Author Archives: Michael Taft

From top: Taoiseach Leo Varadkar (centre) flanked by Minister for Finance Paschal Donohoe (left) and Minister for Health Simon Harris; Michael Taft

In the debate over healthcare we get a lot of commentary on how the health budget is out of control with continual overruns, combined with waiting lists and A&E overcrowding.

In this mix we sometimes get statistical comparisons which purport to show that we already spend more than almost any other European country on health.

It’s a statistical and comparative minefield trying to get a sense if we are spending too much or not enough, never mind if we are getting value for money.

One blog is not going to answer these questions definitively. But let’s see if we can ground the debate in some hard numbers by comparing our health spending with countries in our EU peer group, using relevant indicators.

In 2017, Ireland total health expenditure was 2.8 percent above the average of our peer group, ranking 4th in the table. This would seem to suggest that we spend enough money on health care.

However, this represents all spending in the economy – government, voluntary health insurance and household out-of-pocket spending. A big contributor to Ireland’s average health care expenditure is the amount people pay on voluntary health insurance:

In Ireland, voluntary health insurance payments amounted to €634 per capita

The average in our EU peer group is €216 per capita

So the headline numbers can undermine clarity in the debate over government spending on healthcare.

Let’s focus on Government and compulsory healthcare schemes.

When we focus on Government and compulsory health expenditure (e.g. state-mandated occupational or private insurance) we find Ireland falling below average.

When comparing Euro spending per capita, Ireland would have to increase health spending by 9.5 percent.

However, when we factor in prices, Irish spending falls even further, requiring an increase of 29 percent to reach our EU peer average.

However, we have to be cautious regarding PPS (i.e. purchasing power standards). The above uses Eurostat PPS. OECD has a different PPS measurement though both work off the same data.

Using Eurostat’s PPS, Ireland would have to increase Government healthcare spending by 29 percent to reach our EU Peer average

Using OECD’s PPS, the necessary increase would be 20 percent

While the OECD shows a smaller gap between Ireland and its EU peer average this seems seems to have widened in 2018 to 23 percent, though these are only provisional figures.

We can also compare some key healthcare categories using Eurostat’s PPS.

In hospital expenditure, Ireland lags far behind its EU peers. Irish spending on ambulatory care (which includes GPs and medical specialists for outpatients) is even further behind while spending on medical goods (pharmaceuticals and other goods) is closer to the EU peer average.

There are three important issues following on from all this.

First, the Eurostat data only takes us up to 2017. Between 2017 and 2020, real healthcare spending per capita rose by approximately 10 percent. This is likely to be higher than our EU peer group so the gap should have closed somewhat.

Second, demographics are a significant driver in healthcare spending. The older the population the more spending there will be. Ireland has a lower older demographic and, therefore, need to spend less on health. So, while Ireland is a health under-spender, is this merely a function of demographics. Could it be that Ireland, once age-related spending is factored in, is actually an average health spender or even higher?

It is difficult to test this given the paucity of data. The OECD does provide data from the Netherlands regarding spending on different age groups.

If we use this data and apply it to German and Irish age structures we might be able to get an insight as to whether Ireland spends too much or not enough – at least in comparison with Germany. I emphasise this is a stylised estimation and should be treated cautiously.

The gap in actual spending between German and Ireland is 16.8 percent. Demographic-based spending is 18.4 percent. This suggests that, after factoring in age, Ireland spends 1.4 percentage points more than Germany. However, when price levels (PPS) are factored in, Irish spending drops back down again as we saw above.

This is just an exercise and more data would be needed to confirm this. A similar exercise done with Dutch levels of spending shows the same outcome – near parity when age is factored in but a large gap re-emerging when prices are factored in.

Third, even though Ireland appears to be an under-spender, this shouldn’t lead us to think that merely increasing expenditure will solve all the problems in healthcare.

Whether it’s waiting times or A&E overcrowding, more resources would be welcome but we can’t be sure whether some of these issues are structural.

And then there is the upfront cost of Slaintecare – with additional costs arising from free provision of healthcare and the ending of private use of public assets.

However, what the above shows is that, when comparing like-with-like, Ireland does not appear to spend too much on healthcare and may well be a significant under-spender when factoring in both age and prices.

If this turns out to be the case then basing policy on the assumption that we spend too much will undermine sustainable and positive reform.

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: The Central Bank, Dublin Quays; Michael Taft

In last week’s article I argued that, while increasing taxation on the rich was desirable, it would not be enough to raise tax revenue to the level of our EU peer group.

But if we want to be an average tax and spend economy (by European terms) what does this mean?

Income tax increases?

Big VAT hikes?

How is the Irish tax structure different than our peer group?

Let’s attempt to identify the key driver in Ireland’s ‘low-tax’ status.

Personal Income Tax

There is one issue we can dispense with quickly: income tax.

For those countries with a comparable tax/social insurance structure (Finland, Belgium, Netherlands and Austria), Irish income tax revenue is in the middle, slightly above the average of the four countries.

We exclude Denmark and Sweden. The former doesn’t have a social insurance system; therefore, income taxes are higher. In Sweden, employees’ don’t pay social insurance (though, unlike Denmark, employers do). Therefore, higher income taxes make up for the lack of employees’ social insurance.

In short, income taxes, which include USC, are not the cause of Ireland’s low-tax status.

Other Main Tax Categories

The other two main tax categories are consumption and household capital taxes. They are approximately average. It should be noted, however, that increasing capital taxes by 0.7 percentage points to reach the EU peer group average would raise €1.2 billion. Even fractional differences can be significant.

Last week we saw that corporate tax revenue was above the peer group average. Here we find that in the other main tax categories Ireland is average. Income, consumption, capital and corporate taxes: they make up over 85 percent in tax revenue.

So if we are average or even slightly above average in these categories, where do we fall down?

Social Insurance

Social insurance (PRSI): Ireland is at the bottom of the league – not only in comparison with our peer group but with all EU countries. Only Malta and Denmark (which doesn’t have a social insurance system) are lower than us.

Total social contributions are less than half our peer group. Headline social contributions would have to rise by some €15 billion though when demographic spending is factored in, the gap shrinks somewhat. This is the driving reason behind Ireland lagging behind other countries.

With some exceptions, social contributions are paid into a social insurance or similar fund. They do not get paid into the Exchequer. These funds are not for financing education or police or public sector pay.

They specifically finance in-work benefits, including pensions. In some countries healthcare is wholly or partially funded out of social insurance funds. There are two parts to social contributions.

1) Employers’ social contributions are considered part of employees’ compensation. For example, if an employer pays a worker €20 per hour, they pay €2.15, or 10.75 percent, to the Social Insurance Fund (SIF).

The total compensation to the employee is €22.15. If the worker experiences an insurable contingency – temporary unemployment, sickness, pregnancy, occupational injury, etc. – they can access benefits from the SIF. That is why this part of social insurance is sometimes referred to as the Social Wage.

2) Household social contributions are made up of employee and self-employed social contributions. They act like insurance payments as they insure against particular contingencies and are paid directly out a workers’/self-employed wage.

Increasing social contributions would be a huge challenge and constitute systemic reform. It would have to be phased in over the long-tem (e.g. 10 years) and would impact on all businesses and income groups.

There are two aspects to this.

First, according to conventional analysis, an increase in employers’ social insurance would be shared out between both the employer and employee. Half would be absorbed by the employer and half absorbed by the employee.

Take the example of a one percentage point increase: employees would pay 0.5 percent, meaning that instead of getting a two percent wage increase, they would get 1.5 percent increase.

They would, however, gain through increases in benefits. This is how workers in many firms negotiate through collective bargaining: they reduce their pay demands in order to win a better pension plan or increased sick-pay. Thus, increasing the social wage is, or should be, part of a collective bargaining process.

Second, regarding increased contributions directly from workers and the self-employed, there is one advantage to social insurance.

Unlike general taxation which finances public services, uninsured social protection payments and investment (for many this is like money going into a black hole), I know where my social insurance contributions go.

They go to finance specific benefits related to work and my needs. In that respect, social insurance is more transparent.

Why are contributions so much higher in other countries?

Because their in-work benefits are much more generous. Take maternity benefit: in Ireland it is a flat-rate payment of €245 per week.

An average full-time employee will only receive a payment equivalent to 25 percent of their wage. In other EU countries, maternity benefit is paid out at 100 percent of the workers’ wage, which means households do not lose income during a high-cost period.

Temporary unemployment benefits, illness benefit, occupational injury benefit, old age pensions – all these are low flat-rated payments in Ireland. In other countries they are pay-related and, therefore, much higher.

And in some countries free healthcare is fully or partially paid through social contributions. That is what we might get if we paid European level of social insurance.

* * * *

As stated in the previous post, we should still seek to increase revenue through taxes on wealth and capital, and high incomes.

But if we want to make a European-style breakthrough, increase benefits for workers and the self-employed, and drive living standards, it won’t be done through taxation. It will be done through social insurance.

Progressives should make every effort to direct the debate towards social insurance and the benefits it can provide society.

A good start would be a catchy slogan that upends the usual tax-and-spend image progressives have. How about: ‘a low-tax, high-insured economy’.

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

Shopping on Grafton Street, Dublin last Christmas; Michael Taft

There are many necessary and progressive projects that could be implemented if there was enough money – public services, in-work supports, anti-poverty programmes, social and economic investment.

How would these be paid for?

There is a tendency to underplay the question, or imply that funding would come from simply ensuring the wealthy and corporate sectors pay their fair share.

Unfortunately, taxing the rich (whether households or corporations) will not be enough.

Let’s first look at how far behind we are other comparable small open economies in the EU. Among high-income countries, the Department of Finance suggests we should compare ourselves to Austria, Belgium, Denmark, Finland, Sweden and The Netherlands.

We find that Ireland lags well behind the other countries. In primary revenue (total revenue excluding interest payments), Ireland would have to increase public spending by €19.2 billion to reach the average of our peer group.

However, we don’t need to raise all that money as we need to spend less on pensions given our low elderly demographic. Nevertheless, when we exclude spending on public pensions, Ireland would still have to raise taxation by €11.5 billion.

However, this is probably an under-estimate as we have a much higher youth demographic requiring additional spending on education and family supports.

Would simply taxing wealth, high-incomes and the corporate sector raise €11.5 billion? No.

Taxing Wealth

The arguments for a net assets tax, commonly known as a ‘wealth’ tax, are considerable. How much we would get from that source is debatable. The ESRI and NERI’s Dr. Tom McDonnell have done excellent work on the design of a net assets tax, different models and the resulting revenue.

The ESRI estimates that, in its most expansive form, a net assets tax would raise €3.8 billion. However, they rightly call this ‘highly unrealistic’:

‘ . . . the highly unrealistic scenario of taxing all positive wealth at 1%, this would raise an estimated €3,781 million and affect 86% of all households. To achieve this yield, however, would require taxing lots of people who have very little net wealth and possibly low incomes. In addition, applying a wealth tax to all households would present a very large administrative burden.’

More realistic scenarios suggest yields of between €300 and €600 million (where only 6 percent of households would be affected). One could drive revenue up to €2 billion, but that would involve taxing one-third of all households.

We need a net assets tax, but we also need to be realistic about the revenue it can raise within the parameters of social equity and economic efficiency.

One bright spot: there is a tendency to underestimate wealth and, thus, the potential tax revenue. But that still won’t get us to the levels of other comparable EU countries.

The Corporate Sector

The scandalous stories of corporate tax avoidance suggest we should be capable of raising more revenue from this source. But given Ireland’s position in the global tax avoidance chain, we need to tread carefully given the potential of perverse outcomes.

Ireland is already a significant beneficiary of corporate tax revenue, the highest in the EU – and with the lowest corporate tax rate.

Irish corporate tax revenue makes up 6 percent of national income with a very low corporate tax rate. How does this happen?

This is one of the few benefits of being a tax haven (or ‘tax haven conduit’ or a ‘vital link in the global corporate tax avoidance chain’ – whatever). Money flows in and through Ireland and the state can wet its beak – taxing profits generated in other countries.

If Ireland were a normal economy (i.e. non-tax haven type jurisdiction – though The Netherlands has been known to play fast and loose) with a normal corporate tax base and tax regime, it would take in far less corporate tax revenue – about €3.6 billion less.

Calls for increasing taxation on the corporate sector need to take into account that the revenue we already raise is labelled ‘unsustainable’ – a nice way of saying that tax-avoiding multi-nationals could move their tax-avoiding profit flows away from Ireland.

Such calls also need to take into account the fact that flows into Ireland as part of a tax avoidance chain can easily be diverted elsewhere.

Calls need to take into account the impact that potential changes in international taxation (e.g. the OECD base-erosion proposals and the EU’s digital tax) will have on Irish taxation without any domestic policy change.

The fact is that international tax justice will likely lead to lower corporate tax revenue for Ireland.

And while Ireland has tax haven features, it is not by-and-large a letter-box tax haven (though someone might want to knock on a few doors in the IFSC to see if anyone answers).

Most multi-nationals here have substantial presence – in terms of employment, wages and economic activity. What would the combination of changing international tax rules and any domestic policy changes have on future foreign direct investment?

We have a tax-based FDI policy which is long past its sell-by-date. Do we have a new one ready to go? A progressive one that doesn’t rely on a lax regime with low tax rates?

Social Justice Ireland estimates that a minimum corporate tax rate would raise a substantial €1 billion. Even if that had no blow-back or downsides, this would still leave us far from the tax revenue raised in other countries.

High Income Individuals

What about increasing taxes on high income individuals?

While Irish marginal tax rates (the percentage of tax you pay on each additional Euro earned) are average, average tax rates under-perform – but not by significant amounts. So we could do a little better.

What about our friends in the top 1 percent? According to the Revenue Commissioners, the top 1 percent income earners – earning over €200,000 – pay an effective tax rate of 35 percent. If we were to increase that to 50 percent it would raise an additional €1.4 billion.

To do the same thing for the top two percent would yield an additional €2.3 billion. However, this would require steep increases in tax rates and could incentivise tax avoidance activities.

Sinn Fein proposed a more modest tax on higher incomes – essentially a new 45 percent tax rate on incomes above €140,000. This would raise €345 million. While this money would be welcome, it would not get us a whole lot closer to our peer group’s overall tax levels.

This also suggests that to raise the €2.3 billion on the top two percent would require an income tax rate of 70 percent for those on €150,000 and above; or a marginal tax rate of 81 percent. That is not terribly realistic.

* * *
This is not an argument against increasing taxes on those who can well afford it. Taxes on wealth – financial and real property – should be a no-brainer. They are efficient and progressive.

Nor is it an argument against domestic reforms of our corporate tax regime, even as we support international reforms.

The operations of a number of corporate tax expenditures (i.e. tax reliefs) are worthy of examination and reform: the knowledge box, entrepreneurial relief, bringing forward losses, enterprise incentive schemes, R&D tax credits. These could yield considerable resources which could be put toward better purposes.

And as for high-income individuals, it’s not the rate that counts but the base. We could lower marginal rates – especially on average income earners – while increasing yield by broadening the tax base. A stronger Universal Social Charge could achieve this for the simple reason that all income is subjected to the tax.

However, even these changes will not be sufficient to raise our revenue to the levels enjoyed in other countries. What will? I hope to take up this issue in a future post. But here’s a teaser: it’s not just about raising taxes.

It is about progressing the economy, especially the indigenous sector, into higher value-added activities while ensuring a more equitable share-out between labour and capital.

This is the hard work of transforming the productive base of the economy while privileging the producers (aka the workers). Increasing tax revenue doesn’t always have to mean raising taxes.

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

Rollingnews

From top: The cost of retrofitting our building stock to low carbon status is estimated at €35 billion; Michael Taft

Going by Budget 2020, you wouldn’t think there was a climate emergency.

There was bits-and-pieces funding for greenways and urban cycling, electric vehicle infrastructure and purchase, installation of solar panels, emerging ocean technologies and uptake of alternative fuels such as biomass; a 14 percent increase for the Department of Transport, Tourism and Sport, and a Just Transition Fund for the Midlands along with a Just Transition ‘Commissioner’.

All in all, little enough funding and even less urgency.

The Government’s big ambitions for retrofitting the building stock in their climate change strategy don’t seem to have been matched by the budget. Yes, there will be an increase to the Warmer Homes Schemes – to €53 million – but that is a means-tested scheme for those on low incomes.

The climate change strategy envisages 500,000 building retrofits to reach a B2 BER, along with the installation of 400,000 heat pumps.

According to Social Justice Ireland, the Sustainable Energy Authority estimates the cost of moving our building stock to low carbon status at €35 billion. IBEC has a price tag of €25 billion. Whatever the sums, it will be significant.

We will also need, as IBEC puts it, a systematic upskilling programme to develop nationwide expertise and know-how in new low-carbon technologies, energy efficient design, building services and retrofitting. We can’t assume that, if the Government provides the investment, the retrofits will follow.

Most of all, we need affordability. Under the Deep Retrofit Scheme – which was launched, closed down and then slightly re-opened – applicants have to pay 50 percent or more of the total costs.

This is beyond most households’ ability (especially given that 42 percent can’t afford an unexpected financial expense). In effect, such grants constitute regressive subsidies to higher income households.

This is one of many acid tests of Just Transition. If people are locked out of the retrofitting programme or can only participate at considerable cost, then not only will it fail to achieve its climate objective; it will violate social equity.

There is a commitment to develop a retrofitting plan to ensure that the grant schemes, new finance models and the delivery system are effectively integrated. This plan is to be published by the autumn of next year.

A number of proposals have been put forward: to allow repayments through energy bills or through increased property taxes. Here is one more suggestion.
Accessible and Affordable

The first principle is that retrofitting – to the maximum possible depth (deep over shallow retrofitting) – should be free upfront. Retrofitting brings wider social benefits; in particular, the reduction in carbon consumption.

It also brings economic benefits such as the reduction of fossil-fuel reliance and imports. The benefits are spread well beyond the fiscal and environmental benefit to the household.

The financing model could be a variant on Fine Gael’s proposed National Recovery Wholesale Bank:

‘Fine Gael proposes that a “National Recovery Wholesale Bank (NRWB)” will be created. The NRWB will provide funds to the utilities to allow them to start retrofitting the 1.2 million houses with poor energy ratings.

The NRWB will provide the up-front funds to the power
utility companies, who will then subcontract the work to construction companies.
They will, in turn, install insulation and other energy efficient fixtures in applicant houses.

The money invested in the retrofit programme will be recouped through “Pay as You Save” schemes, which will allow consumers to pay back the costs of the retrofit over a number of years out of the fuel savings generated.’

While the operation through utility companies may not be optimal, the principle of free up-front retrofitting is recognised.

The second principle is that repayments should be affordable. Ideally, they could be linked to ability to pay. This may or may not be achieved through repayments based on energy bill reductions.

It could be achieved through a small levy on income, to be collected by the Revenue Commissioners or Department of Social Protection on an agency basis.

The repayment period shouldn’t be an issue. The Bank would have a lien on the property and the balance could be cleared on the sale or transfer of the house.

The state could still step in with grants, but now they would be open to everyone. Further, any house that is sold or transferred would be required to have a deep retrofit executed before the sale/ transfer is legally completed. In addition, this Bank could similarly fund retrofitting of rental accommodation and commercial / industrial premises.

These principles – accessibility and affordability – can be extended to other climate repair initiatives. There could be a programme of providing similar loans based on ability to pay to purchasers of electric vehicles.

The loan could be based on the cost difference between purchasing a regular car (petrol or diesel) and an electric vehicle, and rolled out in rural areas where car-reliance is highest.

Such initiatives could also play a role in ensuring best labour and consumer practices. Only construction companies that apply the highest level of labour protection would be allowed to participate in the scheme, while there would be a bank-guarantee for the work done with bonds posted by installers.

If Just Transition is to have any substance we will need to ensure that everyone is enabled to participate in climate repair initiatives. This is only one example. The principles of accessibility and affordability can be extended throughout the range of activities required by decarbonisation.

But this will require new programmes, financial innovation and a little bit of imagination. Unfortunately, all these were absent in Budget 2020.

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, Public Expenditure and Reform Paschal Donohoe TD after presenting Budget 2020 in front of Government Buildings ahead of presenting it to the Dail last week; Michael Taft

We all know that GDP, inflated by multi-national activity, is not an accurate reflection of the Irish economy. Therefore, the Government along with analysts are increasingly using GNI* as the more appropriate measurement.

If we use that measurement, then we are heading into recession, followed by sluggish growth in a no-deal scenario.

The Minister didn’t once mention the word ‘recession’ except in reference to the last one. However, when using GNI* growth is projected to fall 1.4 percent next year. One caveat here – we don’t have a price measurement for GNI* (that is, GNI* is not presented in real terms).

Therefore, I have used the GNI deflator. There shouldn’t be much of a difference.
This budget is facing two ways. In a no-deal scenario, with the economy heading towards recession, the Government is putting all its counter-cyclical eggs in a €1 billion Brexit contingency basket.

These supports are intended to limit the damaging impact of a disorderly Brexit and strengthen enterprises’ ability to grow sustainably post-crisis.

However, what if that doesn’t work or comes up short – if the recession is longer and deeper than expected (the Department of Finance believes a larger impact is highly likely)?

There is little firepower left. The Government is planning capital investment at levels higher than previously published in the Stability Programme Update, but this could reflect higher prices and costs such as the National Children’s Hospital and the rural broadband network. The Government is taking a big gamble basing everything on the Brexit fund.

But if a deal is done and the economy survives the next year relatively unscathed (even with a deal, there will be an economic hit – but nothing like the worst case scenario), what are we left with?

A rather deflated budget that can be sold as either preventing ‘over-heating’ or as ‘fiscally prudent’.

The Government projects a significant increase in investment out to 2024, but public services and social payments will be cut when inflation and population growth are factored in.

The reduction in social protection payments is particularly worrying. The Minister for Social Protection stated pension payments alone will increase by €1 billion every four to five years due to demographic changes; this doesn’t include payment increases. So what happens to the non-pension payments?

Under an orderly Brexit scenario these medium-term projections allow the Government to present itself as ‘prudent’, taking the heat out of the economy while pointing to all that good productivity stuff (i.e. investment).

But this comes at a price.

The majority of social protection recipients will see their weekly payments cut by 1.3 percent in real terms next year. Public services will be squeezed in real terms (unless the Government can pull some productivity rabbits out of the public sector hat). And minimum wage workers will have to wait on their wage increase of 30 cents per hour.

[Note: the Government is postponing the minimum wage increase to avoid a burden on businesses under a disorderly Brexit. However, under the current legislation employers who face financial difficulties from a minimum wage increase can postpone the increase for up to a year – so businesses already have an inability to pay clause. Therefore, the postponement will benefit businesses who can afford to pay the wage increase.]

But the real news about the budget is not so much the details or projections. How many commentators used phrases like a ‘non-event’, ‘no-change’, ‘steady as she goes’ – along with more supportive comments like ‘safe’, ‘sound management’, etc.

This was a potential no-win budget given the Brexit unknown. In football terms, the Government scored an away draw.

It won’t win votes but it won’t lose votes. And that Fianna Fail was co-opted into the budget outcome through the negotiations was a big help in the Government’s sell.

This was a deeply ideological budget as pointed out by Aidan Regan. And they got away with it.

With a housing crisis, there was little blowback at the lack of housing investment; with a climate emergency there was little criticism – except from green activists – at the alarming lack of supply-side measures; with the budget surfing on a corporate tax bubble, there was . . well . . . almost nothing done or said about it.

And yet, these were the three issues – housing supply, climate change and concentration of corporate tax revenue – that the Department identified as high and likely risks to the economy.

To do nothing about them and get no criticism for it – that is an achievement. Of course, there was Brexit – the ultimate get-out-of-doing-much card.

And the alternative? Progressives by and large focused on redistributionist issues, demanding higher taxation on high-income groups and the corporate sector in order to distribute to lower income groups.

But on key fiscal questions – such as the role of borrowing, deficits, debt reduction, sustainable taxation, and public spending reform – the response has been weaker.

This is a lost opportunity – both for progressives and for the general debate. In the first instance, progressives could address those risks identified by the Department as part of a long-term risk-aversion strategy. The Government is not taking these risks seriously, not is the official opposition. We should.

But a progressive strategy would go beyond orthodox fiscal fundamentalism that dominates the debate – that it is only a matter of pulling tax-and-spend levers once a year to achieve long-term macro-economic stability.

The fact is that such stability requires layers of institutions and practices that go beyond the mere fiscal:

* Collective bargaining can help tackle low pay, precarious contracts and the gender pay gap. The outcome would be a more stable ‘wage-led’ consumption, unlike the ‘credit-led’ consumption we witnessed prior to the crash which led to growing household debt.

* Increasing workplace democracy (of which collective bargaining is a crucial element) which can promote productivity in the private sector and employee-led innovation in the public sector to drive efficiencies.

* A climate change strategy which promotes a positive vision of a society living within its ecological means (free public transport, warm and energy-efficient housing, living cities, social security during periods of transition – a Just Transition, etc.) rather than depicting climate change as a ‘sacrifice’ or a burden.

* Creating a learning Republic through increased investment in education from early years to the post-graduate level – for people of all ages. Investment in education and R&D (which Ireland fares poorly at) is probably the best investment in sustainable long-term growth.

*Political decentralisation to provide greater power at local and regional level to respond to local disruptions, supply-side shortages (lack of market enterprises, labour skills, etc.) and local needs.

* A shift towards government consumption (i.e. public services) and reduced reliance on private consumption to drive living standards – public housing, public transport, universal basic services

* Most of all, a shift from taxation to social insurance to create greater social security for people at key points of need: illness, family care, old age, return to education, unemployment.

Growing equality – not just in terms of income but access to services and security – is a key element in creating a fiscal policy that can promote long-term stability. These are the issues that progressives can pursue within the context of budgetary arithmetic – showing that they are not a cost, but rather necessary policies to even out the inevitable cycles of a market economy.

We have an open goal. But first we must get on the pitch and gain control of the ball. That will be a big enough challenge.

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

Top pic: Sam Boal/Rollingnews

From top: Taoiseach Leo Varadkar and Minister for Finance Paschal Donohoe; Michael Taft

The Taoiseach, in discussing a tax package for the upcoming budget, recently said:

‘ . . . there were lots of different ways to put money back in people’s pockets.’

Too true.

So let’s look at some of the ways Budget 2020 could put money into people’s pockets.

Cost Rental Housing

Build housing that would be rented at cost. Rents are going through the roof – even the Minister for Housing admits levels of rents are unsustainable. Cost rental housing could reduce rents by hundreds of Euros a year, driving down rents to levels that exist in other European capitals (that is, cutting rents in half). This would, however, take time to roll-out.

So in the short-term the Government should pass emergency legislation to freeze rents for three years with increases confined to inflation increases (no doubt, this would end up in courts). Further, new units coming into the market would be priced to the average of similar units in the locality.

Affordable Childcare

Childcare is treated as a market commodity. No wonder it costs twice as much as in other EU countries. However, affordability won’t be easy with over 4,000 early years’ providers. The first step would be for the Government to admit the current system is incapable of being reformed.

A new, public service model will be required – substantial public investment in the sector combined with some sort of fees cap. Or the Government could start to roll out local authority providers as exist in other countries. It should set out a road-map and start walking it with this budget.

Public Transport

We will need significantly increased investment in accessible public transport – for climate reasons, for productivity (reduce congestion). The budget could start that, coupled with a 50 percent reduction in fares.

Security against Unemployment

We know there will be job losses due to Brexit and the transition to a renewable energy regime. So let’s help households, shore up consumer spending (which protects jobs in other sectors) and build some resilience in the economy – introduce pay-related unemployment benefit at between 50 percent to two-thirds of the previous wage. This is the standard approach throughout the EU.

* * * *

There are other examples but what all these amount to is a ‘tax’ on living standards; or a social tax burden. By and large, these tax burdens can only be alleviated by the state. But, unlike income tax cuts, they can realise substantial savings even with slight alleviations. For instance:

* Reducing childcare from €184 to €120 – which would still see Irish childcare costs as one of the highest in the EU – could save households over €2,500 a year.

* Reducing rents by 10 percent through cost-rental housing could save Dublin tenants €2,000 on average

* A 50 percent reduction in Dublin public transport could save commuters over €800 per year on a monthly pass

* A pay-related unemployment benefit of a modest 50 percent of previous wage, for an average full-time employee (€45,000), would see their benefit rise by over €200 per week.

Even these slight alleviations would create considerable savings for people – far higher than any tax cut. And the costs are not as high as one might think.

For instance, increasing the universal childcare subsidy to a level that would reduce childcare fees to €120 would cost €66 million (though there is still the issue of ensuring that savings are passed on).

Cutting public transport fares by half would cost €300 million.

A programme of building cost-rentals in urban areas could be financed out of the NAMA surplus.

And introducing a pay-related unemployment benefit could be financed by a fractional increase in employers’ social insurance (0.2 to 0.3 percent) – and if there is understandable nervousness about increasing this if the economy goes south, there is still enough of a surplus in the Social Insurance Fund to temporarily fund this.

And it’s not like this money disappears.

The increased income will, for the most part, be spent in the productive economy which could make for an excellent counter-cyclical policy.

The Taoiseach is right. There are many ways to put money in people’s pockets.

There are cost efficient, socially equitable, economically effective and environmentally friendly ways – such as reducing the social tax burden.

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: Climate change strike in Dublin city centre last Friday: Michael Taft

Amidst all the commentary on the millions-across-the-globe Friday climate change strike, one remark was striking: we should be very afraid.  Certainly, failure to contain the rise in global heating will wreak devastation. And the United in Science report makes for unnerving reading.

However, fear may not be the best way to mobilise people into action. A better way is to show how climate repair will actually make life better and improve our living standards beyond just avoiding global meltdown.

In other words, the policies to address the climate emergency will actually result in a more prosperous society.

Take a carbon tax: if this were increased without a robust compensation mechanism, it will further degrade the living standards of low and average income households. However, if it is accompanied by a Carbon Dividend – or a ‘climate income’ – things change.

Low and average income groups are likely winners and income inequality is reduced. In that context, the carbon tax could then do what it is supposed to: reprice carbon to remove externalities (i.e. remove the massive subsidy fossil fuel extractors receive from a failed market) and provide environmentally-sound incentives to investors and innovators.

So what climate repair policies can actually make things better? Here is a small list – no doubt there are other and better examples.

Free Public Transport

Public transport is key to reducing emissions and congestion. So why not make it free? This could induce more people out of their vehicles, provided there is capacity and access. Looking at the experience of other European cities, free public transport can have a transformative impact on mobility and life quality. And it would especially benefit low and average income groups given that a month’s pass in Dublin costs €140.

Car-Free City Centres

Ban or limit private cars into city centres. Again, this could induce people to use public transport, while recapturing the city streets for people . Cities throughout Europe are taking initiatives, from outright bans to bans on weekends to extending pedestrian zones.

Free Retrofitting

Well, free up front. One of the problems with the current grant system is that only those with enough money can take advantage of the grant. So why not make the retrofit free upfront with repayments linked to income or ability to pay. The full cost can be recovered when the house is sold or disposed. This could be funded by a National Housing Bank (similar to the bank Fine Gael proposed under their NewEra proposals) and include solar panel installation and fuel pumps. Further steps would be to require retrofitting when a house is sold or transferred.

Electric Cars

Similar to retrofitting, grants and tax breaks for electric cars benefit higher income groups who can afford such vehicles. So why don’t we substantially subsidise the purchase of electric cars with repayments based on income and the balance cleared upon disposal of the car? In the first instance, we could initially target this programme at rural dwellers, since they will be disproportionately impacted by a carbon tax. This would have to be done alongside a rollout of a recharging infrastructure.

Green Our Cities

Greening urban areas has a multiple of beneficial effects – from health to climate change to improving the overall liveability of our neighbourhoods. This is where community democracy can play a driving role – neighbourhood councils established to draw up local plans for greening, design and planting. This should come with sufficient resources to realise these plans (e.g. Munich local government provides grants to households to dig up hard surfacing and replant their gardens).

Make Just Transition Truly Just

The Green Party has proposed a Just Transition Commission in their Just Transition (Worker and Community Environmental Rights) Bill. This would be a significant step forward. But we can go further.

There will be job losses across a range of sectors. A fund could be established to ensure that anyone who loses their job due to decarbonisation would be entitled to their full wage for a an extended period to facilitate re-training, new employment opportunities, or moving to a new job – a Green Guaranteed Income.

This would not only provide security for workers, it would maintain their spending power which would help protect employment in other sectors (e.g. retail).

Another new feature would be a Green Examinership – a process by which a failing company (due to decarbonisation) is given legal protection to allow its workforce to come up with proposals to convert production to renewable or sustainable goods and services.

Let a 1000 Ideas Bloom

When we think about climate repair we tend to think of either government policy or individual action. We have to bring the productive economy into this debate.

Every business with more than 50 employees (this threshold could be lower) should produce an annual joint environmental audit between management and employees, emphasising environmental innovation in new processes and / or products. The Strategic Investment Fund could be re-orientated towards green innovation to assist in this. Let people in and let a thousand ideas flourish.

* * * *

The advantage of these policies is that they would be good in and of themselves. That they can help in pursuing climate justice and repair makes them win-win. There are more policies that could be introduced to achieve this beneficial impact:

To shore up low incomes we could consider a partial Basic Income, the Living Wage and collective bargaining – all of which can boost living standards.

Considering that some things may get more expensive (e.g. food), we should be reducing costs in other areas such as housing with cost-rental and cost-purchase housing.

Reduction in working hours (the 30-hour working week) can contribute to climate repair through a reduction of our carbon footprint (the fewer hours worked, the better).
Of course, the first question in response is how much will it cost?

The problem is we have no baseline for the cost in the scenario where we do nothing or very little. Therefore, we can’t make comparisons. So let’s just work out costs based on where we are now.

Many of the above have few cost implications: guaranteeing people’s income in the case of climate-related job loss (a 0.2 percent increase in social insurance), car-free city centres, etc. Some of the proposals could actually raise revenue by driving productivity (the 1000 ideas, green examinershp), while subsidising retrofitting and electric cars would be debt-financed by households over the long-term.

Even so, a truly Just Transition will have significant costs. For instance, free public transport would cost over €600 million – and this doesn’t count the cost of increased demand and capacity (thanks to @Sean_Fearon for pointing out this PQ).

The Government should conduct a thorough analysis of what the CSO describes as ‘potentially environmentally damaging subsidies.’

In 2016, through direct spending subsidies and indirect tax reductions, we spent over €4 billion in 2016 on such subsidies. It should be noted that these are potentially damaging, and many of the subsidies are social supports (fuel and gas allowances, subsidies to disabled drivers, etc.).

This means that it is far from a simple matter of ending the subsidies and redirecting the money towards green investment. However, in the first instance, the Government should identify which subsidies are definitely damaging.

Warmer houses at lower cost, living city centres, retrofitting and electric cars accessible to everyone, green towns and cities, income guarantees and employee-driven innovation – the transition to the new energy, production and consumption regime needed to combat climate change will contain many challenges.

But in so many areas we can show that the transition can be Just, spreading real benefits to everyone.

This is a programme capable of mobilising society around a new and progressive consensus.

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: ATM in central Dublin; Michael Taft

The slowdown is beginning. Whether it is a slowdown, as the Minister for Finance claims, to a more sustainable level remains to be seen (growth rates of five, six, seven percent are not sustainable). It could easily be a prelude to something much worse with a no-deal Brexit looming.

Let’s look at some of the relevant indicators.

Domestic Demand

Domestic demand comprises all economic activity excluding exports and imports; that is, consumer spending, investment and government spending on public services. Like so many other economic things, there is no one measurement.

There are two measurements of domestic demand. Total domestic demand includes inventories (value of physical changes in stocks). Final domestic demand excludes inventories. Though a small category, inventories can be quite volatile.

The two measurements give slightly different perspectives. With final demand, it can be argued that growth continues. However, total demand suggests that it has flat-lined over the last two years.

The difference between the two measurements can inform alternative narratives. The Minister for Finance pointed to final demand to suggest things are still going fine. He couldn’t have said that if he referred to total demand.

Further, the CSO press release accompanying the national accounts release also referred to final demand. However, in national accounts press releases over the previous two years, they referred to total demand. Why the change?

We don’t have to choose one measurement. We can content ourselves with showing that there is some evidence of a slowdown given total domestic demand’s flat-line.

Purchasing Manager’s Indexes

Purchasing managers’ Index, or PMI, is an index of the prevailing direction of economic trends in the manufacturing and service sectors. It surveys a range of enterprise activities: new orders, inventory levels, production, supplier deliveries, and employment.

While this is not an official survey, it is useful insofar as it tracks business activity in close to real time. The surveys seek to assess whether business activity is improving, deteriorating or stagnating. The following are from AIB’s PMI surveys.

Manufacturing PMI

When the PMI index goes below 50 (which it has done over the last three months), it suggests that manufacturing activity is contracting.

Services PMI

While the Services PMI is not contracting (i.e. hasn’t fallen below 50) it has declined from a high in 2016. This could be falling to a sustainable level. However, if it follows the pattern of manufacturing the next few months could see further deterioration.

Employment

Given the demise of GDP as a reliable measurement, many commentators have looked to employment data as a proxy for economic health. On that basis the economy has been in rude health. However, the latest employment numbers may suggest a turning point.

Suddenly, in the second quarter of this year employment fell by 21,000. However, this was off the back of a rise of nearly 50,000 in the first quarter. This looks like one of those glitches (that’s the technical term) one can get in quarterly series.

However, employment in the market economy – a proxy for the private sector – is showing some sluggishness. Between 2014 and 2018 (2nd quarter), employment increased by an average annual four percent. Last year it increased by 1.7 percent.

Looking Under the Hood

In 2006 the economy was looking strong. By 2008 we were in a recession. A year later we were in a crash. Economic strength was an illusion.

So what about this time? A no-deal Brexit could expose faultlines that are now barely seen. And without properly reading the economy, we may launch ourselves into policies that not only fail to address the problems but actually make them worse.

In 2008 we started on a downward spiral originating in the construction sector. Instead of addressing the source of the problem in that sector, we fanned the flames through austerity policies.

As IBEC’s Gerard Brady pointed out, the counties that are most exposed to a Brexit downturn are also lower-income areas (e.g. Cavan, Monaghan, Donegal, etc.). This suggests that a downturn would have an uneven impact throughout the country, but would be particularly severe in some.

NERI’s report on the growth of precarious work suggests that employment, while growing strongly, may be vulnerable to a downturn. To what extent are even supposedly robust measurements still tainted by the activities of multi-national companies?

The IMF’s suggestion that 60 percent of foreign direct investment into Ireland is ‘phantom’ could lead to distortions that undermine our ability to read the economy. And soft indicators like ‘inability to afford an unexpected expense’ and ‘difficulty in making ends meet’ suggest that household finances are in a weaker state than before the crash.

We may be entering a downturn with a weaker economy than headline numbers suggest. All the more reason why economic commentary must become more forensic and more sceptical, analysing the detail of activity rather than trusting headline numbers featured in official press releases.

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: Arnotts department store during last year’s budget address by Minister for Finance Paschal Donohoe; Michael Taft

One of the arguments for tax cuts is that it is necessary to boost people’s income, a type of rewarding the ‘wealth creators’.

Let’s leave aside the issues of whether tax cuts or social investment would be a better way to increase living standards. What is a more effective way of increasing people’s income from work?

Over the last four years the average employee has received a weekly wage increase of 8.9 percent, or approximately €4,000 for a full-time employee. In the last year, the increase was 3.8 percent, or €1,800. Without tax cuts, employees’ income is rising.

The problem, though, is that this is an average. Some sectors are growing faster than others; ditto with occupations and social class. Not everyone gets the average increase and many get more than the average, depending on market demand and other factors.

Driving employee income through wages would appear to be more socially equitable and economically efficient. Employees’ net income increases while the extra tax revenue can be used by the Government to invest in programmes that reduce living costs.

However, while tax cuts will increase employees’ net income, it will reduce the government’s capacity to invest, given the reduction in tax revenue.

Affordable childcare is one programme that would reduce living costs through lower fees; reduction of public transport fares is another. And then there’s a programme to build cost-rental housing which could substantially reduce rents.

These and other programmes would effectively boost people’s income though lowering costs. This is the benefit of linking income with wage increases.

But what would the economic impact be of rising wages?

Measuring the level of wages in the Irish economy is a challenge. It suffers from the same problems when using conventional national account data.

For instance, in other countries it is rather straight-forward to measure labour’s share in the economy. It is based on wages as a percentage of GDP.

But as we know, GDP is not reliable in Ireland. It is also becoming clear that using the CSO’s modified Gross National Income is not helpful when comparing with other countries, either. This is because the formula that the CSO uses cannot be applied to other countries.

There is another, little used measurement – Net National Income, or NNI. NNI essentially strips out capital depreciation in all countries.

It essentially measures the sum of all income – household, business and government income. The only tweaking of this measurement is to exclude the income re-domiciled companies, not something that would feature much in other countries.

When we use NNI, how does Irish labour’s share of national income compare to our peer group?

We don’t fare well. Ireland’s labour share of national income is well below that of the weighted average of our peer group in the EU. The only exception was during the recession but the ‘rise’ is misleading.

Between 2007 and 2011 employee compensation fell by 13 percent. But national income fell even more – by 20 percent.

What difference does this make?

In 2018, if Irish wages were to increase to our EU peer group average, it would mean an 11 percent increase for all Irish employees. It could also mean an increase of €6,500 for each employee (full-time equivalent).

This puts the demand for tax cuts into perspective. There is no tax cut that comes anywhere close to the amount employees would receive if they were paid at the level of our EU peer group average.

The counter-argument is that higher wages would make Ireland uncompetitive. However, our low-wage status (as defined by labour share) does not make us more ‘competitive’.

In our peer group Ireland ranks bottom – in both the global competitiveness ranking and labour share. It is not that there is a causal relation between a higher labour share and greater competitiveness; there isn’t. But equally, there is no causal relation between a low labour share and high competitiveness.

To drive wages does not require budgetary action. It requires new labour market institutions and practices; notably, collective bargaining at both firm level and across industries.

The main beneficiaries of collective bargaining are those with little economic leverage – the low paid, precarious workers, most women and non-nationals.

Collective bargaining raises the floor because by bargaining together employees can exercise greater industrial power (which is why employers don’t like it). However, without a legal right to collective bargaining, employees are at a considerable disadvantage.

There are wider economic implications of driving wages. For instance, if output doesn’t keep pace with wages or leads to a spike in imports, the economy can over-heat.

This requires a macro-economic strategy that is compatible with rising wages but seeks to promote output at the same time. In this regard, a wages strategy that is focused on the low-paid could help.

All this to say, we must find ways to reward the wealth creators – the men and women who produce the goods and services that we need or want to buy. Wages rising with productivity, wages rising with national income, wages rising for everyone – this is a way around the dangers that a Brexit-induced could bring us.

But more importantly, it is a way to ground the economy in a sustainable manner.

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

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From top: Taoiseach Leo Varadkar and Minister for Finance Paschal Donohoe; Michael Taft

In the run-up to the budget we will hear a lot about how the Government spends a lot or not enough, and needs to spend a lot less or more.

While there is considerable scope for legitimate disagreements, let’s at least get the context right.

For instance, does Ireland spend too much in comparison with our peer group in Europe? Are we a high or low spender?

Different Ways of Categorising Spending

Comparing public spending is not straightforward. Countries have different ways of spending money on ‘public goods’, but not all of them are considered state spending.

Some spending is conducted by non-state bodies; for instance, spending on housing and water/waste in other EU countries is done through off-balance sheet vehicles such as public cooperatives or public corporations.

Then there is social protection spending which is organised through civil society organisations (the Ghent system in countries such as Belgium and Sweden where trade unions operate unemployment benefit insurance schemes); these do not necessarily appear on the state balance sheet.

Finally, there are demographic issues. Countries with a high proportion of pensioners will (or should) spend more on pensions, while those with a higher share of young people will spend more on education and family supports.

Demographics even apply to policing: countries with younger demographics or high levels of youth poverty are likely to need more policing.There is no one formula to accommodate all these contingencies and differences.

What Measurement?

There is also the problem of how to measure public spending. We know, for instance, that assessing public spending as a proportion of GDP will wildly understate Irish spending. We can use the CSO’s measurement of modified Gross National Income (or GNI*) for Ireland, but it can give a slightly skewed result since we don’t have a similar modified measurement for other EU countries.

For instance, the CSO removes intellectual property depreciation and aircraft leasing when calculating their GNI*, but we can’t do that for other countries to get a like-for-like comparison.

Acknowledging these caveats and differences, let’s see what we can come up using three measurements:

Gross National Income with the CSO’s GNI* measurement for Ireland

Public spending per capita – this is a measurement used by the Nevin Economic Research Institute

Net National Income – this is not used as much though, for comparison purposes, it is probably more robust than Gross National Income. It essentially removes capital depreciation in much the same way as the CSO removes intellectual property depreciation to obtain their GNI*.

Using these three ways of measuring ‘primary’ public spending (excluding interest payments), what do we find?

In all measurements Ireland is at the bottom of our EU peer group, exceeding only the UK. On the basis of the above, we can estimate the amount of additional public spending needed to reach our EU peer group average.

Ireland would have to increase public spending by between €14 and €18 billion to reach our EU peer group average, or between 20 and 26 percent. However, this does not factor in key variables.

Demographics

As noted above, demographics drive a substantial proportion of public spending. For instance, people aged 65 and over make up 20 percent of our EU peer-group population; in Ireland, they make up 14 percent. There are two ways to adjust for this:

If we just exempted expenditure on social protection pensions, the gap between Ireland and our EU peer group would fall to between €5.2 and €8.6 billion.

If we were to adjust by assuming that Ireland has the same proportion of elderly as our EU peer group, then the spending gap would be between €9.4 and €13.7 billion.

The reason these figures differ is because not only do other EU countries have an elevated age demographic; they also spend more on pensioners (per elderly capita).

However, when we turn to young people, it is Ireland that has an elevated demographic: 27 percent of the Irish population are 19 years or younger compared to 21 percent in our EU peer group.

At the same time Ireland underspends on education on a per pupil basis. Different ways of measuring this gap shows that Ireland may be spending €2 billion less than our EU peer group average on education.

Another category impacted by a high youth demographic is social protection spending on families and children. A back-of-the-excel-sheet estimate shows Ireland, because of a higher demographic and lower per capita payments, could be spending approximately €1 billion less than our EU peer group average.

Fiscal Capacity

While we should be hesitant about putting a definitive number on it, it appears that when age-related spending is factored in, Ireland – using the conservative GNI measurement – spends somewhere between €8 and €12 billion less than our EU peer group average, and this could be an under-estimate.

Of course, merely increasing spending is no guarantee of quality or efficiency (though underspending is sure to undermine quality).

But this raises the question of our fiscal capacity to meet the current challenges: the fastest growing elderly demographic in the EU, Brexit, a global trade slowdown, the climate emergency, Eurozone stagnation and the housing crisis – to name only a few.

Increasing our fiscal capacity, however, is not something that can be done in the short term. It requires a long-term strategy consistent with the economic cycle. Raising resources for public services, social protection and investment to European levels would mark a systemic break with our historical low-spend economy.

We squandered the opportunity to start this strategy in the years following the recession, and now we are heading into what could be a storm.

Let’s hope the Government doesn’t set us back with unnecessarily tight budgets in the years ahead.

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

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