Forgetting Lessons We Never Learned

It is amusing to hear talk about learning the lessons from the crash.  Take housing:  we entered the crash due to a housing crisis, with public subsidies in the form of tax reliefs being a contributory factor in the unsustainable boom.    What do we have now?  A housing crisis with the government providing public subsidies:  the help-to-buy scheme, capital gains exemption and postponement of the property tax revaluation.

How about banking culture; in the aftermath of the bank guarantee and public bail-outs all the conversation was about the banking culture.  Fast forward a few years – with the tracker mortgage scandal and the Paradise Papers – and what are we talking about?  The banking culture.  And what is the government doing?  Privatising AIB.

One more example:  tax cuts.  Prior to the crash governments slashed just about every tax it could:  income tax, corporation tax, capital taxes, PRSI – leading to an over-reliance on property-boom revenue.  When the crash came, the reduced tax base was exposed.  What is happening now?  The Government is cutting just about every tax it can:  income tax, capital taxes, USC, PRSI, corporation tax.  This is reducing the tax base and  . . . well . . . hmmm.

It’s one thing to fail to learn lessons.  It’s another to forget lessons we never bothered to learn.  That takes skill.

There is one lesson that doesn’t an airing – automatic stabilisers.  The principle stabiliser is unemployment benefit.  When people become unemployed they are automatically entitled to unemployment benefit (assuming they have enough contributions).  This protects people from the loss of work income and being driven into penury. 

But this payment also helps stabilise demand in the economy by providing people with a temporary benefit to allow them to continue to purchase goods and services, thus protecting domestic businesses.

Hence, automatic stabilisers.

Ireland’s automatic stabilisers are quite weak compared to our peer group.  The replacement ratio measures unemployment benefit as a percentage of the previous take-home pay.

Ireland is at the bottom of the pile apart from the UK.  If someone on the average wage (€34,700) loses their job, unemployment benefit here would only make up 34 percent of their previous take-home pay.  Most other EU countries are substantially above this – averaging 56 percent of previous take-home pay.

If Irish unemployment benefit were to rise to our peer group level, benefit would rise from €188 per week (in 2015) to €306 per week – an increase of €118, or 63 percent.

As this is benefit, it would be time-limited.  In Ireland, benefit runs out after six to nine months.  Unemployment payment after that is means-tested.

A strong, pay-related unemployment benefit would protect household finances when a job is lost which, in turn, would keep demand up – consumer spending - protecting jobs and wages.  At the macroeconomic level, it is a defensive measure designed to buy time – time to put in repairs such as replacement businesses, retraining and re-skilling and other counter-cyclical measures - and get the economy back on its feet.

This could be crucial given the prospect of Brexit impacting on particular industries (e.g. food) and in certain regions (e.g. border counties).  If jobs are lost, a strong pay-related benefit could provide time to cities, towns and rural areas rather than just experience a sudden and sharp contract as households finances melt down to the current low level of unemployment benefit.

Another feature is that unemployment benefit is paid out of the Social Insurance Fund.  If that Fund is in surplus – as it is now – then benefit payments made do not require additional borrowing.  That’s why it is important to build up the Fund during the sunshine days, in preparation for the rainy days.

Expenditure on unemployment benefit has fallen considerably in the last few years as fewer people lose their jobs.

Unsurprisingly, expenditure rose dramatically between 2007 and 2009 but started to decline afterwards.  Expenditure in 2016 is now below 2007.

How much would it cost to raise unemployment benefit to the average of our peer group?  This is a crude estimate, using the percentage increase in the example of the single average income person above.  Applied here, it would cost an additional €220 million.  However, there would be benefits to the Exchequer:  higher income tax, consumption taxes, etc.

This could be paid out of the emerging surplus.  In 2016, the Social Insurance Fund went into surplus - €466 million.  In previous years, the Exchequer had to make a subvention to bring the Fund into balance.  However, we need to drive up the surplus in the years ahead, especially to pay for pensions.

So it would be far more prudent to increase the social wage – or employers’ PRSI – to pay for the increased unemployment benefit.  An increase of ½ percent – spread out over three years – would not only cover the increase, but would add to the surplus in future years.  Given that Ireland’s employers’ PRSI is ultra-low by our peer group standard, this would still leave us lagging.

If we are going to learn the lessons of the boom-and-bust period, one of those lessons is to strengthen our automatic stabilisers.  Now is the time to do that when wages, employment and profits are increasing. 

Building a strong, European-style social protection system can not only assist households in times of need but help shield us from the inevitable down-turns in the future.

Comments

[Fact Checker]

The problem is that almost no one has a clue what the Social Insurance Fund is and, if they do, they know that it is not really a fund, it is just an accounting presentation. The SIF did not stop paying out in 2011 when it was in massive deficit and the Exchequer was topping it up to the tune of billions!

If you want to give Ireland a proper pay-related welfare system (and I am sympathetic to the idea) you would need to really educate workers about the difference between social insurance and income tax.

I recently got hold of my PRSI contributions record. It was not obvious how to do so and, when I did, the record told me nothing about my entitlements.

As a minimum PRSI payers should be entitled to an annual, automatic statement of their contributions. This would helpfully tell them how much of a contributory state pension they are entitled to so far.

It would also tell them how much PRSI (employee and employer) they have paid in the current year. It is only then that you could really start with a proper entitlement-related system.

[Michael Taft]

Fact Checker - couldn't agree more. In many EU countries, the paycheque or equivalent breaks down the tax and social insurance, and further breaks the social insurance down into component parts: unemployment benefit, illness, pensions, etc. This allows people to not only see where there 'tax' or SI is going but makes the direct link between SI and the benefit. As part of building a strong social insurance state, education and information would be vital.

[Fact Checker]

You would also want a very strong legal framework around the SIF. What it can't be used for, what it can't, annual assessments of its solvency - not just the five-year assessment as at present.

It would need an independent head with some distance from the political system and informed reporting to the Oireachtas.

This is unlikely to ever happen of course. In the meantime it would be very nice if DEASP could do a better job of splitting up the presentation of means-tested and contributory programmes in their Vote. Currently they are just lumped together as 'welfare' in the public eye which is really not helpful.

There is a world of difference between a contributory pension paid after years of PRSI on the one hand, and universal cash transfer programmes like child benefit on the other.

Revenue could also advise people on how much PRSI they actually pay - I looked at my P21 recently and there is no reference to it at all - even though Revenue collect €8 billion of it every year from us!