Author Archives: Michael Taft

From top: Taoiseach Micheál Martin (right) and Minister for Finance Paschal Donohoe launch the Stay and Spend Scheme at Fire Restaurant, Mansion House, Dublin last week; Michael Taft

When the Irish Fiscal Advisory Council produced its ‘Long-Term Sustainability Report’, examining the effect of an ageing population on public finances, most of the media focus was on the cost of pensions while the two big findings in the report escaped largely unnoticed.

First, the Fiscal Council projected two decades of near economic stagnation; second, it showed how totally inadequate our low-tax economy will be in absorbing additional expenditure. If these two issues are not addressed, additional pension costs will be the least of our problems.

The Fiscal Council report projected, among other things, growth rates out to 2050. Such exercises are always fraught. At times it is hard to estimate even a few months ahead (like now), never mind 30 years ahead.

However, such projections can help guide current policy, if only to warn us of potentially future difficulties.

While not the most pessimistic, the Fiscal Council’s projection for the 22 year period of 2028-2050 is an average of 1 percent growth each year. And that is pretty grim.

Even in the recessionary and stagnating 80s, average annual growth rates were 1.7 percent. And while the first decade of the millennium saw an average growth rate of 1.3 percent, that included the unprecedented fall of 14 percent in 2007-2009. Up to 2007, it was 3.9 percent.

By comparison with these figures, the Fiscal Council’s projections look pretty grim but, unfortunately, realistic. It is called secular stagnation. This theorises that advanced economies are entering into a long-term period of minimal growth.

There is no consensus as to the cause of this phenomenon, or even if secular stagnation is a likely prospect.

Some have suggested a number of factors: the falling level of capital investment, an ageing population (which would reduce overall demand), the financialisation of the economy (where finance capital plays a stronger and non-benign role), limited technological advances, the reluctance to invest in new technologies, etc.

This is all a bit speculative but one thing we do know – in the US, Japan, the Eurozone and Ireland, economic growth has been in long-term decline since the 1960s.

Unfit for Purpose

The second challenge described in the Fiscal Council’s report is the low-tax economy. In their projections, they assumed that government revenue remains at a fixed share of GNI* after 2025.

We don’t have the actual projection of revenue as a proportion of GNI* in 2025, but we can compare Irish government revenue levels with our peer group in 2019 just prior to the pandemic crisis.

Ireland’s low-tax economy means that it would need to raise Government revenue by 19 percent, or €16.8 billion (though given our relatively young population, we may not need to spend as much on pensions; nonetheless, Irish spending would be well below our peer group average).

The Fiscal Council estimates that, without any fiscal adjustments (spending cuts, tax increases), the deficit will deteriorate to 5 percent by 2015. However, if Ireland moved incrementally towards the average spend in our peer group, this deficit would fall substantially.

What this shows is that when dealing with demographic pressure on public finances, as well as enhancing public services, social protection (including in-work benefits) and public investment, our low-tax economy is not fit for purpose – not now and certainly not in 2050.

Meeting the Challenges

The great advantage of the Fiscal Council’s report is that we get a heads-up. The 2008 financial crash came on the economy suddenly (though, in truth, it was the inevitable and, so, predictable result of the rise of property speculation). The pandemic crisis was legitimately unforeseen.

We have no excuses now. Long-term growth will slow over the years ahead and if the Fiscal Council’s projections are realised, we will start entering into a period of long-term stagnation in this decade. We’ve been warned.

The growth challenge is the most difficult. There are no magic wands to increase long-term growth in a sustainable manner. A starting point should be Dr. Tom McDonnell’s detailed analysis of the determinants of long-term growth . Here is the briefest of summaries of what we need to do:

* Substantially increase investment in education and R&D – growth in the future will increasingly rely on knowledge capital

* Affordable and comprehensive childcare to promote labour force participation

* Reduce and eventually abolish child poverty – poverty in early years leaves long-term economic and social scars

* Modernise infrastructure through increased public investment, an infrastructure bank to ensure long-term access to affordable interest rates, and an independent evaluation body for major projects.

* Rebalance the tax system with increased taxes on land, property, wealth, inheritance, passive income and gifts

This only captures some of the proposals. I would add a new enterprise strategy that focuses on corporate best practice (permanent contracts, collective bargaining, gender equality, reduced carbon emissions, etc.), workplace democracy to expand the innovation base in the economy, and affordable housing to redirect revenue from the rentier to the productive economy.

None of this is a guarantee for increasing long-term growth. But it puts us in a stronger position to at least edge the output higher (for instance, the Fiscal Council didn’t assume additional education investment).

On the revenue side, the Fiscal Council assumes that tax rates are held fixed and tax bands and credits are indexed, such that government revenue remains at a fixed share of GNI* after 2025.

However, Ireland’s low-tax economy has little to do with personal taxation, which is average compared to our peer group in the EU.

When we combine income tax, income levies (e.g. USC) and PRSI contributions and express them as a percentage of gross wages, not only does Ireland come in average – we are above ‘high-tax’ Sweden.

Ireland’s low-tax economy is primarily attributable to a very low employers’ social insurance rate and, to a lesser extent, low capital taxation. In 2018:

* The effective rate for Irish employers’ social insurance (as a percentage of total wages) was 10.4 percent; our EU peer group average was 21.8 percent. To close that gap would mean raising €9 billion.

* Capital taxation in Ireland made up 5.2 percent of national income, lagging behind our EU peer group average of 6.3 percent. The gap comes to nearly €2 billion.

We have quite a few years to bring our tax rates into line with Europe. This would entail a long-term but incremental rise in employers’ social insurance and capital taxation.

The challenge is to integrate the steps we must take to resolve the long-term issues with the short-term measures needed to get us through the immediate crisis.

Addressing affordable childcare and child poverty, increasing educational investment (starting with early education and third-level), launching a Green New Deal and increasing taxes on passive income such as inheritances and gifts (which have little negative economic impact) are all steps that we can start taking in the next budget, but which will launch us on the long march to boost growth and productivity.

Think long, think big, start now.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. Michael’s regular column resumes next Tuesday.

Rollingnews

From top left to right: Minister for Finance Paschal Donohoe, Minister for Public Expenditure and Reform Michael McGrath, and Tanaiste and Minister for Enterprise, Trade and Employment Leo Varadkar; Michael Taft

Back in July the Tánaiste Leo Varadkar warned of a coming economic crisis that could be ‘very divisive’:

‘ . . . it’s a very serious economic crisis and one that’s very unequal . . . The country was very united during the pandemic. The economic crisis that is coming could be very divisive.’

Unknown to us (at least based on national statistics) was that a serious crisis was emerging in 2019. The pandemic crisis is likely to give it legs and if we don’t act, it could run away from us.

The CSO has released its Survey of Income and Living Conditions (SILC) focused on the issue of enforced deprivation. According to the CSO, the enforced deprivation rate measures the proportion of households that are considered to be marginalised or deprived because they cannot afford goods and services which are considered to be the norm for other people in society.

Enforced deprivation is where a household experiences two or more of the following eleven deprivation items:

* Without heating at some stage in the last year

* Unable to afford a morning, afternoon or evening out in last fortnight

* Unable to afford two pairs of strong shoes

* Unable to afford a roast or an equivalent once a week

* Unable to afford a meal with meat, chicken or fish every second day

* Unable to afford new (not second-hand) clothes

* Unable to afford a warm waterproof coat

* Unable to afford to keep the home adequately warm

* Unable to afford to replace any worn out furniture

* Unable to afford to have family or friends for a drink or a meal once a month

  • Unable to afford to buy presents for family or friends at least once a year

During the last crisis, 30 percent of the population experienced enforced deprivation. Since that peak in 2013, the rate steadily declined.

Until last year when the enforced deprivation rate suddenly and unexpectedly rose. In 2019, unemployment fell and job numbers increased along with wages and incomes. Yet deprivation rose. Even before the crisis, something in the social structure was wrong.

Those most at risk of deprivation are social housing tenants, those who can’t work because of illness or disability, and single parents. The former two categories saw a sizeable increase in 2019, while close to half of single parents suffer multiple deprivation experiences.
We tend to assume that deprivation is associated with being out of work. That would be a mistake.

Nearly one-in-eight people in work are categorised as deprived. 20 percent of households with one person working are deprived. More surprisingly (and depressingly), even where there are two people at work in the household, more than one-in-ten suffer deprivation.

Clearly, in an economy with high levels of precarious working conditions and low pay, having a job is not a ticket out of deprivation and poverty.

And for children the situation is looking even grimmer. In 2018, the deprivation rate for children (under-18s) was 19.7 percent. It rose last year to 23.3 percent.

This is not only an indictment that nearly one-in-four children in the state suffers enforced deprivation; it also undermines future growth and prosperity for these households and society at large. And in one final stat twist, 30 percent of the population still experience at least one enforced deprivation experience.

And all this in the year prior to the pandemic, during a year of growth and expansion. This raises two questions:

Will the pandemic accelerate these trends? As the Tánaiste put it – will it accelerate inequality and divisiveness?  And if the answer to the first question is yes, then what are the policies that we need to put in place starting now in Budget 2021?

For we will need to do something. If we go back to ‘normal’, we’re heading back into rising deprivation.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. Michael’s regular column resumes next Tuesday.

Rollingnews

From top: Minister for Finance Paschal Donohoe and Minister for Public Expenditure and Reform, Michael McGrath, at a media briefing on the July Jobs Stimulus in the Government Press Centre, Government Buildings last week; Michael Taft

Any critique of the Government’s July Stimulus should acknowledge that they had to plan it in a metaphorical fog – not knowing the duration of the public health crisis, the extent of long-term economic damage, or the most efficient measures to employ in this unprecedented situation.

Nonetheless, there are certain benchmarks we can use to assess the stimulus plan.

How much of the plan is actual additional spending (above what would have happened anyway)?How much is just re-announcing previously announced measures?

How much is deadweight (that is, subsidising activity that would have happened anyway)? How much is targeted, going to the sectors most in need?

None of these questions have black-and-white answers. For instance, measure A may be more efficient than measure B, but the former can be done almost immediately – urgency sometimes being the enemy of efficiency.

And, yes, this scheme may have deadweight, but do the benefits still outweigh the costs? Fiscal policy, especially in a crisis, is not a slide-rule. And for many measures, we may not be able to pass judgement for months or even years.

Given these caveats and the flying-in-the-fog acknowledgement, let’s see how some of the measures stack up.

Additionality and the Pandemic Unemployment Payment (PUP)

The PUP will be extended to April. However, it will be closed to new entrants in mid-September. There is no doubt this payment provided a life-line to many households.

The number of recipients reached nearly 600,000, but with businesses re-opening the numbers have fallen by half. In announcing the extension of PUP to April, Minister Heather Humphreys stated:

‘The total cost of the payment, if modified as proposed, between now and April 2021 is estimated at about €2.24 billion. This is about €380 million more than would be paid out at standard jobseeker rates (that is, if the scheme was closed as planned in August).’

I’m assuming this refers to the overall cost since the PUP was introduced (though, in truth, it’s hard to say). It suggests that while PUP has put €2.2 billion into households and the economy, ordinary social protection payments would have put in €1.9 billion.

The additionality of PUP was only €380 million, which while desirable from the household’s perspective is far less than the headline number and, so, far less stimulating.

Cut in Headline VAT Rate and Commercial Rate Waiver

The Government took everyone by surprise by cutting the standard VAT rate from 23 percent to 21 percent. This will have almost no impact on prices but will assist business cash-flow. A VAT cut is administratively simple compared to an expenditure-based subsidy with qualifying conditions.

Similarly with the commercial waiver. But since they are across the board they are not very well targeted. Many businesses that don’t need help will still benefit.

The CSO reports that 10.2 percent of enterprises had higher than normal turnover in June/July, while another 28.2 percent had ‘turnover at or close to normal expectations’. Nearly 40 percent are not in urgent need of relief, yet they will benefit from these two measures.

However, businesses that have yet to open or have substantially reduced turnover (10 percent report turnover decline of 75 to 100 percent) may get limited benefits – especially in the hospitality sector.

The VAT cut and rates waiver, at a cost of €440 and €600 million respectively, could be highly inefficient at targeting relief at enterprises which need it most, though they are relatively quick to implement.

Help-to-Buy, Staycation and Deadweight

The Help-to-Buy scheme will be enhanced. The level of support available to first-time buyers will be increased to €30,000, up from €20,000, or 10 per cent of the purchase price of the new home/self-build property. This will run to the end of the year.

The Parliamentary Budget Office found the scheme was fraught with deadweight:

‘41% [of recipients) had a loan to value ratio of less than 85%, which means that they already had the 10% deposit requirement and didn’t need the scheme to meet the macro-prudential rules. This could be seen as a deadweight loss.’

Dominic Coyle makes this excellent point:

‘What housing needs is more supply, especially of affordable homes, not further tinkering to sustain prices that are already beyond the reach of so many aspiring homeowners.’

The only good thing about this measure is that it will only cost €18 million. Hopefully, it won’t be continued.

And what about the Stay and Spend Incentive? Taxpayers spending over €625 on accommodation, food and non-alcoholic drinks between October and April can get up to €125 back through a tax credit.

How much of this money would have been spent anyway? How much new spending will it induce (especially since people won’t get the credit until 2022)? How much of this will actually stimulate anything?

Public Investment

The stimulus plan envisages €500 million in accelerated capital projects covering schools, public transport, heritage and tourism, fishery and on-farm renewable energy investments, peatlands rehabilitation, local authority housing, and town and village renewal.

The July plan goes further:

‘The Government is also committing to increasing capital expenditure in 2021 to €9.1 billion. This level of capital expenditure represents an increase of almost €1 billion or 12 percent on 2020 levels.’

This sounds impressive – an additional €1 billion for capital spending. But is it additional?

While we don’t have the numbers, capital spending would have slowed in 2020 due to the pandemic crisis. So the Government is correct in saying that their projection represents an increase over this year.

However, it doesn’t represent an increase over what was already projected – in last year’s budget and this year’s Stability Programme Update.

A smaller example of this is the provision of €15 million for peatlands rehabilitation, an important element of the overall Just Transition strategy. However, in Budget 2020 reference was made to €5 million to be spent from carbon tax revenues and a reference to €7 million under the Culture, Heritage and the Gaeltacht portfolio.

Does the €15 million announced include these already committed allocations or are they additional to them?

[Note: some enterprising TD or political party might consider exploring this whole area of additionality and re-announcing previously announced measures through Parliamentary Questions and research].

The Road Not Taken

TASC’s Shana Cohen noted:

‘This first economic litmus test for this new Government fails to impress because it does not give the sense that the new FF-FG-Green alliance is prepared to think big enough to move beyond Covid-19 to a new normal that is predicated on equality, and – more profoundly – hope for the future. Instead of generating jobs for the sake of employment numbers, the stimulus package could have hinged on linking job creation to wellbeing, climate change and economic democracy.’

One could reasonably argue that the urgency of the situation required immediate action without the luxury of longer-term thinking. Conditionalities can take time to devise and implement. Nonetheless, while a government in the middle of crisis might not be able to work out the vision thing in the short term, it could give some signals as to where it might be heading.

Take for instance the biggest subsidy – the Employment Wage Support Scheme (which replaces the Temporary Wage Subsidy Scheme). This will cost €1.9 billion, or over a third of the entire stimulus package.

Under this scheme firms which have suffered a 30 percent decline in turnover will receive a flat-rate subsidy of up to €203 or €151 per employee, per week, depending on the employee’s gross weekly pay. This is a significant subsidy.

The government could have established sectoral oversight committees comprising the relevant stakeholders in the sector: employees, employers and civil society organisations. This was proposed by the SIPTU trade union.

These committees could have monitored the roll-out and implementation of the scheme, reported back on any sharp practices, and put forward policies to improve administration of the scheme.

This would have signaled that the government was moving towards a stakeholder model which could eventually develop the type of conditionalities that Shana Cohen referred to above.

Alas, there was no proposal, mention, or even hint that the Government was looking down this road.

* * *

We have programmes which are not delivering the headline amount of stimulus as is claimed (PUP), are administratively simple to introduce speedily but not very well targeted (VAT cut and rates waiver), spending targets which are just old targets (public investment), and are full of deadweight (help-to-buy, staycation incentive).

All told, these schemes make up the vast majority of the stimulus spending. Given this, will it be enough or will we have to return to the stimulus table?

One good thing: the Government can revisit these and other missed opportunities in the roll-out of the National Economic Plan and associated sectoral initiatives in Budget 2021.

The jury is still out.

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: Dara Calleary (left) newly appointed Minister for Agriculture, Food and the Marine at his investiture, with, sitting from left: President Michael D. Higgins and Taoiseach Micheál Martin TD at Áras an Uachtaráin last week; Michael Taft

With Dara Calleary replacing Barry Cowen, Mayo finally has a Minister. This should assuage The Western People. When the Government initially ignored Mayo and all other Connaught counties, the paper’s leader writer became very exercised:

‘The new Cabinet is the ultimate and final betrayal of the people of the West, the people of rural Ireland, the people who get up early and go to bed late just to keep the lights on in towns and villages buffeted by one economic storm after another since the turn of this millennium.

. Yesterday in the National Convention Centre in Dublin, the triumvirate of Micheál Martin, Leo Varadkar and Eamon Ryan unveiled a Cabinet that Oliver Cromwell would have been proud to call his own. To hell or to Connacht, indeed.’

To what extent a single Minister can address this complaint is questionable. But there is logic to it.  Would a Cabinet only made up of urbanites be fully sensitive to the issues faced by rural dwellers?

Would a Cabinet only made up of men be fully sensitive to the issues faced by women? Would a Cabinet comprising only business owners be fully sensitive to workers’ issues?

But it goes further than being regionally, gender and class- balanced. We have a system whereby Ministers are expected to ‘deliver’ for their constituencies. As Diarmuid Ferriter pointed out when critiquing the Western People’s claim of victimisation:

‘What was really at play this week had nothing to do with a pure, downtrodden people but with what the political scientist Jane Suiter referred to as “Chieftains Delivering” . . . : whereby “individual, powerful ministers in charge of the purse strings direct funds to their own constituencies” ‘.

So now Chieftain-Minister Calleary will be expected to go to Dublin and bring economic dividends back home.

And therein lays the problem for the people of Mayo, Connaught and the country as a whole. The issue isn’t access to power through individuals, but lack of direct access to power. And this lack of power can be seen in the ultra-weak status of local government in Ireland.

Ireland’s weak local government system has been well documented. A good summary is provided by Dr. Mary Murphy of Maynooth University in a paper entitled ‘‘Democracy Works if You Let It’ ’ written for the trade union campaign ‘More Power to You’. According to Dr. Murphy:

‘The international index of self-autonomy uses seven categories (legal protection, organisational autonomy, and institutional depth, fiscal autonomy, financial selfreliance, borrowing autonomy, and financial transfer system, and administrative supervision, central or regional access) to assess self-autonomy. Over 1990 to 2015 Ireland declined from the third least powerful local authority to the weakest across all Europe [among 39 countries surveyed].’

Another way of looking at local government power is to compare the level of expenditure at local government level. Surprise – Ireland lies near the bottom.

[Note: this excludes Belgium, Germany, Spain and Austria which have an extra sub-central tier in addition to local government; that is, regional or state governments. However, even with this regional structure, local government in these four countries have spending levels far above Irish levels.]

Denmark has the most fiscally decentralised system, with nearly two-thirds of total public spending occurring at local level while Sweden comes in at half.

Ireland on the other hand lies at the other end, with less than 10 per cent of public spending being spent by local authorities. Irish local spending would have to increase by three times their current level to reach the EU average.

In many countries, health and education are delivered at local level – something that doesn’t exist in Ireland. Given this structural feature, there is an argument for excluding these spending categories. When this is done, EU local government spending falls to 23.1 percent while Irish spending increases to 12.0 percent.

Excluding health and education spending, Irish local spending would have to nearly double to reach the EU average.

Let’s return to Mayo. Mayo County Council adopted a budget for 2020 that provides for €147.5 million in spending, funded by state grants, receipts from goods and services (council rents, pay & display, planning fees, etc.), recoupment payments (e.g. work carried out on behalf of Irish Water), commercial rates and local property tax.

If Mayo spent at an average EU level (excluding health and education), its budget would nearly double – rising from €147.5 million to €284.4 million; or an additional €137 million.

What could it spend it on?

* Mayo could provide affordable childcare (fees of less than €60 per week) through the 60 community childcare facilities – and do this with enhanced wages and working conditions.

* Mayo has a higher proportion of older people than the national average (7.3 percent are over 75 against a national average of 5.5 percent). With nearly 10,000 people over 75 years, Mayo could directly employ carers in the community to supplement HSE activity.

* Mayo could launch a business start-up and expansion programme for SMEs in the market economy to grow competitive commercial enterprises. This could be done through equity stakes so that Mayo would benefit when businesses are successful (and help defray the costs for businesses that aren’t). Equity stakes of up to €500,000 could see a minimum of 20 businesses each year getting support.

* Mayo could launch its own public transport company that would link up urban and rural areas with low fares and frequent scheduling.

There are a number of commercial and social activities Mayo County Council could engage in, including issuing bonds to pay for major once-off infrastructural projects.

It could also launch a programme of participatory budgeting at town and village level. For instance, based on a crude population count, Castlebar could expect an additional €14 million spending

Mayo could spend at the same level as the EU. The Council could conduct a series of community meetings, on-line surveys, focus groups, etc. to empower the people of Castlebar to decide how some of that money would be spent – on public amenities, social services, business supports, infrastructural investments, etc.

In short, what the people of Mayo – and all people throughout the country – need is more power and resources at local level, and more ability to influence decisions that have a direct impact on their lives.

They don’t need brokers (though it always helps to have friends in high places). They need greater democracy and greater localisation.

That’s a campaign that should be taken up throughout the country. Starting in Mayo.

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 at left: Taoiseach Micheál Martin; Tanaiste Leo Varadkar; and Minister for Finance Paschal Donohoe following Minister Donohoe’s election as President of the Eurogroup last week; Michael Taft

The Government will be announcing its stimulus plan in the next few days. This will continue with the announcement of sectoral initiatives under the National Economic Plan to be announced in Budget 2021. We are in for weeks of doling out the dosh.

So here’s a wishlist – for stimulating the economy, giving people a voice in how we build a more socially-accountable economy while protecting households from poverty.

Some of these proposals will take a while to get off the ground (so best to start now). Some of these proposals might not work so best to continually evaluate and reform). But people and businesses are hurting.

Youth Unemployment

Youth unemployment could be as high as 45 percent, with nearly 150,000 under 24s now unemployed. Grants and incentives to businesses to hire young people might help in some respects.

But such grants do not create new jobs; they just prioritise certain categories – which mean non-young-people get pushed back in the queue. The state needs to create jobs by directly employing young people.

A specifically designed ‘employer of last resort’ programme could be rolled out to provide for up to 25,000 – 50,000 jobs in time (here is how it can be implemented). Young people would be employed in non-profit civil society organisations and public agencies (local government, etc.) on full-time, two to three year contracts. These jobs would be integrated into training and education schemes.

Only the state has the ability to mobilise the resources to put people back to work while we re-structure the economy away from low value-added, low-pay activity to higher value- added, higher paid work.

Continue the Pandemic Supports

The Temporary Wage Subsidy Scheme (TWSS) should be continued on a sectoral basis into next year. Clearly, hospitality and non-food retail should be targeted along with other sectors. Enterprises outside the targeted sectors could also benefit on a case-by-case basis with clear benchmarks (reduced turnover, etc.).

This should be combined with continuing the Pandemic Unemployment Payment and the elevated Illness Benefit – until at least the end of the year when new, enhanced, income-related social protection payments could be introduced courtesy of Budget 2021.

Helping SMEs

Business groups are queuing up for subsidies to re-open and stay open. This is understandabl, given that many sectors will continue to suffer reduced demand owing to the health crisis (customer-facing businesses, sectors reliant on discretionary spending).

The Central Bank Governor put the cat among the proverbial pigeons, stating that tax breaks such as VAT cuts may not be the best way forward given that they are not targeted. I’d be inclined to agree.

A better way would be to focus on those businesses that have suffered a significant decline in turnover. The 25 percent loss of turnover that is used for eligibility for the TWSS could be used.

To create efficiencies and a new revenue stream for the state, grants could be based on the actual amount of turnover loss or the number of employees (in full-time equivalents). Subsidies could be based on either zero-percent loans or grants that are repaid through the tax system.

The latter would probably be more beneficial for firms, as they would only start repaying the loan when they have turned a profit; i.e. repay according to their means. Under a loan, you have to pay regardless of your ability to meet the payment.

If a tax-based grant system were used, the Government could apply a temporary VAT cut (one to two years) with the difference between that and the normal VAT rate being treated as a grant which would be repayable through the tax system.

Workers’ Voice

Any sectoral initiatives, such as continuing the TWSS as suggested above or sector-based grants, should be accompanied by the establishment of sectoral committees comprising representatives of employees, employers, government and other stakeholders.

The last government established a Tourism Recovery Taskforce to propose measures to support tourism. This could have been useful but the Government hobbled the taskforce from the start by omitting to appoint employee representatives – the biggest number of stakeholders in the sector.

Sectoral committees would oversee the implantation of support schemes; draw up protocols (wages, working conditions, health & safety); report problems, etc.

In short, the sectoral committee would be a communication conduit from the ground to the policy makers and serve as early warning systems. A key function would be to ensure that public supports and subsidies benefit all stakeholders.

Household Supports

While the debate has been focused on business supports and how to wind down the pandemic payments, what about households? Many will be falling into debt, or more debt.

Many will be struggling, postponing key household repairs or purchases. Prior to the crisis, nearly a third of households couldn’t afford an unexpected expense; that level is likely to rise with the Covid-19 crisis.

For instance, according to the St. Vincent de Paul, quoting a Social Finance Foundation research paper:

‘ . . . there are an estimated 330,000 customers of moneylenders in Ireland, with an average loan size of €566. The majority of customers are female, in the lower socio-economic group and between 35 and 54 years of age. Most commonly loans are offered over 9 months at an APR of 125%.’

So why not offer a scheme (either a new one or retooling existing ones), operated though the credit unions or the Money Advisory Budgeting Service, which would roll up all such loans, redeem them and put people on a more sustainable interest rate/repayment schedule?

Such a scheme could be expanded to households facing rent, mortgage and credit card arrears. There would need to be provisions to prevent moral hazard.

This could be complemented by an extension of the rent freeze and moratorium on evictions. These steps, along with continuing pandemic payments until new social protection payments are introduced, should help households which are waiting for a return to full employment.

Arbitration Panels

The Central Bank Governor sent another cat into the pigeon nest, calling on insurance companies to be more ‘consumer-centric’ when it comes to paying out on business interruption claims.

He identified three situations: contracts that didn’t have a business interruption clause, those that did, and those where the position was uncertain.

There’s a very easy way to resolve this: establish a binding arbitration panel through which businesses could pursue their claims, avoiding costly and length court proceedings.

The panel could rule that insurance companies must honour the claim in full (where it is obvious) or in part (where the situation is uncertain). Similar arbitration panels could be established for commercial leases though which tenants could make a claim for relief; ditto for residential mortgages.

These shouldn’t be treated as strictly private contracts. Society has a stake in these claims as they impact on employment, incomes and economic growth. Therefore, there is a legitimate public interest in resolutions that serve the social good.

New Asset Tax

The Government could announce that it will be introducing a net asset tax in Budget 2021 and set up a process of consultation on the best design. A net asset tax, or wealth tax, would impact on the highest income groups and to ensure that everyone contributes to crisis resolution.

In any event, the super-rich seem to be warming to the idea. 88 billionaires wrote a letter to their respective governments calling for higher taxes on themselves:

‘No, we are not the ones caring for the sick in intensive care wards. We are not driving the ambulances that will bring the ill to hospitals. We are not restocking grocery store shelves or delivering food door to door. But we do have money, lots of it. Money that is desperately needed now and will continue to be needed in the years ahead, as our world recovers from this crisis.

‘So please. Tax us. Tax us. Tax us. It is the right choice. It is the only choice.’

* * * *

That’s my wish list: getting young people back to work, continuing supports, rolling out repayable grants, giving workers a say, supporting households, arbitration panels to help the productive economy, and a new asset tax.

There will be other and better ideas. So it’s important to keep up this conversation. Because while there will be an announcement next week of Government measures, this will only be the start, with the National Economic Plan and Budget 2021 coming in the next few months.

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

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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:

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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.

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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.

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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.

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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.

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