Notes On The Front

Time to Introduce Price Controls on Energy

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

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

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

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

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

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

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

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

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

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

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

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

There are a number of forms price regulation could take. 

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

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

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

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

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

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

The Inflation Dividend

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Modelling a New Collective Bargaining Framework

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

 

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

 

Don’t Lower Wage Expectations. Raise Them!

Ibec’s Danny McCoy stated:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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