Author Archives: Michael Taft

From top: ATM in central Dublin; Michael Taft

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

Let’s look at some of the relevant indicators.

Domestic Demand

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

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

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

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

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

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

Purchasing Manager’s Indexes

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

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

Manufacturing PMI

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

Services PMI

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

Employment

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

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

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

Looking Under the Hood

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

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

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

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

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

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

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

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

Rollingnews

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

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

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

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

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

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

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

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

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

But what would the economic impact be of rising wages?

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

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

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

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

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

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

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

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

What difference does this make?

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

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

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

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

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

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

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

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

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

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

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

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

Rollingnews

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

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

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

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

Different Ways of Categorising Spending

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

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

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

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

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

What Measurement?

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

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

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

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

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

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

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

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

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

Demographics

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

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

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

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

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

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

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

Fiscal Capacity

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

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

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

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

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

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

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

Rollingnews

From top: RTÉ Director General Dee Forbes and Minister for Finance Paschal Donohoe; Michael Taft

What is the Government doing with the TV licence? They have raised the prospect of charging computers and tablets while acknowledging they have no idea how to do it

They have talked about charging households, raising the memories of that pathetic and wholly unnecessary Household Charge. They have raised a number of questions to which they have no answers for.

Raising the prospect of a ‘device-independent’ charge and basing it on households is nothing new. It was first mooted back in 2013. Back then I put forward this suggestion which I’m presenting again.

In 2018, €221 million was collected in TV licences. Of this amount, 86 percent, or €189 million, goes to RTÉ.

The Broadcasting Fund (which funds independent productions and is administered by the Broadcasting Authority) and An Post (for the cost of collecting the licence fees) account for 14 percent of the licence revenue.

The licence fee is currently €160. The last increase was in 2008, when the fee went up by €2. There is an estimated 12.8 percent evasion rate. If there was 100 percent compliance, revenue would increase by €32.4 million. Or you could reduce the TV license fee by €20 per year.

The TV licence is, for all practical purposes, a charge on households. Over 95 percent of households own a TV, with 54 percent owning two TV sets or more. There is little distinction between high and low incomes, with an ownership rate of 97 percent at the higher end and 94 percent at the lower end.

Being a flat-rate charge, however, the TV licence is regressive. The Household Budget Survey provides data on weekly expenditure on the TV licence by income deciles.

Unsurprisingly, the lowest 10 percent income group pays the most when measured as a percentage of disposable income – eight times the amount paid by the top 10 percent.

The Minister has said he wants a new broadcasting charge that is ‘fair and sustainable’. I would add another objective: efficiency.

So is there a way of administering a new charge that would reduce evasion and collection costs, capture new developments in non-TV devices, and be fairer in terms of people’s ability to pay?

Yes. Administer the new broadcasting charge as a levy on all income.

An income levy would certainly be fairer – especially if it was levied on all income: wages, self-employed income, capital income and social transfers.

Based on the Household Budget Survey, a levy of 0.25 percent would be needed to raise the same revenue. This is fractional.

Actually, it would be less because this calculation assumes that households generate all license revenue. Businesses also pay the TV license fee. However, I don’t have a revenue breakdown between households and businesses (if anyone does, please send it along). Such a breakdown would result in an even lower levy on household income.

The key is that all income – including capital income – be subject to the levy. This would keep the rate low and promote equity.

Some might ask whether levying the income of social protection recipients is fair. Social protection recipients already pay the TV licence fee and because it is flat-rate it is highly regressive (as shown in the above chart).

A levy on income would actually reduce the cost for average and low income households.

The lowest 60 percent of households would benefit from a switch to an income levy. This is an addition to the current exemptions from the license fee for recipients of the Household Benefits Package.

The top income decile would see an increase of €134 per year, which wouldn’t be too onerous as it represents 0.1 percent of income in the top decile.

And as mentioned above, the levy of 0.25 percent would be less once business TV licence revenue is factored in; especially if some of the measures mentioned here are introduced.

There are other benefits.

It would help ensure 100 percent compliance. Taxing all income at source (by the Revenue Commissioners and Department of Social Protection) would reduce the opportunities for evasion.

Expenditure that now goes on licence collection, monitoring and compliance could then be re-directed into the Broadcasting Fund which could support more independent productions and even independent on-line journalism.

Revenue would automatically rise as aggregate income increases without the need for a Government-sanctioned increase in the TV licence fee.

One problem would be the negative impact on post offices and An Post. The Irish Postmasters’ Union said the licence fee is worth €3 million each year, and claims that if it is lost it would place hundreds of Post Offices at risk of closoure.

Post offices are facing greater problems than just the loss of revenue from licence fee activity. However, to ensure that post offices don’t come under greater pressure – and to keep them going until new and innovative policies are put in place to ensure their survival – a small amount from the levy could continue to go to post offices.

This is just a suggestion. There may be downsides that would make this income levy approach unworkable or undesirable.

However, on a range of issues we need to start thinking outside the ‘this-is-how-we-have-always-done-it’ box and come up with more equitable and efficient solutions.

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; Taoiseach Leo Varadkar and Minister for Social Protection Regina Doherty; Michael Taft

Give everyone €75 a week. All adults regardless of whether they are in employment or not, regardless of their income, irrespective of their household circumstances.

This is the pathway to a more rational and efficient social protection and income tax system, to reducing in-work poverty and precariousness, to boosting living standards and to a more efficient productive economy.

In one respect, there is nothing new in this proposal. We already spend a lot on cash transfers to households: billions through the social protection system, tax expenditures (i.e. tax reliefs, allowances and exemptions) and targeted supports such as education maintenance grants.

The €75-per-week proposal is not in addition to these payments. Rather, it is a reform intended to create a more progressive and efficient transfer system – especially for those in low-paid work.

This is not a Basic Income proposal but it does borrow certain principles; namely, the unconditionallity (everyone gets the €75). However, unlike Basic Income, it does not cover all the basics needed for an adequate income.

For instance, the Vincentians estimate the minimum essential living standard for a single person in urban areas to be €245 per week (higher in rural areas due to the need for a car). €75 is a long way from that.

Most of the benefit of this proposal would go to the low-paid or those below the income tax threshold. For those fully in the income tax net, the state pays a single PAYE employee €3,300 a year in tax credits (€1,650 personal credit, €1,650 PAYE credit). This is a flat-rate payment, regardless of earnings. In that sense it is progressive.

However, there is a flaw in the system.

Below the income tax threshold, the lower your income, the less subsidy you get.

By making the payment directly, all income groups at work would receive the same payment. In that sense, the €75 per week (or €3,900 per year) is merely an extension of the personal tax credits to everyone in the workforce.

The €75 a week would also be paid to those reliant on social protection payments. However, it would be a matter of policy whether this would increase a recipient’s income.

The new universal €75 payment could be offset by a similar reduction in the social protection rate. For instance, a Jobseekers’ Assistance recipient could receive the guaranteed €75, and a social protection rate of €128, leaving them with €203 per week – the same amount they receive today.

However, this provide an opportunity to increase social protection payments towards the Minimum Essential Standard of Living which the Minister for Social Protection recently discussed.

Estimating the cost is difficult as we don’t have an accessible database of earnings for those at work. Revenue Commissioners data includes those on occupational pensions.

Further, there would be complex cost estimates for couples with both earning, couples with one earner, and the interaction between social protection and tax for temporary, casual or part-time workers.

Given that, let’s see if we can come up with a (big) ballpark figure for 2016, the last year we have full data for.

There were 2.1 billion people at work. A payment of €75 per week (€3,900 a year) would cost approximately €8.1 billion.

There were about 450,000 adult dependents (married persons’ or civil partners’ tax credit). Extending the €75 per week to this group would cost €1.8 billion.

The total cost would be €9.9 billion. This would be recouped through the abolition of personal tax credits.

Total savings would be €8 billion. Therefore, the net cost would be €1.9 billion. The Government has already set aside €3 billion over the next five years for tax cuts.

This would be a far more progressive approach – and less expensive.

The abolition of the tax credits would mean that workers would receive €75 per week, but after that all income from work would be taxed. For example, someone earning €10,000 a year pays no tax.

Under this proposal, they would pay €2,000 in tax but would receive €3,900 – leaving a net gain of €1,900 per year, or €36 per week. This would mean a sizeable 19 percent increase in income.

The above does not take into account any net gains for those on social protection payments. However, moving towards the Minimum Essential Standard of Living would still not exceed the costs of the Government’s proposed tax cuts.

What are the advantages to this system?

First, most of the benefits would go to the low-paid, or those below the income tax threshold. Not only would this boost living standards and reduce inequality, it would also help in our Brexit-fevered times. These income groups would be likely to spend almost all the additional income they receive, helping to maintain consumer demand.

Second, it could help reduce some of the complexities that occur when social protection payments meet working income (impacting on the low-paid).

For instance, means-tested unemployment payments can vary depending on how many days work you might get; some of this complexity (and reliance) could be reduced if you receive a weekly guaranteed income.

Third, depending on the impact of such a guaranteed income, it could be expanded into a more full-blown Basic Income. The point is that we would have some evidence on which to base any decision to increase the guaranteed income.

This would not revolutionise the tax/welfare system – but it could make it better. It is only one brick. We need several more. But it’s something we can start in the upcoming budget.

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

We are getting a lot of frighten-the-horses commentary about our debt: ‘mountain of debt’, €42,000 of debt per every man, woman and child; one commentator referred to our debt as ‘scarifying’.

Should we be concerned about our debt? Yes. But we need to put it in context to avoid over-reactions and missed opportunities.

It has been a wild ride, debt-speaking.

Irish debt levels fell from 86 percent of GNI* in 1995 to 28 percent in 2006. Then it jumped to a massive 166 percent in 2012 only to fall again to 102 percent in 2019.

The trajectory of Eurozone debt, however, was more boring. This year Irish debt will be 16 percentage points above the Eurozone average.

There’s one interesting caveat: Irish debt levels only exceed Eurozone levels because of our bank debt.

The Irish bailout of financial institutions (which stands at €47.4 billion in total in 2018) increased the debt by 30 percent, measured as a percentage of GNI*.

Actually, this understates the impact as we suffered higher interest payments as a result of the bail-out. Were it not for bailing out senior creditors, Irish debt would be below the Eurozone average – even after a savage crash and recession.

This is cold comfort, however. Regardless of the source, regardless of the justice (and with the bank debt on government books, there is little justice), debt is debt and we are liable for it.

We will be carrying this burden for a long time. However, what it does point to is that the economy itself is capable of quick recovery in debt levels.

For instance, in the last seven years Irish debt has fallen by 64 percentage points. No other Eurozone country can match that reduction. And while some have complained that we have not significantly reduced deficit levels since 2015, the same cannot be said for debt levels – which have fallen by 23 percentage points.

Let’s get one thing out of the way. Much commentary focuses on the actual amount of debt – the ‘scarifying’ €200 billion debt. There are complaints that this has not come down since 2014. This is not the key metric, however. Increasing growth reduces the burden of the debt.

For instance, between 1995 and 2007, debt fell dramatically – from 86 percent to 28 percent of GNI*. However, during this same period the actual amount of debt increased by 14 percent – from €41 billion to €47 billion.

A similar trend occurred at Eurozone level – falling debt ratio while the actual debt increased.

Looking forward, the Government is projecting debt will fall from over 100 percent of GNI* to less than 85 percent by 2023. However, there are two caveats: the Fiscal Council’s warning that Government projections are unreliable; and Brexit.

While it is difficult to correct for unreliable projections, we have some projections for Brexit. The ESRI and the Central Bank have both modelled the potential impact of a ‘hard’ or ‘disorderly’ Brexit on growth and debt levels, with the Central Bank projections being the more pessimistic.

This graph – taken from the Fiscal Council’s recent fiscal assessment report – shows that the economy will avoid a recession, though the more pessimistic Central Bank projection shows growth crashing towards zero. Further, both projections show the economy bouncing back in a relatively short period, even higher than the baseline growth.

However, debt levels will take a hit compared to current projections – the baseline.

Under the ESRI projections, debt will top out in the first year of a hard Brexit and then start to decline. The Central Bank projections, however, are bleaker with debt still rising in 2023.

However, based on the trajectory of the deficit, even under the Central Bank projections, debt will start to fall after 2023.

What should be the response? First, it shouldn’t be what the Fiscal Council is tentatively suggesting:

‘A question worth considering is what level of adjustment to the structural primary balance would be required to stabilise the debt ratio. . . . Based on the [Fiscal Feedback] model, this could be achieved with a front-loaded adjustment of almost €4 billion in 2020 or with a cumulative adjustment of €5 billion phased evenly over the three years 2020–2022.’

This puts us back into pro-cyclical policy territory – taking money out of an economy that is already losing money.

The Government seems set to let the deficit rise without any fiscal response. This would be done in the expectation that the Brexit hit is temporary and that the economy will resume its upward trajectory. This is a more responsible approach.

But we can go further.

First, strengthen the economy’s ability to respond to the crisis by introducing pay-related unemployment benefit in the next budget. If jobs are lost (and this is highly likely) then, at least, ensure that affected households can retain most of their purchasing power. This would help maintain consumer demand and, so, keep businesses in business.

Second, introduce a net assets tax. This would have little impact on demand but would raise revenue to protect the deficit/debt line.

Third, establish sectoral committees across those sectors likely to be hit (e.g. food manufacturing and other UK-facing sectors) with employer and employee representatives.

Special measures for badly hit enterprises should be conditional on support from both groups – but especially employees. This, in effect, would establish sectoral collective bargaining and would ensure that everyone who is affected has a role in developing and overseeing the  response.

Fourth, proceed with the carbon tax but return the revenue to households. A per capita payment would benefit average-to-low households and redistribute from the higher income groups. Not only would this be a tool for reducing inequality, it would boost demand during the downturn.

Fifth, take €2 to €4 billion from the Government’s substantial cash balances and invest it on a once-off basis into public housing construction – especially cost rental.

This would be all the more necessary if the Central Bank’s more pessimistic projections come to pass.

As well as addressing the housing emergency, this will create employment, raise revenue and reduce unemployment costs, and support the productive economy with lower rents.

And it wouldn’t impact on the debt (cash balances have already been borrowed).

And, finally, ditch the €3 billion tax-cut promise. Even in the best of times this would be folly; when the economy is suffering from a slow-down, this would be reckless.

Yes, we should be concerned about the debt. Therefore, we should be concerned to avoid pro-cyclical responses which will only embed high debt levels in the future. We need to avoid reactive and self-defeating policies.

Prudence knows no fear.

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

Leah Farrell/ Rollingnews

 

From top: Minister for Employment Affairs and Social Protection, Regina Doherty (right), with Minister for Finance and Public Expenditure and Reform, Paschal Donohoe, is seeking to provide a minimum income for all: Michael Taft

The Minister for Social Protection, Regina Doherty, wants to guarantee everyone an adequate minimum income. Good.

This would entail substantial redistribution to those on the lowest incomes. Fine.

Hopefully she can convince her Cabinet colleagues. If she can, great.

According to The Irish Times:

‘Signalling an intention to end traditional across-the-board welfare increases on budget day, the Minister said she wanted a far more targeted approach to guarantee a minimum basic income for everyone . . . Ms Doherty argued that the welfare system should guarantee a minimum essential standard of living (MESL) for everyone.’

Obviously the Minister has been poring over the Vincentian Partnership for Social Justice’s new release of their Minimum Essential Standard of Living (MESL), a detailed survey of what constitutes an income floor.

The MESL is the minimum needed to live and partake in society, meeting the physical, psychological and social needs of individuals and households. It calculates the actual weekly cost of over 2,000 items (goods and services) needed to enable a socially acceptable minimum standard of living.

Much attention has been devoted to the Minister’s discussion of the gap between the living standards of pensioners in different parts of the country, but this misses the main point (I’ll return to the pensioners below).

The Minister’s ambition would greatly expand the social protection budget.

Let’s look at how much additional expenditure might be needed. The VPSJ lists 7 household types (of which two are pensioners), sub-divided into urban and rural.

They then estimate the MESL required (the minimum level of expenditure), calculate the social protection income and show the ‘adequacy gap’.

If the gap is negative, then that is the increase needed to reach the MESL.

Out of the 10 household types, only two have a minimum essential standard of living – none in the rural areas.

For instance, a couple with two children (in primary and secondary school) in an urban area would need a €61 weekly increase to reach the minimum essential income (or €3,200 annually); in a rural area they would need an additional €112 per week (or €5,700 annually).

A lone parent with two children, similarly in primary and secondary school, in a rural area would need an additional €142 per week (or €7,400 annually).

These are massive sums. The Minister said she wants to move away from the €5 weekly across-the-board increase to one that targets household types in order to bring them up the MESL.

This would entail significant increases for most categories.

An across-the-board increase of €5 would mean a 2.5 percent increase. Compare that to the percentages needed to bring households up to a minimum living standard.

The Minister referred to ‘targeting’ households. If that is her approach, then the Government would be targeting just about everyone.

Even the two household types with an adequate income – they’re not overly adequate. For an urban couple or single parent with two children in pre-primary and primary school – they are only 2 and 1 percent above the minimum living standard level respectively.

Another aspect that comes through in these household types is the difference between costs in the urban and rural areas. This was especially highlighted by the Minister in her references to state pensions.

Again, the Irish Times reports:

‘It is not “fair” that some older people receive State pensions that are more than they need while others on the same amount live in poverty, Minister for Social Protection Regina Doherty has said.’

Let’s look at this ‘unfairness’.

Pensioners in the urban areas have incomes above the minimum essential though for a single pensioner, but not much above.

For those living in rural areas, single pensioners are below the minimum essential living standard while couples lag considerably behind their urban counterparts. The Minister homed in on this disparity.

‘The same payments for similar households in different parts of Ireland may not be appropriate,’ she said, adding that political and public “buy in” would be needed to explain to the “lady in Donegal” why she was going to get “more, or less” than “the lady somewhere else” in the State.’

Clearly, all rural households are disadvantaged. Is that because ‘costs’ are higher in the rural areas? Not really, not in the plural.

There is only one significant cost difference.

The overall cost difference is €73 weekly of which transport makes up 72 percent. VPSJ assigns no transport cost in urban areas since there are easily accessible public transport systems (with the Free Travel scheme).

These systems do not exist in the rural areas. If we exclude transport, the difference falls to less than €20; or 6 percent higher costs in the rural areas – a gap but not a significant one.

The Minister appears to be seeking to equalise treatment among pensioners. The simplest way is to provide a €50 supplement for those with a car in the rural areas. This would significantly close the gap.

Distinguishing between urban and rural areas would not be new. As late as 1988, rural recipients of basic social protection payments received 4 percent less than their urban counterparts – probably based on an old logic that people in rural areas could provide food from their own plots.

What would be the cost of bringing all households up to a minimum essential living standard?

Let’s assume a 20 percent increase. Excluding pensioners, this would cost €1.4 billion (using Social Justice Ireland’s calculation for a 4.4 percent increase in 2020). That is significant but feasible.

This doesn’t include costs for all household types. For instance, it is reasonable to assume that people with a disability or long-term illness would have additional expenditures above average households.

There are still the cuts to young people’s social protection benefits that are waiting to be restored. When all the myriad household types are accounted for, the social protection budget may need to expand even further.

One can’t help speculate whether the Minister is seeking to challenge the Taoiseach’s proposed tax cut, which would cost €3 billion over the next five. If only half of this were assigned to social protection benefits, the Minister’s ambition could be fulfilled.

However it is to be paid for, the goal of raising everyone up to the Minimum Expenditure Standard of Living would be a great stride towards eliminating poverty and redistributing income in society. If that is the Minister’s intention, she should be fully supported.

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

Leah Farrell/ Rollingnews

From top: Ajai Chopra (right), then Deputy Director of the International Monetary Fund (IMF) European Department, and an associate on their way to a meeting at the Department of Finance to discuss an EU/IMF emergency loan, November 2010; Michael Taft

Economic historians will write of the period we are just emerging from as the ‘lost decade’. When the crash hit, jobs were lost, incomes fell, and government spending was slashed.

It is only now – 10 years or so after the event – we have made up that last ground. Now we have low levels of unemployment, rising income and warnings that the government is increasing spending too fast.

But as we emerge from out of the shadow of the crash, what does the world around us look like?

Well, if Eurostat is anything to go by, we still lag other high-income EU countries in key living standard categories.

Living standards is notoriously difficult to measure. However, Eurostat makes a stab at it with their ‘actual individual consumption’ indicator.This combines personal consumption (consumer spending) and government spending on behalf of households.

This latter is important. If one just took consumer spending as the measure of living standards, a number of anomalies could arise.

For instance, if an Irish household spends €150 per week on childcare while a German household spends only €50, a consumer spending-only measurement would suggest the Irish household had a higher ‘living standard’.

However, under the actual individual consumption (AIC) measurement, the amount of state subsidy on childcare which the household ‘consumes’ is also factored in.

That makes it a superior measurement, especially as it factors in prices for international comparison purposes.

Under these living standard measurements – AIC and consumer spending – how do we fare in 2018?

Factoring in inflation we find:

Per capita consumer spending is still 2.1 percent below the peak in 2008

Per capita AIC is still 3.1 percent below the peak in 2009

Hopefully, this year will see us surpassing pre-crash peaks.

Except just as we are emerging from a lost decade we have warnings of over-heating in the economy.

Question: how could we get to a situation where, after a decade, all we do is return to the point at which we started and, yet, we’re in danger of over-heating?

Some might say that our previous peak was unsustainable. Without getting into that historical argument, this is hardly the explanation today.

Even if we concede the argument that consumer spending and AIC (which includes government spending on behalf of households) was unsustainable in 2008, that argument shouldn’t apply today.

Both consumer spending and AIC are significantly below 2008 levels as a percentage of GNI*; yet now we are being warned that we are at capacity (just like a decade ago).

So at this point of full capacity, how does Ireland fare compared to other high-income EU countries, our peer group?

We are far below our peer group average in this living standard measurement. We would have to increase consumer and government spending on households by over 20 percent to reach the average.

When we disentangle consumer spending and government spending on households we find the gap remains somewhat the same.

Both consumer spending and government spending on households are well below our peer-group average, with Ireland coming in at the bottom of the table in both.

Consumer spending would have to increase by 16 percent and government spending on households would have to increase by 40 percent just to reach the average.

So after a lost decade, when we have only returned to pre-crash levels, when our living standards are still well below other high-income EU countries, we have hit a capacity wall suggests the problem is deeper than just fiscal policy (though that is a contributor). It suggests that there is a structural problem.

Now consider the impact of even a ‘managed Brexit’ (?) never mind a no-deal Brexit. We would not only stall, we could start falling backwards.

After a lost decade, we may still be lost.

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

Sam Boal/ Rollingnews

At top. from left: Minister for Finance,Paschal O Donohue , Taoiseach Leo Varadkar and Minister for Communications, Climate Action and the Environment Richard Bruton; Michael Taft

We are now getting crash courses in pro-cyclical and counter-cyclical fiscal strategies. This has the potential to be more mind-numbing than discussion of fiscal space. But at the risk of numbed minds let’s jump into this by first defining these terms.

Pro-cyclical means a fiscal policy that accelerates either the upward or downward trajectory of the economy.

We have two recent examples:

Prior to the crash, Fianna Fail-led governments accelerated the economy and the property market through tax cuts and spending increases that resulted in unsustainable growth. They were feeding an economy to the point of gluttony.

Following the crash, Fianna Fail and Fine Gael-led governments accelerated the decline of the economy through tax increases and spending cuts, taking money out of a cash-starved economy.

Successive governments pursued the same fiscal policy both before and after the crash – a pro-cyclical policy. At their extremes such policies lead to booms and busts which is exactly what Ireland suffered.

The alternative is to pursue a counter-cyclical fiscal strategy. This is intended to smooth out the inevitable ups and downs of a capitalist market economy.

Therefore, when the economy is accelerating, a prudent government would try to slow it down to something approximating normal. This would entail raising taxes and slowing down spending increases.

For instance, had the government removed property tax breaks and introduced a property-tax in 2003/04, this would have taken some of the heat out of a runaway property market.

And if the government had stimulated the economy through investment increases in 2009/10, the economy would not have collapsed to the extent it did.

Now we are getting lectures about the current pro-cyclical policies, how we should have been cutting back when the economy started growing; and how we should be running substantial surpluses (the budget won’t go into surplus until next year and, even then, only marginally).

That, however, is the wrong way to read our current situation.

We are stuck in upside-down fiscal strategies. Yes, the right-side up approach would be to start cutting back (reduce the pace of spending increases, reduce the level of tax cuts) as the economy recovers.

But you only do that if fiscal strategy expanded during the preceding downturn. That didn’t happen here. We cut back during the recession.

So when the economy started growing, the government had to raise spending to make up for the cuts during the austerity years, while at the same time trying to turn the deficit into a surplus.

Public spending only started increasing in 2015, but the deficit was still nearly 2 percent of GDP. It wasn’t possible to do both.

Indeed, the Government struggled to return spending to pre-crash levels.

Factoring in inflation (GDP deflator), public spending per capita – in particular, investment – has not returned to 2008 level. Not only did spending increases struggle, deficit reduction started to lose steam.

Upside-down fiscal strategies cannot be corrected by simply flicking a policy switch. We may be stuck in a pro-cyclical trap that is structurally embedded in our public finances. And, like a finger trap, if we start reducing spending just before an economic slow-down we could end up reinforcing the trap by accelerating the slow-down.

This gives a different perspective to the oft-repeated phrase ‘well, austerity worked’. It didn’t. Austerity was many things, but in this context it was like cramming clothes into a suitcase and then sitting on the cover to close it shut.

It seemed to work for a while but it wasn’t sustainable. Eventually, the cover blows open and the clothes spill out on the floor. This is the pro-cyclical trap we are in.

So how should we proceed? Carefully, eschewing quick-fix solutions. Let’s look at two things that could help inform a more viable and sustainable fiscal policy.

First, strengthen our automatic stabilisers. This usually refers to unemployment benefit. Unemployment benefit replaces the reduced purchasing power of those who have lost jobs.

In other EU countries, unemployment benefit is pay-related which means most of the purchasing power is replaced. This helps maintain consumer spending and domestic demand.

In Ireland, the benefit is low which means only a small amount of purchasing power is replaced.
In the upcoming budget it is imperative to introduce a pay-related component to unemployment benefit (Fine Gael actually advanced this proposal recently).

This should be paid for by a small, incremental increase in employers’ social insurance which is ultra-low by EU standards.

Second: never mind the deficit, focus on the debt. We have considerable savings to help prevent the debt from rising out of control.

We have more than €20 billion in Exchequer savings. Judicious use of these funds (it is unclear if this includes the NAMA surplus of €4 billion or the liquid assets in the Strategic Investment Fund) could help moderate any increases in the debt arising from a hard Brexit.

This will depend on how bad the hit is. The ESRI projects a small hit, with the budget immediately going into deficit but returning to surplus by 2023 with debt falling again.

The Central Bank’s projection is more pessimistic, with the county’s finances still mired in a significant deficit in 2023 with debt still rising.

There are other measures we can take to mitigate the downward impact on public finances (a small example would be the net assets tax outlined here) and using the NAMA surplus for public housing in order to maintain revenue-generating activity (and to house people).

The very last thing we need to do is take fright and start cutting and taxing without regard to economic and fiscal harm – like we did in the last crisis.

If we do go down that route we’ll just be reinforcing the pro-cyclical trap. And picking clothes off the floor for a very long time.

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

Sam Boal/ Rollingnews

From top: Minister for Finance Paschal Donohoe; Michael Taft

The Minister for Finance believes in the property tax and the ‘latent potential for the tax to play a more significant and positive role in our overall taxation system’.

Any increase in the tax should be ‘affordable’ says the Minister, while the ‘progressivity’ of the tax should be upheld. Potential, affordable and progressive: yes, the Minister is a believer.

But a true believer would promote a full property tax – one that attaches itself to all assets, in particular those assets (such as financial property) that are held mostly by higher income groups.

The residential property tax is levied only on some property. It is confined to houses and apartments which are the main capital asset for low-average earners.

It is not applied to financial property (shares, bonds, pension funds, cash) or land beyond the one acre associated with the residential dwelling. This is a major omission.

If we put together real (land and buildings) and financial property, and exclude liabilities (e.g. mortgages), we find that total net assets come to approximately €750 billion following the red line in the following graph comes from the Central Bank.

This equals €156,600 average net wealth per capita or roughly €440,000 per household. This would be concentrated among higher income groups.

So what would happen if we started to refocus our tax system away from income and the productive economy and on to wealth, assets and property?

As the Nevin Economic Research Institute states:

‘The weight of evidence suggests that taxes on property, wealth and passive income have minimal negative consequences for economic growth compared to other taxes and are highly redistributive. Recurrent taxes on land and immovable property appear to be particularly pro-growth, and very likely pro-equality, and we can design these taxes in such a way as to make them progressive.’

We could start by extending the tax to all property with appropriate reliefs where necessary.

This is traditionally called a wealth tax but, in truth, it is merely ensuring a property tax is applied to all property; in particular financial assets.

The CSO’s Household Finance and Consumption Survey can help.

When we look at the ratio of asset values between the top and bottom 20 percent income groups, we find that for the main residence (home), the ratio is rather narrow due to widespread home ownership.

However, when we include all real assets (land, other real estate property, self-employment business wealth, vehicles and valuables), the inequality gap starts to widen with the top 20 percent owning three times the median value of the bottom 20 percent.

When it comes to financial assets, the top 20 percent own 10 times the value of the bottom 20 percent. Financial property is highly concentrated at the top.

Martina Lawless and Donal Lynch of the ESRI have produced a useful paper outlining the impact of an asset or wealth tax. They looked at nine different tax models applying a 1 percent tax on wealth.

We can see the range of models from those with high thresholds (income) and high exemptions (particular assets) to those with much lower thresholds and exemptions.

These models have the capacity to raise between €53 million and €3.8 billion. The variations are due to exemptions and thresholds. We should start a national conversation over the optimal model.

From NERI, Dr. Tom McDonnell’s seminal work on a net assets tax shows similar yields – ranging from €250 and €750 million in revenue (and this was published in 2013).

Of course, there will be the usual criticisms of a comprehensive net assets tax; namely, that it would disrupt our collective entrepreneurial chi. However, as Martin Sandbu from The Financial Times points out:

‘Compared with taxes on profits, dividends and capital gains, the wealth tax favours those who deploy their assets more productively. That is because it is a levy on the same slice of a fortune regardless of the returns the assets produce. Owners of a high-return asset . . . keep a larger share of the income generated by their wealth than owners of low-return assets . . . a net wealth tax effectively redistributes from those who invest their capital badly to those who find high-return uses for it. That should reward talented entrepreneurs and boost productivity growth in the economy overall — a combination that could just begin to look politically attractive.’

Extending the property tax to all property – making it a comprehensive tax on all assets – has the potential to make a positive impact on public finances, reduce inequality and extend the tax base.

This would vindicate the Minister’s belief in a property tax with potential, affordability and progressivity.

Indeed, it would make him a true believer.

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

Sam Boal/ Rollingnews