Tag Archives: Michael Taft

From top: Minister for Finance Paschal Donohoe unveiling Budget 2019 at Government Buildings last week; Michael Taft

After all the post-budget commentary – the articles, interviews, studio debates – I’ll attempt to summarise the broad direction of the budget with three charts based on the detailed tables at the end of the budget’s Economic and Fiscal Outlook.

These are the Government spending projections. I have used the GDP deflator for inflation and the IMF’s population projections.

Capital Investment

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

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

Public Services

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

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

Social Protection

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

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

* * *

The story is simple. The increase in capital spending is being funded by real cuts in public services and social protection. We should note, however, that the Government has given itself some wriggle room.

They have pencilled in €3.6 billion in ‘unallocated’ spending in 2023. But even if this were to be divided between public services and social protection, they would still experience real cuts.

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

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

The point here is that the Government’s starting point is to squeeze public services and social protection to pay for increases in public investment.

That’s their strategy. It may not finally come to that. But it won’t be want for planning it.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front.

Rollingnews

From top: Minister for Finance Paschal Donohue during last year’s budget press conference; Michael Taft

Budget day, today. Since all measures will be revealed later this afternoon there is little sense in going through what should be.

Let’s just throw a few facts into the debate for there are plenty of assumptions, assertions and ‘in passing’ comments that pretend to be self-evident truths.

While the following is a bit number-wonk we can take this as just one example of the unfortunate state of the debate over the economy.

In particular, it has been stated on a number of occasions that day-to-day current spending (health, education, social protection) is rising ‘too quickly’ and that the improvement in our public finances is ‘slowing-down’.

The evidence, however, is weak.

Current Spending
Since 2014, when current spending reached an austerity low, it has been increasing. But is it rising faster than the European norm?

Growth in Irish current spending since the start of fiscal recovery (2014) has been approximately average by Eurozone standards. T

his is particularly modest when one considers that Irish current spending fell by over six percent during the austerity years while Eurozone spending grew by nearly seven percent.

The fact is that current spending is not growing ‘fast’ – not in comparison with other Eurozone countries.

National Debt
There is a claim that our progress on reducing the debt and the deficit is sluggish. Let’s look at debt figures.

Since 2013 (when Irish debt was its highest) Eurozone debt has fallen by 9.8 percentage points when measured as a percentage of GDP; Irish debt has fallen by 53.1 percentage points when measured as a percentage of GNI*.

Of course, Irish debt was extremely high in 2013. But on any reckoning, this has been an incredible achievement.

Even looking at short-term period – the projected debt between 2017 and 2019 – Irish debt will fall by 6.9 percentage points; the Eurozone will only fall by 4.7 percentage points.

Our debt is falling faster than all other Eurozone countries. We still have a long ways to go to bring it to Eurozone levels but we are heading in the right direction.

Deficit
Remember those double digit deficit figures when the recession hit? By next year we will have effectively balanced the budget.

Indeed, we will have a significant current budget surplus – meaning that we are raising considerably more revenue than we are spending on day-to-day budget.

And we are doing better than the Eurozone average. Next year, Ireland will have a 0.2 percent deficit (measured against GNI*); the Eurozone deficit will be 0.6 percent.

* * *

This may seem small griefs but this is the type of debate we have – assertions and assumptions that prepare the ground for a restrictive fiscal stance regardless of the context or even the fiscal rules.

This is compounded by a general media commentary (with some exceptions) which accepts these assertions uncritically.

The best example of this is the Government’s claim that it has only €800 million to spend before discretionary measures (i.e. before tax increases); actually, it is €1.7 billion but you wouldn’t know that by that following public debate. Ironically, to get the actual state of affairs you need to read the Government’s own statements.

Should there be a restrictive budget? A surplus? An increasing emphasis on reducing the debt (and the manner in which you do that)? These are all legitimate areas for debate.

Unfortunately, we don’t get that debate. We get hollow arguments and unsubstantiated claims which only degrade economic discourse and close off alternative options.

Just like the debate over austerity.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front.

Rollingnews

From top: Minister for Finance Paschal Donohoe; Michael Taft

It’s that time of year when people and organisations put forward their favourite tax cut, tax rise or new tax altogether.

So in that spirit I’d like to put forward one of my favourite blue-sky reforms: abolish income tax and substitute an expanded Universal Social Charge (USC).

The USC is a great tax. It is simple, transparent and no matter how many accountants you hire, you can’t escape it. The tax has almost no exemptions, reliefs, or allowances – unlike the income tax system which is riddled with tax expenditures.

The rates for USC are:

Up to €12,012: 0.5 percent (though if you earn below €13,000 you will be exempt)

€12,012 to €19,372: 2 percent

€19,372 to €70,044: 4.75 percent

Above €70,044: 8 percent (except for self-employed – income above €100,000 is taxed at 11 percent)

In 2016, income tax – with rates of 20 and 40 percent – raised €14.3 billion. The USC – with rates of between 1 and 8 percent (the standard rate then was 5.5 percent) raised €3.6 billion.

The cuts to USC since 2014 have been substantial.

Originally, the USC had three rates: 2, 4, and 7 percent. Why cut a tax that is simple, transparent, easy to administer and raises substantial revenue on low rates? One can always change the rates and thresholds and still maintain revenue.

Let’s play out this exercise and assume the Government abolished income tax in the budget. By how much would USC rates have to rise to make up the lost revenue?

I am not suggesting that these same rates and thresholds are optimal. They would be very high and penal for those on low incomes. However, rates and thresholds can be changed quite easily with a provision to exempt income below a higher threshold.

What it does show is the potential to substantially reduce marginal income tax rates among middle income earners who now pay 44.75 percent (48.75 percent if you include PRSI) while maintaining tax revenue.

The above doesn’t provide for any tax reliefs. We could re-introduce tax reliefs into the system – credit for dependent adults, health insurance, pension contributions, etc. But for each credit introduced, we’d have to increase the tax rates or reduce the thresholds or both to maintain revenue.

As a rule, for each €100 million in tax relief, each of the rates above would need to increase by approximately 0.1 percentage point. However, moving towards a USC system would allow us to revisit the way we provide resources for households.

Take a small but important relief – the Blind Persons’ Tax Credit. The implication of moving to a USC-based system would be to remove this credit which is worth €1,650 (or approximately €32 per week) for recipients.

There is an additional relief for guide dogs worth €165. Removing this credit would seem, at first glance, inequitable.

But here’s what the Commission on Taxation said about this credit when it recommended that it be abolished:

‘We consider it inequitable that this tax expenditure only benefits blind persons who are liable to tax and with sufficient income to absorb the credit; blind persons on lower incomes or those dependent on social welfare obtain no benefit from this credit.

We recommend that the appropriate level of State support be provided to blind persons through the direct expenditure route and that the tax credit be discontinued.

However . . direct expenditure support at the appropriate level should be put in place first; only then should the tax credit be withdrawn.’

So those on social protection and those at work, but whose income is so low they don’t pay income tax, do not benefit from this credit. This is not equitable.

The Commission’s proposal would mean that all people with visual impairment would benefit – regardless of their employment or tax status.

We could go one better. We could increase the direct payment and tax it. This would mean that those on low incomes would benefit even more while those on high incomes would receive only a proportional benefit, commensurate with their income.

This would turn the payment into a progressive one.

There are a number of tax expenditures that could be turned into direct payments with progressive effect. Another one is the credit for households with an incapacitated child.

This is a valuable credit for households with real needs; however, those on low incomes do not benefit.

Again, the Commission on Taxation proposes the credit become a direct expenditure equivalent to the same amount – and then abolish the credit.

So moving to a USC-based system is not just about tax rates and thresholds – it could also reform way we deliver support to households.

We would need more detailed data and an assessment of the impact on different income groups – especially those who rely on crucial tax reliefs to make ends meet.

But this approach can help focus the debate away from marginal tax rates and on to effective tax rates – creating a simpler, more transparent and efficient tax system.

It is not about cutting revenue. It is about reform.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front.

Rollingnews

From top: Fine Gael Minister for Finance and Public Expenditure and Reform, Paschal Donohoe on his way into talks with Fianna Fáil over the 2019 budget at the Department of Finance last week; Michael Taft

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

Fiscal policy can put a lot of people to sleep, especially as it is presented in numbers, ratios and sometime dubious historical parallels. But it is one of the key foundation stones in the area of public expenditure, investment, taxation and, most of all, macro-economic stability.

Lately we have been treated to a barrage of calls to ‘run a budgetary surplus’, ‘rein in our high debt levels’, ‘prepare for Brexit’ and ‘avoiding over-heating’. Each of these is contestable and has profound implications for social and investment policy. For the most part, the Left is silent and the debate has the sound of one-hand clapping.

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

Tainting the Golden Rule

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

The bases on which they are making these calls, however, are flawed.

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

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

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

The Golden Rule was undermined by the Fiscal Rule which stated there must only be a 0.5 percent deficit (one percent for those countries with an overall debt level below 60 percent of GDP).

This means that Governments are not allowed to borrow to invest. They must fund most of investment out of current income.

This is irrational for two reasons:

What would happen if households had to fund major investments out of current income – house purchase, retro-fitting, new car, etc?

Central Bank rules require households to pay 10 percent of the house price (investment) up front. Imagine if those rules required households to pay 70 or 80 percent of the house price: house purchases would collapse along with the building sector.

Why would you not borrow for investment when interest rates are on the floor?

But now it is getting worse. By demanding that the entire budget be in surplus many commentators are going beyond even the restrictive fiscal rules, tuning the Golden Rule into rust.

They are demanding that not only should all investment be paid out of current revenue but that there be an additional large surplus. This is despite our many infrastructural deficits.

How Do We Compare?

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

Not only does Ireland have a very high surplus on current, or day-to-day, spending compared to the Eurozone; it is rising much faster. The Government intends to drive this up even higher in 2020 and 2021.

This is not only unnecessary in terms of the fiscal rules; it deprives the productive economy of badly needed resources.

If we enter the next downturn, slump or recession with a housing crisis, an unaffordable and poorly paid childcare system, low levels of R&D and per student expenditure we will find an economy struggling to return to growth.

On the other side of the downturn it will cost even more to repair the economic and social damage, repeating the same mistakes we made coming out of the last recession.

A Progressive Starting Point

What should progressives be proposing? First, we should argue adherence to the Fiscal Rules, that is, a 0.5 percent deficit. This would facilitate economic and social investment.

The Government’s Summer Economic Statement gave us a table showing what additional expenditure – above Government projections – would be allowable under the Fiscal Rules.

Over the next three years we would be allowed to spend over €4.1 billion above what the Government intends. This is a sizeable amount available for investment.

Of course, this doesn’t tell us where to spend the money – that is another debate to be had (for my money it would be housing, childcare, education, R&D and primary healthcare).

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

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

In short, progressives should get back into the debate over fiscal policy – by proposing an alternative medium-term framework.

In doing this, though, progressives should also confront the real dangers that lie ahead – and do so in open and honest manner: Inflated revenue levels due to multi-national accounting practices; rising interest rates – probably starting in 2019; Brexit; a global slowdown due to the next downturn, fueled by tariffs and trade wars, etc.

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

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

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front.

Leah Farrell/Rollingnews

From top: Minister for Finance and Public Expenditure and Reform Paschal Donohoe TD addressing the Dail about  Budget 2018 last year on TVs in Arnotts; Michael Taft

We need to broaden our tax base, keep taxes on the productive economy as low as possible and shift taxation on to unproductive capital, unearned income and environmentally-degrading activities.

That’s why Dr. Tom McDonnell’s proposed net wealth tax (A Household Net Wealth Tax in the Republic of Ireland: Some Considerations) is so welcome. It ticks all these boxes.

During the recession and austerity years, the wealth tax featured as a proposal. Since then, it has disappeared from the public debate.  Now is the time to put it back on the agenda.

There are a couple of starting points to this discussion:

* A wealth tax is merely an extension of the property tax to all property – both real and financial property. The exemption of financial property from the current property tax is a significant subsidy to high-income groups.

  • There isn’t a pot-of-gold in a wealth tax. It can raise significant sums (see below) but it is only one piece of a broad tax mosaic.

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

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

What would a net wealth tax look like?

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

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

How much would such a tax raise?

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

* First, a threshold of €1 million (double if married) with additional relief for children and a tax rate of 1 percent with few exemptions. This would have generated €248 million in 2013 and affected just 1.5% of households.

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

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

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

In short, we are looking at somewhere between €125 and €300 million in revenue for a net wealth tax of 0.5 percent.

However, it should be noted that this is based on 2013 data. Since then the Central Bank has estimated that net household wealth has increased by a massive two-thirds. So revenue would be higher today.

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

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

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

Budget 2019 could be that start.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front.

Leah Farrell/Rollingnews

From top: left to right: Central Bank’s Head of Communications, Jill Forde, Director of Economics and Statistics, Mark Cassidy and Head of Irish Economic Analysis, John Flynn  delivering the thrid quarterly bulletin for 2018 in  the Central Bank of Ireland, North Wall Quay, Dublin yesterday; Michael Taft.

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

Now they have modified the modified GNI. And our level of output has been revised downwards.

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

We have also found ourselves deeper in debt. When measured against GDP, our general government debt was 68 percent last year – below the Eurozone average.

However, when measured against the old GNI* our debt level went up to 100 percent. Now we find that our public debt is 111 percent of the new GNI*.

So, poorer and deeper in debt; and now we may find ourselves on the wrong side of the economic cycle. In the years since the end of the recession/stagnation, all our indicators have been in fast growth.

This was never going to last; it was a result of pent-up demand and foreign direct investment. Eventually it would settle down. But we may be settling down earlier than we thought – and at a lower level than we thought.

Let’s look at two indicators that are fairly detached from multi-national activities: personal consumption (consumer spending) and employment.

Personal Consumption

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

Consume spending reached 4 percent in 2016. However, growth suddenly cooled off at 1.6 percent. This was not anticipated. Early last year: The Government anticipated consumer spending to fall off by a marginal 0.2 percentage points in 2017

The ESRI expected consumer spending to marginally increase over the 2016 level

The Central Bank did expect consumer spending to fall off – by 0.9 percentage points. But this was more optimistic than the actual 2.6 percentage point fall.

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

Employment

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

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

And if we exclude construction, the fall-off was even more marked. Again, only the Central Bank expected a fall-off close to this magnitude.

* * *

What does all this mean?

Growth rates immediately coming out of the recession and stagnation were never going to be maintained. They should ease off to more sustainable levels. However, there are signs that the levelling off is occurring earlier than expected and potentially at lower levels than projected.

The easing off of consumer spending and employment could be blips that will correct themselves this year. The Central Bank, while expressing surprise at the low levels of consumer spending last year, is nonetheless confident that it will rise again this year. We will have to wait and see whether the confidence is justified.

What happens if and when all those ‘known unknowns’ come down on us? Brexit, corporate tax reform (coming from the EU and the US), interest rate increases, a looming deficit in the Social Insurance Fund, trade wars, climate change, housing shortages, over-heating, concentration of tax/production in a few multi-nationals, etc.

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

There is a fear, understandable given our recent experience, that any of these factors could lead to another recession. However, it doesn’t have to be as dramatic as that. We could enter a period of low-growth – so low that it feels recessionary.

In the 1980s it certainly felt like a recession but in actual fact the economy grew during most of that period – it just didn’t grow much.

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

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

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

Progressives and trade unionists need to enter this space and construct a progressive framework for the medium-term.

If we don’t, then others will do it for us. And given our recent experience, that wouldn’t be good for vast swathes of working people.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front.

Leah Farrell/Rollingnews

From top: Irish army soldiers leave an armoured personnel carrier while taking part in pre-Golan Heights deployment training in the Glen of Imaal, County Wicklow; Michael Taft

What great fun following President Donald Trump’s global tutorial on how to win friends and influence people.

Particularly intriguing is Trump’s claim that European members of NATO are not spending enough on ‘defence’ and that they should increase defence spending to 2 percent of GDP immediately, and even double this target to 4 percent.

Throw in a bit of German-bashing and Euro-trashing and it was a great summit.

But this Trump-watching fun masks the dismal fact that global military spending is crowding out the investment necessary to create international stability and security.

All the countries of the world spend $1.7 trillion on their militaries (or approximately €1.5 trillion). The US accounts for 35 percent of that spending (it’s expensive maintaining an empire), while Europe accounts for another 20 percent.The world spends 2.2 percent of its GDP on the military – up from 1.6 percent in 2007.

In short, these are obscene numbers.

And now the EU is getting involved in this growing military-mania with PESCO: Permanent Structured Cooperation, as in European security and defence. This issue got an outing some time ago in the Dáil when TDs debated joining.

Proponents sought to present the issue as one of voluntary cooperation on a range of issues, including peace-keeping missions with opt-outs available, while opponents raised important concerns over neutrality and Ireland’s global role.

One doesn’t have to be a fully signed-up peacenik to be concerned about rising military spending in Europe.

While PESCO imposes no binding target for total defence spending, there is the NATO target of 2 percent and the institutional entanglement between the two:

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

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

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

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

To reach 2 percent of GDP spending EU-wide would require a considerable amount of redirecting resources and opportunity costs.

There are only three countries that currently spend this amount on the military and one of them – the UK – soon won’t be with us.

Though the Government was quick to point out that signing up to PESCO doesn’t mean that Ireland has to increase it’s spending to 2 percent, we shouldn’t be surprised if pressure is put on individual national defence budgets.

Joining PESCO with the commitment to the triple-lock (Government and Dáil approval, and UN authorisation before Irish involvement in overseas missions) may seem to provide some cover, but we should be prepared for militarisation-drift. Already, Fine Gael MEPs have called for Ireland to fully join the EU Defence Union.

So what would a 2 percent military spending level mean for the EU as a whole?

In 2016, it would have meant and increase of €100 billion, or 50 percent. That is a significant sum.

What about other urgent priorities within the EU?

To return public investment spending to pre-crash levels would require an additional €77 billion; and to make up for the lost years in recession, the increase would be multiples of that.

There are 118 million people in the EU who are at-risk of poverty or social exclusion, with 80 million experiencing deprivation

There are 21 million people unemployed in the EU, of whom 8 million are long-term unemployed

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

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

Put nuclear disarmament and the elimination of all weapons of mass destruction back on the agenda – these are terror weapons that have no place in any country’s armoury

Launch a drive to reduce military spending – in the long- term to 1 percent in each country and re-direct the savings into international social, environmental and economic programmes under the auspices of the UN

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

Reducing military expenditure is, of course, dependent on resolving the myriad conflicts throughout the world – Palestine, Yemen, Syria, Sudan, Kashmir, Kurdish-Turkish conflict, Armenian–Azerbaijani conflicts, Afghanistan, Pakistan-India hostility, Korea; and the list goes on.

It is also about limiting the capabilities of imperialist powers and ventures. In other words, it is about re-establishing the UN, for all its faults, as the driver of peace, conciliation and stability.

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

Here, Irish civil society organisations can play a role, based on our historical neutrality, in promoting a new anti-militarisation drive in Europe.

There are peace movements throughout Europe and the potential of a pan-European peace initiative – centred on demands to remove WMDs from European soil, to redirect military spending to social programmes, and to pursue non-offensive defence strategies – could help mobilise public opinion away from militarisation.

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

‘In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex.

The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes.’

Or we can re-start and re-animate a politics and economics of peace. For the world desperately needs fewer and smaller armies.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front.

Rollingnews

 

From top: Minister for Finance Paschal Donohoe; Michael Taft

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

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

First, in many EU countries low-paid workers pay a much higher marginal tax rate (marginal tax rate is the tax you pay on the next Euro you earn; it is not the effective tax rate – that is, the tax paid as a percentage of income).

For example, at €30,000, Austrians pay 35 percent marginal income tax rate while Belgians pay 40 percent; and this doesn’t include much higher social insurance (PRSI) rates. In Ireland, taxpayers pay only 25.5 percent.

So, yes, Irish taxpayers enter the top rate of tax earlier than Austria and Belgium – but they pay much lower marginal tax rates on lower income.

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

Austria has six tax rates – from 25 percent at entry level to 50 percent at the top

Belgium has five tax rates – again, from 25 to 50 percent

France has four tax rates – from 14 to 45 percent

Netherlands has four rates – from 8.9 to 52 percent

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

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

Fortunately, we can make relatively robust comparisons between Irish personal tax levels and other EU countries courtesy of Eurostat’s informative Taxation Trends in the European Union.

The two ways of measuring this tell similar stories.

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

We find that personal taxation on Irish employees is slightly higher than our peer-group average. It ranks 4th and is ahead of ‘high-tax’ Sweden (which surprises many).

When we look at employees’ personal tax as a percentage of national income we see a similar story.

In this measurement we see Ireland (using the CSO’s special GNI*) falling below our peer-group average – but only marginally so.

These measurements do not speak to the progressivity of different tax systems – they just take the total amount of personal tax revenue as a proportion of wages and national income. In essence, both these measurements show that Irish employees’ personal taxation is approximately average.

We will still hear arguments – about how the Irish personal taxation system is a disincentive to employment creation.

The broad parameters of the tax system have not changed in the last four years, although there has been a slight reduction in marginal tax rates with the cuts to USC. And yet during that period employment has increased by 270,000, or 14 percent. That doesn’t look like much of a disincentive.

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

Could we devise a more efficient taxation system? Yes, of course. Is personal taxation a priority in this budget? No.

We are an average personal–taxed economy, and clearly our structure is not a disincentive to employment creation and wage increases.

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

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

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front.

Rollingnews

From top: The Living Wage Technical Group’s logo; Michael Taft

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

What has been driving this increase?

One word: housing.

The Living Wage is constructed on the work of the Vincentians’ Minimum Essential Standard of Living with some variations introduced by the Technical Group. This is a comprehensive and detailed breakdown of the cost of all goods and services that go into a minimum living standard.

When we separate out housing costs from the rest of the expenditure (food, transport, health, utilities, etc.) we can see the issue.

In the four years, housing costs increased by 37 percent. All other costs fell by -4 percent.
This leads us to a particular insight: if general pay increases in the economy are merely going to pay higher rents or higher house prices, then employers are essentially subsidising economic rents, whether to a landlord or developers /financial institution.

This is a drain on the productive economy and leaves many people’s living standards no better off except that they may have kept pace with housing costs.

For many people the solution is to increase the minimum wage to the level of the Living Wage. This would require an hourly increase of €2.35 or 25 percent.

Leave aside the issue of whether this would be feasible without employment or working time loss (just to note: the ESRI found that the 50 cents increase in the minimum wage in 2016 had no negative impact on employment).

The Living Wage, while expressed in an hourly payment, is actually based on a full-time worker (39 hours per week). Therefore, the Living Wage is:

Weekly: €469

Annual: €24,444

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

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

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

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

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

Public transport fares: we have one of the least subsidised public transport systems in Europe, resulting in high fares and a poorer service. Increased subventions would mean lower fares.

Healthcare: reduce insurance, GP and prescription medicine costs – through a free, universal health service.

Communications: yes, Ireland is a high-cost country. Consumer prices are 17 percent higher than EU-15 levels. But why is communication 24 percent higher? It would be helpful if the Government commissioned a study into all prices to get a real handle on the reason for our high living costs – rather than assume that current market pricing is somehow ‘natural’.

Second, provide for collective bargaining at company and sectoral level. The Irish private sector is generally low-paid compared to our EU peer-group. It also has much lower collective bargaining coverage.

This is especially so in the low-paid sectors – retail and hospitality – where Irish pay and collective bargaining levels are even further down the EU table. By providing workers with the tools to bargain together, they can drive up wages consistent with the company’s ability to pay and, so, bring workers closer to the Living Wage.

Further, workers can better protect themselves collectively if employers try to claw back wage increases by degrading working conditions.

Third, the minimum wage does have a role but what is needed is a more robust approach. For example, minimum wage increases could be linked to overall wage increases in the private sector but instead of expressing them in percentage terms, they could be expressed in terms of a flat-rate pay increase or a combination of the two.

This would use general wage increases as parameters but express the increase in terms of an egalitarian calculation. In this way, the minimum wage would rise as a proportion of the average or median wage.

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

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

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

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front.

From top: Minister for Finance and Public Expenditure & Reform Paschal Donohoe TD at a Budget 2018 press briefing; Michael Taft

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

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

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

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

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

Over the period of recession and stagnation, median incomes (the point at which 50 percent earn above and below) increased while the incomes at the top declined – for the top 0.1 percent, quite substantially.

We should note that the rise in median incomes doesn’t mean that all or most received income increases. This could include the compositional effect whereby people lost their jobs, changing the make-up of the group we are measuring.

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

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

Other Revenue data confirms this trend.

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

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

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

We should note, though, that Irish market inequality remains substantially higher than our peer group. Indeed, it is the highest in the entire EU, not just our peer group.

Returning to pre-crash levels is not enough from an equality perspective. And if the trends identified in the Revenue data persist, Ireland’s Gini coefficient could start to turn north.

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

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

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

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

We shouldn’t always think that inequality is about taxation and social transfers (though there is that). The inequality that flows from the workplace must be addressed in the workplace. And we can do this without resorting to fiscal space gymnastics.

But the benefits – in terms of increased tax revenue (though higher wages) and higher consumer demand (through social benefits and certain working hours) – shows that reducing inequality can be a win-win win situation; for the workers, the Exchequer and domestic businesses reliant on the spending power of workers.

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