-paid workers, the debate is far from abstract. 

Still, employer organisations keep repeating mantra-like their unsubstantiated claims, hoping this will gain some purchase in the debate (unfortunately, this seems to be working).  They have now resorted to spinning analysis to suit their arguments.

Enter the Government’s recently published ‘An Assessment of the Cumulative Impact of Proposed Measures to Improve Working Conditions in Ireland’ (Report).  This is an impressive 170-page analysis of the impact of the Government’s labour market measures:  minimum wage, sick pay, auto-enrolment pensions, parental leave, etc. 

On RTE, Maeve McElwee from IBEC claimed:

“Government have actually published a report . . . They have projected that employers will experience a nearly 20% rise in labour costs over the next two years and that’s before factoring in any of the subsequent pay pressures or standard wage growth that’s coming through.  You can’t say that that is modest – a 20 to 25% increase in labour costs is really substantial.”

According to McElwee, the Report projects that the Government’s measures would add 20 to 25 percent to payroll expenditure.  There is only one thing wrong with this assertion. 

The Government report never said this, never projected this, never measured this. 

Let’s go through what the Report actually did.  It sets up ‘highly-stylised’ examples of businesses to assess the impact of labour market measures.  The word ‘stylised’ should provide a hint (dictionary definitions include ‘non-realistic’ or ‘not natural)’.  This is not a quantitative analysis either at enterprise or sectoral level. 

The Report estimates that in 2024 the Government’s Living Wage* measure will raise payroll expenditure by 4.5 percent in highly-stylised hospitality firms.  Over the three-year period up to 2026, this rises to 15.5 percent. 

But here’s the problem:  these stylised examples assume that all hospitality workers are on the minimum wage. In reality, only 28 percent are on the minimum wage (this comes from Report).  Therefore, in real life, the cost would be substantially less than 4.5 and 15.5 percent.

Why did the Report use these stylised examples?

‘To highlight the heterogeneity of potential impacts by sector, we present an assessment of impacts on highly stylised firms . . .’

These highly-stylised examples allow a comparison between sectors – with hospitality experiencing the biggest impact from the Government’s Living Wage while ICT firms experience almost no impact.  The Report uses these examples, not to quantify the impact on the sector, but to compare the impact between different sectors in a highly simplified form.

So is there any reference to the actual impact of the Government’s Living Wage at sectoral level.  Thankfully, yes.  The Report references the Maynooth University paper commissioned by the Low Pay Commission - Research on the Introduction of a Living Wage in Ireland.  It estimated, using wage data from the Survey on Income and Living Conditions, that raising the minimum wage to 60 percent of the median wage (the Government’s policy) would increase hospitality payroll expenditure by 4.5 percent. 

That is a long, long way from the 15.5 percent used in the highly-stylised examples where all hospitality workers are on the minimum wage. 

And the Maynooth paper goes further.  Given that hospitality pay makes up approximately 37 percent of all operating costs, the Government’s Living Wage policy will raise operating costs by 1.7 percent.

1.7 percent.  And this would be spread over three years.

In short, the impact on hospitality operating costs would be fractional.  There is one caveat.  The Maynooth University estimate was based on 2019 wage data.  Inflation could have increased these costs; maybe.  But let’s assume a worst-case scenario.

Let’s say that instead of 4.5 percent, the Government’s Living Wage policy raises payroll expenditure by 7.5 percent over three years.  Operating costs would still only increase by less than 1 percent annually.

And this is a static measurement.  It doesn’t factor in increased turnover over the three years or the benefits to businesses highlighted by the Report – notably, the reduction in recruitment and retention costs:

‘High staff turnover and the associated recruitment costs can be burdensome for many firms, particularly smaller and more labour-intensive firms.’

When we factor in the benefits (increased sales, reduced expenditure), operating costs would increase by less again.

* * *

This is how spinning works.  A measure that would increase costs by less than 1 percent annually is turned into a measure that would increase costs by 20-25 percent.  In this case, it comes from extrapolating from highly-stylised examples (which were never intended to measure actual cost increases) and mis-applying them throughout the sector.

One can understand why employer organisations resort to these tactics.  There is little real evidence to vindicate their claims.  If the Government starts rolling back on their labour market measures, it won’t be because of evidence-based policy. 

It’ll be because they were taken in by the spin.

___

* The Government’s Living Wage is not actually a living wage.  It falls short of the Living Wage Technical Group’s estimate.  However, that’s a story for another post.  The Government’s Living Wage - 60 percent of the median wage - is still a positive advance.

Save Our Profit Margins

Eleven employer organisations, led by ISME, Restaurants Association of Ireland and Retail Excellence Ireland have set up a new group: SaveJobs.  It purports to represent small and medium-sized businesses and comes with a set of demands.  First, these employer groups want the state to subsidise their profit margins and, second, they want the wages of the lowest-paid to be frozen.  This would be extremely costly and economically degrading. 

Subsidising Profit Margins

Let’s first look at the employers’ demands for increased state subsidies:

• Reduce the standard VAT rate from 23 percent to 21 percent

• Permanently establish the 9 percent VAT rate for the food service and ‘grooming’ sectors

• Increase the employer low-rate PRSI threshold by over €50 per week

The cost of three measures would be significant. 

Nearly €2 billion – that is the price tag (the estimated cost of VAT cuts can be found here and here).  There are a couple of things to be said about this. 

First, these demands are not targeted at businesses struggling and in danger of closing down.  It is a general tax cut benefitting many companies that are doing fine.  Why cut taxes for profitable companies?  What is the logic of giving highly profitable companies a windfall tax-cut subsidy?

Second, this could either blow a hole in our public finances or drive inflationary pressures.  The Central Bank projects a budgetary deficit for this year (once excess corporation tax revenue are set aside) with barely a balanced budget over the next two years.  So what taxes would the employers raise or what spending would they cut to recoup the €2 billion in VAT and PRSI cuts? 

Or, maybe, the employers want to subsidise their profit margins with the ‘windfall’ corporate tax revenue, relying on income that is not generated by the Irish economy.  This would risk driving inflation back up again. 

Re-inflation, tax rises, spending cuts – this is what the employers’ programme risks.

Freezing Workers’ Pay

In addition to demanding state subsidies, the employers’ have workers’ wages in their sight. 

‘Future increases in the NMW (National Minimum Wage) must not exceed CPI (Consumer Price Index)’

This would tear up the Government’s commitment to raise the minimum wage to 60 percent of the median wage.  It would mean that low-paid workers would fall further behind general wage growth in the general economy, increasing inequality.

Most of all, it would mean that in the future, low-paid workers (i.e. workers on the minimum wage or just above it) would receive no real pay increases.  Pay would stagnate regardless of the profitability of their employers or the increase in national income.  In truth, targeting the economically weakest is particularly nasty.

What’s This All About?

According to SaveJobs website:

‘The increased cost of doing business will lead to a tidal wave of business closures and job losses unless government act NOW!’

What evidence do they put forward for either this claim?  None.

We discussed this issue previously but let’s do a little of updating.

(a)         Employment

If jobs are at risk, if shops and restaurants are closing down with no replacements starting up, we should see some evidence of this from employment data.  We don’t.  In fact, just the opposite

Over the last year employment rose in the total economy by 3.5 percent.  In the wholesale and retail sector employment grew by over 6 percent while in hospitality, employment growth was nearly twice the national rate.  This doesn’t suggest sectors in crisis.

Of course, the crisis might have only become apparent in the latter part of the year.  But when we look at employment growth over the last quarter (2023 Q3 to 2023 Q4) we find total employment increasing by ½ percent, while wholesale & retail increased by 6.9 percent and hospitality increased by 3.8 percent.  If anything, employment growth in the alleged ‘crisis’ sectors was gaining momentum.

(b)         Growing Profits

What about the profitability of these sectors? 

Profits in the distributive and hospitality sectors continued to show strong increases over the last year, well above the domestic sector as a whole which flat-lined (but only after a 30 percent increase in the previous four years).  Again, this doesn’t suggest red flags.

There is evidence of a softening in profit growth from last summer in the hospitality sector and for both sectors volume turnover is struggling (through seems to have bottomed out last year).  But there is little in the data to point to a pending crisis.

* * *

The evidence doesn’t suggest a crisis.  Neither, in a strange way, does the employers’ new campaign.  If they believed there was a real crisis then they wouldn’t have suggested spreading the tax cuts to sectors and businesses which are doing ok.  They would have focused on sub-sectors and businesses which are having genuine problems and concentrated a much smaller amount of subsidies on these areas to much greater effect.

And they wouldn’t have had a go at the lowest paid workers since we have experience of temporary wage subsidies for vulnerable firms.  They could have made this argument, too.  But they didn’t.  

They didn’t even bother suggesting that VAT reductions could reduce prices.  Instead, they stated these would be used to ‘reduce costs’ (i.e. increase business revenue).

Here’s the bottom line:  the Department of Enterprise identified €20 billion in Brexit and covid pandemic supports for the business sector.  In the last two years:

‘. . . a total of €12 billion was provided in cost of living and business supports, comprising a mix of permanent and one-off measures, to absorb some of the impact and ease the burden of inflation on both households and businesses. In supporting households, this has also indirectly benefited firms by maintain consumer consumption/demand.’

Nearly €40 billion in direct and indirect subsidies. Now that these subsidies are being withdrawn, now that the era of ultra-low interest rates is over, many businesses are finding it difficult to adapt and compete in the marketplace.  The new employer group could have identified the pinch points, sitting down with employee representatives to discuss productivity-enhancing solutions, and putting together a programme that can lead to sustainable and resilient businesses.  They didn’t.

Instead, they are using the difficulties of some firms to demand the government subsidise profit margins while turning low-paid workers into the ‘enemy’ of enterprise. 

When we understand that this is just a plain ol’ money grab, it starts to make sense.

Tax Cuts: the 3-Card Trick

Budget 2025 is coming early this year.  The Minister for Finance is already outlining what we should expect:

‘Taxpayers will benefit from “substantial” income tax cuts in the next budget, the finance minister has pledged . . . “I’m committed to introducing a further substantial income tax package in the autumn budget.”

The Government parties believe that ‘substantial’ tax cuts is the pathway to re-election.  How should progressives respond without falling into the trap of promising ‘better’ tax cuts?

Substantial tax cuts would be fiscally irresponsible, highly irresponsible. 

First, it would return us to the type of budgetary policies that existed before the crash when the tax base was hollowed out resulting in an over-reliance of fragile tax revenue from property and building activities.  Future substantial tax cuts would just be a repeat of this – weakening our tax base and relying on all that – potentially temporary - corporate tax revenue flooding in.  This is a return to irresponsible Celtic Tiger-type fiscal policies.

Second, the government is well aware that economic growth will slow in the future.  Heck, they are projecting it themselves.  A slowing economy generates less tax revenue.  This can best be seen in projected employment growth. 

Between 2015 and 2023 the annual increase in employment averaged 3.2 percent. Tens of thousands of jobs were created each year bringing in higher tax revenue and reducing unemployment-related costs. In 2024, the Government projects employment will increase by only 1.4 percent.  In the lifetime of the next Government the projected increase will fall to ½ percent.  So while the Exchequer could rely on increased employment to generate tax revenue in the past, it will be sluggish from here on to the end of the decade. 

As Eoin Burke-Kennedy rightly points out:

‘The Irish labour market has also begun to soften and the Government’s extremely favourable budgetary position, fuelled by buoyant tax receipts, has probably peaked.’

Whatever about cutting taxes at the beginning of an upward business cycle (and with so many economic and social deficits, even then it wouldn’t be a good idea), cutting taxes at the beginning of a downward cycle is well, irresponsible.

If we are to build a strong social state – public services, social protection – we will need to strengthen our tax base, not weaken it.  If we are to address the challenges of climate change and ageing demographics – we will need to increase taxation, not cut it.  If we are to repair our infrastructural deficits (housing, health, public transport as identified by the Irish Fiscal Advisory Council) we will need to increase investment.  And we will need to do all this without pushing capacity limits which could risk over-heating the economy. 

Progressives need to challenge the tax-cutting agenda:  first, that cutting taxes is highly irresponsible, a return to the bad ol’ days of Celtic Tiger profligacy – all in the name of buying an election.  Second, we need to base our tax-raising measures on (a) the Commission on Taxation and Social Welfare recommendations; namely that capital, property and wealth should be targeted, and (b) incrementally increasing employers’ and self-employed PRSI contributions over the long-term.

We can also show that wage increases have the benefits of increasing tax revenue while, among low-income groups, reducing public expenditure through lower reliance on low-wage subsidies such as the Working Family Payment.  Progressive pay rises are can have considerable fiscal benefits while collective bargaining can ensure that such increases are consistent with firm-level productivity.

It is never easy to argue against tax cuts.  They give the illusion of increasing living standards (more money in the pocket) while doing very little to increase living standards. Extending and deepening free and affordable public services, bolstering in-work benefits and eliminating poverty through social insurance and social protection, investment in our economic and social infrastructure, and stronger labour rights – that’s the ticket to meeting the slowdown, raising living standards, and building a resilient economy.

Progressives can’t win the tax cut argument.  Nor should we want to.  If some people want tax cuts, they’ll vote for the government parties.  We need a better conversation.  And it starts with calling this for what it is.

Proposals to cut taxes and increase spending while promising fiscal stability is nothing but a three-card trick. 

The More You Have

Maybe it is true:  the more you have the more you get.  That’s if recent CSO data is anything to go by.  The statistical agency’s Annual Earnings database provides a breakdown of annual earnings growth, including the top 1 percent and the top 10 percent. 

Between 2011 and 2022, the earnings of the top 1 percent increased by 46 percent while the top 10 percent grew by 38 percent.  The earnings for all of us increased by only 26 percent.  That is a significant gap. 

In terms of actual median earnings, the top 1 percent took in over €283,000 in 2022 – up €89,000 since 2011.  This is more than double the earnings of the top 10 percent.  The top 1 percent earn 6.8 times that of all earners – up from a ratio of 5.9 in 2011.

In all likelihood this understates the gap between the top 1 percent and the rest of us. The above refers to earnings and doesn’t include capital gains and other capital income.  Most capital gains flow to the highest income groups.  Revenue Commissioners report that 73.8 percent of capital gains tax is paid by the top 10 percent of income earners. 

Unsurprisingly, men in the top 1 percent earn more than women but only marginally so: 2.9 percent.  However, among all earners, men earn 20.5 percent more.  So the gap between the top 1 percent and the rest of us is larger among women owing to low earnings.

How much do the top 1 percent in each sector earn?

The top 1 percent in Administrative Services earn the most, at €304,000.  This would probably be due to salaries in the aircraft leasing sector.  Top earners in finance and construction round out the top three.

At the other end, the lowest earning among the top 1 percent work in the education, health and public administration sectors – sectors dominated by the public sector.

Wage inequality is a feature of the Irish economy.  Ireland has one of the highest wage inequality ratios in the EU, ranking 6^th out of 27 countries.  Among its peer group in the EU, other high-income economies, Ireland leads the inequality table by a considerable length.

These Eurostat surveys are taken every four years.  Ireland’s wage inequality ratio has remained constant.  In 2006 the ratio was 4.0, the same level as 2018.

A number of reasons have been put forward to explain this inequality; in particular, the presence of multi-nationals which drive up wages at the higher end, and the lack of collective bargaining rights which can depress wages at the lower and average levels.  These and other reasons need to be teased out.

But here’s one example:  Sweden has a high level of multi-nationals operating in its economy, with 22 percent of its workforce employed by multi-nationals (Ireland is not that much higher at 28 percent).  Yet Swedish wage inequality ratio is half of the Irish level.  The big difference is not the level of multi-national employment; rather it is the high levels of collective bargaining and employee voice in the Swedish economy – at over 90 percent, nearly three times the level of Ireland.

At the end of the day, Inequality is a political choice. 

What's Going on in Business Land?

The media has been full of stories of businesses – in particular, restaurants – coming under considerable pressure and closing down. What is the explanation?  Genuine economic strain?  Or is this narrative being fashioned to justify a money grab - for more state subsidies, for higher profits at the expense of wages?  What is going on? 

Closures and Start-Ups

There is little verifiable evidence in this discussion.  Most of the stories rely on anecdote, usually an owner explaining why they have to shut doors or are thinking of it. 

For instance, according to a ‘survey’ by the Restaurant Association of Ireland (RAI), 280 food and drink businesses closed their doors in the last 6 months of 2023.  Does this actually signal a crisis and merit demands for government action (tax cuts, more subsidies, a ‘pause’ in the minimum wage)?

According to RTE: 

‘The RAI has said it compiles its figures on closures in the sector from liquidation lists published by the Companies Registration Office and through contacts with its own members.  It is difficult to independently verify these figures.’

Figures that can’t be verified must be treated very carefully.  It would help if the RAI published their survey in full, showing how they arrived at their number.

The restaurant sector is subject to considerable volatility.  Even during the recovery period – 2014 to 2019 – there were high levels of closures.

In 2019, there were over 1,400 restaurant and pubs that closed down.  This cannot be directly compared with the RAI’s survey but it does raise a question.  The RAI states that 280 restaurants closed down in the second half of 2023.  Is this consistent with previous years?  Are the number of closures higher or lower or about the same?  What is the context of the RAI survey?

Nor does any of this address the other side of sectoral volatility - restaurant start-ups. Despite high level of closures between 2014 and 2019 the total number of restaurants increased – by over 1,400 or 10 percent. 

Even now, restaurants are opening up:  the Business Post (pay-walled) lists a number of new start-ups and expansions in the hospitality sector, or what they call ‘an abundance of new ventures opening their doors’, from restaurants to cafes to wine-bars and pubs.  Restaurants close, restaurants open - are the number currently opening exceeding the number closing?    We don’t have the current data but, without context, the RAI’s 280 closures tell us less and less.

Profits, Wages and Income

What information we do have does not necessarily show a sector in crisis.

From the CSO’s quarterly productivity database we find that profits per hour (capital compensation) in the hospitality sector more than trebled over the last four years.  Wages, however, rose by 41 percent.  Unfortunately we don’t have restaurant-specific data.  But this puts the hospitality sector in a different light than that portrayed by employer organisations.  

Another measurement is the Services Index which fortunately has restaurant-specific data.  This measures the volume of output (turnover) in the restaurant sector:

• Between 2019 and 2023 (Q3), sales volume in the restaurant sector increased by 43.3 percent (taking into account inflation).

This performance compares to the service sector as a whole which increased by less – at 35.4 percent.  So the restaurant sector out-performed above the total services average.

Warning Signs

There are some warning signs. 

While restaurant volume output performed strongly up to the 3^rd quarter of last year, the October and November provisional monthly data shows a fall.  This was, however, consistent with the downward trajectory of the total services sector.  We don’t know if this is temporary or part of a new, downward trend.  Another measurement is employment. 

In the last four years, hospitality employment increased by 14 percent compared to a national growth of 12 percent.  However, in the last year hospitality employment trailed national growth.  From a high point in April of last year, employment in the hospitality sector edged downwards up to November – suggesting some retrenchment, though this could also suggest employees working more hours.

Corporate Insolvencies

Another measurement of overall business closures is the Deloitte insolvency statistics which measures all sectors.  While this captures only a portion of business closures, the categories are consistent:  voluntary liquidations, receiverships, examinerships, etc.

While the number of insolvencies has risen from 2021, this shouldn’t be surprising.  It’s been a bruising time with lockdowns and the cost-of-living crisis.  However, the number of insolvencies in 2023 is still below 2017 and 2018 levels when the economy was recovering.  We await to see if the numbers keep rising or plateau or even fall in the years ahead.

* * *

So what do we have?  In the restaurant sector we have a RAI survey which is ‘difficult to independently verify’, producing a figure which has no context (comparison with previous years).  We know that restaurant closures can be high, even in good years; but there are also start-ups and expansions.  We also see this sector’s turnover performing well with hospitality profits rising significantly since 2019.  Corporate insolvencies are rising across the economy but they are still lower than in the good years.  Yes, there are some warning signs in late 2023, but little yet to suggest that gains made since 2019 are being reversed.

What we have in the media, though, is a constant anecdotal stream highlighting individual restaurant closures and calling it a crisis.

The case for a crisis in the business sector – whether the hospitality or SME sector – is, so far, weak.  So what’s at play?  Maybe the owners of businesses just want more money to enhance their profit line; maybe they got used to Covid subsidies and want them to continue by other names).  Maybe they are opposed to rising wages (e.g. the minimum wage) because it is eating into their profits. All this is up for debate.  Or maybe some businesses find it difficult to adapt to a post-Covid, post cost-of-living-crisis environment?

I’ll just leave it with this story from a retail chain.  Centra recently announced:

• Record-breaking sales in 2023 (€2.1 billion) with strong sales growth projected to continue
• Plans to open 20 new stores and revamp 40 existing stores
• An investment programme of €27 million

Yet the managing director said:

‘The cost of doing business has just gone off the charts, really . . . [the €250 million business support fund is] just insignificant, completely . . . We want the government to do more.  We want support.  What we want are policies to help us . . . ‘

What’s wrong with this picture?

 

 

 

 

 

Housing Illusions

The Irish Fiscal Advisory Council’s recent Fiscal Assessment Report got a lot of attention for describing the 2024 budget as ‘gimmickry’ (see note below re: link).   However, the Council’s examination of our considerable infrastructural deficits got no attention – deficits in health, transport and education infrastructure.  We will examine these in a future post.  Here, we look at the Council’s examination of our relatively poor housing infrastructure, or housing stock.

The Council collected data on housing stock in 14 EU countries and the UK.  They compared the level of housing stock in each country by measuring the number of houses (including apartments) per person aged 15 years and over.

Ireland has the lowest level of housing stock when compared with other high-income EU countries (our peer group).  But we would also fall well behind Italy, Spain and Portugal.  No doubt other factors will come into play as we lift the hood – age, geographical dispersion, price.  But there is strong evidence we don’t have as many dwellings as other countries.

How many houses would we need to build to reach the level in other countries?

If the level of Irish housing stock were to increase to Dutch levels, we would need an additional 150,000 houses.  In France, the Irish housing stock would need to increase by nearly 600,000.

These are my own calculations based on the Fiscal Council’s data.  The Fiscal Council stated that:

‘To achieve the sample average across countries (for the most recently available year), Ireland would need an additional 170,000 dwellings, equivalent to nearly six years of the level of completions achieved in 2022.’

Even using the Fiscal Council’s more conservative estimate, we’d need an increase of 170,000 dwellings.

Further, the Fiscal Council provides a time series along with housing stock projections out to 2026, using the Government’s own estimates.

The housing stock increased substantially between 2000 and 2008; unsurprisingly as we were building over 50,000 houses per year.  However, our stock has fallen since then when measured per adult.  The Fiscal Council estimates, using the Government’s projections in Budget 2024, that our hosing stock will essentially stagnate out to 2026 when measured as a proportion of the population.

Our infrastructural deficit in housing has been over a decade in the making.  But it is not simply a supply-demand issue.  Lorcan Sirr, writing in the Irish Times, succinctly references the issues which have contributed to the hole we have dug ourselves into over the years:

‘For Irish housing, this has meant a preference for deregulation (lower standards); under-resourcing of the State (which currently needs 541 planners and administrative staff); a reliance on the private sector for delivery as the State retreats (about 70 per cent of social housing is delivered by non-State providers); the dilution of public participation and bypassing of local democracy to facilitate the private sector (see the Planning and Development Bill 2023); and low taxation for investors.

‘The results have been predictable: legal challenges, rising homeless numbers, backlogged systems, missed targets, the State struggling to catch up, the increased financialisation of housing, young people who can’t find new homes to buy even if they could afford them – and spin to cover it all up.’

There is a tendency to debate housing as simply one of competing targets; that is, who can build how much in the shortest time.  However, without addressing the issues Lorcan highlights, we will be spinning wheels.  We may get more housing but it may not be affordable, it may be not be sustainable (suburban sprawl adding to congestion and commute times), it may not anticipate future demographic trends, it may not lead from tenant to ownership.

There are no quick fixes.  This a long-term project, requiring a reversal of long-term downward trends and long-term failed policies.   We tend to think of capacity in money terms – how much do we need to spend to solve a problem.  However, in housing, money is not the problem.  Issues regarding labour (do we have enough builders), planning processes, public authorities’ skill base, land availability, etc. are the challenges.  This requires an honest conversation with people about the challenges of expanding capacity – in particular, how much we can build in what time-frame. 

It’s either that or, as Lorcan quotes Alain Denault, we will get governments carrying out an imitation of work only to produce an illusion of an outcome.

And we know where that leads us.

* * *

[NOTE:  Gov.ie has taken over the Irish Fiscal Advisory Council’s website.  This is unfortunate.  Further, Gov.ie has yet to put up the Council’s December Fiscal Assessment report which was previously available online.  A number of researchers believe Gov.ie to be inadequate and confusing, obscuring more than it reveals.[

Should We be Worried About Unemployment

In the public debate there is a sense that we have ‘solved unemployment’.  Apart from the recession-austerity period, unemployment has been low.  It fell below 5 percent in 2000 and remained there until the crash.  When the recovery started in 2012, it fell from 15 percent to 5 percent just a few years later.  And in the post-Covid period it has remained below 5 percent.  We may be facing into a number of challenges but unemployment doesn’t seem to be one.

Nonetheless, there are a number of early warning signals.

First, unemployment has started to rise, if only incrementally. 

Unemployment has increased from 4.1 percent in May to 4.8 percent in October.  In these five months, the numbers unemployed rose by nearly 20,000, or a 17 percent rise off a low base.  Not reason to panic, but certainly grounds for concern.  The key question is whether this is a once-off or the beginning of a trend.

Second, there is the warning from the Central Bank governor that the full impact of recent interest rate increases has yet to be felt in the domestic economy. 

‘The full impact of higher interest rates still lies ahead, [the Central Bank] warns. Even ahead of that there are what are described as tentative signs of a slowdown in export flows and corporation tax receipts, it notes. In both cases that slow down follows years of growth.’

In our property-centric focus, we sometimes forget that the intent of interest rate rises is to depress economic activity in order to bring inflation under control.  And this means depressed employment growth.  Rising unemployment is the price we pay for inflation control; at least, in the Central Bank’s model.

Third, are the Government’s projections for a slow-down in the job-creation rate. 

• In the 12-year period prior to the crash, employment was growing each year on average by over 6 percent.
• In the 8-year period prior to Covid, employment was growing each year on average by nearly 3 percent.

What is the Government projecting out to 2030?

After the post-covid bounce in 2023, employment increase slow considerable.  By 2030, job creation will only grow by ½ percent.  This shouldn’t be too surprising given the Government’s general projection of slowing growth rates throughout the economy (as discussed here).  This will have implications not only for household living standards as more people struggle to find work in a slowing labour market; it will impact on revenue generation. Lower job growth leads to lower income and consumption tax revenue.  And if unemployment rises, this imposes a cost.

However, the Government doesn’t believe slowing job creation will lead to higher unemployment.  They project that unemployment will remain below 5 percent out to 2030.  This is a function of a slow-down in the labour force – all those people who are either in a job or looking for one.  If labour force growth declines in tandem with the slow-down in job creation, unemployment will remain stable.  But this raises its own questions.

The Government projects that growth in the labour force will fall from 1.4 percent in 2024 to 0.6 percent in 2030.  The labour force will grow by approximately 41,000 next year.  In 2030 that growth will fall to 18,000.  Why?  Fewer young people leaving education to go into the labour force?  Emigration?  Increased exit of older people?  In the budget papers, the Government was silent – though it did state in the Stability Programme Update that ageing demographics would depress labour force numbers.

Whatever the reasons, we may have a problem.  We need more people to do more things – from construction, ICT to caring, health education professions, along with business specialists. This is on top of providing employment for young people coming out of education and encouraging more people back in the workforce (e.g. parents).   A slowing labour force could impede our ability to address our infrastructural deficits or supply the resources needed to expand business opportunities.

In policy terms we need to anticipate rather than wait for rising unemployment to overwhelm us.  And we need to get beyond the self-congratulatory commentary that employment has never been higher.  Of course, it’s never been higher.  Unless employment actually falls, this will always be the case:  every month, every quarter, every year. 

And whatever about slowing job-creation, if it falls starts to fall – or fall below the growth in our labour force – we could be in a world of hurt.

 

The Great Slowdown

While the discussion about falling GDP and its impact on the Irish economy is important – especially in assessing the performance of our multi-national sector – we are in danger of missing a larger point.  We are entering into a Great Slowdown, an extended period of low growth which will impact on a range of indicators; but most importantly, on incomes and living standards.

The Government is projecting that real economic growth (GNI*) will average 2 percent per year out to 2030.  However, when we factor in population growth (GNI* per capita) this could fall to less than 1 percent per year for rest of the decade. 

How does this compare with previous periods of growth?

• In the boom years from 1995 – 2007, the average annual growth rate per capita was nearly 4 percent. Of course, in the latter part of this period this growth, based on property-related activity, was unsustainable.

• In the recovery period after austerity, recession and stagnation average annual growth rates came in at a healthy 3.2 percent.

• However, out to 2030 average annual growth rates are projected fall to less than one percent.

This is not surprising.  Analysts have been predicting this slowdown for some time - here and throughout Europe. 

Cliff Taylor describes the current situation:  higher interest rates dampening economic activity, cost-of-living crisis dampening consumer spending, weakening international markets with a jobs market topping out.  Cliff describes these as ‘amber lights’.

It is tempting to think we can return to higher growth rates once we have turned the corner on these issues:  when interest come down, when we exit the current cost-of-living crisis, when international trade picks up again.  This might be a mistake. 

The medium-term growth slowdown is structural.  There are many explanations: ageing demographics, climate change, technological disruption (increasing use of AI and automation).  Given that these and other factors could hit all at once – and in some respects, they already are - many commentators have used the term ‘polycrisis’.  Whatever the reasons, it will have considerable implications for incomes and living standards, and set up fierce competition over a dwindling pool of resources.

We do not need to be resigned.  A growth slowdown will put new emphasis on a number of appropriate policy responses.

• First, even a small increase in average annual growth, over the long-term, can help lift the economy, generate higher tax revenue and promote living standards.  Increasing growth (i.e. productivity) will require higher investment in education, or human capital.  It will also require more democratic practices at firm level and sectoral – collective bargaining, employee participation, enterprise councils, worker-directors, sectoral planning – which have all been shown to promote growth and reduce inefficiencies.
• Second, it will put more emphasis on redistribution.  This is not just about cash transfers. Extending free public services will play a key role in reducing household and business costs.  This needs to be accompanied by a drive to eliminate poverty, especially child poverty.  The Society Vincent de Paul found that poverty imposes a high social, economic and fiscal cost.  Raising income floors – whether wages or fixed incomes – can help reduce this cost. 
• Third, John Fitzgerald reminds us that national income is not the only or even best way to measure life quality.  Environment, stability, security, and climate all play a role in people’s preference, especially working hours.  Therefore, in constructing a response to a growth slow-down, special attention will need to be paid to life quality issues, workers’ preference and their ability to exert more control over their working and work-free lives.

The growth slowdown demands an egalitarian and democratic response.  Most of all, it requires a different kind of debate.  There is a danger that the next general election (which looks sooner rather than later) will be fought on the assumptions of high growth.  Not only will this disappoint down the line, it could risk over-looking those policies which can actually advance strong living standards, policies that are deliverable and necessary in a low-growth environment.

There is no iron-law that states that a low-growth economy means a low life-quality environment. But progressives and trade unionists first need to analyse what is likely to happen in the economy in the years ahead and prepare the appropriate policy responses.   The last thing we need to do is promote policies that are out of step with a changing political economy.

 

The Employers Strike in the Childcare Sector

An employers’ body – the Federation of Early Childcare Providers – has called a three-day ‘strike’ in the childcare sector.  They are closing down creches and early years’ services over their claim that the government is not providing enough money to private sector owners to run the services. 

However, a SIPTU survey of the accounts of select companies providing early years’ services tells a far different story:  profits, dividends and directors’ remuneration all rising, while providers amassed larger amounts of cash thanks largely to public subsidies.  Are there private companies that are struggling?  No doubt.  How many?  We don’t know.  Is it spread across the entire sector?  No.

If there is a crisis in the childcare sector, the main driver is not that private providers aren’t getting enough subsidies; it is that the current ownership structure of the sector (largely privately owned) is incapable of providing affordable childcare, proper wages and services accessible throughout the country, in a fiscally efficient manner.

Giraffe Childcare

Giraffe is the largest childcare chain in Ireland, operating in 23 locations.  It is owned by a UK firm which is controlled by the Ontario Teachers’ Pension fund.   Their financial accounts only go up to 2020 – they are over a year late in filing their 2021 accounts. However, the first year of the covid lockdown proved profitable to the company.

In 2020, profits rose by 61 percent, to nearly €3.5 million. 

The company more than doubled their cash holdings – to over €5 million. 

In 2019, the company paid €6.5 million in dividends to their owners.  Though the amount paid in 2020 was reduced, nearly €1.7 million was paid.  In that year, the company received €6.7 million in public subsidies through the Temporary Wage Subsidy Scheme.  In effect, the subsidy helped pay the dividend.

Given the pattern of other private sector childcare companies (see below), when Giraffe management finally get around to filing their 2021 accounts, we should see another bumper year for the company.

Six Select Companies

Taking six companies, which can be categorised as small to medium companies (Links, Cocoon, Grovelands, Little Rainbows, Safari and Tiger) we can see their financials up to 2021, incorporating two years of covid lockdowns, restrictions and public subsidies.

Between 2019 – the year before Covid – and 2021:

• Combined profits for the six companies increased nearly 7-fold, to €6.9 million (though a large chunk of that was due to one company: Links). 

• Combined cash holdings increased by over 3-fold, to €9.1 million

• Directors’ remuneration (another vehicle to extract value from a company) increased by two-fold, to €2.4 million.

These are serious increases, though we won’t know how these companies fared in 2022 for some time (there is usually a lag of 9 months in filing annual accounts).  It should be noted that four of the six companies (two did not report) received over €8 million in covid and other public subsidies, though not all public subsidies may have been reported.

Not all companies report whether they paid dividends.  Besides Giraffe, only Safari reported their dividend status.  They paid €383,000 in dividends in the years 2020-2021 while at the same time reporting the receipt of €143,000 in covid subsidies. 

A Company on Strike

The employers claim that whatever about larger private companies, small and medium sized companies are suffering (though, as stated, the six companies above can be categorised as medium).  There is no doubt this is true of many providers.  But how many?  How do we know?

Let’s look at one company that is going on ‘strike’:  Oakview.  Two Oakview creches (Tallaght and Cork City) filed financial returns.  Of those two, Tallaght went out on strike, and Cork city may have.

These two creches combined generated nearly €600,000 in profits in 2020 / 2021.  In particular, it paid out over half-a-million Euros in dividends (€569,000).  The dividends are paid to Antartic Cub – a holding company of several companies, including Oakview.  This holding company, owned by the Crean family, generated profits of €1.7 million in the two years 2020 / 2021.

Maybe the parents who are experiencing the loss of this service due to the strike might want to ask who benefitted from those dividends and what impact that has on fees.

What Childcare Companies Are Doing With Their Profits

Childcare companies used their profits and cash holdings for a variety of reasons.  In two instances of the above companies surveyed, it paid for expansion of the company (i.e. public subsidy paid for the expansion).  In one other case, public subsidy was used to pay down significant debt.

Somewhat exotically, one company, among other things, diverted resources to invest in luxury property.  From Links childcare 2021 accounts:

“The company advanced an initial loan of €1,500,000 to connected undertaking P. Kelly Villas Limited in a previous financial year and has advanced further loan funding in the current financial year. The loan balance receivable by the company at the financial year end amounts to €3,064,667 (31 October 2020 - €1,500,000) . . . P. Kelly Villas Limited is a company which is registered in Republic of Ireland and is a connected party by virtue of common shareholders and directors.”

Kelly Villas specialises in luxury property rentals in places such as Florida, Lanzarote, Marbella, etc.

No Basis for Claims

The Federation claims that the situation is so dire that creches are increasingly closing down.  However, this is not the case.  The Department has produced data which tracks the number of closures in the period of January to August:

• In 2019: there were 77 net closures (closures minus new start-ups)
• In 2020: there were 77 net closures
• In 2021: there were 62 net closures
• In 2022: there were 80 net closures
• In 2023: there were 38 net closures

If anything the number of closures is falling. This doesn’t look like a sector in crisis.  And the reasons for closures don’t substantiate the employers’ claim.  For instance, when asked the reason for closures in 2022 less than a quarter stated it was due to ‘financial viability’.  

And if so many childcare providers are in financial straits, on the verge of closure, why are so few seeking the resources they would be entitled to?  The Department has stated:

‘. . . only a handful of providers [are seeking] to avail of particular supports available to those in financial difficulty.’

If companies are in financial difficulties – and no doubt there are – there is a fund to assist them.  But few are availing of it.  Maybe because relatively few need such assistance.

The Real Issues

The real issues in the childcare sector are, first, the lack of financial transparency.  Most private childcare companies hide behind reporting exemptions to withhold financial information from the public (all quite legal).  While the employers’ group claim hardship, they never produce data to substantiate this claim.  If they want to be taken seriously they should urge their members to publish their full financial accounts – and publish it on time.

The second related-issue is accountability.  Many of the private employers complain about the ‘bureaucracy’ and ‘red-tape’ involved in accessing funds.  However, what they call red-tape could be the Department of Children attempting to ensure value-for-money from public subsidies. 

Most of all, this begs serious questions about the ownership structure of the early years sector.  Nearly two-thirds of early year services are owned privately (the remainder are community places).  An additional €400 million has gone into the sector and, yet thousands of workers are on low wages and are not being adequately compensated for professionalisation of the workforce.  Staff turnover is still at crisis levels.  Most services are at capacity.  Access to services is becoming more difficult.  Fees are far too high. 

Maybe we are seeing the contradictions of a public service being provided by for-profit interest groups coming to the fore. 

Maybe we are seeing prosperous, profitable companies exploiting the difficulties that some providers are experiencing; exploiting so that they can get more public subsidies and add to their profit line.

Maybe we are seeing the logic of state-provided childcare services emerging in the debate where decent wages would be paid, fees would be reduced to affordable levels and investment would go into the service rather than dividends.

The employers’ ‘strike’ could create a turning point in the debate over childcare and early education.  But not a turn they anticipated:  rather than increase support for more public subsidies to the private sector, the ‘strike’ could provoke an increase in support for a publicly-provided childcare service.

[Note:  all financial accounts are available from the Companies Registration Office but they are behind a paywall]

Shorting our Future

Education is vital to people’s personal development and life chances, to economic growth and productivity, to social prosperity and equality.  But you wouldn’t think so when listening to pre-budget debates.  Among our peer group in the EU (other high income countries), Ireland comes last in terms of educational investment – and it would take billions of Euros to catch up.

That’s according to the OECD’s recent Education at a Glance 2023.  It utilises a helpful measurement: total expenditure per full-time equivalent student.  This avoids problems with using GDP/GNI* as a benchmark as this doesn’t factor in youth demographic.  For instance, in country A, young people make up a quarter of the population while in country B they make up only 15 percent.  The two countries could both spend the same proportion of GDP on education but that would mean country A is underspending on education, given it has more children.

Of course, measuring the spend per student favours higher income countries.  But as we are measuring like-with-like (other high-income EU countries) this is not so much an issue here.  

So what is the OECD telling us (with the help of Eurostat’s data on pupil numbers to get a weighted average)?  Let’s turn to primary education. 

There’s Ireland – at the bottom of the investment table at primary level.

In 2020, we would have had to increase spending at primary level by 16 percent, or over €760 million.  To reach the best performer – Denmark – we would have had to increase spending by nearly half, or a staggering €2.3 billion.

There are even a number of low-income EU countries that spend more than us per primary pupil:  Estonia, Slovenia, and Italy with Portugal and Spain not far behind.

Turning to secondary education (lower and upper secondary education combined), we find a similar pattern.

There’s Ireland again – at the bottom of the table.  However, in money terms we are further behind our peer-group average.  To reach the average, we’d need to increase investment by 31 percent, or €1.4 billion.  To reach the top performer – Austria – spending would have had to increase by €2.4 billion.

Regarding tertiary, or third-level, education, the OECD provides two measurements:  one that includes Research & Development (R&D) and the other that excludes it. 

When we exclude R&D, Ireland comes close to our peer group average, though it would still need to increase spending by over €450 million in 2020 to reach the best performer – Belgium.

However, we would need substantial increases if R&D were included:  €600 million to reach our peer group average and €1.6 billion to reach Sweden, the best performer.

One final measurement:  early childhood education.  This is not an easily comparable sector.  The OECD points out that early childhood education (ECE) services are ‘very diverse’ with variations in the targeted age groups, funding, governance, type of delivery (full-time or part-time), etc.  Further, Ireland’s data reporting is spotty at best.  The following combined spending on ECE and pre-primary and, even here, there may be different categorisation methodologies.  Nonetheless, what data we do have is instructive.

Ireland is at the bottom of the table – by a considerable amount.  While the magnitude may change with more robust data, this is not only consistent with investment in other educational levels, it corresponds with government data on ECE expenditure.

* * *

In the last 10 years, Irish education expenditure has increased by over 40 percent, while total expenditure increased by 30 percent.  So more resources have been directed into education. 

However, as a proportion of national income, education expenditure has fallen during this same period and remained static over the last few years.

Investment in education doesn’t get the same airtime as, say, tax cuts – even though it is far more important for a prospering economy and society.  We are essentially ‘shorting’ our future, suppressing necessary investment in education in order to facilitate tax cuts and a low-tax economy.

We would need to spend billions to reach the average of our peer group; billions more to reach the best performers.  The first thing we need to do to show how out of step we are with other EU countries in our peer group.  

Then we can start having a debate on issues that really matter.

 

Best in the Class

The Irish Fiscal Advisory Council is warning against over-spending in this year’s budget – over-spending relative to the 5 percent spending rule.  It could undermine confidence in Ireland’s public finances, warns the Council; it could see a repeat of the mistakes made in the run-up to the crash.  It could, according to the Council, risk plunging us into a pro-cyclical trap whereby more spending risks a deterioration of our fiscal stance in an ever-downward spiral.

These risks and warnings are well-taken; especially as both Fianna Fail and Fine Gael have implemented irrational fiscal policies in the past - both prior to and in the aftermath of the crash (even the Fiscal Council aggressively promoted pro-cyclical fiscal policies in the past).  So caution is needed when considering these track records.  However, let’s get some perspective on all this.

First, Irish public finances are stronger than almost all other Eurozone countries – by a considerable margin. 

The EU Commission projects that Ireland will be the only country (bar Cyprus) to run a b budget surplus in 2024 (and that is after excluding the excess corporate tax receipts).  Ireland will be running a surplus of 1.5 percent of GNI*.  The Euro area, on the other hand, is projected to run a deficit of 2.4 percent. 

The International Monetary Fund projects annual surpluses and deficits out to 2026.  While a little bit more tentative, they show that this story will continue:  Ireland (apart from Cyprus) will be the only Eurozone country with a budget surplus.  And the gap between Ireland’s strong performance and the Eurozone average will widen even further.

The situation is similar when comparing debt levels.

The EU Commission projects that, up to 2024, Ireland’s debt level will be well below the Eurozone average.  In 2025 and 2026, the IMF projects that Irish public debt will fall even further compared to the Eurozone.  Irish public debt is falling faster than any other Eurozone country. 

The Government will take credit for this ‘prudent fiscal management’ and in many respects, they deserve kudos.  However, it is easy to run surpluses when you suppress spending.  Even when old age pension expenditure is excluded, Irish current spending would have to increase by approximately €7.5 billion just to reach the average spend of our EU peer group. 

There are a number of important debates in the run-up to the budget.  Whether the Government increases net spending by 5 percent or 6 percent (the reason for the row between the Government and the Fiscal Council) is not one of them.  If the Government ‘breaches’ its spending rule, it will make little difference relative to Eurozone averages and our own fiscal dynamic.

We would still be best in the class.

However, all this glosses over a far more important debate.  If we want to make transformative improvements in public services and social protection, while maintaining a high level of public investment, we will need to significantly increase tax revenue, and without resort to the windfall or excessive corporate tax receipts. 

But this is a debate we’re not getting.  It is looking more and more likely that the recommendations of the Commission on Taxation and Social Welfare will be marginalised.  There will be no road-maps to an enhanced social state.  Overall tax levels will remain relatively low at the cost of social prosperity and economic efficiency.

If that happens, we will be sent to the back of the class.

The Politics of the Universal Social Charge

Two polls, two different narratives.  A Red C poll showed that an overwhelming majority in favour of abolishing the Universal Social Charge.  An Ireland Thinks poll shows that a clear majority want increased public services over tax cuts.  Which is a true reflection of public opinion?  Discuss.

It may not be so contradictory.  People want more services and social supports but they ‘hate’ the USC.  For many, the USC is a legacy of the austerity period – part of a number of socially damaging measures.  That political parties have used the tax as a crude bid for votes (e.g. Fine Gael’s 2016 election promise to abolish it) has created the impression that the USC is an ‘illegitimate’ tax. Add to this the cost-of-living crisis and you have understandable calls for support. 

The USC, however, is a ‘good’ tax. Leave aside the issue of rates and threshold - elements which can be easily changed.  The USC is good tax is because it is simple, transparent and no matter how many tax accountants you hire, you can’t escape it.  The tax has almost no exemptions, reliefs, or allowances – unlike the income tax system.  Most of all, because it attaches itself to nearly all income, relatively small tax rates can yield considerable amount of revenue.

Importantly, the USC is progressive.  Its abolition would be a significant boon for high-income earners.

Someone on €30,000 would receive approximately €11 per week.  The famed ‘middle Ireland’ earner (€40,000) would get about €20 per week.  However, at the top end, someone on €100,000 would get €92 per week while a very high earner would get €322 per week (data taken from Deloitte tax calculator).

More perversely, those on low and average incomes would end up funding their own USC cuts.  The tax took in €4.9 billion in 2022.  Abolishing this revenue would mean longer waiting lists (housing, healthcare, home care), suppressed social protection increases, and squeezed public services which would impact most on older people as they will have greater reliance on health supports.

And it would pretty much wipe out government surpluses going forward (excluding windfall corporate tax revenue). 

Regressive, squeezing public services, wiping out the surplus:  this would return us to the reckless fiscal policies prior to the crash.  Welcome to the politics of abolishing the USC.

Aidan Regan puts it in very trenchant terms (paywalled):

‘Ireland’s corporate tax boom is an invitation to do some very stupid things such as cutting income taxes, including the Universal Social Charge, further shrinking an already extremely narrow tax base  . . . what the 2022 census clearly shows is that Ireland’s population is growing way beyond what our infrastructure and public services can handle.  We ned a decade of ambitious forward-thinking investment, not tax cuts.  We need to expand our tax base to finance future growth.’

Can’t disagree with a word of this – or any other word in his article.  But I suspect that, in political terms, reliance on these arguments alone won’t win the public debate (though I really, really hope I am mistaken).  Armed with Aiden’s logical arguments, progressives can make two strong counter-arguments.

First, show how an expansion of public services, government consumption and social transfers can make a transformative impact on people’s living standards in the short-term.  Relying on a stronger social state can achieve far better results than crude tax-cutting. 

In this regard, I will propose in my next post how progressives can argue that Budget 2024 should be a budget for families with children.

Second, we should argue for real tax reform.  Here is just one example.

• Merge USC with social insurance to create a greatly strengthened social insurance system.

An enhanced social insurance system could start to deliver a range of pay-related in-work benefits (e.g. family, old age, illness and disability, caring, etc.).  This would significantly increase living standards for all workers.

And like many other EU countries, we could provide health benefits from the Social Insurance Fund:  free or heavily subsidised GP visits and prescription medicine.

This would, however, create a hole in Exchequer finances (public finances excluding social insurance).  But we have the Commission on Taxation and Social Welfare proposals to extend the tax base primarily through increased taxes on capital, wealth, assets and property.  And we would still need to increase employers’ PRSI incrementally over the long-term.

This is not so radical sounding.  The Government published a report on merging USC and PRSI back in 2018.  The report came up with five options.  Progressives would do well to re-read this report with a view of privileging social insurance as part of a strong social state.

[Note:  for a more radical tax reform option, see here for a proposal to abolish income tax and replace it with a reformed and enhanced USC.  I still think it is valid.]

The last thing progressives should do is allow the Right to advance tax cuts as a solution to the cost-of-living crisis or an efficient way to assist low and middle-income earners.  Lasting solutions lie in an expanded social state – public services, social insurance, and economic and social investment. 

Let’s start talking about that now.

Manufacturing an Unnecessary Row

If the government parties were committed to implementing the proposals in the Programme for Government, they would not be having this current tax-cut row.  The Programme states:

‘In Budget 2021, there will be no change to income tax credits or bands. From Budget 2022 onwards, in the event that incomes are again rising as the economy recovers, credits and bands will be indexed linked to earnings.’

The Programme can’t be any clearer.  No indexation in 2021 (due to uncertainty during the Covid pandemic and lockdowns).  Starting in 2022, income tax credits and bands will be indexed to wage growth.  The Taoiseach was adamant:

‘I’ve been very clear that I’m not tying myself to any specific policy, I am tying myself to the programme for government commitment, which is that we index tax bands and credits.’

So what should happen in Budget 2024 if the Programme’s tax commitments are honoured?  Let’s remember that Fine Gael is calling for an increase in the standard rate tax band of €4,000 and personal tax credits by €100.

If the Programme for Government’s commitment were honoured – that the Standard Rate Tax Band be increased in line with wages – then next year the tax band would be increased by €432 – not Fine Gael’s proposed €4,000. This is due to wages increasing by 14.5 percent between 2021 and 2024.

If we apply the Programme for Government’s formula to personal tax credits, they would rise from €1,775 to €1,890 – an increase of €115.

Of course, all commitments in a Programme must be judged against unexpected events.  And one can reasonably argue that the high levels of inflation we are experiencing were unexpected.

Therefore, let’s index the tax measures mentioned in the Programme to inflation. 

Between 2021 and 2024, the Government projects inflation to rise by 16.2 percent – higher than the wage increase rate.  This would mean the standard rate tax band would increase by €1,030; again, well below the Fine Gael demand.

Inflation-indexing personal tax credits would see them rise by €143 – from €17,75 to €1,918.

Given that a formula for increasing the standard rate tax band and personal credits has already been agreed by the three parties in the Programme for Government, what is the basis for abandoning this commitment?  This question has not been asked in the debate.

Opposition parties (and even Fianna Fail and the Greens) shouldn’t feed this unjustified demand.  Rather, they should stick to the Programme commitment - with a slight amendment of indexing increases to the unexpected inflation increases).

This would mean (with a little rounding):

• Increase the standard rate tax band by €1,050
• Increase personal tax credits by €145

This would free up about €1 billion from Fine Gael’s tax demand which has been estimated to cost €1.5 billion.

Are there better ways to spend this €1 billion to assist ‘middle Ireland’ – and ‘low-income Ireland’ as well?

That will be subject of my next post.

Most Middle-Income Earners Won't Benefit

The Taoiseach is making a big play for ‘middle Ireland’.  In an interview with the Irish Times he stated:

‘. . . our basis for participation in this Government is that middle Ireland gets looked after, and that’s looking after working people. . . So we’d be very clear in this Government that we want income taxes reduced.’

To this end, Fine Gael is proposing:

• A major tax cut: an increase in the standard rate tax band of €4,000 – from €40,000 to €44,000 for a single person. Everyone earning above €44,000 would get €800.  Anyone earning below €40,000 would get nothing.

• A minor tax cut: an increase in personal tax credits of €200.  This would mean an additional €3.86 per week for all workers in the tax net.

Fine Gael is claiming these cuts will bring considerable benefit to middle income earners: €1,000.  However:

• Most workers will get less than €4 per week as they won’t benefit from the increase in the standard rate tax band.

• The majority of middle-income earners will not receive the major tax cut and will have to content themselves with less than €4 per week as well.

Let’s look at the evidence that most middle-income earners will not be the primary beneficiaries of Fine Gael’s tax cuts.

Survey of Income and Living Conditions (SILC)

SILC measures all income – from employment and social transfers –broken down into deciles.  If we take the 5^th and 6^th deciles as ‘the middle’ we find:

The average weekly income from employment for households is €718 – or an annualised €37,400; below the top rate tax band which is the entry level to Fine Gael’s major tax cut (i.e. €40,000).  A problem with SILC data, however, is that it is based on household income.  So we don’t know how many people in the household are in-work or are working full-time or part-time.  So this €718 could be earned more than one worker.

It should be noted that in the higher 7^th decile, weekly employee income is approximately €1,100.  However, if two persons work in this household, they, too, may be well below the €40,000 benchmark.

So while we can’t estimate how much an individual earns from the SILC data, household market income doesn’t suggest that this particular ‘middle’ would benefit from Fine Gael major tax cuts.

CSO Data

The CSO’s Administrative Data Sources shows that in 2021, median earning was €644.55 – or an annualised €33,600.  We can project earnings in 2023 by applying the 3.3 wage increase last year and the Government’s projected 5.6 percent wage increase this year.  Median is an important metric as it represents that point at which 50 percent above and 50 percent earn below.

• In 2023 we can project median earnings to be a weekly €703 – or an annualised €36,700.

That ‘middle’ income earner is well below the top rate of tax; well below Fine Gael’s main tax cut threshold. 

The CSO also produces the Earnings Hours and Employment Costs Quarterly Survey.  This is the main database for earnings.  What does this tell us?

In 2022 average weekly earnings was €881.   Again, if we apply the Government’s projected wage increase of 5.6 percent this year, we find:    

• In 2023 the estimated average weekly earnings will be €931 – or €48,500 annually.

However, this is the average and doesn’t tell us what the middle, or median, income is.  The Administrative Data source suggests that the median is 20 percent below the average. If so:

• In 2023 the estimated median weekly earnings will be €745 – or an annual €38,800.

Again, this ‘middle earner’ won’t benefit from Fine Gael’s main tax cut.

Revenue Commissioner Data

The Revenue Commissioner provides detailed data on the range of income from employees.  But there are problems:  first, the latest data is 2019; second, a high number of low earners are actually pensioners not in employment (though some would be); third, about a quarter of the data comes from the combined income of ‘married couples’ so we don’t know what they individually.  So we should treat the following as indicative. 

In 2019, the middle cohort (the middle third) earned between €16,000 and €37,400.  The median income was €25,800.

If we adjust the income range by the increase in wages up to 2023 (20 percent), we find that the middle cohort earned between €19,200 and €44,900.  The median income is estimated to be €31,200.

This shows that while most of the upper third of income earners would benefit from Fine Gael’s main tax cut, most of the middle third wouldn’t.

If we could adjust the Revenue Commissioners table by removing pensioners and disaggregating married couples’ joint income, we’d probably find that range of income for the middle third and the median income to be higher.  But it wouldn’t change the main story-line; namely, that the majority of middle-income earners wouldn’t benefit from Fine Gael’s main tax cut.

* * *

While each data source has its own challenges, they tell a similar story:  namely, that most employees, and most middle-income employees, would get less than €4 year per week from Fine Gael’s tax cut proposals.

Even if one didn’t care about the impact of such tax cuts on inequality, the ability to fund European-level of services, the resources to fund in-work benefits (which would really benefit middle-income earners), on economic and social investment – even if you didn’t care about any of this, you would still have to conclude that Fine Gael’s tax cuts for most workers is pretty minimal.  The big winners would be higher earners – those that have a better capacity to absorb the current cost-of-living crisis.

We need a better, more informed debate on ‘middle Ireland’.

 

 

 

The Current Cost-of-Living Crisis is Not Temporary

The background noise in the public debate is that since inflation is ‘easing off’, prices should start coming down. We have heard this in the coverage over the meeting between the Government and representatives of the food sector.  However, this misrepresents how inflation impacts on living standards.

If the rate of inflation falls this doesn’t mean prices fall.  It just means prices are rising at a slower level.  The inflation of last year and this year becomes embedded in our living costs going forward. 

Last year, inflation ran at 8.1 percent.  This year inflation is projected to slow to 4.9 percent.  However, this only means that prices are rising at a slower pace.  Over the two years, inflation will rise by 13.4 percent.  By 2026, while price rises are projected by the Government to settle down to 2 percent annually (a manageable and desirable level), prices will have risen by 21 percent over the five-year period.

Of course, within this mix there will be some products or services where prices actually fall back.  For instance, energy products have fallen by 6 percent since their high point in October 2022.  Still, non-energy prices have continued to rise.

Inflation’s legacy will be a drag on household living standards for years to come. 

There are two ways to overcome this crisis:  reduce prices and/or increase income.  That profits have been driving prices is discussed here.  Increasingly, the debate has turned to price controls though it is hard to see the Government going down this route.  They refrained from doing this with energy costs.  What chance they will start with bread?

The second way is to increase incomes.  Gross wages will have to rise by 5 percent each year between 2023 and 2025 to match inflation by 2025. Even if this were achieved, this would only bring employees back to 2021 levels in real terms.  A number of years of income growth will have been lost.

Even so, wage increases of 15 percent between now and 2025 looks to be a steep hill.

During the period of recession and austerity, average weekly earnings fell.  They started rising (slowly) in2013.  In 2019, the year before the pandemic, average earnings increased by 3.6 percent.  They increased further in 2020 and 2021 but this would have been affected by compositional changes.  Last year average earnings rose by 3.3 percent.

Wage growth of 5 percent for an extended period might be achievable in the context of a tight labour market – low unemployment, full capacity.  An increase in union membership would also help.  But it will be challenge.

Some will argue (as the Taoiseach has) that cutting income tax will ‘put more money in people’s pockets’ and, so, assist in fending off price increases.  This is a poor argument.

For the single average earner on €46,000, the gross wage increase was 3.3 percent.  When tax cuts are factored in, the increase rose slightly – to 3.5 percent.  For the single average earner in the wholesale/retail sector, the tax cuts made only a fractional difference.

The dangers of going down the tax-cut route are two-fold: first, it diverts resources away from reducing prices in public services (e.g. public transport fares, childcare, free textbooks at secondary level, etc.).  Second, such tax cuts are potentially regressive.

Let’s say we were able to increase wages across-the-board over the next three years to bring them back to inflation.  We have another, larger problem.  Namely, that we already have the highest living costs in the EU.

In 1995, Irish prices were below the EU average.  However, over the years, living costs have increased to the point that they are now the highest in the EU.  They are even above Denmark which has always been a high-cost economy.  The Danes, however, have compensated their high costs through higher nominal wages, better resourced public services and a more generous social protection system.  We haven’t. 

The current cost-of-living crisis will subside, either through market equilibrium or the ECB raising interest rates even if they push European economies into recession.  This crisis will pass, though it will leave considerable economic and social damage in its wake.  

The point is this.  Even after the current cost-of-living crisis we will still be in a . . . cost of living crisis.  We will still have one of the highest living costs in the EU, if not the highest.

The question, therefore is:  what do we do then?

 

Searching for Profits

There is a growing debate over why prices are so high, why prices aren’t falling, what is driving prices.  Conor Pope has another instalment in his series on price outrages.  Answers vary according to sectors.  But one of them must be rising profits. Profits now take a bigger slice of the price of goods and services in the domestic sector than wages.  In the economic sectors dominated by domestic-owned enterprises in 2021:

• Total profits (gross operating surplus) made up €97.4 billion
• Total employee compensation made up €92.3 billion

This is unusual.  In modern economies, wages (employee compensation) usually exceed profits, though the history of most European countries has seen wages fall as a share of income over the long term, with profits rising.

Of course, when measuring the Irish economy, one has to introduce caveats.  In this instance, profits are boosted by aircraft leasing which are removed by the CSO when assessing national income (GNI*). This is because aircraft leasing, while domestically-owned, has little impact on domestic activity:  aircraft is bought abroad, flown abroad, maintained and warehoused abroad.   We don’t have profit data for aircraft leasing in the CSO’s productivity database but we can remove the Administrative Services sector, where those profits dominate.

When we do this, profits fall below wages – but not by much.

• Total profits (gross operating surplus) made up €81.8 billion
• Total employee compensation made up €86.6 billion

But the story of rising profits remains. 

Prior to the crash, profits and wages rose together – that is, they shared out productivity gains equally.  The crash drove down profits which is usual in periods of economic contraction.  However, since 2012, profits have nearly doubled while wages rose by less than 50 percent. 

Importantly, during the two years of the pandemic, profits, excluding administrative services, increased at an even faster pace.  Between 2019 and 2021:

• Profits rose by over 21 percent
• Wages rose by 8.6 percent

Unfortunately we don’t have data for 2022.  Again, we have to caveat these numbers.  The lockdown period saw considerable changes in sectoral composition meaning that economy-wide data is likely to be volatile.  It is likely this data won’t settle until this year.  But the pattern of rising profits is well established.

We can also get in an insight into the inputs into gross output, or price. Unfortunately, for the domestic sector, we only have data for manufacturing.

Unsurprisingly, materials and services used in production make up the largest amount of inputs.  Energy, in 2021, makes up a small amount but this will have risen in 2022 with the price hikes.

The key point is that profits (capital) make up 22 percent of total output while wages make up only 15 percent.  Profits make up a bigger slice of price than wages. 

It is important to remember that while profits economy-wide are rising, they may not be rising uniformly across all sectors, or across Irish and foreign-owned enterprises.  Unfortunately, the data does not allow us to safely assess profit increases at sectoral level given the data distortions by multi-nationals.

We would probably find that many businesses are also suffering from a profit-price spiral.  One example of this would be businesses that purchase energy as part of their inputs.  If there are ‘excess’ profits in energy, then businesses as well as households will be paying over the odds.

What all this calls for is a greater focus on profits.  When it comes to wages, we get up-to-data on a quarterly basis.  It is possible to bread down this data by sex, age, size of enterprise, sector, public/private sector, region and even county-level, etc.  We get a wall of relatively-contemporaneous numbers when it comes to wages.  And a further benefit is that this data is not distorted by multi-national tax and legal strategies.

However, when it comes to profits the data can lag by two to three years with few details.  You are left with putting together a puzzle with a lot pieces missing.

This is further exacerbated by the fact that many companies do not have to file complete company accounts, laying out their profit-loss accounts and balance sheets.  Full and partial exemptions include small companies (which can still have significant commercial activity), companies based abroad – especially headquartered in tax havens, and private unlimited companies (e.g. Dunnes Stores). 

What we need is Freedom of Economic Information to operate alongside the current Freedom of Information legislation.  This would require:

• The Government to increase resources to the CSO to allow them to gather and publish contemporaneous data on profits on a par with wages.

• All companies that do business in the state publishing their full company accounts in a timely manner.

• Providing free access to company accounts. Currently, people have to pay to get accounts from the Companies Registration Office.  This service should be free.  The UK provides free company information so why can’t we?

We need to get a better understanding of the role of profits in the economy – who makes how much and what is done with profits (re-investment, retention in the company, dividends, etc.). 

We know that profits are driving prices.  We are in a profit price spiral.  Greater attention on profits will help inform policy, identify price-gouging and, potentially, name and shame.  Most importantly, it would provide the information the Government needs to control and eventually bring down prices.

What the President Said

The President, Michael D. Higgins, has upset some economists.  According to a front-page Business Post article entitled ‘Economists round on President over ‘lazy’ and ‘uniformed spiel’: 

“Economists have rounded on President Michael D. Higgins and claimed comments made about their profession are ‘lazy’, ‘outdated’, ‘uninformed’ and ‘incomprehensible’.

Of course, it was only some economists who made these comments (I spoke to other economists who gave a thumbs-up to the Presidents’ comments). 

So what upset people so?  One was the issue of growth.  The President said:

‘Many economists remain stuck in an inexorable growth narrative . . .  A fixation on a narrowly defined efficiency, productivity, perpetual growth has resulted in a discipline that has become blinkered to the ecological challenge – the ecological catastrophe – we now face.’

This is one of the main themes of his speech – critiquing a growth narrative that fails to acknowledge ecological limits.  I doubt anyone would disagree that ignoring such limits is a really bad idea.  And to be fair, it’s not just that ‘many’ economists remain stuck. Much of the public debate, unfortunately, is stuck in that narrative. 

Some might argue that this is a de-growth argument.  That’s how Jim Power interpreted it:

‘Economist Jim Power said without economic growth it would not be possible to generate the resources needed to create a functioning society and address issues such as climate change.  “Give us a decade of zero growth and see how that works out.”’ 

The President anticipates this argument:

‘Our obsession with inexorable economic expansion expresses, perhaps, a desire to transcend our material limits and rise above the state of nature. Yet this growth fixation paradoxically increases the potency of those very limits.’

Ironically, a growth narrative without ecological limits lays the ground for devastating de-growth for economies and humanity in the not-too-distant future. 

The President didn’t attack economic growth per se; nor did he attack the economic profession as a whole.   On the contrary, he highlighted the work of a number of economic and social academics who have enriched our understanding of the economy and suggested a ‘ . . . real, emancipatory potential for a new, recovered political economy’.  Further, he didn’t dismiss conventional tools of measurement. On the contrary he gave them a new political economy framework:

‘ . . . all of the prevailing ruling concepts in our present economic discourse – flexibility, globalisation, productivity, efficiency, innovation, indeed economic growth itself – are capable of being re-defined within an active citizen participative state context, given a shared moral resonance, reimagined sustainably within the context of the new ecological-social model.’

Given this, I am at a loss to understand the reaction of some economists. The President’s approach holds out the best hope of becoming unstuck from a potentially dangerous narrative.  Thankfully, there is a growing number of economists who believe this repurposing can be done, that we need such limits, and who are working on new tools to help us achieve these goals.

A second issue raised by critics is the state of economic education.  The President called for a

‘. . . pluralism of approaches in teaching economics . . . The question of how economics is taught. . .  is a matter of utmost importance . . . failure to facilitate a pluralism of approaches in teaching economics is a deprivation of basic students’ rights . . . leading, as it does, to a narrow, blinkered and distorted education in economics and the wider social sciences.’

Again, it’s hard to imagine anyone objecting to this. But is this issue relevant today?  Stephen Kinsella described the President’s views as ‘outdated’:

‘The President is critiquing an economics that existed in the 1970s before I was born . . . he’s not engaging with the subject as it exists in 2023, as it is taught in 2023, and most importantly how it is researched in 2023.’

If that economics existed in the 1970s, it continued to exist four decades on in many places.  Following the Great Recession, a group of UK academics supported students who protested against the way economics was being taught, describing it as an ‘intellectual monoculture’ which was ‘heavily biased in favour of orthodoxy and against intellectual diversity.’

‘Students can now complete a degree in economics without having been exposed to the theories of Keynes, Marx or Minsky, and without having learned about the Great Depression.’

Similar protests occurred in the US – at Harvard University, for instance.  Students from 19 countries staged a trans-national protest stating:

‘The lack of intellectual diversity limits our ability to contend with the multidimensional challenges of the 21st century – from financial stability to food security and climate change . . . The real world should be brought back into the classroom, as well as debate and a pluralism of theories and methods.’

This speaks to the use of models in economic teaching.  Professor Karl Whelan gave a well-argued defence of economic teaching back in 2014:

‘Why don’t models in economics describe how “real people” act? The answer is that human beings are the most complex thing in the world . . .  so economic models could never be literal descriptions of how people behave.  The purpose of theory in economics is to use a model that is literally false but could help us get a better (if still incomplete) understanding of the world than we would have if we weren’t using the model to organise our thoughts.’

If this is so – the need to use false models to get us closer to describing complex interactions which are inevitably resistant to modelling – then the case for a pluralist approach to economic teaching becomes even stronger. 

These reactions described above occurred in the aftermath of the financial crash.  What about today?  A recent survey of economic students in US universities conducted by Rethinking Economics USA and the Roosevelt Network revealed that 78 percent of students have not learned about environmental or ecological economics while another 92 percent have not learned about Stratification or Feminist economics.  91 percent never heard of heterodox economics. 

It may be that, in Ireland, these issues have been resolved and that they were resolved well before the crash. Clearly, the President believes there has been considerable progress:

‘New ideas are fortunately available . . .   Thankfully, we now have a richer discourse than perhaps we did a decade-and-a-half ago at the last point of crisis . . . ‘

In stating this, he cited the recent contributions of a number of economic and social academics.

Again, given this, I am at a loss as to understand the reaction of some economists.  The President is certainly not describing the 1970s.

Ultimately, the quality and breadth of economic teaching in Irish universities is an empirical issue to be examined and tested.  It would be helpful if some academics took up the President’s challenge and surveyed the breadth and plurality of economics education.  I suspect it would be a mixed bag – dependent on the department, module and lecturer as well as under-grad/post-grad courses.  This would hopefully lead to a more constructive and informed debate.

The key word is constructive.  There have been some reactions to the President’s speech that have been anything but.  For instance, Karl Deeter tweeted:

‘The President is Irelands lefty version of Trump. Statements devoid of meaning and ignoring the fact that economic growth is the path out of poverty both here and abroad. Economic growth and rising life expectancy are two of the best metrics there are.’

Yeah, right – as if President Higgins incites far-right, racists, and neo-nazis to trash Leinster House as Trump did with Capitol Hill.  This type of contribution only degrades the debate.

It should always be remembered – the economics profession, like other academic disciplines, does not speak with one voice.  If some economists take issue with the President, they are also taking issue with other economists who would support the President’s remarks.

Once again, the President has laid down a challenge – to use our sometimes-inadequate tools to a better purpose, to construct a growth narrative within ecological limits, to enrich our understanding of economic and social issues through a plurality of analytical tools.  Many people are up to this challenge, including economists.  And if people are opposed to that democratic and sustainable purpose, fair enough.  That’s a political debate.  

So let that debate begin.  But for goodness sake, read what people have said or written before commenting.

__________________________________________________________________________________________________________________

STOP THE PRESS

Just as I was posting this blog, Minister Paschal O’Donohoe intervened in the debate – in particular, on the issue of economics education.  He stated:

“I think it’s brilliant to see a debate underway regarding how economics is taught, and what is the framework through which it is taught.  I think the President was raising some very interesting points regarding the teaching of economics. And I think all those in the economics community here in Ireland, I’m sure will engage with the substance of the claims that he’s making.’

Of his own experience the Minister said:

‘I was a student of economics in the 1990s, when we were taught to believe that financial markets were rational, and that they were able to process all information that was available to them at all times. And I think we’ve all learned, and I’ve certainly learned that that kind of theory and that kind of framework bears little resemblance to the real world.’

When specifically asked about Stephen Kinsella’s comment that the President’s views were out of date, the Minister replied: 

‘I think the President is well up to date on this. And I think if you look at the reading, and thoughts of our President, I think it is pretty obvious he is on top of many of the different themes and trends in economics.’

And all this from someone who couldn’t be considered an ideological ally of the President.

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.