Author Archives: Michael Taft

From top: Free public transport is central to a Universal Basic Service; Michael Taft

We have all heard of Universal Basic Income – the proposal that everyone receive an income sufficient to meet basic needs, regardless of income or employment status.

Now, there is another proposal from the University College London’s Institute for Global Prosperity. They are proposing Universal Basic Services (UBS).

They describe it as:

‘The provision of sufficient free public services, as can be afforded from a reasonable tax on incomes, to enable every citizen’s safety, opportunity, and participation.’

Free public services: they claim this will meet needs more directly, increase economic efficiency and reduce costs, and buttress the social fabric by focusing on public needs.

Based in the UK, the ICP’s starting point is the National Health Service – a free service based on need. They take this principle and apply it to:

Education

Shelter

Food

Transport

Information

Democracy & Legal Services

Some of these are fairly self-explanatory. Education should be free – from early years to third level. Households shouldn’t have to sacrifice to educate their children (education, in any event, is a public good) while students shouldn’t have to start out their working life in debt. And in Ireland we would have to include free health.

Other candidate services for a UBI are a bit more debateable. For instance, it is proposed that social housing be doubled (1.5 million in the UK) and be provided for free on a needs basis.

In this proposal, shelter is not a universal service but a free means-tested service. Similarly with food – UGL proposes to provide one-third of meals free to those experiencing food poverty (8 percent of UK population). Again, this is not a universal service but a free means-tested approach.

The proposal for free public transport is on more solid ground. A number of cities throughout Europe provide free public transport – including ferries and bike rental schemes.

In Ireland, nearly a million people have free travel passes, or more than one-in-four adults. There are further free travel schemes for island residents (e.g. Tory Island residents receive 8 free journeys on the seasonal helicopter to the mainland). So the principle of free travel is established for a significant number of people.

The UGL also propose free information which would include a household package of free basic phone, Internet and the BBC TV licence fee. Certainly, if digital participation is a necessity in the 21st century, then there is a logic for free internet.

While free universal public services are appealing, the perfect is the enemy of the good. Ireland struggles to reach the level of public service spending in our EU peer-group, never mind providing public services for free.

Ireland is a bottom dweller. Just to reach the second lowest spender – Austria – we’d need to increase spending on public services by €5.6 billion; to reach Danish levels we’d have to increase spending by over half, or nearly €19 billion (gulp).

However, UBS can help reframe the debate over public services. For instance, cost-rental or income-linked housing can deliver affordable housing to a huge swathe of the population.

Regarding public transport, it’s not just fare levels – it is also about urban planning (costs fall in higher density areas), frequency, ease of access and comfort.

However, a flat-rate fare of €1 for all Dublin public transport could provide an incentive to move from car-reliance and reduce costs for passengers.

We can also innovate the way we pay for certain services. I have written about turning the TV license from a flat-rate payment into a fractional charge on income. This would turn a regressive charging structure into a progressive one; as well as eliminating administration and enforcement costs, and license-evasion.

And if you think that providing basic internet to all households would be costly, it would come to only 0.6 percent of gross personal income (but the immediate issue is coverage, particularly in the rural areas).

There are other services we could look at. For instance, why shouldn’t childcare be free, like early childhood and primary education?

Recently, TASC proposed that childcare workers be paid directly by the state with childcare providers given a capitation grant for each child in their service. While there still might be a household co-payment, it would not constitute a bar to labour market entry or a burden on parents.

A key element in the UGL’s proposals is a radical decentralisation of public services to local and regional government. Once again, Ireland is a bottom dweller when it comes to local government spending.

In the Nordic countries over half of all public spending comes through local government, compared to 7.5 percent for Ireland. This may help explain why there is a general consensus in Nordic countries for higher spending – at local levels accountability is potentially enhanced.

However, ambitious and radical reform would be needed for Irish local (or sub-central) government to have the political and economic capacity to administer public services.

Most of all, UBS, in reframing the debate, could promote an inclusive and authentically democratic dialogue about the nature, operation and delivery of public services – a dialogue not just of ‘expert’ consultants but one that is extended throughout civil society, rooted in the experience and ideas of the producers (workers who deliver public services) and the users of those services; that is, all of us.

The emergence of public services in the late 19th century – education, health, sewers, water, waste collection, energy – was the foundation of social modernisation. We need to launch a new debate over the foundations of a 21st century public service infrastructure.

Universal Basic Services should play a significant role in that debate.

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

Rollingnews

From top: Labour Party leader Brendan Howlin at the party’s conference last Saturday, where he urged support for the EU’s digital sales tax; Michael Taft

Deputy Brendan Howlin made a surprising announcement during his leader’s speech to the Labour Party conference last weekend: Labour will support the EU’s digital services tax.

Labour is the first parliamentary party to break the green-jersey consensus to support this tax. The Workers’ Party has also come out in support of this measure (these are the only parties I know that are doing so; if I am mistaken I gladly stand corrected).

The digital services tax is a proposal from the European Commission to allow EU countries to impose a levy on the sales of digital services made in their own jurisdiction by large companies.

It has been described – especially by Irish detractors – as a tax on turnover as opposed to the traditional tax on profits but that is not the full story.

As the EU Commission puts it:

‘In the digital economy, value is often created from a combination of algorithms, user data, sales functions and knowledge. For example, a user contributes to value creation by sharing his/her preferences (e.g. liking a page) on a social media forum.

This data will later be used and monetised for targeted advertising. The profits are not necessarily taxed in the country of the user (and viewer of the advert), but rather in the country where the advertising algorithms has been developed, for example. This means that the user contribution to the profits is not taken into account when the company is taxed.’

In one respect, this is probably a rationalisation, though that doesn’t make it any less valid. A key driving force is the fact that digital companies are guilty of some of the most aggressive tax planning among multi-national companies, using sophisticated accounting and company formation strategies to drive down their tax payments.

This, and the prospect that some EU countries will unilaterally introduce their own digital levies, has prompted the EU Commission to make this proposal.

This levy has been widely criticised in Ireland as a ‘tax-grab’ by larger economies; as infringing ‘sovereignty’ over tax; and as he EU is ganging up on small countries.

However, these criticisms don’t stand up to close scrutiny. Either we let large digital companies decide where they pay tax (and how much) or we subject them to some type of democratic accountability.

For all its many faults, the EU represents a public response.

Rather than undermining Irish ‘tax sovereignty’, the tax-avoidance practices of many multi-nationals, including digital companies, are eroding the tax base of other countries and, so, their sovereignty. The digital services tax actually helps restore countries’ control over their tax base.

And if Ireland is being ‘ganged-up’ on, it is due to its key role in the global tax avoidance chain.

Another criticism is that this would undermine Ireland’s attractiveness to foreign capital. However, we are not relatively worse off given that this is an EU-wide measure. And foreign companies will still retain sufficient taxable income here and enjoy our low tax rates.

But supporting tax accountability over multi-nationals raises a number of other issues.

There is no doubt this would reduce Ireland’s corporate tax take. The Revenue Commissioners estimate a loss of €160 million from the digital services tax, but international tax experts I have spoken to suggest the figure could be much higher.

This will have to be made up with higher taxation in other areas; if not, we would have to resort to spending cuts.

Some commentators have said that the digital services tax – and other EU measures designed to counter aggressive tax planning – would undermine Ireland’s business model. If that means a model based on tax incentives that facilitate global tax avoidance, then that is a good thing.

But what comes after that? What policies do we need to attract foreign direct investment on a sustainable basis while building an internationally-competitive indigenous sector?

We need to start that debate now – and any new model shouldn’t start with tax breaks.

At the end of the day, even if international tax justice doesn’t float your boat, supporting measures like the digital services tax can be based on a hard-headed pragmatism.

The game is up.

The Government knows this, the Department of Finance knows this, even the Big Four accounting firms know this. We need to get ahead of the curve on this so that we can cut the best deal possible. Claiming that there is nothing to see here is no longer sufficient.

So Labour’s position is welcome. It certainly marks a policy change in matters relating to multi-national taxation, given their recent support for the Government’s decision to appeal the Apple tax ruling.

The logical extension of supporting the digital service tax – and the logical position of progressive politics in general – should be to support the principle of the Common Consolidated Corporate Tax Base and the Financial Transactions Tax.

These are, after all, part of a long journey with the goal of imposing democratic accountability on multi-national companies and finance capital.

Supporting the digital services tax is a good first step.

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

Rollingnews

From top: Taoiseach Leo Varadkar and Peter Casey at the Presidential election centre at Dublin Castle on Saturday; Michael Taft

The worrying thing about Peter Casey’s campaign was that it was unplanned. Having spent weeks hovering around two percent, he stumbled into his controversy on the Travelling community.

Such was the outcry he temporarily withdrew from the contest. However, he apparently received enough support that he came out of isolation to talk about the hard-working Irish, paying for everything and getting nothing in return, the alarm-clock people, the culture of entitlement and welfare-dependency – all in the last few days.

He ended up with over 23 percent.

Now imagine if all this was planned from the very beginning, that his starting platform encompassed these issues and more. Imagine if went on about how we were forced to pay for banks, how we had to ‘control’ immigration, how the EU is taking power from the people (insert your favourite complaint here). What might his support have been?

There’s been a lot of commentary deconstructing this vote – what it represents (racism?), who it represents, its long-term political impact. There’s been exaggeration and dismissal. One Minister called Casey voters moaners. However, with nearly one-in-four voters supporting Casey, dismissal and name-calling doesn’t help us understand.

We can describe Casey’s vote as anti-politics – the rejection of traditional politics, institutions and discourse. Hence, the epigrammatic ‘he speaks the language of the people’; ‘he connects with ordinary folk’, ‘he’s not afraid to say what people think.’

This rejection emerges out of the de-politicisation of public space:

‘The New Right Project of the last few decades – neoliberalism – has attacked the public domain in the name of free markets and market discipline. Public choice theorists have positioned politicians and civil servants as self-interested rent-seekers. Deregulation, privatisation, and audit have removed power and responsibility from public actors. Why should people engage with formal politics when those involved are not to be trusted and no longer powerful?’

Therefore, in a contest for a ceremonial office in which the winner was already known, people could vote with few consequences. And many used it to express a frustration at a stifling political consensus, crystallised in a supply-and-confidence agreement between the two largest parties playing out a mock battle of Government and Opposition.

Anti-politics defies neat ideological categorisation. Casey can go on RTÉ radio and attack the greed of the one percent and even describe himself as a socialist-capitalist symbiosis. We can call it a right-wing vote, even a far-right vote, but there were not insignificant strands of anti-politics in the anti-austerity demonstrations a few years ago.

What ties all this together is an inchoate ‘anti-establishmentism’: the juxtaposition of a corrupt elite (liberal establishment, the rich, cosmopolitans) who exploit a ‘pure’ people. Ironically, Casey victimised the Travelling community but many people who voted for Casey see themselves as victims.

It’s not that Casey’s vote will result in a new party or movement – though Gemma O’Doherty is already calling on people to organise ‘anti-corruption’ candidates for the next locals and Europeans. It’s that it may infect political culture in subtle, indirect and subterranean ways, awaiting a clever, opportunistic leader to exploit people’s legitimate concerns. And that’s when the danger would become real.

Currently, the Left is incapable of meeting this challenge – whether to channel people’s understandable frustrations into a more positive politics or to challenge the more reactionary elements it contains. The Presidential campaign was one more example of that.

Michael D. Higgins showed that a life-long politician of the Left, a principled proponent of progressive causes, thoughtful, intelligent and capable of reaching a broad range of the population in all social constituencies, can win national office not just once, but twice – the latter in handsome fashion.

What does that say for the fragmented Left, stagnating in the polls? Some supported the President, some opposed him and others abstained.

President Higgins is holding up a mirror to us: what is it that he can do that we seemingly can’t? What is it that he is saying that we’re not?

More importantly, how is it that he instills confidence in the majority of people and we don’t?

Hopefully the Presidential election will force progressives and the broad Left to do some serious reflection on the nature of anti-politics – both its symbols and its underlying narrative.

But just as importantly, we need to begin constructing a politics that can convince people, inspire their confidence, and seriously challenge for power – to persuade them that politics itself has the power to resolve problems collectively, and reverse the marketisation of people’s economic and social relationships.

A big ask but at least we have one important asset – for the next seven years we have a President who understands these issues.

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

Rollingnews

Yesterday: Bryan Wall: A Warning Shot

From top: Presidential hopeful Peter Casey; Michael Taft

So, Peter Casey has decided to continue inflicting his presidential campaign on all of us. And now he has stepped up his wannabe-Trumpism by showing off his ignorance of social protection.

In a Sunday Independent article he described Ireland as a ‘welfare-dependent state’, stating:

‘We have become a nation of people who expect, no demand, that the State looks after them. Pay all of their bills, provide them with homes, provide all sorts of social benefits.’

To be fair, Casey is not alone in getting social protection wrong. In my last post I showed that the Government projected a real (after inflation) cut in social protection.

This led someone to comment that I didn’t understand that when unemployment falls, so does social protection expenditure.

What this commentator didn’t know was that unemployment benefits make up only 12 percent of total social protection spending.

It is not fully appreciated what makes up social protection spending. Total Social Protection expenditure in 2017 was €19.9 billion.

What was it spent on?

The biggest category is pension expenditure – and this will continue to rise. Is Casey suggesting that the elderly are a needy, demanding group even if they have paid social insurance contributions their whole working lives?

The next biggest category is the sick, people with disability and those in need of care – another needy, demanding group in Casey’s opinion I suspect. And most child-related expenditure goes to households in work.

Another widespread misunderstanding is that social protection is paid out of taxes. Only a little over half of the total budget is paid out of taxes (€10.9 billion); the rest is paid out of the Social Insurance Fund which is financed by insurance contributions from employees, employers and the self-employed.

If you exclude the only universal payment – Child Benefit – then only a minority of the Social Protection budget is paid out of taxation.

This is not to say that there aren’t issues regarding access to, and participation in, Social Protection:

1. The social protection system works overtime to compensate for high levels of market inequality.

There is higher Irish inequality in the ‘market’ (that is, before social transfers) than in the Eurozone. Therefore, in order to achieve more equality (and reduce poverty) we need to spend more on Social Protection payments.

2. Ireland’s employment rate is low compared to most of the other EU peer-group countries.

Irish employment rates would always struggle to reach the higher levels of participation given the high proportion of households with dependent children (such households have lower employment rates in all countries).

However, the lack of affordable childcare and uncertain work hours exacerbates this. This leads to higher unemployment and non-activity.

3. Ireland suffers relatively high levels of chronic long-term unemployment.

Even though it has fallen substantially since the depths of the recession, there are still 70,000 long-term unemployed. The longer many people are unemployed the more difficult it is to return to work (e.g. skill erosion, reputational, etc.).

There are other issues, notably the relatively high level of unemployment among people with a disability. And it is worth noting that Ireland pays a much a higher level of housing allowances than in the Eurozone – a feature of subsidies chasing rising rents in a dysfunctional private market.

Addressing difficult issues with populist sound-bites (entitlement-culture, etc.) only means we don’t get any closer to resolving these issues.

Collective bargaining and ending precariousness can help in addressing market inequalities, affordable childcare can help in addressing sustainable access to a job, employer of last resort programmes (with the state and civil society organisations working in partnership) can help in reducing chronic long-term unemployment.

But, ultimately, what Casey’s ignorance overlooks is that, instead of having too much social protection, we don’t have enough.

In other countries, workers benefit from pay-related unemployment benefit and pay-related sickness benefit; women receive 100 percent of their pay in maternity benefit (in Ireland it is relatively small flat-rate payment); while in other countries workers receive pay-related pensions through the social insurance system unlike Ireland where workers are forced on to the private pension industry to top up their flat-rate state pensions.

In other words, social protection is just that – fully social and fully protective.

Peter Casey could have spoken to these issues and helped inform the debate. Instead, he just threw out nonsense on matters he didn’t understand. Unfortunately, there are a lot of Caseys out there.

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 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