Notes On The Front

Snatching Social Prosperity from Climate Crisis

Amidst all the commentary on the millions-across-the-globe Friday climate change strike, one remark was striking:  we should be very afraid.  Certainly, failure to contain the rise in global heating will wreak devastation.  And the United in Science report makes for unnerving reading. 

However, fear may not be the best way to mobilise people into action.  A better way is to show how climate repair will actually make life better and improve our living standards beyond just avoiding global meltdown.  In other words, the policies to address the climate emergency will actually result in a more prosperous society.   

Take a carbon tax:  if this were increased without a robust compensation mechanism, it will further degrade the living standards of low and average income households.  However, if it is accompanied by a Carbon Dividend – or a ‘climate income’ - things change.  Low and average income groups are likely winners and income inequality is reduced.  In that context, the carbon tax could then do what it is supposed to:  reprice carbon to remove externalities (i.e. remove the massive subsidy fossil fuel extractors receive from a failed market) and provide environmentally-sound incentives to investors and innovators.

So what climate repair policies can actually make things better?  Here is a small list – no doubt there are other and better examples.

Free Public Transport

Public transport is key to reducing emissions and congestion.  So why not make it free?  This could induce more people out of their vehicles, provided there is capacity and access.  Looking at the experience of other European cities, free public transport can have a transformative impact on mobility and life quality.  And it would especially benefit low and average income groups given that a month’s pass in Dublin costs €140. 

Car-Free City Centres

Ban or limit private cars into city centres.  Again, this could induce people to use public transport, while recapturing  the city streets for people .  Cities throughout Europe are taking initiatives, from outright bans to bans on weekends to extending pedestrian zones.

Free Retrofitting

Well, free up front.  One of the problems with the current grant system is that only those with enough money can take advantage of the grant.  So why not make the retrofit free upfront with repayments linked to income or ability to pay.  The full cost can be recovered when the house is sold or disponed.  This could be funded by a National Housing Bank (similar to the bank Fine Gael proposed under their NewEra proposals) and include solar panel installation and fuel pumps.   Further steps would be to require retrofitting when a house is sold or transferred. 

Electric Cars

Similar to retrofitting, grants and tax breaks for electric cars benefit higher income groups who can afford such vehicles.  So why don’t we substantially subsidise the purchase of electric cars with repayments based on income and the balance cleared upon disposal of the car?  In the first instance, we could initially target this programme at rural dwellers, since they will be disproportionately impacted by a carbon tax.  This would have to be done alongside a rollout of a recharging infrastructure.

Green Our Cities

Greening urban areas has a multiple of beneficial effects – from health to climate change to improving the overall liveability of our neighbourhoods.   This is where community democracy can play a driving role – neighbourhood councils established to draw up local plans for greening, design and planting.  This should come with sufficient resources to realise these plans (e.g. Munich local government provides grants to households to dig up hard surfacing and replant their gardens).

Make Just Transition Truly Just

The Green Party has proposed a Just Transition Commission in their Just Transition (Worker and Community Environmental Rights) Bill.  This would be a significant step forward.  But we can go further.  There will be job losses across a range of sectors.  A fund could be established to ensure that anyone who loses their job due to decarbonisation would be entitled to their full wage for a an extended period to facilitate re-training, new employment opportunities, or moving to a new job – a Green Guaranteed Income.  This would not only provide security for workers, it would maintain their spending power which would help protect employment in other sectors (e.g. retail).  Another new feature would be a Green Examinership – a process by which a failing company (due to decarbonisation) is given legal protection to allow its workforce to come up with proposals to convert production to renewable or sustainable goods and services.

Let a 1000 Ideas Bloom

When we think about climate repair we tend to think of either government policy or individual action.  We have to bring the productive economy into this debate.  Every business with more than 50 employees (this threshold could be lower) should produce an annual joint environmental audit between management and employees, emphasising environmental innovation in new processes and / or products.  The Strategic Investment Fund could be re-orientated towards green innovation to assist in this.  Let people in and let a thousand ideas flourish. 

* * *

The advantage of these policies is that they would be good in and of themselves.  That they can help in pursuing climate justice and repair makes them win-win.   There are more policies that could be introduced to achieve this beneficial impact:

• To shore up low incomes we could consider a partial Basic Income, the Living Wage and collective bargaining – all of which can boost living standards.
• Considering that some things may get more expensive (e.g. food), we should be reducing costs in other areas such as housing with cost-rental and cost-purchase housing.
• Reduction in working hours (the 30-hour working week) can contribute to climate repair through a reduction of our carbon footprint (the fewer hours worked, the better).

Of course, the first question in response is how much will it cost?  The problem is we have no baseline for the cost in the scenario where we do nothing or very little.  Therefore, we can’t make comparisons.  So let’s just work out costs based on where we are now.

Many of the above have few cost implications:  guaranteeing people’s income in the case of climate-related job loss (a 0.2 percent increase in social insurance), car-free city centres, etc.  Some of the proposals could actually raise revenue by driving productivity (the 1000 ideas, green examinershp), while subsidising retrofitting and electric cars would be debt-financed by households over the long-term.  Even so, a truly Just Transition will have significant costs.  For instance, free public transport would cost over €600 million – and this doesn’t count the cost of increased demand and capacity (thanks to @Sean_Fearon for pointing out this PQ). 

The Government should conduct a thorough analysis of what the CSO describes as ‘potentially environmentally damaging subsidies.’  In 2016, through direct spending subsidies and indirect tax reductions, we spent over €4 billion in 2016 on such subsidies.  It should be noted that these are potentially damaging, and many of the subsidies are social supports (fuel and gas allowances, subsidies to disabled drivers, etc.).  This means that it is far from a simple matter of ending the subsidies and redirecting the money towards green investment.  However, in the first instance, the Government should identify which subsidies are definitely damaging.

Warmer houses at lower cost, living city centres, retrofitting and electric cars accessible to everyone, green towns and cities, income guarantees and employee-driven innovation – the transition to the new energy, production and consumption regime needed to combat climate change will contain many challenges.  But in so many areas we can show that the transition can be Just, spreading real benefits to everyone. 

This is a programme capable of mobilising society around a new and progressive consensus.

The Slowdown Begins

The slowdown is beginning.  Whether it is a slowdown, as the Minister for Finance claims, to a more sustainable level remains to be seen (growth rates of five, six, seven percent are not sustainable).  It could easily be a prelude to something much worse with a no-deal Brexit looming. 

Let’s look at some of the relevant indicators.

Domestic Demand

Domestic demand comprises all economic activity excluding exports and imports; that is, consumer spending, investment and government spending on public services.  Like so many other economic things, there is no one measurement.

There are two measurements of domestic demand. Total domestic demand includes inventories (value of physical changes in stocks).  Final domestic demand excludes inventories.  Though a small category, inventories can be quite volatile.  The two measurements give slightly different perspectives.  With final demand, it can be argued that growth continues.  However, total demand suggests that it has flat-lined over the last two years.

The difference between the two measurements can inform alternative narratives.  The Minister for Finance pointed to final demand to suggest things are still going fine.  He couldn’t have said that if he referred to total demand.  Further, the CSO press release accompanying the national accounts release also referred to final demand.  However, in national accounts press releases over the previous two years, they referred to total demand.  Why the change?

We don’t have to choose one measurement.  We can content ourselves with showing that there is some evidence of a slowdown given total domestic demand’s flat-line.

Purchasing Manager’s Indexes

Purchasing managers’ Index, or PMI, is an index of the prevailing direction of economic trends in the manufacturing and service sectors. It surveys a range of enterprise activities:  new orders, inventory levels, production, supplier deliveries, and employment.  While this is not an official survey, it is useful insofar as it tracks business activity in close to real time.  The surveys seek to assess whether business activity is improving, deteriorating or stagnating.  The following are from AIB’s PMI surveys.

Manufacturing PMI

When the PMI index goes below 50 (which it has done over the last three months), it suggests that manufacturing activity is contracting.

Services PMI

While the Services PMI is not contracting (i.e. hasn’t fallen below 50) it has declined from a high in 2016.  This could be falling to a sustainable level.  However, if it follows the pattern of manufacturing the next few months could see further deterioration. 

Employment

Given the demise of GDP as a reliable measurement, many commentators have looked to employment data as a proxy for economic health.  On that basis the economy has been in rude health.  However, the latest employment numbers may suggest a turning point.

Suddenly, in the second quarter of this year employment fell by 21,000.  However, this was off the back of a rise of nearly 50,000 in the first quarter.  This looks like one of those glitches (that’s the technical term) one can get in quarterly series. 

However, employment in the market economy – a proxy for the private sector - is showing some sluggishness.  Between 2014 and 2018 (2^nd quarter), employment increased by an average annual four percent.  Last year it increased by 1.7 percent. 

Looking Under the Hood

In 2006 the economy was looking strong.  By 2008 we were in a recession.  A year later we were in a crash.  Economic strength was an illusion. 

So what about this time?  A no-deal Brexit could expose faultlines that are now barely seen.  And without properly reading the economy, we may launch ourselves into policies that not only fail to address the problems but actually make them worse.  In 2008 we started on a downward spiral originating in the construction sector.  Instead of addressing the source of the problem in that sector, we fanned the flames through austerity policies. 

As IBEC’s Gerard Brady pointed out, the counties that are most exposed to a Brexit downturn are also lower-income areas (e.g. Cavan, Monaghan, Donegal, etc.).  This suggests that a downturn would have an uneven impact throughout the country, but would be particularly severe in some.  NERI’s report on the growth of precarious work suggests that employment, while growing strongly, may be vulnerable to a downturn given the quality of much of that employment. To what extent are even supposedly robust measurements still tainted by the activities of multi-national companies?  The IMF’s suggestion that 60 percent of foreign direct investment into Ireland is ‘phantom’ could lead to distortions that undermine our ability to read the economy.  And soft indicators like ‘inability to afford an unexpected expense’ and ‘difficulty in making ends meet’ suggest that household finances are in a weaker state than before the crash.

We may be entering a downturn with a weaker economy than headline numbers suggest.  All the more reason why economic commentary must become more forensic and more sceptical, analysing the detail of activity rather than trusting headline numbers featured in official press releases.

A Lot Worse Than Expected

It evoked some unnerving words from the Cabinet meeting: ‘carnage’, ‘significantly worse’, ‘taken aback’, ‘severity’ and ‘shocked’.  They were discussing a report on the impact of a no-deal Brexit, a report which was not published but was taken off Ministers at the end of the meeting.  So we don’t have hard numbers though one report stated that 10,000 jobs will be lost in the tourism sector alone in the first three months.

The ESRI and the Central Bank have already done simulations on a no-deal Brexit with the latter suggesting that it could drive the economy into recession territory.   This ‘lot worse’ Cabinet report might lead to an even further downward revision.

The Government will be challenged on two fronts (among many).  First, it will have the opportunity to show that it has learned the lessons from the last crisis.  If the economy is hit, jobs are lost, wages frozen – then the last thing it should do is try to maintain a balanced budget.  We need to get through this crisis with as little damage as possible and as quickly as possible.  This will cost.  We can deal with that cost when the economy is on the mend.

Second, if Ministers come out with a ‘we’re-all-in-this-together’ then they must be kept to their word.  This requires the full participation of employees in decisions taken at company and sectoral level in Brexit-exposed industries. 

We should treat this as an emergency – an emergency that could impact on the lowest-income areas.  Gerard Brady of IBEC tweeted a provocative graph.

The further left a county is on the chart, the lower the income.  The higher, the more Brexit exposed.   Cavan and Monaghan are really in the firing line – having below average-income with more than 25 percent employment in Brexit-exposed sectors.  Needless to say, the lower the income the more difficult it will be to deal with an economic hit.

The budget will be framed around Brexit responses.  Therefore, in keeping with the two principles above – a loose fiscal policy and wider participation in decision-making – here are some proposals to create resilience in the economy.

Fiscal Policy

1.    Unemployment Benefit: Introduce pay-related unemployment benefit in the next budget.   If jobs are lost then, at least, ensure that affected households can retain most of their living standard and purchasing power.  This would help maintain consumer demand and businesses reliant on that demand.  Further, it would help maintain income and indirect tax revenue

2.    Short-Time Working Scheme: introduce a short-time working scheme (similar to ICTU’s proposals re:  the construction sector in 2009).  Germany used this approach during the early part of the last recession.  This would help workers remain in work.  Instead of laying people off, working hours would be reduced with the state subsidising the employee for the wage loss.  This would operate for a temporary period but it would give time for firms to adjust and pursue alternative market strategies, or for job creation agencies to develop new employment in the area affected.

3.    Public Housing Drive:  construction sector activity has hit a six-year low and is now on the verge of contraction.   Use the NAMA surplus - €4 billion over two years – to build public housing, especially cost-rental.  As well as addressing the housing emergency, this will create employment, raise revenue and reduce unemployment costs, while supporting the productive economy with lower rents.

4.    Raising Revenue Harmlessly: tax revenue will fall with employment losses.  The Government will need new sources of revenue to partially off-set this loss but without harming the economy.  A Net Assets Tax (or wealth tax) would be an ideal candidate.  It would only impact the very highest earners and, according to ICTU, could raise €350 million – though the ESRI has estimated even higher revenue depending on the design of the tax.  Increasing tax on assets and rentier income is a prudent, efficient and equitable way of raising revenue

5.    Carbon Dividend: the crisis should not be used as an excuse to defer necessary action on the climate emergency.  The carbon tax should go ahead but only on condition of a Carbon Dividend – returning the revenue to households through a flat-rate per capita payment.  This would benefit low-average income households and reduce income inequality, an excellent instrument during a downturn.

6.    No Tax Cuts: tax cuts, beyond adjusting for inflation, should be removed from the agenda.  It would be irresponsible to cut taxes during a crisis.  And ditch the Rainy Day Fund.  It’s starting to rain.

7.    Never Mind the Deficit: the key principle in fiscal policy during a downturn is to limit the duration and depth of the downturn.  Once the economy has returned to growth, the deficit can be addressed (this is true counter-cyclical policy).  Ireland has the benefit of having over €20 billion in cash available to it.  Further, the National Treasury Management Agency is selling bonds at almost 0 percent rate.  Access to funding for investment and counter-cyclical policies is not an issue.

Economic Participation

8.    Establish Sectoral Committees across Brexit-exposed sectors with employer, employee and Government representatives. State support for companies in these sectors would be managed and monitored through these Committees:  goods and services diversification, niche marketing in the UK, production efficiencies, finance accessing, R&D and innovation initiatives, etc.   This, in effect, would establish sectoral collective bargaining and ensure that everyone who is affected has a role in developing and overseeing the response, especially employees.

9.    Public Enterprise Expansion:  Public enterprises should be required by their shareholders (the Irish people through the relevant Minister) to commercially develop expansion and new-start plans in the most affected sectors and regions.  Energy, transport, communications, forestry and fisheries, waste management, postal and financial services:  all these are areas where innovative ideas can emerge at national and local level.  The Sectoral Committees could have a regional dimension and, so, play a key role in public enterprise expansion.

10.    Progressive Companies: developing progressive companies is key to enterprise resilience and flexibility (in terms of diversification).  A natural follow-on from effective sectoral bargaining would make state support for individual companies conditional upon those companies agreeing to bargain collectively with their employees if that’s what workers want.  This is based on the simple principle that if we are all facing a crisis then we should all have a say in resolving that crisis.

These are only some ideas.  Others will no doubt have better ones.  Let’s get them into the political mix.  If the report to the Cabinet was as bad as reported, then many areas and sectors are facing into an emergency.  Emergencies require bold and innovative measures, learning from the past so we don’t repeat the same mistakes.

And vision. Lots and lots of vision.

Ireland's Low-Spend Economy: Facing into the Storm

In the run-up to the budget we will hear a lot about how the Government spends a lot or not enough, and needs to spend a lot less or more.  While there is considerable scope for legitimate disagreements, let’s at least get the context right.  For instance, does Ireland spend too much in comparison with our peer group in Europe?  Are we a high or low spender? 

Different Ways of Categorising Spending

Comparing public spending is not straightforward.  Countries have different ways of spending money on ‘public goods’, but not all of them are considered state spending.  Some spending is conducted by non-state bodies; for instance, spending on housing and water/waste in other EU countries is done through off-balance sheet vehicles such as public cooperatives or public corporations.  Then there is social protection spending which is organised through civil society organisations (the Ghent system in countries such as Belgium and Sweden where trade unions operate unemployment insurance schemes); these do not necessarily appear on the state balance sheet.

Finally, there are demographic issues.  Countries with a high proportion of pensioners will (or should) spend more on pensions, while those with a higher share of young people will spend more on education and family supports.  Demographics even apply to policing:  countries with younger demographics or high levels of youth poverty are likely to need more policing.

There is no one formula to accommodate all these contingencies and differences.

What Measurement?

There is also the problem of how to measure public spending.  We know, for instance, that assessing public spending as a proportion of GDP will wildly understate Irish spending.  We can use the CSO’s measurement of modified Gross National Income (or GNI*) for Ireland, but it can give a slightly skewed result since we don’t have a similar modified measurement for other EU countries.  For instance, the CSO removes intellectual property depreciation and aircraft leasing when calculating their GNI*, but we can’t do that for other countries to get a like-for-like comparison.

Acknowledging these caveats and differences, let’s see what we can come up using three measurements:

• Gross National Income with the CSO’s GNI* measurement for Ireland
• Public spending per capita – this is a measurement used by the Nevin Economic Research Institute
• Net National Income – this is not used as much though, for comparison purposes, it is probably more robust than Gross National Income. It essentially removes capital depreciation in much the same way as the CSO removes intellectual property depreciation to obtain their GNI*. 

Using these three ways of measuring ‘primary public spending (excluding interest payments), what do we find?

In all measurements Ireland is at the bottom of our EU peer group, exceeding only the UK.  On the basis of the above, we can estimate the amount of additional public spending needed to reach our EU peer group average.

Ireland would have to increase public spending by between €14 and €18 billion to reach our EU peer group average, or between 20 and 26 percent.  However, this does not factor in key variables.

Demographics

As noted above, demographics drive a substantial proportion of public spending.  For instance, people aged 65 and over make up 20 percent of our EU peer-group population; in Ireland, they make up 14 percent.  There are two ways to adjust for this:

• If we just exempted expenditure on social protection pensions, the gap between Ireland and our EU peer group would fall to between €5.2 and €8.6 billion.
• If we were to adjust by assuming that Ireland has the same proportion of elderly as our EU peer group, then the spending gap would be between €9.4 and €13.7 billion.

The reason these figures differ is because not only do other EU countries have an elevated age demographic; they also spend more on pensioners (per elderly capita). 

However, when we turn to young people, it is Ireland that has an elevated demographic:  27 percent of the Irish population are 19 years or younger compared to 21 percent in our EU peer group.  At the same time Ireland under-spends on education on a per pupil basis.  Different ways of measuring this gap shows that Ireland may be spending €2 billion less than our EU peer group average on education.

Another category impacted by a high youth demographic is social protection spending on families and children.   A back-of-the-excel-sheet estimate shows Ireland, because of a higher demographic and lower per capita payments, could be spending approximately €1 billion less than our EU peer group average.

Fiscal Capacity

While we should be hesitant about putting a definitive number on it, it appears that when age-related spending is factored in, Ireland – using the conservative GNI measurement - spends somewhere between €8 and €12 billion less than our EU peer group average, and this could be an under-estimate.  Of course, merely increasing spending is no guarantee of quality or efficiency (though underspending is sure to undermine quality).

But this raises the question of our fiscal capacity to meet the current challenges:  the fastest growing elderly demographic in the EU, Brexit, a global trade slowdown, the climate emergency, Eurozone stagnation and the housing crisis – to name only a few.

Increasing our fiscal capacity, however, is not something that can be done in the short term.  It requires a long-term strategy consistent with the economic cycle.  Raising resources for public services, social protection and investment to European levels would mark a systemic break with our historical low-spend economy.   We squandered the opportunity to start this strategy in the years following the recession, and now we are heading into what could be a storm.

Let’s hope the Government doesn’t set us back with unnecessarily tight budgets in the years ahead.