Tag Archives: Michael Taft

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


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