Notes On The Front

Looking Under the Hood of the Jobs Bonanza

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

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

 

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

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

 

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

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

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

 

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

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

The Irish Times’ Cantillon observed:

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

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

 

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

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

It’s a good story but not without downsides.

One Graph for a New Model

Is there an argument for a new housing market model?

 

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

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

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

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

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

 

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

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

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

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

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

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

Breaking the Consensus on Multi-national Taxation

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

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

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

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

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

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

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

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

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

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

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

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

Supporting the digital services tax is a good first step.

The Anti-Politics

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Why I am Supporting President Michael D. Higgins

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Budget in Three Charts

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

Capital Investment

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

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

Public Services

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

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

Social Protection

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

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

* * *

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

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

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

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

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

 

Taking on the Fiscal Fight

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

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

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

Turning the Golden Rule into Rust

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

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

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

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

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

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

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

How Do We Compare?

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

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

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

A Progressive Starting Point

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

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

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

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

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

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

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

Taking a Break

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

Taxing Wealth - A Common Sense Proposal

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

There are a couple of starting points to this discussion:

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

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

 

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

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

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

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

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

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

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

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

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

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

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

Budget 2019 could be that start.

Poorer and Deeper in Debt

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

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

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

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

Personal Consumption

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

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

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

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

Employment

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

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

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

* * *

What does all this mean?

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

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

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

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

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

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

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

Turning Ploughshares into Swords

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

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

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

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

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

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

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

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

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

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

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

What about other urgent priorities within the EU?

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

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

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

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

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

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

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

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

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

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

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

For the world desperately needs fewer and smaller armies.

A Small Step Towards a Big Goal

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

Here are the Ministerial responses.

 

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

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

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

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

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

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

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

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

Hoping for an Evidence-Based Tax Debate

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Making the Living Wage a Living Fact

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

One word:  housing.

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

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

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

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

• Weekly: €469
• Annual: €24,444

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

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

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

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

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

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

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

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

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

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

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

Paying for Investment by Squeezing Public Services

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

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

 

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

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

·         Increase by 34 percent or a staggering €11.9 billion

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

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

 

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

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

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

 

As well, we have the fastest rising youth demographic. 

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

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

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

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

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

It’s a bad trade-off.

An Income Story of Two Halves

The Revenue Commissioners have produced some interesting data relating to incomes over the period of the recession and the beginning of the recovery.  What’s noteworthy is the reversal of fortunes between low/average and top income earners in these two periods.  There are some caveats in the data.

·      First, Revenue income data includes those with occupational incomes which are taxable.  So the following data includes more than just those at work

 

·      Second, incomes do not include contributions to pension schemes; therefore, this is likely to understate incomes at the higher end.

 

·      Third, this counts cases, not individuals.  This is important when it comes to ‘married’ cases where there are two earners but only counted as one tax case.

Keeping these caveats in mind let’s see what stories the data may be telling us.

 

Over the period of recession and stagnation, median incomes (the point at which 50 percent earn above and below) increased while the incomes at the top declined – for the top 0.1 percent, quite substantially.   We should note that the rise in median incomes doesn’t mean that all or most received income increases.  This could include the compositional effect whereby people lost their jobs, changing the make-up of the group we are measuring.

For those at the higher incomes, the decline was due primarily to the self-employed (property-related?).  The EU Survey of Income and Living Conditions shows that employee (PAYE) income rose between 2007 and 2012; however, self-employed income fell by nearly two-thirds.

The story changes, however, when the recovery set in.  Between 2012 and 2015, median income fell marginally by 1 percent.  However, the top 10 percent saw incomes rise by 2.1 percent while the top 1 percent and top 0.1 percent experienced income increases of 3.6 and 6.8 percent respectively.

Other Revenue data confirms this trend. 

Prior to the crash, the top 20 percent earned 4.9 times that of the bottom 20 percent.  This fell during the recession but started rising with the recovery.  This is consistent with the data above. 

While Revenue shows rising inequality among income tax payers, there is other data that shows inequality falling. 

This Gini coefficient measurement refers to market incomes (before social transfers) and covers the entire population, not just those in work; the higher the number, the higher the inequality.  We see Ireland returning to pre-crash levels; and in contrast to Revenue, inequality has fallen since 2013.  . 

We should note, though, that Irish market inequality remains substantially higher than our peer group.   Indeed, it is the highest in the entire EU, not just our peer group.  Returning to pre-crash levels is not enough from an equality perspective.  And if the trends identified in the Revenue data persist, Ireland’s Gini coefficient could start to turn north.  

Three policy responses (among many) are needed to address in-work in equality:

·      First, collective bargaining:  there are indications that sectors with high levels of collective bargaining rise to the average of our peer group (along with those sectors where there is high labour demand such as the ICT sector).  However, those sectors with low bargaining coverage and union density fall well behind.  Collective bargaining – especially in the large domestic sectors such as retail and hospitality – would boost wages and working conditions and make a substantial contribution to closing the inequality gap.

 

·      Second, increase the social wage – that is, employers’ social insurance and introduce new in-work innovations such as pay-related sick pay and pay-related maternity benefit.  We are an outlier by not linking social benefits with income.  This, again, would boost low/average incomes especially as many high-income earners already benefit from workplace schemes designed to protect incomes.

 

·      Thirdly, limit precarious contracts by not only facilitating collective bargaining across sectors, but introducing minimum requirements regarding certainty of working hours, temporary contracts and, specifically, public sector and public agencies’ outsourcing.

We shouldn’t always think that inequality is about taxation and social transfers (though there is that).  The inequality that flows from the workplace must be addressed in the workplace.  And we can do this without resorting to fiscal space gymnastics.  But the benefits – in terms of increased tax revenue (though higher wages) and higher consumer demand (through social benefits and certain working hours) - shows that reducing inequality can be a win-win win situation; for the workers, the Exchequer and domestic businesses reliant on the spending power of workers.

Wintertime in the Summer Economic Statement

 Just a few quick thoughts on the Summer Economic Statement released Tuesday.

1.    €900 million won’t be Spent

In the name of preventing ‘over-heating’ the Government is not going to spend €900 million that it would be entitled to under the fiscal rules.  The Minister for Finance stated that to spend this money: 

‘ . . . would represent the wrong choice for the economy at this stage of the cycle.’

No, the wrong choice would be to allow homelessness and housing need to rise, to further degrade our childcare system with high fees and poor working conditions, to starve education and R&D of badly needed resources.  All three of these – housing, childcare, education – are vital to long-term economic growth.  The wrong choice would be to short-change the future.

But it’s not just €900 million next year that the Government intends to forego.  According to the Statement, the Government intends to forego spending €2.4 billion in 2020 and €700 million in 2021 (and these are probably under-estimates).  That’s €4.2 billion over the next three years that should be invested but won't be, even though it is allowable.

2.    Heads You Lose, Tails You Lose

When people were arguing for increased economic and social investment, the Government said they couldn’t because the fiscal rules prevented them.  Now that the fiscal rules allow for it, the Government says the fiscal rules are flawed.  Regardless of the fiscal rules, the Government intends to pursue a small state strategy.

During the Fiscal Treaty debate we were told (lectured) that only the fiscal rules could save ourselves from our fiscally-reckless selves; that if we followed these rules, we would enjoy fiscal responsibility and stability.  Now the Government is saying:

‘The fiscal rules are currently unhelpful  . . . A full and literal application of the fiscal rules would involve the adoption of pro-cyclical policies not remotely appropriate to our position in the economic cycle.  That is why fiscal space is increasingly an inappropriate concept.’

‘A literal application of the fiscal rules would damage our economy; that is why policy will no longer be formulated on the basis of ‘fiscal space’.

Hmmm.  The fiscal rules were to be our financial salvation.  Now they would damage the economy.  Can we please re-run the Fiscal Treaty referendum?  The Minister for Finance could chair the repeal campaign.

3.    Over-Heating

The Government fears the economy is ‘over-heating’ – that is, it is reaching full capacity so that additional expenditure could result in inflation, current account deficits and economic imbalance.  But is it over-heating?  The Government says:

‘Capacity constraints are increasingly becoming a feature of some sectors and this, in turn, could lead to overheating of the economy. Government policy should never add fuel to the fire.’

So the answer would be tentatively, yes.  However, the Statement admits to:

‘. . . difficulty in measuring the cycle and the general pro-cyclicality of potential GDP estimates.’

That would suggest the answer is we don’t know because we can’t measure it.

This is the problem:  we don’t have the tools to measure over-heating or over-capacity.  The usual measurements – output gap and the current account balance – are so tainted by the impact of multi-national accounting practices they are not fit for purpose (for more on this see my post ‘Sweating the Economy’).

The Government assessed the risk of over-heating only a few weeks ago in their Macro-economic Risk Assessment Matrix published in the Stability Programme Update.  They rated the risk of the economy over-heating as ‘medium’.  Yet, they assessed the risk of housing supply pressures as ‘high’.  So we have this curious situation that in addressing the medium risk of over-heating (by not spending €900 million) we could be fuelling the high risk of low housing supply (by not spending the €900 million). 

The Statement does not put forward any evidence for over-heating apart from the projected unemployment rate of 5 percent.  There are a couple of points here.

First, the employment rate (the percentage of people employed among all adults below 65 years) is still below pre-crash levels.  In 2017, the rate was 67.7 percent.  10 years previously, it was 71.8 – a difference of over 130,000.  So there is still some room for improvement. 

Second, we lag most of our EU peer-group in employment rate.

 

There is evidence that we have not reached employment capacity.

4.    We’re Still Borrowing

Yes, we are (fractionally) but let’s get a handle on this.  We are running a considerable and growing surplus on our day-to-day spending. 

The current budget surplus will rise above €8 billion, or 2.3 percent of GDP by 2021.  This is not a bad situation.  So why are we still borrowing?  Because we’re investing for productive purposes.   This, too, is not a bad thing, especially as interest costs will continue to fall up to 2021. 

Ultimately, you want to balance your day-to-day spending and borrow for investment purposes only over the life-time of a cycle.  This is called the golden rule.  We are pursuing a platinum rule – and this is resulting in quickly falling debt levels.

The last 40 years it has been quite a rollercoaster ride. Peaking in the late 1980s debt fell consistently up to the crash, aided by the property boom in the latter years.  Then it skyrocketed (thank you private finance capital).  Debt is now falling again. In terms of GDP (which is the benchmark used by the fiscal rules) we will become compliant by 2021 – that is, debt will fall below 60 percent of GDP.  This means the Government will be provided even more fiscal space. 

However, when using GNI* we find the debt higher in percentage terms. However, this is falling just as fast – from nearly 160 percent in 2012 to a projected 89 percent by 2021.

Some commentators want to balance the budget immediately – in other words, the 0.1 percent deficit next year is still a fraction too much.  The Minister says he won’t spend the €900 million because this could, apart from over-heating, drive up debt.  But we are talking about fractions here.  If we spent the €900 million, the debt would rise by less than 0.3 percent of GDP (on a static basis – it would be less when additional growth and tax revenue is factored in).  Does anyone really believe these fractions are going to protect us in a downturn? This is angels dancing on the head of a fiscal pin.

The key point here is that debt is falling.  If we keep it falling in line with the fiscal rules, not only are we rule-compliant, we are prudent-compliant.

5.    The Real Source of Fiscal Instability

The Government published a table, comparing fiscal situation with other ‘small open states’.  It showed the countries having a better deficit position than Ireland in 2017.  However, it didn’t mention is that the EU Commission projects that all these other countries, with the exception of Slovenia and Ireland, the fiscal position will deteriorate by next year.  Leave that aside.  There is a larger point here.

The Government balance (the annual deficit or surplus) was supplied by the Government’s Statement.  The Government revenue column is my own addition.  Yes, Ireland has a deficit – all the other countries have surpluses.  But all those other countries have much higher levels of taxation.  The mean average for the other countries is 45 percent of GDP.  Ireland lags considerably, being under 38 percent of GNI*.  To reach the average of the other countries would require additional taxation of over €13 billion (though this gap might close somewhat once demographics are factored in).

High levels of taxation do not automatically insulate a country.  However, a broad robust base of taxation – income, property, environment, profits, capital income, etc. – can cushion a downturn as some tax streams will remain more resilient than others. Ireland, however, does not have such a tax base.

If you want to stabilise public finances and smooth out the cycles – broaden and strengthen your tax base. 

* * *

There are calls for a ‘fiscal buffer’ to protect us from a future downturn.  This is the cold and misplaced comfort of numbers on a balance sheet.  Further, it assumes that improving deficit and debt figures by fractions through suppressing social and economic investment will somehow provide a protective wall.  This is mistaken.   If we go into the next downturn with high housing needs, a broken childcare system, and low investment in education and R&D, it can only get worse.  And on the other side of the downturn, we’ll be in a deeper hole with even higher expenditure needed for social repair. 

This is not to ignore the concerns of over-heating and high debt levels.  Indeed, it is about integrating investment into sound management policies in order to create a strong ‘economic buffer’.  A progressive response would be to take the €4.2 billion the Government intends to forego and create a strategy over five to seven years to addresses our main deficits.  This could include:

• Structural reform of the childcare system to attain both affordability and professionalisation of quality
• New programmes to invest in indigenous enterprise innovation, including public enterprise (at national and local level)
• A special agency to roll our cost-rental housing along the lines of the Nevin Economic Research Institute’s proposal capable of leveraging an initial investment.  This would allow greater resources to be devoted to social housing.

There are no doubt other and better proposals. 

There is no option without a downside.  Yes, the economy may start over-heating in the medium-term.  The issue is how to manage and stabilise it.  The Government’s strategy is to separate out investment from fiscal policies, to the detriment of the former.  Progressives must argue for an integrated approach, showing that investment – overcoming our social and economic deficits –is part of the solution, not the problem.

It’s bad enough we are in danger of repeating old mistakes.

What’s worse is that we are in danger of creating new ones.

 

 

Measuring the Real Value of Business

People are rightly questioning whether the measurement of national output– GDP –actually measures the real worth of economic activity.  President Sarkozy even set up a commission – the Commission on the Measurement of Economic Performance and Social Progress – to ascertain whether there were alternative measurements to capture the wealth and social progress of a nation.  From what was once a fringe interest the question of how to break from ‘GDP fetishism’ has now moved mainstream, five decades after Senator Robert F. Kennedy stated:

‘Our Gross National Product, now, is over $800 billion dollars a year, but that . . .  counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage.  It counts special locks for our doors and the jails for the people who break them.  It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl.  It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities.  It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children.  Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play.  It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.  It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.’

While we still remain wedded to GDP-ism, we have a range of new indicators that attempt to provide a wider measurement of our economic and social health.  The UK’s Office of National Indicators has started to chart this area with measures of well-being which include personal well-being, relationships, health, personal finance, education, economy, environment, etc.

But one thing researchers into national well-being have overlooked is how to measure the real value of the enterprise.  If businesses are the motor of wealth-creation in a market economy, then this is a big omission.  The only measurement we have of an enterprise’s value is the financial accounts that count profit, loss, assets, cash-flow, etc.  In this tabulation, the higher the profit the more successful an enterprise.  But does this truly capture the value of a firm?

We know that a firm may be profitable but at a cost to the economy and society.  A typical example is the firm that pollutes the nearby river which the state has to pay to clean up.  This is called ‘externalising’ costs – the firm makes money by transferring the costs of its activity on to someone else.

Another example would be the firm that relies on precarious contracts.  In competing with others that provide permanent contracts (full-time or part-time), the precarious firm may make more money and grab greater market share; hence, more successful.  However, these precarious contracts externalise costs on to the Exchequer (either through social protection payments such as Family Income Supplement and/or reduced tax revenue), on to the employees (the stress of uncertainty) and on to other businesses (reduced consumption from precariousness).  The balance sheet says one thing but everything else tells another story.

If we are a long ways from measuring social value at a macroeconomic level, we are even further away from measuring value at the micro-level – in businesses.  But there are some interesting developments:

• The government intends to introduce gendered payroll reporting for firms, to fight the gender pay gap.
• The Central Bank is taking steps to ensure gender equality at the boardroom level of firms under their regulatory oversight
• In the US they are going further – with requirements to publish payroll based not just on gender but the ethnicity and race (though whether this got through Congress I can’t say)
• Staying with the US, companies will have to disclose the gap between CEO pay and average employee pay (the median wage)

There are a number of areas companies could be required to report on annually – wages, working conditions (benefits, collective bargaining, precarious contracts), environmental auditing, etc.

Just as we can’t automatically assume that a high GDP brings about real value, we should not automatically assume that high profitability brings about real economic and social value.  This is open to measurement, debate and action.

If one accepts the proposition that the enterprise is a social space comprising dense layers of contractual interaction between various stakeholders (shareholders, employees, managers, suppliers, the environment, the community), then measuring the enterprises’ social value becomes not only logical but desirable.  Even necessary.

This is one small step in bringing market activity into alignment with the democratic interest.

Wasting Money on Savings We Already Have

The Government is planning to introduce a Rainy Day fund – a fund to be used when the economy starts to slow down or enters a slump.  This sounds very prudent, very far-sighted.  For instance, it makes good sense for a household to put aside some savings in the case of emergency expenditure (that’s if people have the ability to generate such savings; we know that so many don’t). 

The Government will fund this via two sources.  First, it is going to take €1.5 billion from the Strategic Investment Fund (which is, essentially, the successor to the National Pension Reserve Fund which was emptied out to invest in the banks).  Second, the Government is going to take €500 million out of each annual budget for the foreseeable future. 

There are two issues here.

First, we already have rainy day funds – a considerable amount in fact.  There’s the Strategic Investment Fund itself which has nearly €20 billion.   Nearly half of that is ‘invested’ in the banks and so can’t be accessed easily in the case of an emergency.  However, we have €8.5 billion in what is called the ‘discretionary’ portfolio.  Not all of this may be easily accessible but there are over €3 billion in stocks, bonds and cash.

There’s another source of funding:   the Government’s cash balances.  This is the money the Government (through the National Treasury Management Agency) keeps in cash and other short-term investments.  In October 2017, the Government had nearly €15 billion.  This rose to over €20 billion by April 2018.  Not all this money is accessible in the case of an emergency.  The Government needs to keep a healthy balance for cash-flow purposes and to refinance debt.  Still, there are considerable funds already in place to help us out in an emergency.

In short, between the ISIF and the Government’s cash balances, we already have a rainy day fund, even if it’s not called that.  The Government’s proposal appears to be just a costly duplication.

The second problem is that the Government’s proposal may not actually be a rainy day fund.  The Parliamentary Budget Office had this to say about the Department of Finance’s consultation paper:

‘ . . . the Department of Finance uses inconsistent terminology. Rainy day fund and contingency fund are used interchangeably which makes the specific proposals difficult to analyse. In particular, the paper repeatedly refers to rainy day funds. In the context of government finances, a rainy day fund generally refers to money set aside during times of budgetary surpluses to fund future deficits. However, the consultation paper seems to conflate this with a fund to meet unexpected expenditure for one-off events. These are more usually referred to as contingency funds.’

So which is it?  Money set aside to fund future deficits (such as during a recession when tax revenue falls)?  Or money set aside to meet unexpected expenditure (such as a natural disaster like flooding)?  We will have to wait and see but it is not a particularly helpful way to conduct a debate, especially as the Government aims to build up the fund to €8 billion over time.

The Parliamentary Budget Office also suggested the Government’s rainy day fund might be wasteful:

‘Holding cash in this manner (i.e. a rainy day fund) has a high opportunity cost as the funds being held in the fund could be used to invest in means to boost productivity and improve the quality of life of citizens.’

Despite the economy needing more housing, healthcare funding, and crucial investment such as high-speed broadband or public transport – the Government intends to withhold  half a billion Euros a year from the budget.  That means less spending on these crucial areas.  This makes no sense given that we already have rainy day funds.

A better approach would start with abandoning the rainy day fund in the short-term, thus freeing up €500 million a year.  This would, first, require the Government developing a long-term strategy of ring-fencing funds in the ISIF and its own cash balances that could be utilised in the case of an emergency.

Second, the €500 million should be assigned to investment projects in order to, as the Parliamentary Budget Office puts it, ‘boost productivity’ and ‘improve the quality of life’.  We may have different priorities but my own preference would be to build houses. High rents and property prices are a drain on the productivity economy, while depressing workers’ life quality.

Third, the Government should plan for unexpected expenditures.  This, of course, can be difficult; after all, they’re unexpected.   But we can anticipate some – even if we can’t anticipate when.  For instance, with erratic weather arising from climate change, the risk of flooding will increase.  Therefore, the Government could anticipate this with increased flood defenses.   

There’s no reason to set up a rainy day fund – we already have the funds.  What we need is economic and social investment.  We need to ensure that when the next downturn comes (and it will come – that’s what market economies do:  rise and fall like a roller-coaster ride), the economy is strong enough to see us through with minimal social damage. 

If we sacrifice vital investment in order to accumulate savings which we already have, then the next downturn will be even worse and will require us to spend even more repair money on the other side.  And the €500 million?  It will disappear into mounting deficits.

What at first sounds prudent can turn out to be reckless and wasteful. 

And who can afford that?

Sweating the Economy

Is the economy over-heating?  Are we reaching full capacity?  Are we in danger of slipping into heighted inflation and balance of payments deficits?  The problem is we may not know and may not have the tools to measure this.

There are basic measurements that should be able to help us determine our ‘temperature’.  First up is the output gap.  This measures the gap between actual output and the potential output of the economy.  A negative output gap means the economy is performing below its potential. During a recession, the output gap is negative.   A positive gap means the economy is operating above its potential.  The higher the positive, the more the economy is overheating.  A 0 percent means the actual and potential of the economy are aligned.  This is the goal of sound economic management.

 

The Finance Department is projecting a very positive gap in 2018, falling to a near alignment in 2021.  The EU Commission, however, shows the economy to be over-heating last year but falling well below its potential next year. 

On either reading, the economy is not over-heating.  Should we be guided by these projections?  No.  The Finance Department is highly critical of the methodology behind measuring the output gap. 

‘It must be acknowledged that the concept of potential growth is more complex to assess for a small, open economy such as Ireland, which inter alia is characterised by significant cross-border mobility of labour and capital.  Indeed, the positive output gap . . .  currently estimated for this year, which is inconsistent with limited inflationary pressures evident in the economy, highlights the health warnings attached to estimates of the cycle using this framework.’

The Department attempted to create an alternative measurement and what they came up with was a more practical graph showing that as the economy recovers the negative output closes and starts to stray into positive – that is, slightly over-heating – territory. It’s what common sense would dictate.

A second measurement to identify over-heating is through the balance-of-payments.  This calculates all transactions between Ireland and the rest of the world, consisting of imports and exports of goods, services and capital, as well as transfer payments such as foreign aid and remittances.

A negative balance can pose trouble as a country is importing more than they are exporting (not a greats space for a small open economy to be in), or borrowing more than they are lending.  During the speculative boom years, Ireland’s balance deteriorated into negative territory.  Following the crash it has been improving.

If we look at the balance of payments as a percentage of GDP or a percentage of GNI* (which removes all the multi-national noise from the accounts) we have seen a sustained recovery.  While using GDP as a benchmark is just as problematic as using it for the economy’s well-being, we can see that the Government’s projections out to 2021 (in dash) shows a slight falling back.  If this holds for GNI*, it is reasonable to assume that our balance of payments will remain in fairly good health for the years ahead – with the all the downside caveats like an exploding Brexit, exploding Trump, etc.

So where does that leave us?  It leaves us using common sense.  It should also compel us to, without complacency or fear-mongering, focus on the real problems.  Here, Chris Johns has some sensible words:

‘Overheating is one of those things that is often mentioned, but there is no commonly accepted definition of the term . . . It’s talked about with dubious confidence . . . Policy should be about acknowledging all risks and problems, particularly the ones that are real, rather than threatened. Dealing with the problems of today and building resilience to a wide variety of potential shocks, most of which we cannot foresee, is at the heart of good policymaking. I suspect the overheating warnings are partly a device for pressuring the Government for tighter fiscal policy. There are good reasons for budgetary caution . . . but overheating is not high on that list. Coded warnings risk being unhelpful, and lack both transparency and the context of an overall analysis of what is really needed.’

There is a clue buried in the output gap.  If we can remove the obstacles to a higher potential GDP then we can prevent the economy from sweating.  The problem is that potential GDP cannot be directly measured; it is one of those benchmarks that are tied up with a methodology which the Department of Finance is rightly critical of.  Nonetheless, we can agree on some obstacles. 

• If we’re not building enough houses in a planned sustainable manner to accommodate people at affordable rates then we’re going to be in social and economic danger of limiting our capacity to grow.
• Affordable childcare: If you’re trying to entice more people into the labour market then making childcare fees expensive is hardly the ticket.
• If people want to work more but are prevented by management practices (precarious working, uncertain hours, bogus self-employment) then full participation in the economy will be, for those caught in this trap, elusive.

And if the fear is that the economy will overheat as we build more houses or provide childcare then the fiscal tool of taxation is still available – property and asset taxation, diesel taxation, reversing the temporary reduction in VAT.  Oh, yes, and abandon the tax cuts. 

We shouldn’t let the debate about over-heating side-track us from the necessary investments in the productive economy.  If we cut back on these then we may satisfy this graph or that.  But the economy itself will be unable to withstand the inevitable downward cycle, social problems will mount and we will find ourselves weaker.

That would be pretty poor fiscal politics.

Next Step: Women's Rights in the Workplace

Now that women have secured a basic human right denied them by the constitutional caprice of the now defunct 8^th amendment, what is the next step?  It depends on how people see the issue.  If it was about secularizing the constitution, then the next step would be to dis-establish the church in the provision of health and education.  If it was seen as a woman’s issue – an issue of choice and autonomy – then the next step would be to address issues that continue to deny women their rights.  (By the way, we can take these and other steps in tandem).

In the workplace, this means the continuing discrimination against women – in pay and working conditions.  The usual way of measuring this is the gender pay gap, a simple calculation that measures the earnings inequality between men and women.  This has rightly received a lot of attention.  However, there are problems with this measurement.

A pay gap can be due to structural factors, not outright gender discrimination.  For instance, occupational segregation could explain the difference in earnings.  While 24 percent of women work in the low-pay distributive and hospitality sectors, only 19 percent of men work there.  Because of this and other factors (occupational segregation, educational achievement, number of working years), this simple measurement is called ‘unadjusted’.   The EU Commission states:

‘. . . the unadjusted GPG (gender pay gap) entangles in its measurement both possible discrimination between men and women, in terms of "unequal pay for equal work", as well as the impact of differences in the average characteristics of men and women in the labour market.’

Eurostat has been working on an ‘adjusted’ gender pay gap – one which removes these structural factors.  What is left is called the ‘unexplained’ pay gap and it is in this measure we will find actual pay discrimination.

So how do these compare?  Ireland performs comparatively well in the ‘unadjusted’ pay gap with a lower percentage than the average of our EU peer group (13.9 percent as opposed to 16.9 percent).  However, when we turn to the adjusted, or unexplained, gender pay gap a different picture emerges.

Ireland shoots up to the top.  This suggests that actual pay discrimination is the highest in our peer group.

There are a number of strategies to end the gender pay gap:  legislation (and highly resourced monitoring and compliance) and transparency which the Government intends to introduce, requiring companies to publish gendered payroll breakdowns.  

One strategy that doesn’t get much mention is the attempt to rebalance, however, slightly, the power relationships in the workplace; namely, collective bargaining.  Where collective bargaining exists there is a tendency for the gender pay gap to fall.  There are two examples of this in unadjusted figures.

First, in the public sector – where workers benefit from collective bargaining – the gender pay gap is much less than in the private sector, where only 15 percent of workers benefit.   In the public sector the gender pay gap is 9.7 percent; in the private sector it is more than double – 19.7 percent.

Second, those economic sectors with higher levels of union density (the number of workers who are members of trade unions this can be used as a proxy for collective bargaining) tend to have lower gender pay gaps.

These four sectors have gender pay gaps lower than all the other sectors reporting (curiously, some sectors don’t report for ‘confidential’ reasons).  These sectors also have high levels of union density compared to a economy-wide level of 27 percent.

These are strong and positive co-relations between the ability of employees to negotiate collectively with the employer and a lower gender pay-gap.  The European Trade Union Confederation also found this:

‘ . . . systems with a focus on centralised bargaining (sectoral and cross-sectoral) and high collective bargaining coverage tend to have been more successful in integrating gender equality issues into collective bargaining . . .the most successful gender equality outcomes are found where sectoral and company bargaining co-exist.’

This shouldn’t be too surprising.  When people work together – whether in a social organization campaigning for the repeal of an odious amendment or in the workplace campaigning for equality – positive change can occur.  These are persistent lessons - people assuming power over their own lives.

And when people work together, the next steps and the steps after that become a little bit easier.

* * *

Note:  this data was presented by Ethel Buckley, SIPTU Deputy General Secretary, to a Unite seminar on collective bargaining.

Irish Swedish or Swedish Irish?

I was at a meeting a few days ago where a torrent of good news on the equality front was expressed; in particular, how Irish equality is reaching Swedish levels (some friends have also told me this is an increasing theme among some journalists and commentators).   Sweden, of course, is the popular benchmark for equality.  So if Ireland is reaching those levels, surely we must be doing something positive on the egalitarian front?

Or are we looking at data without context, without reference to what we are measuring?   We may be in a stat duel with calculators at dawn.  So what is the story behind this data? 

Income Inequality

In 2016, the ratio of the top 20 percent to the bottom 20 percent was 4.5 for Ireland and 4.3 for Sweden.  In other words, the top 20 percent received 4.5 and 4.3 times the bottom 20 percent, respectively.  That comparison looks pretty good.  However, if we graph it historically a different story emerges.

 

In 2004 Ireland was considerably more unequal than Sweden.  By 2016, the two countries were almost the same.  However, a disproportionate amount of this gap-closing came not from a better Irish performance but a seriously deteriorating Swedish situation where the ratio rose from 3.3 to 4.3.  The best performing EU country over this period was Finland where income inequality didn’t rise.

If anything, the Swedish are becoming more like the Irish rather than the other way around.

At-Risk of Poverty rates

In 2016, Irish and Swedish at-risk of poverty rates were almost the same – 16.6 and 16.2 percent respectively.  But, again, the historical numbers tell a more nuanced story.

 

 Irish at-risk of poverty rates fell between 2004 and 2009 – from 20.9 percent to 15 percent – while at the same time Swedish rates rose.  However, since 2009 both Irish and Swedish rates have been rising, with the latter rising slightly faster.  Again, we see a deteriorating Swedish performance largely contributing to a dove-tailing of the two countries (with Finland, again, being the best performer).

In-Work Poverty Rates

In this measurement we see Ireland performing much better than Sweden.  In 2016, 3.7 percent of Irish workers were at-risk of poverty compared to 5.8 percent in Sweden.  Irish rates are still above 2009 levels (the first year both countries report) while Swedish rates have fallen.  But other data tell different stories.

In 2016, 2.7 percent of Irish workers were in severe material deprivation; only 0.5 percent of Swedish workers suffered this.  Irish rates are still above 2009 levels (but they have fallen from a high of 5.3 percent in 2012) while Swedish rates more than halved.

In 2013, the earnings ratio between the top 10 percent and lowest 10 percent was 2.28 in Sweden (the last year they report).  In Ireland it was 3.86 and it has increased in the three subsequent years - to 3.99.  This measures employees’ earnings.

Two Other Welfare Measurements

Throughout society, Swedish severe deprivation rates are the lowest in the EU – at less than 1 percent.  In Ireland, the figure is 6.5 percent.  In measuring general deprivation (a slightly lower benchmark than ‘severe’) Sweden stands at 3.7 percent; Ireland performs far worse at over 15 percent, though thankfully this has fallen from a high of 25 percent in 2012. 

In measuring living standards – actual individual consumption – average per capita spending in Sweden was €23,700 in 2016; in Ireland it was considerably lower at €20,800.  Irish levels are still below crash-levels.

* * *

What does all this mean?  Sweden and Ireland remain poles apart on many measurements concerning equality, deprivation and living standards.  Where they are starting to converge, it appears due to a deteriorating Swedish performance rather than an improvement in Ireland’s. 

But this is less a story about the comparative data between Sweden and Ireland.  Rather, it is a story of how data – isolated from the totality of information we have and the historical performance – can give us a misleading impression.  This is a universal lesson, applicable to all information, all debates.

In short, data tells you what it tells you; what we have to look out for is how it used in any story-line.

 

Fiscally Frightening the Children

There are a number of reasons being put forward to justify limiting the amount of budgetary resources available for repairing the social and economic damage of the recession years:  an over-heating economy, limited fiscal space, future uncertainties.  One more reason is the level of government debt, as in ‘we have crippling levels of debt’ and we have to do ‘something’ about it (i.e. suppress government spending).

On first glance, our debt levels appear relatively modest.  In 2017, our debt was 68 percent of GDP compared to a Eurozone average of 87 percent.  By 2021, the Government projects our debt to be 59 percent.  This falls below the Fiscal Rules threshold (60 percent) which means our fiscal space expands; i.e. we’re allowed to borrow even more.

So far, so good.  However, measures using GDP are not so good for familiar reasons.  Therefore, analysts have been using GNI*, the CSO’s measurement which attempts to filter out distortions in our national accounts.  When we do this, a different picture emerges.

 

It’s been quite a toboggan ride.  Irish debt was well below Eurozone levels in 2000.  It fell even further up to 2007 though this was a period of speculative-based growth.  Between 2007 and 2013 debt went out of control – rising from just under €50 billion to over €200 billion thanks to a lethal mixture of collapsing tax revenue, falling output, bank debt (especially Anglo-Irish) and austerity measures.  However, since then the debt ratio has been falling.  By 2019 Irish debt will still be above Eurozone levels but not by much.   Out of the 19 Eurozone countries, Ireland ranks mid-table in 8^th place.  

However, there are other measurements.  For instance, Ireland fares poorly when we measure debt on a per capita basis.  In the Eurozone, debt is €28,700 per capita while in Ireland it is over €43,000 – though one must take note that Eurozone per capita income is low compared to Irish standards.  When incomes and prices are factored in, the difference could be reduced by half.

 Another take on this ‘fiscally frightening the children’ scenario is the claim that we are still borrowing, still running a deficit.  This, however, overlooks a key metric.  Looking at our current, or ‘day-to-day’ spending (this excludes capital spending) we are running a considerable surplus.  In 2018, the Government project our current budget to be €4 billion in surplus, or 1.9 percent of GNI*.  This will rise to over €8.1 billion by 2021 or 3.3 percent of GNI*. 

In effect, we are running a considerable surplus on our day-to-day spending, the remainder being invested in our future infrastructure and growth prospects. 

All that being said, there should be some concerns, not only because of the future uncertainties.  The classic approach to fiscal management during economic cycles is to reduce debt levels during periods of upswings while at the same time taking measures to ensure the upswings don’t get out of control.  We should note that this doesn’t mean actually lowering the debt.  Between 1987 and 1995, the national debt fell from 117 percent to 82 percent of GNP. Yet, the actual debt rose by €8 billion or over 20 percent.  Again, Germany has lowered its debt-to-GDP ratio from 81 to 64 percent between 2010 and 2017 even though actual debt levels rose marginally.  However, for Ireland such was the damage during the last bout of recession-cum-austerity; we need the extra expenditure for repairs. The big question is whether there will be enough time to finish these repairs before the economy enters into cyclical decline.

This question has gained some urgency with the recent and mysterious slowdown in Eurozone growth.  From a big pick-up in 2017, Euro countries have started 2018 poorly.  The following graph comes from Fulcrum Asset Management showing not only a fall-off since the New Year but a continuing anaemic long-term trend.  With UK activity hitting the doldrums it would be unwise to think Ireland will somehow escape.

This is not suggest that a recession is around the corner (but who knows given the near universal failure to predict the last one), but it does mean we have to do two things in preparation.

First, prioritise expenditure to strengthen the productive economy.  The Government has started taking positive steps in this regard, increasing investment but it is crucial that we obtain value-for-money and that cost-benefit analyses are openly and thoroughly scrutinised.  We need to take further steps by increasing R&D expenditure (an area Ireland fares poorly in), introducing affordable childcare which can reduce barriers to labour force participation, and taking a more directive role with banks under state control to counter their intrinsic pro-cyclical character (that is, banks reduce their lending when it is needed most – during a downturn).

Secondly, we need to start recession-proofing the economy.  Introducing pay-related unemployment benefit will help stabilise demand during a downturn while designing an employment subsidy scheme to keep employees in work by subsidising reduced hours rather than seeing people being laid off.  These and other measures won’t prevent a downturn but will help limit the damage.

Finally, we should replace the desultory tax cuts vs. spending increase debate with another choice:  tax cuts or debt reduction.  Indeed, we need to strengthen our tax base (after the reckless erosion over the last few years under Fine Gael governments) with incremental but persistent increases in taxation starting with the remaining tax breaks that disproportionately favour higher income groups, taxation on property (including unproductive financial property) and passive income (e.g. inheritance and gifts tax).

The last thing we need is scare-mongering about the levels of our debt. Progressives should lead this debate as I outlined in this post.  We need a clear analysis and an honest conversation.  We didn’t have that prior to the crash.  We didn’t have that during the recession. 

If we don’t have that now, why should we expect the future to be any different than the past?

 

The Incredible (Slowly) Shrinking State

The Government produced their draft Stability Programme Update containing projections for the economy and the budget up to 2021.  They will firm up on these numbers – along with the projected fiscal space – in the Summer Economic Statement.  But it is not likely to differ in any substantial way.

There’s been lots of commentary:  the validity of GDP, rising employment, available budgetary resources, etc.  Let’s take a step back and look at the long-term, using the CSO’s GNI* which attempts to factor out distortions in our GDP.  What we find is an ever slowly shrinking social state.

There’s been a long-term stagnation at best.  Since 1995 there has only been one year that public spending was lower than it what it is projected to be in 2020/21. (Note:  during the crisis years, spending as a percentage of GNI* shot up.  This was not due to increased public expenditure which actually fell (though bank debts were included).  It was GNI* falling by 22 percent between 2007 and 2011.  So a fall from that peak was inevitable).

There is a projected slow reduction in public spending (as a proportion of output) between 2017 and 2021. 

We find primary public spending falling, with current spending (public services and social protection) falling faster.  Fortunately, investment is on the rise.

The above doesn’t mean that public spending is being cut in nominal terms.  It is actually increasing, from €71.4 billion to €83 billion – an increase of 16.3 percent between 2017 and 2021.  This may seem like a substantial amount.  But when you factor in prices and population rise, the increase comes to 7.4 percent.  This increase, however, reflects greater emphasis on investment.  Current spending will rise by only 3.2 percent up to 2021, or less than 1 percent annually. That is going to be a tight squeeze. 

How does this compare with our peer –group in the EU; other Northern and Central European economies?  We can compare the Government’s and EU Commission’s projections for 2019.

Ireland would have to spend an additional €23.5 billion just to reach the average of our peer group.  However, this doesn’t take account of the different factors that drive spending in particular countries.  For instance, because of the older age demographic other EU countries have to spend more on pensions than Ireland.

So if we exclude expenditure on pensions (taking the proportion of pension expenditure in 2016 and applying it to 2019 levels), we find that Irish primary public spending comes in at 29.6 percent of GNI* compared to our peer group average 35.1 percent.   While reduced, this still leaves a gap of €12.3 billion.

However, we also have to factor in our higher young demographic, which should drive education and family support expenditure higher than our EU peer group.  There are other factors:  prices, defence spending (which, however, is a discretionary category), dispersed population, and categories which constitute expenditure but are counted as household and not government spending (e.g. our old friend – water and waste spending).

Therefore, we should be careful about using comparative headline rates.  However, there is strong evidence that Ireland is an under-spender compared to our peer group.

Becoming a more European-type spending economy is not an easy task.  One could argue for higher taxation but there is no gold at the end of the fiscal rainbow.  Clearly, we have a low ‘social wage’ (employers’ social insurance).  In other countries this finances enhanced in-work benefits and health services.  But increasing the social wage would require systemic multi-employer collective bargaining structures to ensure equity – and we don’t have these structures.

We could be entering into a difficult fiscal and economic cycles.  Even before the EU starts bringing multi-national tax avoidance under control (and, so, reducing our revenue), companies are taking unilateral steps to reform their tax strategies which could put downward pressure on Irish corporate tax revenue.   Then there’s Brexit.  Then there’s the still the high level of general government debt, though estimates vary depending on the measurement. 

We seem to be stuck in a structural trap – a trap that is becoming tighter.  How do we break out of it?  Here are three responses:

·         First, abandon net tax cuts.  If there are to be tax cuts then these should be funded by tax rises in other areas.  And within this, push out the boat a little.  A good start would be to let the 2019 property valuations come on stream without amendment. 

 

·         Second, constitute a collective bargaining structure which would integrate an increase in the social wage with overall wage increases.  This would have the benefit of strengthening our automatic stabilisers (e.g. pay-related unemployment benefit) which would keep domestic demand up if there are job losses with a Brexit gone wrong.

 

·         Third, engage in real ‘public sector reform’ (not the crash n’ burn of the austerity years).  This would focus on increasing productivity through the introduction of employee-driven innovation (discussed here).  However, this process requires trust between all partners.  The Government could help to build such an environment by committing itself to full pay-restoration and an end to the two-tier pay structure and negotiating in good faith the time-scale.

In other words, we don’t have to immediately reach for the tax hike cudgel.  But we do need a long-term vision of where we want to be in the future.  And being in in a low-spend, low-tax society where people continue to purchase public goods in private markets and doing without benefits that other European workers enjoy – well, that’s not much of a future.

A High Profit Economy But is It Being Put to Best Use?

Measuring wages in an economy is pretty straight-forward - take the total amount of wages and find the proportion it makes up of GDP.  That is called the ‘labour share’.  Measuring profits should also be pretty-straight forward.  But Irish economic data is anything but.

Why measure profits?  Because they are vital to a market economy (but see below for important caveats).  Investment comes out of capital compensation which is a proxy for profits.  Investment in a market economy – whether private or public – is key to productivity, growth, employment and wages.

But measuring Irish profits is more than problematic.  In our EU peer-group, profits make up 38 percent of GDP; in Ireland, it exceeds 63 percent.  We know this is not real – no more real than our GDP, largely due to the interaction of multi-national accounting practices and Eurostat’s new way of measuring GDP.

Given that normal data can’t provide us a clear picture, we have to use the CSO’s GNI* (a measure of gross national income unique to Ireland).  This excludes outflows from the economy (e.g. repatriated profits) along with a range of distorting features such as re-domiciled profits, aircraft leasing and intellectual property.  Given that the GDP income method is made up of labour income, profit income (including self-employed or mixed income), and taxes on production and imports, I assume labour and taxes are relatively without distortion.  To get the profit share, I subtract labour and taxes from GNI*.  This is not an ideal method and hopefully others will have a better way of deriving profit income.  How do we measure up?

 

Even with all the distortions removed, Ireland is still a highly-profit economy.  Of course, this doesn’t tell us how those profits are distributed.  Revenue Commissioners tell us that as much as 40 percent of corporate tax revenue comes from just 10 companies, which is highly concentrated (and fiscally reckless).   However, much of this tax revenue does not come from profits generated here whereas the GNI* strives to give a picture of domestic economic activity.

Nor does it tell us how these profits are used.  If high profits lead to high investment then there is a social benefit.  However, such investment can be directed to unproductive activities.  This happened prior to the crash when a number of domestic companies used profits to speculate in the property market. Profits can also just be thrown on a big cash pile, or used to over-compensate senior executives, or distribute excessive dividends.  When this is done at the expense of investment, wages or employee benefits, then real economic harm is perpetrated.

 

If Ireland’s share of wages and profits equalled the average of our peer group, this would mean an additional €14 billion for wages, equivalent to a 17 percent rise in employee compensation.  Such a rise would assist in reducing low-pay, reducing government subsidies (e.g. Family Income Supplement) and increasing tax revenue which could be re-invested into social and public services.

Does an economy need high profits to be ‘competitive’?  It does not appear so.  All the countries in the chart above – all below Irish profit levels – rank higher in the Global Competitiveness Index. 

To re-balance the economy, there is a need to strengthen labour rights in the workplace so that employees can more effectively bargain with their employer (discussed here).  But how do we ensure that profits are directed into productive investment?  This is a more difficult proposition. 

·      First, we would need hard data on the profitability of domestic firms, in order to calibrate efficient incentives. In particular, instead of grant-aiding and lending we could invest in new and existing domestic firms and take equity.

 

·      Second, we need to promote investment-rich foreign direct investment – something that will become an imperative as the rules regarding multi-national taxation change. This will require greater emphasis on education, skills and infrastructure such as housing to attract FDI.

 

·     Third, we need to create and expand companies that are essentially investment-driven; namely, public enterprises.  Public enterprises do not create profits for shareholder value (though during the recession the Government milked these enterprises for dividend payments); they pursue profits to boost investment which is paid out of retained earnings. 

And between all three we need new hybrid models – public, domestic private and foreign multi-national – so that we can make these companies work together for the productive economy. 

We need a profitable economy – to invest productively, to compensate labour, to raise productivity, and spread prosperity throughout society.  We have the profits.  It is debateable whether they are being put to best use.

Fiscal Rules: Heads You Lose, Tails You Lose

Ah, the fiscal rules.  They brought us fiscal space, the expenditure benchmark and the structural deficit.  They were supposed to bring us sustainable and balanced fiscal policy to see us through the good times and the bad.  However, In an Irish Times opinion piece Dr. John Fitzgerald is not impressed:

‘ . . . the inadequacy of the rules-based approach may actually provide cover for dangerous pro-cyclical fiscal policy . . . In the period 2004 to 2007, Irish fiscal policy fully complied with the rules, but it was pro-cyclical, making a major contribution to the growing bubble that subsequently wreaked so much havoc.'

He goes on:

 ‘ . . . in the Irish case the continuing exceptional growth suggests that the economy will hit full employment next year, and that action will be needed in the 2019 budget to slow the economy.’

In effect, Dr. Fitzgerald is arguing that while we would be compliant with the fiscal rules if we were to increase public expenditure by the full amount allowable under the rules, it would be folly to do so as we are knocking on the door of full capacity - another bubble, inflationary pressures or a deterioration of our current accounts.  Indeed, we may have to increase taxation or cut public spending to keep things on track, something the fiscal rules don’t call for.

There are two ways of approaching this argument.

The first is – yes, yes, yes.  The fiscal rules have as much relevance to proper fiscal policy as alchemy (ok, a bit exaggerated but not by much).  Champions of these rules claim that had the coercive element of these rules been in force during our boom years, we would have avoided the excesses of that period.  The fact is Ireland was not only compliant with the rules in the boom period – as Dr. Fitzgerald points out – we had the best public finances of any Eurozone country bar Finland.

The fiscal rules were never empirically-based; they are a political instrument dressed up in complicated formulae.  In the immediate sense, they were the price that German Christian Democracy extracted for participating in bail-out mechanisms.  In a larger sense, they are about the de-politicisation of the economy so that regardless of what government people elect, the rules will rule regardless.

So, yes, Ireland and Europe would be far better off without them.

The second way of approaching Dr. Fitzgerald’s argument is to let out a long exasperated sigh:  we were told we must become compliant with the fiscal rules; hence, fiscal constraints.  Now that we are compliant – in fact, overly-compliant – we are told we must practice  . . . fiscal constraints regardless of what the rules allow us.  Heads, fiscal constrictions; tails, fiscal constrictions:  it’s a loaded coin.

It’s not just that the fiscal rules are inappropriate to a highly-globalised small open economy. Or that key concepts (e.g. structural deficit) cannot be directly measured.  They constitute an inherent irrationality.  Under the rules investment must be paid out of current revenue; that is, the state is largely prevented from borrowing for productive investment.  Imagine the impact were this applied to the household sector – people would be forced to pay for a house out of savings, rather than borrowing.  Or applied to the business sector – again, firms would have to pay for investment out of retained earnings, not borrowing.  In the former, only the richest could afford a house; in the latter, firms couldn’t expand, modernise or even set up in the first place.

Some people say we should just tell the EU where to get off and ignore ‘their’ rules.  However, these are our rules, constitutionally mandated through the Fiscal Treaty referendum.  Further, to ignore the rules would be to invite retribution by the international markets, driving up the cost of investment. 

In any event, the issue under the rules isn’t that we are prevented from spending.  We are allowed a structural deficit of 0.5 percent.  By 2021, the Government is targeting an actual surplus of 1 percent.  Seems like a small difference but it amounts to an additional €4.8 billion potential fiscal space on a static basis.

The issue is we don’t have a reliable fiscal framework to plan out future priorities and ensure that our annual budgets work with the economy’s grain rather than against.  Without this risk volatile swings– jumping from pump-priming to austerity, from boom to slumps.  And accompanying those swings will be a debate where the loudest voices and most privileged interests will dominate.    

So how do we proceed?  Dr. Fitzgerald has a suggestion:

‘Ireland might be better off without these particular rules, relying instead on the wisdom of ministers for finance, overseen by a critical media.’

Hmmm.  That seems a tad optimistic.  We can’t measure our national output, or reliably count how many houses we are building, or calculate how much value-added our export sector actually produces.  Wisdom needs evidence. 

Let’s admit it – we’re in a fog.  And when you’re in a fog, you turn on the high-beams and proceed slowly.  We need a new fiscal framework, we need new measurements.  But until such time (and it will take some time) we need to measure best-case and worst-case scenarios.  And in that space between the two we should assign resources to urgent investment priorities to support a productive economy.   

Housing would be high up the list.  So would urban public transport and renewable technologies as we face into an environmentally-problematic future to put mildly.  There are other priorities – hospital beds and childcare facilities.  We don’t have much time until the next downswing or to take advantage of ultra-low interest rates.

Because, for example, if we enter into another slump – induced by Brexit or whatever – with high levels of homelessness and housing need, it will only get worse and even more expensive to repair on the other side of the cycle. And the roller-coaster ride will start all over again.

If you have a coin whereby heads you lose, tails you lose, you don’t keep flipping it.  You get rid of it.

And get another coin.

Rising Wage Inequality

Following an exchange of graphs on Twitter with Seamus Coffey (@seamuscoffey), chair of the Irish Advisory Fiscal Council, I did some looking around Eurostat’s Structural Earnings Survey database.  This dataset focuses on employee earnings.  We can not only compare Irish wages to other EU countries, we can look into the ratio of high wages to low wages.  The news isn’t particularly good.  The following focuses on the business economy which can be used as a proxy for the private sector.

The SES comes out every four years so the data lags a bit but is still relevant. 

 

Unlike the average wage, the median wage measures the mid-way point at which 50 percent earn above and 50 percent earn below (if we were to measure average the pattern would be pretty much the same). 

We find that Ireland is well down table, above France and the UK.  To reach the mean average of the other countries, the Irish median wage would have to increase by 8.6 percent, or nearly €3,200.

But not all employees rank towards the bottom.

The median wage in the first decile (the lowest 10 percent income earners) falls even further behind the mean average:  the median wage would need a 22 percent increase to reach the average.  However, in the 9^th decile (the second highest income group), the Irish median wage is actually above the average (3 percent).

So not only is the Irish private sector median wage low, it is skewered against the lower-paid.

This results in a highly unequal situation, though not the most unequal among our EU peer group.  In terms of the ratio between the 9^th and 1^st decile, Ireland ranks 3^rd from the bottom– ahead of the UK and Germany which comes in at the bottom (this should caution us about the alleged strong economic performance of Germany – it is built on precarious mini-jobs which now employs one-in-five employees).

Another concern is the rise in inequality.

In Ireland inequality jumped during the property boom period and has remained high since, significantly above the mean average of our peer group.  The other EU countries remained on the whole relatively stable but this includes considerable increases in inequality in Germany and Netherlands.

The one downside to this data is that it doesn’t include employees’ full wage; in particular, the social wage.  This is the portion of a workers’ wage that the employer pays into the Social Insurance or similar fund.  From this fund, people can access free healthcare and enhanced pay-related in-work benefits (maternity benefit, illness benefit, etc.); that is, except in Ireland where the social wage is weak which results in low in-work benefits while forcing Irish workers to pay for goods and services on the private market which, in other countries, would be provided free or at below-market rates (e.g. GP care, prescription medicine, etc.). 

Before we turn to tax and redistribution to reduce inequality let’s first consider policies at the workplace level since that is where inequality starts in the market economy.  A big instrument in fighting inequality is workers’ ability to bargain collectively with their employers.  I have discussed this in some detail so I won’t go into details here.  But here’s this from the International Monetary Fund: which found that union membership and collective bargaining reduce economy-wide inequalities:

‘We find evidence that the erosion of labor market institutions is associated with the rise of income inequality . . . notably at the top of the income distribution . . . the decline in unionization is related to the rise of top income shares and less redistribution, while the erosion of minimum wages is correlated with considerable increases in overall inequality.’

A quick look at the CSO’s analysis of the distributional impact of public sector wages (which are collectively bargained) and private sector wages (which are largely not) shows the former has a more egalitarian wage structure with much smaller gap between the top and bottom income scales.

And the great thing about a collective bargaining strategy to tackle market inequality is that it doesn’t have a financial cost, unlike social protection programmes such as Family Income Supplement which effectively subsidises low wages.

We should be concerned about wage inequality, the inefficiencies it brings to the market economy and the corrosive effect it has on social cohesion.  And we should translate that concern into giving men and women more power in the workplace.  In this way, every workplace can start making a contribution to reducing inequality.

A Small Suggestion: Use the NAMA Surplus for House Building

Just a short follow-up to the previous post outlining the dismal facts about the housing crisis.  Lest anyone say that those campaigning over the crisis are great at pointing out problems but are short on solutions (this is not the case but it is said anyway), here’s one more small suggestion.  You know that projected surplus NAMA will have when it’s wound up in two years’ time?  Use it to build social and affordable housing.

NAMA has projected a ‘terminal’ surplus of €3 billion when it is wound up in 2020.  This could be even higher according to Investec, which suggested the surplus could be closer to €4 billion, but let’s stick with the NAMA projection.  According to the Irish Times:

‘The Oireachtas Public Accounts Committee (PAC) has called for a Dáil debate on how a projected €3 billion surplus on the wind-up of Nama should be spent.’

Can we spend that €3 billion?  Yes, according to the Minister for Finance.  Unlike the sale of AIB shares, the NAMA surplus will count as current revenue and, so, can be spent. 

We should reject any suggestion that the surplus be used to pay down government debt or be assigned to a rainy day fund.  We are already reducing our debt levels faster than what is required by the EU rules (and any other Eurozone country).  As for a rainy-day fund – well, for those in housing need, it’s pouring.

In fact, given that we can spend this money on housing without recourse to borrowing or increased taxation, it will have a beneficial effect on our debt levels given that the increased economy activity will generate higher GDP and tax revenue.

This money can really only be used on capital spending as it is a once-off revenue bounce.  And if the €3 billion is assigned to housing, it should be additional spending.  The Government shouldn’t be allowed to reduce its own projected housing capital spending under Rebuilding Ireland by substituting the €3 billion.

This money won’t solve the housing crisis.  The €3 billion equates to the cost of building 15,000 to 17,000 houses.  However, it would make a significant contribution to reducing the level of housing need.

Indeed, given the scale of the crisis, spending the NAMA surplus on housing building should be a no-brainer.  The only debate should be over how it is spent – whether on social housing, cost-rental affordable housing or a combination of the two. And fiscal strategies should be devised to draw down part of that surplus before the agency is wound up. 

But regardless of the balance of the expenditure or when the money comes on stream, use the NAMA surplus for house-building.   

It’s one more reason to march on April 7^th – to ensure the Government gets the message. 

Some Reasons to March on April 7th

The National Homeless and Housing Coalition is holding a demonstration on Saturday, April 7^th over the housing crisis.  It has the support of dozens of organisations spanning civil society groups, trade unions and political parties.  To highlight the urgency of this issue and the importance of the march, I have expanded on some ‘quick facts’ published in Home Truths – a special newspaper being distributed nationally in advance of the march by supporters of the coalition.

1.    Homelessness Rising

 

Homelessness has seen a steady rise since 2015, more than doubling.  The last year saw an increase of over 1,900; this compares to an annual average increase of about 1,650 in the previous two years.  Of the 9,100 homeless, nearly 3,300 are children.

These numbers only refer to people in emergency accommodation.   The Housing Agency’s Summary of Social Housing Assessments 2017 shows nearly 20,500 households living with family or friends.  And this doesn’t include people in the same circumstance but not on the housing list.  

2.    People on the Social Housing Waiting List

There are over 85,800 households on the social housing waiting list – nearly 200,000 adults and children.   That’s a bad enough.  But a look at some of the sub-categories illustrates the dismal realities of this fact:

• Nearly 40 percent have been waiting for five years or more
• Over 7,000 have a household member with a disability or exceptional medical condition
• Nearly 18,800 are actually in employment
• And there are 6,600 aged 60 years and over

3.    Upward Pressure on Homelessness

Over 72,000 households are in residential mortgage arrears.  Over two-thirds have been in arrears for 90 days or more.  In addition, over 20 percent of employees are officially categorised as ‘low-paid’, while 13 percent at work live in deprived conditions.  Evictions and inability to afford rent are now driving forces behind homelessness.

4.    The Rise and Rise of Rents

According to Daft.ie, rents have increased by over 60 percent in the last five years.  During this same period inflation rose by less than 1 percent.  Rents are increasing by over 10 percent a year.  Wages are only increasing by 2.5 percent.  Every year, rents are moving further out of reach of low and average income groups. 

Given that these are Daft.ie figures, they are asking rents.  But this shows that new apartments coming on to the market are not going to make a contribution to reducing the level of rents or increasing the stock of affordable rental accommodation.  And market analysts are projecting a 20 percent rise over the next two years.  Excessive rent increases will be with us for a while.

5.    Dublin Rents far Exceed Other EU Capitals

When compared to other EU capitals, Dublin is at the top of the rent league (only London is more expensive than Dublin).  If you were renting in the city centres of Berlin, Amsterdam, Vienna or Brussels, you’d be paying €8,400 less per year to your landlord.

This shows the difference between managing market rents and, in the case of Ireland, not managing them.

(Note:  the above data is taken from Numbeo, a user-generated site.  This is not as accurate as a properly produced statistical survey.  However, the National Competitiveness Council has started using this site, stating that ‘the scope and depth of the data gives this approach some merit’.)

6.    Subsidies to the Private Rental Sector

In the last 12 years, the state has handed over €6.4 billion to private landlords and the private rental sector.  Under current targets, the Government will be spending nearly a €1 billion a year by 2022. Question:  is it more financially and socially efficient for the state to build and rent housing through a public agency (local authorities, public company, etc.), or to rent housing from the private sector?

7.    Rising House Prices

The average new house price nationally is €330,000.  In Dublin it is nearly €420,000. 

House prices have yet to return to the stratospheric pre-crash levels.  However, since house prices troughed in late 2012 / early 2013 (the above graph includes both new and second-hand), national prices have risen 69 percent in five years while Dublin prices rose by 76 percent.  In the last year, prices have risen by 12 percent. 

There are several contributors to prices:  availability and price of land (and impact of land hoarding); availability and cost of credit; wages and incomes; desirability and viability of alternative housing tenures – in particular, rental accommodation..  Supply of housing is only one factor in price and, at times, not the main or relevant factor as Mel Reynolds and Dr. Lorcan Sirr have pointed out.

8.    Home Ownership Increasingly Out of Reach

In Dublin, a couple buying their first home will have to pay, on average, a deposit of over €40,000 and have a combined income of over €100,000.  Currently, the average wage for workers is €38,000.  For average-income employees, it is difficult to see how they can afford to buy a house in Dublin.

9.    High Cost of Credit

It has been well-established that Irish mortgage interest rates are higher than in other EU countries. So, in addition to increasingly high house prices, were average income earners able to get to the purchase stage, they would find themselves paying high monthly mortgage costs.

Let’s do a stylised comparison with other EU countries – a €275,000 mortgage for 20 years at fixed rates. 

Like rents, Irish monthly mortgage payments are higher than in other countries.  There will be differences depending on length of mortgage and the mix of variable and fixed rates, but this stylised comparison is likely to hold across the range of option – especially as Irish interest rates are 3.7 percent while in many of the other countries they are below 2 percent. 

We are still paying for the banking crisis.

10.    Land Costs and Developers’ Margins Driving High Property Costs

There’s a housing cooperative in Ballymun – the Ó Cualann Cohousing Alliance – which is building houses for sale at prices that can come in well below (30 percent or more) market rates.  How can they do this?  First, the land is provided at heavily subsidised prices from the Dublin City Council – so land costs are reduced.  Secondly, they don’t have a developers’ margin (though the private companies that build the houses do so at profit).   That’s the difference.

The Journal.ie’s Fact Check came up with a similar finding when asking whether it would be cheaper for the state to build houses.

What is driving high property prices?  The cost of land (which is being inflated given land-hoarding and the lack of market management) and developers’ profits. 

The cost of land and developers’ margins can account for a third of the price of a home in Dublin.

* * *

Those are just a few reasons to march on April 7^th.  But actually, there are hundreds of thousands of reasons to march – the vast number of people in housing need.  These are the stakeholders in this march.  Indeed, they are the only stakeholders.

I will be marching with them on April 7^th.  Hopefully, you will too.

Note:  The ‘Housing is a Human Right’ march will be held on Saturday, April 7^th at 1:00 pm in Dublin.  It will assemble at the Garden of Remembrance, Parnell Square.

In-Work Poverty and the Data Under the Hood

First rule of analysis:  data tells you what it tells you.  One should be cautious about making general assumptions.  For when you ‘look under the hood’ you may find the data has deeper layers and the story that emerges may not hold up the original assumption. 

I was reminded of this rule following the publication of Social Justice Ireland’s Poverty Focus 2018.  In that, they made a rather straight-forward, sourced and uncontroversial point: that there are over 100,000 workers at risk of poverty. 

A number of people took to Twitter pointing out – quite correctly – that Ireland does well in this category compared to other European countries.  Ireland has the third lowest level of in-work at-risk of poverty among our EU peer-group (other northern and central European economies).   Only Belgium and Finland have lower levels.  On the face of it, this is a good statistic story. 

However, not all is what it seems, especially when we examine the layers of data below this particular stat.

Let’s start with the at-risk poverty measurement.  It refers to the percentage of persons in work with a disposable income below the at-risk poverty threshold which is set at 60 percent of the national median income (median means the mid-point of income distribution whereby 50 percent earns above and 50 percent earns below).  So contained within the at-risk stat is three measurements: workers’ income, the at-risk poverty threshold and the national median income to which it is anchored to.

So how does Ireland fare on this anchor – the national median income?

 

As seen, Ireland ranks well behind other countries.  To reach the mean average of our peer-group, we’d need to increase median income by over 13 percent. Note:  equivalised refers to factoring in household size while PPP factors in living costs.

With median income so low, so is our at-risk poverty threshold.

 

In Ireland, the poverty bar is, therefore, lower; easier to jump.  In other countries it is much higher. If someone is earning an equivalised income of €11,000 in Ireland, they would not be at-risk of poverty, at least not statistically.  However, someone earning €13,000 in Austria would be at-risk.  Here’s a question:  which would you rather be earning, regardless of statistical categorisation.

We can get an idea of this by looking at the hourly pay of those workers who are probably more at-risk of poverty than others– hospitality workers employed in hotels and restaurants.

 

Here we find Ireland, again, at the bottom along with the UK.  Unfortunately, we don’t have the median wage, only the average.  But it tells a similar story as the poverty thresholds.  Irish hospitality wages would have to increase by 28 percent to reach the mean average of other countries in our peer group.

If our ranking as 3^rd lowest in the in-work at-risk of poverty table is a consistent reflection of actual social conditions for Irish workers, then we should expect this to carry over into the material and social deprivation rate measurement for the employed. 

It doesn’t.  In 2015, over 9 percent of Irish employed suffered from material and social deprivation, even above the UK.  This was nearly twice the mean average of our peer group.  It should be noted that Ireland doesn’t report for 2016 and that in 2015, Irish data is labelled ‘unreliable’.  However, the decline from 2014 is consistent with published CSO data.  And the good news is that in 2016 CSO deprivation rates have fallen further.  However, Ireland would still be well above the mean average of our peer group.

And none of this considers the social costs Irish workers face.  Unlike workers in other countries in our peer group, we have to pay the market rate for GPs, prescription medicine and childcare.  Rents in urban areas are far higher while public transport is subsidised less.  The at-risk measurement doesn’t capture this.

So where does this leave us?  We have a positive in-work at-risk of poverty measurement (though 100,000 in relative poverty are still far too high).  However, relative to our peer-group we are:

• A low-income economy
• A low-wage economy
• A high deprivation society

Our in-work at-risk of poverty measure is a function of median income (comparatively low) and at-risk poverty thresholds (again, comparatively low).  And it is not consistent with our relatively high deprivation rate for those in work.

And this is the problem.  We can throw out a single stat, assuming it is representative of actual conditions.  But when we ‘look under the hood’ – at the underlying and related data, a different picture can emerge.  And, at times it puts the single stat in a different perspective.  The problem is that the mono-stat is easier to grasp and more amenable to Twitter-length sound-bites.

Looking under the hood demands a broader, more in-depth investigation which, at times, is not so much fun.  But at least you’ll get a little closer to what is actually happening and how we compare with other countries.