Author Archives: Michael Taft


From top: Minister for Finance Paschal Donohoe; Michael Taft

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 more step in ensuring that market activity works in the democratic interest.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Tuesday

Rollingnews


From top: Minister for Finance Paschal Donohoe at the Department of Finance: Michael Taft

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, 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, to ‘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?

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Tuesday

Rollingnews

From top: Grand Canal, Dublin 2 last week; Michael Taft

Is the economy over-heating? Are we reaching full capacity? Are we in danger of slipping into heightened 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.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Tuesday

Rollingnews

From top: pay discrimination in Ireland is the highest in our European peer group; Michael Taft

Now that women have secured a basic human right denied them by the constitutional caprice of the now defunct 8th amendment, what is the next step?

It depends on how people see the issue.

If it was about secularising 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 organisation campaigning for the repeal of an odious amendment or in the workplace campaigning for equality – positive change can occur. These are persistent lessons.

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]

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Tuesday

Top pic: HR magazine

The Swedes are becoming more like the Irish rather than the other way around, argues Michael Taft (above)

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 Swedes 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.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Tuesday

Top pic: Shutterstock

From top: Minister for Finance and Public Expenditure & Reform, Paschal Donohoe and Taoiseach Leo Varadkar TD outlining to the media the update on Ireland’s Debt Service Costs outside Government Buildings last September; Michael Taft

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, analysists 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 8th 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.

However, 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?

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Tuesday

From top: Minister for Finance and Public Expenditure & Reform Paschal Donohoe giving a media briefing of the Draft Stability Programme Update 2018 in the Department of Finance last week; Michael Taft

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.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Tuesday

Rollingnews

From top: Grafton Street, Dublin 2; Michael Taft

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. We find profits by subtracting wages, and taxes on products and taxes from GNI. This is not an ideal measurement but it’s the best we have.

So 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 debatable whether they are being put to best use.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Tuesday

Rollingnews

From top: John Fitzgerald; Michael Taft

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, Dr. John Fitzgerald, of the Economic and Social Research Institute [ESRI], is not impressed.

In an Irish Times opinion piece, He writes:

‘ . . . 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.’

Dr. Fitzgerald continues:

‘ . . . 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.’

Hmm. 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.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Tuesday

From top: Minister for Finance and Public Expenditure and Reform Paschal Donohoe launches Budget 2018 last November.; Michael Taft

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 9th 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 9th and 1st decile, Ireland ranks 3rd 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.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Tuesday