Author Archives: Michael Taft

From top:. Leader of the Green Party Eamon Ryan (left)  with Tanaiste, and Minister for Enterprise, Trade and Employment Leo Varadkar (centre) and Taoiseach Micheal Martin leaving the first Cabinet meeting in Dublin Castle yesterday; Michael Taft

‘You follow drugs, you get drug addicts and drug dealers. But you start to follow the money, and you don’t know where the f*** it’s gonna take you.’
– Detective Lester Freamon, The Wire.

The Programme for Government (PfG) has been touted as transformative, progressive, even left-of-centre. A former Minister claimed it was so left-wing that ‘James Connolly and Che Guevera could vote for it’.

But in the fog of spin and a promised plethora of reviews and commissions, it is hard to see the woods for the trees, to assess whether the PfG will usher in ‘transformative’ policies, or just a new vocabulary of rhetoric and aspiration.

So let’s ‘follow the money’.

A strong social state – based on enhanced public services, social security and climate justice with a Just Transition – will cost money. The increased current expenditure (day-to-day spending on public services, social protection, interest and subsidies) will need to be matched by increased revenue in the medium term.

We will need a substantial increase in investment – to get the economy back on track and to deliver the carbon-reduction targets. The lack of detail is understandable given the highly uncertain environment. But let’s see where following the money takes us.

Deficit

The PfG seeks a ‘broadly’ balanced budget. That the deficit will fall in the next couple of years is merely a function of a recovering economy, as revenue rises and unemployment costs fall.

The Irish Fiscal Advisory Council gives a sense of this trajectory on a no-policy-change basis in their recent Fiscal Assessment’s Central Scenario.

The deficit falls dramatically next year and in 2022, before settling down to a slower reduction. However, this scenario was based on pre-pandemic crisis spending projections. These will increase, if only because of elevated unemployment costs.

And introducing a single-tier health service or affordable childcare would require further spending. Therefore, without any revenue measures the deficit will in all likelihood increase.

The PfG gives no time-frame for achieving a balanced budget; however, the Government will make clear its plans within a few months:

‘At Budget 2021 . . . we will set out a medium-term roadmap detailing how Ireland will reduce the deficit and return to a broadly balanced budget.’

So we will have to wait to assess the Government’s intentions. The real issue is whether the achievement of better public services, stronger in-work benefits and social protection, and higher investment can be achievable within this falling deficit. The answer is quite clearly no. It will require fiscal adjustments – notably tax increases.

Investment and Debt

We get only some insight into the Government’s ‘investment’ plans. They have proposed a National Recovery Fund which appears to represent the stimulus part of the PfG for the next two-three years, diminishing as the economy grows (which is to be expected from stimulus expenditure).

However, not all of the Fund’s expenditure will be investment; much of it could be continuing the Temporary Wage Subsidy Scheme and other current spending initiatives.

One concerning aspect of the PfG is its treatment of windfalls to the state:

‘We will use any windfall gains, such as the National Asset Management Agency (NAMA) surplus, the final resolution of the liquidation of the Irish Bank Resolution Corporation (IBRC), or the sale of the state shareholdings in the banks, to reduce our borrowing requirements.’

Why? Does it really make sense to pay down debt (i.e. save) when there is a crisis? One would have thought these windfalls would be ideal resources for the temporary National Recovery Fund. The picture becomes even cloudier given this article from the Irish Independent (thanks to Conor McCabe for pointing this out):

‘Finance Minister Paschal Donohoe said yesterday that spending cash windfalls makes sense when the alternative would be to increase borrowing.’

Absolutely. But where does that leave the PfG commitment above?

Again, we will get a better sense of the Government’s intentions in Budget 2021. But for comparison purposes we should note that in last year’s budget the Government intended to invest €50.5 billion in the five years 2021 to 2025 (or €39.4 billion up to 2024 – I’ve estimated up to 2025 based on trend).

This €50 billion investment envelope was projected at a time when the economy was in danger of over-heating. Given that the economy will have a lot of slack, we should expect the investment envelope to increase; or at the very least, be maintained.

Any new green stimulus investment should be additional (otherwise we’re robbing Investment Peter to pay Investment Paul). We won’t be able to assess this until the Government’s projections in October..

Taxation

There are three distinct taxation categories in the PfG

(a) General Taxation

The PfG states:

‘We will utilise taxation measures, as well as expenditure measures, to close the deficit and fund public services, if required. In doing so, we will focus any tax rises on those taxes that tax behaviours with negative externalities, such as carbon tax, sugar tax, and plastics.’

The focus is on taxing environmentally-damaging activities which, while desirable, is inherently regressive. Without some compensating mechanism, low-income groups will disproportionately carry the burden. There is also reference to increasing taxes on vaping and a review of motor taxes to capture nitrogen oxide and sulphur oxide emissions.

On the other hand, the Government has stated that income tax, USC, property tax (with minor exceptions) and corporation tax will not be touched. Yet, these are progressive taxes.

In addition to freezing progressive taxes there are particular taxes mentioned with a view to cutting them (or increasing the tax break):

* The 3 percent USC surcharge for high-income self-employed

* Increase in the Earned Income Tax Credit (Self-employed)

* A cut in the Capital Gains tax

* Increase in the Home Carer Tax Credit

* Tax changes to facilitate remote working

* Tax changes to facilitate dairy enterprises in a volatile market

* Review the taxation environment for SMEs and entrepreneurs, with a view to introducing improvements

* From 2022 tax credits and tax bands credits to be indexed in line with earnings

This doesn’t mean all these will be implemented. After all, this is a review, examine, consider and assess PfG which in many cases doesn’t give firm commitments. However, the programme indicates intent. The cost of some of these cuts would be significant, even factoring in the pandemic’s impact on fiscal performance:

* Abolishing the USC surcharge would cost €125 million.

* Capital Gains tax is currently set at 33 percent. Each percentage point cut would cost €32 million. Fianna Fail’s manifesto pledge to cut capital gains tax to 25 percent would cost €256 million.

* Indexation of tax credits and allowances of 1 percent (that is, earnings rise by 1 percent) would cost €364 million.

* These are serious tax cuts. The story here is that regressive tax increases could well end up financing tax breaks, some of which would benefit the highest earners.

(b) Carbon Tax

The PfG estimates the revenue over the next decade from increasing the carbon tax (by €7.5 per tonne each year up 2030) to be €9.5 billion. This sounds like a lot money and it is, though it will only amount to approximately 1 percent of total spending during that period.

The PfG will ring-fence carbon tax revenue for three areas: €3 billion for ‘targeted’ social protection measures to prevent fuel poverty; €5 billion for retrofitting; and €1.5 billion to encourage sustainable farming.

The revenue will be spread out over 10 years. But it will take a number of years to accumulate a significant sum in any one year. From my own – admittedly back-of-the-envelope calculation – 45 percent of that €9.5 billion will only be realised between 2028 and 2030 inclusive. So it will take time to accumulate.

(c) Social Insurance

‘Consideration will be given to increasing all classes of PRSI over time to replenish the Social Insurance Fund to help pay for measures and changes to be agreed including, inter alia, to the state pension system, improvements to short-term sick pay benefits, parental leave benefits, pay-related jobseekers benefit and treatment benefits (medical, dental, optical, hearing).’

This is a positive proposal, a potentially decisive step towards a European-style social protection system. Increasing employers’ PRSI opens up the possibility of enhancing in-work benefits such as Illness Benefit, Maternity Benefit and other family supports, and short-term unemployment payments.

However, except for carbon tax, the issues of taxation and social insurance will be kicked into a Commission on Welfare and Taxation. This is not necessarily a bad thing (though we had a tax commission reporting back in 2009). A Commission that looks in detail at all aspects of taxation and social protection could be a useful exercise.

However, there is a caveat:

‘It will review all existing tax measures and expenditures and have regard to the taxation practices in other similar-sized open economies in the OECD. It will have regard to the principles of taxation policy outlined within this document (i.e. PfG).’

If it has regard to similar-sized open economies, then the Commission will be looking at how to substantially increase taxes. However, if it has regard to the principles in the PfG, it will be hamstrung given that the PfG has shut off so many areas for tax increases.

* * * *

Here are some very tentative conclusions:

Continue reading

From top: Minister for Fianance, Public Expenditure and Reform Paschal Donohoe at a  Stability Programme Update last week setting out revised macroeconomic and fiscal forecasts for the period 2019-2023; Michael Taft

I doubt there’s anyone out there who really wants a return to out-and-out austerity. Businesses don’t want it, people don’t want it, and for political parties it would be electoral madness (just ask Fianna Fáil, the Greens and Labour).

However, policy inertia could lead us towards soft austerity options (that is, keeping expenditure below inflation or income growth) simply because we are not reading the economy right.

In its recent Fiscal Assessment Report, the Irish Fiscal Advisory Council has put forward three scenarios out to 2025: Mild, Central and Severe. They project economic growth and the paths of the deficit and the debt.

The following focuses on the Central and Severe scenarios; the Mild scenario is too optimistic (I’d like to thank the Fiscal Council for supplying requested data on nominal GDP and GNI*).

In the Central Scenario, the deficit starts out at 7.4 percent of GDP but falls dramatically to 1.5 percent in four years. This is on a no policy change basis (i.e. assumes the policy as contained in the Stability Programme Update 2020 with variations in revenue and expenditure according to the scenario).

Crucially, the current day-to-day budget (excluding capital spending) returns to surplus by 2023. This is my own estimate. This is an important benchmark because it means that in 2023 and afterwards we will not be borrowing in order to fund day-to-day spending. We will be borrowing to fund investment.

This is known as the Golden Rule, whereby you balance current spending and borrow for investment.

With the increase in borrowing, the debt rises. But what is noteworthy is that debt only rises in 2020. After this year it starts to fall – as a percentage of either GDP or GNI*. Though it still remains high relative to pre-crisis levels, it is stabilised (the GDP projections are my own).
Unsurprisingly, the Severe scenario projections are worse. Under this scenario:

* The deficit, while falling (sluggishly), still remains high at nearly 3 percent of GDP by 2025

* The current budget only returns to balance in 2025

* Worryingly, the debt is not stabilised, but is still rising in 2025

The Fiscal Council’s Severe scenario is marked by repeat lockdowns – at the end of this year and the middle of next year – resulting in a protracted recovery. But such a scenario would not be confined to Ireland. It would probably be spread throughout Europe. And, according to the Fiscal Council, a Severe scenario would not automatically mean austerity:

‘ . . . would a Severe scenario imply austerity being needed? Not necessarily. Rather than outright austerity—where involuntary unemployment or a negative output gap results from cuts to existing public spending or tax increases—a Severe scenario might simply mean less ambitious budgetary plans being possible in future, without revenue-raising measures or savings being sought elsewhere.4 It would perhaps mean a slower pace of increase in net government spending and it would be against a backdrop of a recovering economy.’

Here’s the point: when commentators and politicians ask how we are going to reduce the deficit, they are asking the wrong question. Economic growth, even without policy change, will reduce the deficit – significantly so. Tax increases and/or spending cuts – in the name of deficit reduction – will actually slow down the economy’s ability to reduce the deficit, since these fiscal adjustments slow down domestic demand.

If you want to hasten the deficit reduction process you should increase investment. Investment increases the economy’s capacity to grow in the future. This growth will drive further tax revenue and falling unemployment costs.

There is one major caveat. The expenditure projections informing the Fiscal Council’s deficit estimates are tight. Unless there are tax increases or spending cuts (though unemployment costs will come down automatically as employment rises), there will be little scope to fund anything substantial that might be proposed in the new Programme for Government, never mind the type of public services and social protection typical of a continental European country.

That’s the real question. That’s where the real debate begins.

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

Rollingnews

From top: Grafton Street, Dublin partially re-opens yesterday; Michael Taft

Ireland may well find it more difficult to restore the jobs lost during the emergency lockdown than most other high-income countries. This is due to our over-reliance on sectors that are and will be the worst affected; not only because of the pandemic emergency but because of pre-crisis trends.

First up is the hospitality sector. Its reliance on foreign tourists and the impact of social distancing means it will restart slowly and may take over a year to recover. With permanent changes in consumer behaviour, there is a good chance it will never be restored to levels that existed prior to the crisis.

We can estimate the damage to the Irish economy relative to our EU peer group by looking at the importance of hospitality in employment.

Market employment primarily refers to private sector activity. Irish hospitality employment makes up 13 percent of total market employment, nearly twice as much as our EU peer-group average.

Of course, there’s a good reason for a high level of hospitality employment. For many foreign tourists, Ireland is a more appealing destination than Finland.

However, Austria has an even higher level of tourism but doesn’t rely as much on hospitality employment as Ireland, while France has tourism levels close to Irish ones (measured as tourists per capita) but with much lower jobs reliance in hospitality.

Whatever the reasons, the challenge of employment – or replacement employment – for a sector that will be hit hard over the medium term will be considerable.

We see a similar pattern with retail employment – another low-paid sector.

Again, Ireland leads the table although the gap with other countries is not as pronounced as with hospitality employment. The retail sector faces particular challenges beyond overcoming the lockdown legacy. Even before the crisis the sector was coming under pressure from online sales and automation.

Like hospitality, retail – especially non-food retail – is exposed to discretionary spending, so falls in disposable income will have a disproportionate impact. Factor in commercial rents in major urban areas, and we have a sector under pressure on a number of fronts.

It should be noted that not only are these sectors low-paid, they are also heavily gendered. Nearly 40 percent of women working in the market economy work in hospitality and distributive sectors. If these sectors take a hit over the medium term, it will be women who suffer disproportionately.

One doesn’t have to be an expert in labour market economics to see the potential problems this will throw up.

If, for instance, hospitality is slow to resume normal business and there is a permanent loss of jobs (there were 170,000 employed in the sector prior to the crash), then the competition for what jobs become available will be intense. We could see wages and working conditions being squeezed in a race-to-the-bottom.

This is all the more possible given the lack of sectoral or firm-level collective bargaining which could act as a bulwark against any degrading of working conditions (it’s noteworthy that the Tourism Recovery Taskforce has no employee representation).

Many will call for supply-side strategies to tackle this employment shortfall; that is, retrain and upskill workers previously employed in hard-hit sectors. That certainly would help. However, there are two problems with this.

First, Ireland doesn’t devote a lot of resources to active labour market policies. Many other countries spend more on labour activation than Ireland. Belgium, Denmark, Austria, France and the Netherlands all devote more than 2 percent of GDP on activation programmes (which include education, training and other supports). Ireland spends closer to 1.5 percent (in GNI*). That may not seem like much of a difference but it represents more than €500 million.

Second, supply-side strategies assume there will be no demand-side problems. Simply put, we can retrain, reskill and re-educate but if there are no alternative jobs to fill, unemployment will remain high while competition for what jobs are available will intensity.

There is no simple answer here. The Irish domestic enterprise base has been dogged by stagnating productivity, and while continued foreign investment is welcome (and needed) it is unlikely to fill the gap of a sluggish recovery in low-paid sectors – if only because of a sizeable skill mismatch.

The starting point is to recognise the over-reliance on low-paid, low-value added sectors for employment.

We need to refocus our productive economy on higher value-added activity and high-road employment. And we need to consider what we do if private domestic capital is not up to this task.

We either accept the need for substantial public capital intervention (in the form of public enterprise and other public-led business models). Or we resign ourselves to endemic and ongoing unemployment.

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: Nick’s Coffee Shop repossessed in Ranelagh, Dublin 6 yesterday; Michael Taft

It is commonly asserted that we will have to be innovative, coming up with new solutions to the unprecedented challenges we face. Of course. The Financial Times’ Martin Sandbu has come up with such a new solution. Referencing a policy letter from the Leibniz Institute for Financial Research SAFE, he writes:

‘Meanwhile, some smart new taxes can be introduced. A group of European economists has proposed helping small businesses not through loans, which can leave them overstretched in the recovery, but through grants combined with a later profit surtax — in effect mimicking government equity injections, even for sole traders and family companies.’

In effect, the Government would provide grants to businesses that would be repaid through a tax surcharge. This would be superior to loans which negatively impact a business’s balance sheets.

Let’s compare a potential tax-based grant system with the SBCI’s (Strategic Banking Corporation of Ireland’s) ‘Working Capital Loan Scheme’.

The SBCI scheme, open to micro-enterprises and SMEs, would provide loans of between €25,000 and €1.5 million with a maximum interest rate of 4 percent, to be repaid within three years.

A tax-based grant scheme would provide similar loans but repayments would be based on profits – for instance, a company would pay their normal 12.5 percent corporate tax and then a 5 percent surcharge which would continue until the loan is repaid. Interest could be a marginal 0.5 percent.

The advantage to the business is that it wouldn’t be carrying debt, would only repay the loan when it was in profit, would spread out repayments as long as it took, and – if inflation exceeds 0.5 percent – the loan would be effectively written down over the medium term.

The advantage to the state is that it would recoup some of the subsidies to the business sector. This would set up a revenue stream in the years ahead, though it wouldn’t recoup all the grant money as many businesses would still go under.

Nonetheless, effectively interest-free grants to be repaid over the medium-term and only out of profits, would increase the number of companies that survive. Indeed by subjecting grants to a tax surcharge, the state can invest more in business supports.

Brian Keegan writes in the Business Post (pay-walled) of the bewildering range of business supports:

‘There are at least a dozen state-supported funding options announced from the Covid-19 working capital schemes to the SME credit guarantee scheme . . for many businesses owners struggling to deal with the day-to-day practicalities of handling a collapsing business, the range of options, terms and conditions can be bewildering . . . We need simple and quick supports to cope with the Covid-19 unemployment crisis, not a complex new industry of loans, grants, tax breaks and deferrals.’

Business groups are certainly not shy in making demands on the Exchequer:

‘Retail Excellence wants the Government to waive local authority rates for 12 months, give grants equal to 60 per cent of commercial rents for the period of the emergency, offer zero per cent loans for all impacted businesses as well as putting in place a Covid-19 compensation scheme.’

Without commenting on the efficiency of any particular proposal, far-ranging business supports will be needed. Retail Excellence’s proposals could be easily wrapped up in an omnibus tax-based grant system. We now have an opportunity to rationalise business supports into three main schemes:

1) Equity provision for large companies, whereby the state gets a stake in a company in exchange for equity investment

2) Tax-based grants as outlined above

3) Direct, non-repayable grants (e.g. Temporary Wage Subsidy Scheme)

Rationalising and funding the schemes to the extent necessary to save as many businesses as possible has now become urgent. It will be more equitable and efficient (e.g. avoid loading debt on business) if we adopt the following principle:

From each business according to its ability to pay, to each business according to its need.

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

Yesterday: Meanwhile, In Ranelagh

From top: Paschal Donohoe, Minister for Finance, Public Expenditure and Reform, at a Covid-19 press briefing last week; Michael Taft

The Sunday Independent headline was certainly dramatic:

Reality bites: Watchdog warns on tax hikes and pension age as recession kicks in

The article featured comments by the Chairperson of the Irish Fiscal Advisory Council Sebastian Barnes which, on closer reading, weren’t as dramatic.

But it nonetheless raises the issues of how we are going to fund the economic and social repair job once this emergency is over; never mind the increase in investment necessary for not-for-profit housing, a fully universal health service, affordable childcare and, not least, a Green New Deal.

Here I just want to focus on one issue; how we can increase tax revenue without increasing taxes. For this we need to go outside the usual fiscal box and look into a recent paper written by Paul MacFlynn of the Nevin Economic Research Institute, ‘The Impact of Collective Bargaining on pay in Northern Ireland’.

This is not a paper about raising taxes. It concerns industrial relations. But the implications of the findings could have a positive benefit on public finances.

Paul shows that there is a pay premium for those workers who bargain collectively with their employer; that is, those who bargain through a single agency – usually a trade union. These workers earn, on average, 13 percent more in pay than those employees who bargain on their own with their employer. He writes:

‘ . . . workers negotiating as a collective are able to mimic or replicate the unity that employers have when they negotiate with their workforce. The market logic is that in any transaction, the power lies on the side with the least number of participants.’

Of course, the situation in the Republic could be different. A similar study might not find a similar premium level. A significant difference is the presence of multinationals, though Eurostat reports that in the multinational sector the average wage, including employers’ social insurance, is lower in the Republic than in any EU country in our peer group.

The OECD estimates that 33 percent of Irish employees are covered by collective bargaining agreements. Approximately half of this would be in the public sector. So we would find only a small proportion of private sector workers covered under collective agreements – certainly fewer than one-in-five.

Let’s assume there is a premium of 10 percent, the level found in this study. Were collective bargaining to be extended throughout the private sector, the level of wages would rise.

This is all pre-crisis but the point is nonetheless valid even if the magnitude is different: collective bargaining raises wages. And with that, tax revenue.

This can be seen in the labour share – wages as a percentage of national income. In this measurement Ireland comes up short.

Were the wage share to rise towards the average, we should expect tax revenue to rise. In 2018, Irish employees paid, on average, 28 percent of their wages in income tax, USC and PRSI. If this held as wages rose, a one percent increase in the labour share would increase personal tax revenue by €400 million.

This should be seen as indicative. One would have to factor in the distribution of the wage increase (towards the low-paid or the high-paid); and the impact on profits and investment.

However, this doesn’t take account the positive impact on consumption taxes (VAT). And as Paul and Tom McDonnell point out, there is a link between collective bargaining and productivity, which means that rising wages are not zero-sum. Companies engaged in collective bargaining benefit from the increased productivity. They write:

‘Seeking these types of pay increases is more likely to be associated with agreements on upskilling and innovation, which provide benefits to the firm as a whole. In this sense, collective bargaining provides a route for firms to boost wages without suffering competitive loss to firms who do not follow their lead.’

Another way the economy would benefit would be the ability of collective bargaining to reduce precariousness in the workplace. Precariousness costs the individual worker and the economy at large.

Workers with uncertain, intermittent income find it hard to forward-plan their expenditure, limiting their full participation in the consumer economy. This leads not only to in-work poverty, it also leads to reduced tax revenue and higher social protection income supports.

Coming out of the lockdown we will need every fiscal edge we can find. Extending collective bargaining to every workplace where employees so wish can help maximise the gains of the recovery and the substantial subsidies that will be provided for business.

The last thing we should do is squander public subsidies as we did with the VAT reductions for the hospitality sector in the last crisis.

Collective bargaining is a win-win-win process – higher wages and tax revenue, higher productivity and reduced precariousness.

Providing every worker with the right to bargain collectively with their employer would have a verifiable and beneficial impact on public finances. Paul makes the point that:

‘Collective bargaining thus represents one of the few policy levers that government has in order to increase wages and ultimately the labour share of income.’

The same could be said for increasing tax revenue. And this without increasing taxes.

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 low-paid can be among the ‘agents of recovery’ in post-lockdown Ireland, writes Michael Taft

The low-paid, the precarious worker, the gig worker and temporary agency worker, the under-employed, the undocumented and the marginalised in the labour market: these are the women and men we now recognise as vital agents in networks delivering essential goods and services in these crisis times.

Where we once, as a society, assumed such poor quality employment was the inevitable result of new business models or low value-added sectors or the competitive nature of markets, we are starting now to see such work and these workers differently.

And as we begin the long unlocking of the lockdown we have an opportunity to assign these men and women a new role; namely, agents of recovery.

The Government projects that consumer spending will fall by 14.2 percent. To put that in perspective, in the worst year of the last crisis – 2009 – consumer spending fell by less than 5 percent.

The Government projects consumer spending will bounce back next year – by 8.7 percent; however this will still leave it at 93 percent of 2019 levels. We certainly won’t see a full recovery until at least 2022 and possibly 2023.

Even when the current emergency has passed (bearing in mind that there is no permanent exit without a vaccine), consumer spending may struggle. Large numbers of people will be out of work (and, so, unable to spend much).

Even those in work may be reticent to spend – especially in discretionary sectors such as hospitality due to fears of a second wave or of lack of social distancing. Fear and behavioural change may undermine a consumer recovery for years.

Driving a consumer recovery will involve many elements; in particular, privileging the ‘spenders’ – those who have a high propensity to consume. This means privileging lower-income groups and average income households with children.

If you give €100 to someone with a low income they are likely to spend all of it; a high-income earner is likely to save some if not most of it. In uncertain times, it makes sense for a household to save but that doesn’t help the overall economy.

This goes further than just redistribution. It is about giving those on low pay and precarious contracts the tools to effect this progressive distribution. Let’s look at some of these tools.

Collective Bargaining

Collective bargaining has been shown to lift wage floors for the low-paid. The ability of employees to come together to negotiate with their employer strengthens their bargaining power which, in turn, contributes to higher wages and better working conditions than would have prevailed under individualised or market-based bargaining.

Collective bargaining could be extended throughout the economy in two ways:

1) Provide every employee with the legal right to bargain collectively; where a substantial number of employees in any enterprise opt for this method of bargaining, the employer must acknowledge this and engage

2) Establish sector-wide bargaining where representatives of employees and employers negotiate wages and working conditions across a sector (e.g. retail, hotels, agriculture, food manufacturing, etc.). This would protect both workers and ‘good’ employers from businesses that use low-road business models (reduced wages, working conditions) to gain a competitive edge.

Such a model, which prevails in many European countries, provides flexibility (sectoral agreements can be adjusted at enterprise level to take account of enterprise conditions) and promotes productivity through high-road strategies (shifting emphasis on to product and service quality, innovation, customer satisfaction, and investment). Most of all, it lifts the wage floor for the lowest paid, providing additional income for ‘the spenders’.

Precarious Contracts

If people experience uncertain income they cannot plan their expenditure and, so, cannot fully participate in the consumer economy. Collective bargaining can address many of these issues at sector and enterprise level, but there will still need to be policy interventions.

Given the range of contracts, there is no magic bullet to solve precariousness but here’s one small example. Bogus self-employment, whereby employees are treated by their employer as self-employed (to avoid higher social insurance payments, holiday pay, etc.), has long been a feature of the construction sector but is now spreading to other sectors.

This deprives employees of benefits while the state loses out on social insurance payments. In effect, this is an attempt to drive down wages and income.

A very simple rule could be introduced: all employment contracts are considered a standard employer-employee contract unless the employer, with the agreement of the employee, can show that it is truly a matter of self-employment.

If they can’t do that, with reference to Revenue Commissioner and Department of Employment Affairs and Social Protection guidelines, then the contract is assumed to be standard. This would set a new floor for workers in sectors affected by bogus self-employment.

Part-Time Flexibility

Employees should be provided with the flexibility of moving between part-time and full-time work in an enterprise where the hours become available. This was the intention of the European Directive on Part-time Employment but it was never fully transposed into Irish law.

This would give workers some autonomy over their working hours, reducing them when they have other commitments (usually caring) and increasing them when they need extra income.

Regularisation

There are an estimated 17,000 undocumented workers (pre-emergency). These workers are subject to considerable exploitation which has the effect of driving down wages and working conditions for all employees at firm or sectoral level. Alan Desmond, law lecturer at the University of Leicester, suggests we:

‘ . . establish a mechanism allowing for automatic transition to legal status for irregular migrants who have spent a specified minimum period of time, say five years, in the state.

While such a mechanism may justifiably be accompanied by requirements like the absence of a criminal record, such limitations should be few in number to ensure that as broad a swathe as possible of the irregular migrant population can avail of the regularisation measure.’

Automatic and accessible regularisation would remove another low-road element in our business model and help workers to become more fully integrated into the consumer economy.

* * * *

These and other reforms – the Living Wage, pay-related social insurance payments, a guaranteed minimum income – would raise the income and living standard floor, privileging low-paid and precarious workers and, so, boosting a critical aspect of recovery: consumer spending.

What’s even more important is that these structural reforms would actually give workers themselves the tools to drive the recovery by improving their living standards.

Orthodox theory suggests that restoring growth – restoring profits, employment, investment and fiscal confidence – will address these issues, but that is patently not the case.

Prior to the emergency Ireland had one of the highest levels of low pay in the industrialised world, while the Nevin Economic Research Institute found that up to 500,000 employees were at elevated risk of contractual precariousness with another large cohort at risk of precarious living standards (in-work deprivation, inability to meet an unexpected expense).

Orthodox theory is wedded to trickle-down economics. What we need is a new surge-up economics – raising wages, working condition and living standard floors. And what’s the best way of achieving that?

Give workers the tools and the choice to address their issues – through collective bargaining, precariousness reduction, flexibility, and regularisation.

Do this, and they will become for all of us the agents of recovery.

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: Green Party Leader Eamon Ryan; Michael Taft

The Green Party is currently debating whether to enter government with Fianna Fáil and Fine Gael. There are legitimate arguments on all sides of this question.

However, before making a decision I would strongly advise the Greens to read the fine print; in particular, the fine print of the Stability Programme Update (SPU) – the Government’s latest economic and fiscal projections.

Of particular interest are the fiscal projections, the Government’s estimate of public spending in 2021. This is a baseline, a product of layering the Medium Term Fiscal Strategy on to the Budget 2020 projections and then adding the impact of the crisis (falling tax revenue, rising unemployment and healthcare costs, etc.).

This baseline reveals the challenge for the Greens and their programme – a programme which emphasises investment to address climate chaos, a new social contract, the housing shortage and other elements of their 17 demands.

Let’s compare the SPU projections with those contained in Budget 2020 (the latter was put together last autumn). This comparison is useful because it shows the leeway the Government is now giving to the radically altered post-coronavirus economy. The problem is the Government is not giving much leeway.

In 2020, spending will greatly exceed the Budget 2020 projections – by €5 billion. This is driven by increases in social payments (unemployment payments, wage subsidy scheme) and healthcare expenditure. However, in 2021 the SPU pulls public spending back to the Budget projections.

Overall public spending (primary expenditure excludes interest payments) and spending on public services are being pulled back to pre-coronavirus projections. In fact, when we exclude social payments, public spending under the SPU actually falls below that projected in the budget last year.

The real question is: how are people’s demands for enhanced public services, especially a single-tier health service, going to be met using pre-crisis budget projections? What about the enhanced income supports? Or a renewed public housing programme?

What about the multi-billion Euro stimulus programme for business that will be needed? Now, add in a significant Green New Deal investment programme. All that on the basis of spending projections presented prior to the current crisis.

Then there’s the orthodox mood music. The Minister for Finance stated in the Dail recently:

‘Our deficit will have to be reduced, our national finances must return to a position of balance again.’

Why? Why must we ‘return’ to a position of balance? Even the Fiscal Rules, as orthodox a set of rules you’ll find anywhere, allow for deficits.

The rationale for a deficit-spending strategy is set out here. Any attempt to pursue a balanced-budget strategy in the medium term will unnecessarily restrict social, environmental and economic investment.

Sebastian Barnes, the acting chair of the Irish Fiscal Advisory Council, writes in the Irish Times:

‘Compared with the 2008 crisis, it should be possible to avoid severe austerity.’

That’s good but note the word ‘severe’.

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From top Minister for Finance Paschal Donohoe; Michael Taft

The Irish Times headline had a familiar, ominous ring:

“We must not forget coronavirus bill will have to be paid someday”

Donal Donovan went on:

‘Clearly, the deficit will be a huge number and likely to be followed by more significant red ink in 2021. Who will pay for this? . . . at some stage Ireland will have to pay the bill associated with the virus . . . Payment will come in the form of higher taxes or postponement of otherwise planned expenditures.’

We’ve been here before. Who will pay for this? The question is framed in the wrong way. It is not about who will pay but what will pay.

Cliff Taylor talks about the ‘tough choices to be faced on tax and spending’. But the real issue is making the right choices. Neither tax increases nor spending cuts are going to ‘pay’ for the substantial debts arising from the crisis, unless we want to risk an extended period of stagnation.

The ESRI has projected a deficit of €12.7 billion for this year, or 4.3 percent of GDP – but that was early on in the crisis. The Central Bank has estimated a deficit of 6 percent of GDP, which could work out close to €18 billion.

We are likely to see a significant reduction in the deficit in 2021 as people return to work. However, much will depend on to what extent employment and enterprises are permanently destroyed, the pace of the return to work, and progress towards a vaccine.

There are few estimates about what the economy might look like next year; understandable given the unprecedented nature of the crisis.

The OECD claims that Ireland will be one of the least affected economically by the crisis, given the presence of medical and big-tech multinationals.

However, there could be significant sectoral and regional variations. The IMF produced a set of projections which look promising if they turn out to be true:

Irish output levels will nearly recover in 2021. The deficit will return to nearly a balanced budget situation. And unemployment, while high, will be reduced to single figures.

There is a major caveat. The IMF uses a global GDP model applied to all countries. It is not an analysis of the detailed conditions for each country. So this GDP model could well over-estimate the Irish economy’s resilience.

Even if the deficit recovers quickly in 2021, we will hear calls to reduce our overall debt levels. There are few projections for these, but with a €15 to €20 billion deficit this year, and the likelihood of this continuing into 2021, debt will rise.

In the short term, general tax increases and spending cuts of the type we saw in the last crisis will only make the recovery more difficult. Unemployment will still be high after the emergency. Households and businesses could fall into debt.

Disposable incomes will be reduced. And this doesn’t count the demand to maintain the positive features of the Government’s response to the crisis: a more equitable healthcare system, a fully subsidised childcare system, enhanced income supports.

Rushing to a balanced budget, never mind a surplus, to pay down this debt would be a mistake. The best way to repair the economy, build on social equity, and reduce the debt would be to embark on a medium-term strategy of deficit spending.

This might seem counter-intuitive – deficit spending to reduce the debt – but that’s exactly what Ireland did coming out of the stagnation of the 1980s.

Even though the Government ran a continuous deficit over this decade, and the actual amount of debt rose by 25 percent, the debt burden (debt measured as a percentage of GNP) fell substantially. Of course, one can’t make straight-forward comparisons.

In the 1988/97 decade, government revenue was boosted by a tax amnesty, privatisation proceeds (which actually flattered the deficit), EU funds, and growth rates, especially in the latter half.

Nonetheless, while running deficits, the debt burden fell by 46 percent even as the actual debt pile grew. Even if growth rates were a third less, the debt would have fallen in excess of what the fiscal rules would have required, if they were operating back then.

It’s actually just common sense. If growth rises faster than the deficit, the debt burden falls.

Let’s run this through an extremely simple exercise.

Let’s assume that GDP falls back to 2018 levels (€325 billion) and debt increases to €250 billion (or 20 percent above 2018 levels).

Further, let’s assume the deficit runs at 2 percent per year while GDP growth rates are 4 percent (between 2012 and 2018 GNI* averaged nearly 8 percent annual growth).

Over a 10-year period, with an accumulated deficit of nearly €50 billion, the debt burden still falls; and that’s with a subdued growth rate.

One would hope for higher growth, obviating the need for a deficit in each of these 10 years. Nonetheless, this simple illustration shows that you can reduce the debt burden while running deficits.

And we should also note that the Fiscal Rules, which are for the time being suspended (thankfully), still allow for deficit spending. And that suspension, along with continued ECB interventions, is likely to continue. In 2021, the IMF predicts a deficit of nearly 4 percent for the Eurozone as a whole.

Fiscal policy, however, cannot rely on deficits alone.

It needs to encompass other initiatives such as productive investment, judicious use of our cash balances (estimated to be over €20 billion), shifting taxation on to assets, and increasing employers’ social insurance (but only when we are fully out of the emergency), and collective bargaining rights to raise wage floors.

If we fall back on fiscal clichés, the recovery will be harder, the social damage will be greater, and our ability to vindicate people’s desire for stronger public services and income supports will be greatly reduced.

And if that happens we should at least know that it will be a political, not an economic choice.

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: Bray Head, Bray, County Wicklow; Michael Taft

‘The words of the prophets are written on the subway walls and tenement halls.’
Paul Simon

‘As I went down in the river to pray, studying about the good ol’ ways, and you should wear the starry crown – good lord, show me the way.’
African-American Slave Hymn

The first book I read, and the first book that was read to me, was the Bible. The first sin I was taught was the sin of racism. My mother was a fundamentalist protestant Christian. So was Dr. Martin Luther King.

So much of the progressive politics of my birth-country was rooted in faith – from the pre-civil war Presbyterian abolitionists; to many of the first trade unionists, gunned down by para-military agents of employers; to the founders of the Catholic Worker Movement; and the civil rights movement of the 50s and 60s. All were informed by a number of sources, and faith was one of them.

Why should we be surprised? The Old Testament prophet wrote:

‘Those who recline on beds of ivory and sprawl on their couches, who eat lambs from the flock and dink wine from by the bowlful, while anointing themselves with finest of oils – you have turned justice into wormwood and hate the man dispensing justice and detest those who speak with honesty.

You have imposed heavy rent on the people, extorting levies on their wheat. You have sold the poor for a pair of sandals and left the widow and orphan outside the city gate – I will destroy your mansions and all who dwell in them (only a few will escape to carry out the bones).

I do not want to hear your prayers; I do not want to smell your sacrificial feasts. ). I reject your solemn assemblies. I want justice to flow like a river. Thus speaks Yahweh.’ (Amos: 5 and 6).

Class war has nothing on this.

So, Easter Sunday. Christians celebrate Jesus’ physical resurrection from death and his return to the creator, his father.

All great religions have similar stories: the Jewish migration from slavery to the Promised Land, Mohamed’s first revelation in the cave outside Mecca, Buddha’s awakening under the Bodhi tree, Krishna’s counsel on the battlefield of life, Lao Tzu’s final advice before he leaves into exile.

These stories contain great sacrifice, great defeats and ultimately, great victory. We are, first and foremost, story-tellers and our first stories are those of struggle and liberation.

I may have moved away from my mother’s faith, but maybe because I grew up with it, the Christian story strikes me as particularly thought-provoking. For though there are mythological precedents, in the Easter narrative God (the Word made flesh) actually dies.It is a brave faith that contemplates the death of its deity. No wonder darkness descends, earthquakes rip open the tombs and the dead walk the city (Mathew 27: 51-53).

The first Christian telling of that Easter morning was not, however about how Jesus appeared to the many. All references to Jesus’ physical re-appearance were later textual interpolations.

That’s why none of the Gospel writers agree on the main points of what happened after the resurrection: Jesus ascended to heaven on the day of his resurrection or he spent 40 days on Earth; he appeared in his own form or in many forms; he ascended from Galilee or maybe from Jerusalem; and so on. Confusion? Yes. Important? No.

The earliest Christian manuscript, Mark, actually ends with Jesus’ disappearance, not his reappearance – a more ambiguous but, for me, a more provocative ending.

For on that first Easter morning, when Jesus’ mother, Mary Magdalene and Salome went to Jesus’ tomb to perform the death rituals they did not find him there or anywhere else.

All they found was a ‘young man’ telling them that Jesus wasn’t there, that he had risen. And what was their reaction?

The last line of the original Christian story puts it this way:

‘And the women went out and fled from the tomb, for trembling and astonishment had gripped them and they said nothing to anyone, for they were very afraid.’ (Mark 16:8)

The Christian faith was rooted in an empty tomb, a cryptic message from an unknown, unnamed man…and fear. And who brought this story to the world?  Women – who in Biblical times were (and still are in so many places and households) treated as second-class, without rights, chattel. The Christian story of salvation starts with a confused message brought to the world by the marginalised.

Today, people celebrate the evolution of that Easter story – evolved not by hidden or supernatural forces – but by men and women filled with the Good News they now couldn’t wait to spread: that death has no domain, that the cryptic message is now clear as the darkness recedes; and that our original fear is not only conquered but transformed into celebration.

Or, put another way, we are no longer enslaved.

The lyrics of the African-American slave hymn quoted above contained hidden messages on how to escape – ‘to go into the river’ is advice to use the water to escape the scent of the tracker hounds; the ‘starry crown’ – use the stars to navigate; ‘show me the way’ – get to the Underground Railroad and, so, freedom).

On this Easter morning, so many here and throughout the world will wake up to fear – fear of a virus, fear of losing loved ones and friends, fear of what the future may hold (this is in addition to the millions waking up to hunger and war, exile and dispossession).

On this Easter morning, we have a choice.

We can hide in our fear, and passively submit ourselves to a future designed by others for others.

Or, coming out of this crisis, we can raise each other up and make clear the good news – of prosperity and hope, democracy and equality; from that tomb, that dark space of decay, comes a new light, a new recovery, a recovery where everyone is invited – no one left behind – to collectively rewrite what is now a desultory narrative.

It is our choice. It is in our power. This is Easter Sunday morning. It belongs to all of us.

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

Pic: Bray.ie

From top: rush hour traffic on the M50 around Dublin this morning; Michael Taft

The Business Post (paywall) reports that Fianna Fáil and Fine Gael are discussing various fiscal responses to reboot the economy when the emergency is over.

‘Initiatives such as temporary VAT cuts across a number of the worst affected sectors, rather than just the tourism and hospitality industry, are expected to be in the mix.

The plan will also seek to answer calls from business groups for the write-off of rates bills and access to working capital for business.’

There is nothing wrong with this approach in principle. We need to get our enterprise base back up on its feet.

The question is: how can we optimise any incentives, subsidies and supports? In this respect, we can learn lessons from the last time the Government intervened to boost a sector with the VAT cuts – in the hospitality sector back in 2011.

One of the first things the Fine Gael / Labour government did on entering office was to launch a Jobs Initiative which included a temporary cut in the VAT rate from 13.5 percent to 9 percent.

This was intended to do two things: reduce prices to incentivise demand, and help repair balance sheets. These, in turn, were intended to drive hospitality employment and, so, help overcome the jobs crisis at the time.

Temporarily reducing VAT to boost economic activity is a classic Keynesian, social democratic or counter-cyclical tool.

During the crisis one commentator taunted the trade union movement with the success of the VAT rate cut, not realising that it was the trade union movement who had first come up with the idea.

Focusing on the hospitality sector, the headline results were impressive. Numbers employed in the sector topped out at 147,000 in 2007. This bottomed out at 113,000 in 2011.

However, from that point, at approximately the same time as the VAT cut, employment rose so that by 2015 it surpassed pre-crash highs and by 2018 – the year the VAT cut was reversed – there were over 180,000 employed.

How much of this was due to the VAT rate cut is open to debate. For instance, the number of visits to Ireland from abroad fell to 6.1 million in 2010. This started rising in 2011 and by 2015, the numbers increased to 8.6 million. By 2018 this rose again to 10.6 million.

The hospitality sector benefited from foreign demand (that is, it was reliant upon the spending capacity of people from outside the country). Most of this increased foreign demand would have been down to rising incomes and consumer confidence in other countries.

Nonetheless, we can be reasonably satisfied that the VAT rate cut was helpful, even if we can’t quite identify its precise contribution to employment growth.

However, within the sector, there are some issues to consider.

According to the CSO, value-added in the hospitality sector rose significantly after the VAT cuts.


Value-added rose by 28 percent in the period between 2009 and 2018 while wages stagnated, rising by less than 4 percent.

Eurostat reports that, in 2008, profits made up 7 percent of value-added. After going into negative territory during the height of the recession, profits started rising in 2012, going from four percent to 24.6 percent in 2017. Meanwhile wages stagnated, rising only 3.7 percent during this same period.

We can see a similar pattern of profit growth in industry surveys.

Crowe Howarth charts the rising level of profits per hotel room. Profits more than doubled between 2012 and 2018.

The failure to match wage growth with profit growth – so that the benefits from a cut in VAT (which is subsidised by everyone) are spread out evenly – not only constitutes a social inequity and industrial injustice. It imposes costs on the public and other businesses as well.

Suppressing wages means less tax revenue (income tax, PRSI, consumption taxes) and higher social protection costs (Working Family Payment, Part-Time Unemployment Benefit).

Consumer spending is hit – not only by low wages but by precarious work contracts where income is uncertain from one week to the next. This has a negative impact on other businesses that rely on workers’ purchasing power.

In short, by suppressing wage growth companies in the hospitality sector externalised, or imposed, costs on to other sectors of the economy, so that they could grab ever-higher profits.

Cutting VAT rates remains a potentially beneficial strategy in reviving economic activity. However, the strategy will be costly and inefficient if it follows the pattern of the last VAT cuts.

How can we make it better?

We can make it better by ensuring that workers in these sectors have a voice at the table, by creating sectoral collective bargaining bodies in those sectors directly benefitting from any proposed VAT cuts such as hospitality, retail, business services, etc.

Representatives of employees would negotiate an agreement with employer representatives covering issues such as wage increases, overtime, pay scales, working conditions (e.g. health & safety) and contractual certainty (e.g. secure hours, minimum hours, secure income).

Such sectoral collective bargaining should be accompanied by the right of employees to bargain collectively at firm level.

And neither employees nor employers would have the right to undermine these bodies by boycotting them (as is being done currently by employers with the Joint Labour Committees).

This could be done by implementing the principles in the private members bill introduced by Senator Ged Nash last year (now a TD).

VAT cuts must be accompanied by stakeholder justice – the right of employees to participate in the benefit that a public subsidy provides. This would ensure such state interventions are socially equitable, fiscally beneficial and economically optimal.

In other words, common sense.

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

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