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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Rollingnews

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2) Tax-based grants as outlined above

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

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

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

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

Rollingnews

Yesterday: Meanwhile, In Ranelagh

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

The Sunday Independent headline was certainly dramatic:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Rollingnews

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

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

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

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

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

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

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

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

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

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

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

Collective Bargaining

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

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

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

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

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

Precarious Contracts

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

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

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

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

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

Part-Time Flexibility

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

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

Regularisation

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

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

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

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

* * * *

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

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

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

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

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

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

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

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

Rollingnews

From top: Green Party Leader Eamon Ryan; Michael Taft

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Continue reading →

From top Minister for Finance Paschal Donohoe; Michael Taft

The Irish Times headline had a familiar, ominous ring:

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

Donal Donovan went on:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Let’s run this through an extremely simple exercise.

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

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

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

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

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

Fiscal policy, however, cannot rely on deficits alone.

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

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

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

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

Rollingnews

From top: Grafton Street, Dublin 2 on Saturday; Michael Taft

We’re all fiscal expansionists now. From the fiscal orthodoxy to the radicals of the Left there is one message: throw money at it, don’t worry about the deficit, do whatever is necessary and worry about the cost later.

Absolutely correct. But progressives should now start debating the implications of that ‘cost later’. Because after the emergency the issue will turn to ‘who’s picking up the bill’.

A good starting point is the ESRI’s current Quarterly Economic Commentary. While normally these contain forecasts, such is the uncertainty that the authors produced a scenario instead. For 2020:

GDP falls by 7.1 percent

Unemployment more than doubles to 12.6 percent

The deficit rises to nearly €13 billion with a deficit-to-GDP ratio of -4.3 percent

And the ESRI says this scenario could be on the ‘benign’ side; that is, it could be worse. They assume a short sharp hit in the second quarter, with the recovery coming on stream in the third and fourth quarters.

However, we don’t know how big the hit will be, when the recovery will start or how robust it will be.There are assumptions layered on assumptions.

For instance, the ESRI assumes the trajectory of unemployment to be:

The unemployment rate in the second quarter of 18 percent suggests nearly 450,000 unemployed, falling to approximately 260,000 by the last quarter if the national and international recovery starts in July.

However, what happens if the second quarter is worse and the recovery is more sluggish? What if there is no vaccine or effective treatment found by the end of the year? Will we see another round of infections, isolation and lockdowns? Even the fear of a fresh round would depress investment and consumer spending, prolonging the recession.

In terms of the budget, what should have been a surplus in 2020 will now be a deficit of nearly €13 billion in the ESRI’s scenario, or -4.3 percent of GDP.

Though the ESRI doesn’t provide a scenario for public debt, we can extrapolate. Based on the pessimistic Brexit budget projections, the Government estimated a debt level of nearly €200 billion, or 56 percent of GDP (97 percent of GNI*).

They produced new more optimistic projections earlier this year, but didn’t include debt numbers. However, based on the budget projections, the debt could rise to over 70 percent of GDP and over 120 percent of GNI* under the ESRI scenario.

A return to growth should help to bring this ratio down, but it may be some time before it returns to pre-crisis levels.

What can we expect?

1) On the other side of the emergency, the Government will need to engage in another bout of spending to resuscitate business activity. These will be the stimulus measures (the current measures can be better described as ‘disaster prevention’).

Those measures may include nvestment increases (though this takes time to come on stream), VAT cuts, cuts in employers’ PRSI, continued liquidity to businesses, etc.

2) At some point, the argument over fiscal retrenchment will start – to rein in the deficit and debt. It will be austerity but it will be called something else (‘consolidation’, ‘stabilisation’, etc.).

However, there could be political limits. For instance, after experiencing a single-tier health system, will people tolerate a reversion back to the two-tier regime and the old normal of waiting lists and over-crowded A&Es? Will people tolerate the reduction of Illness Benefit from €350 per week back to €203?

3) Nonetheless, the fiscal orthodoxy will want to use the pre-crisis levels of public spending as a baseline, even if demand-based expenditure (e.g. social protection, healthcare) cannot be easily reduced. And it is doubtful whether increasing taxation will form a significant part of an austerity/baseline strategy and with some good reason – increasing taxation while an economy is recovering would have the same negative impact it did in the last crisis; but, then, so would cutting public spending.

How should progressives respond? Some starting points to discuss:

First, the elevated expenditure on health care and income supports during the emergency – on public services and social protection – are not sustainable on the current tax base.

Second, in the election some progressive parties proposed substantial tax cuts. These proposals should be scrapped. There may be room for limited, forensic tax reductions where social equity and economic efficiency can be shown. But as a rule, tax cuts should be treated as guilty until proven innocent.

Third, strategies to make the ‘rich’ and ‘corporations’ pay for the crisis will disappoint. For instance, corporate tax receipts will decline in the medium term. This was on the cards prior to the crisis. After the emergency, countries will be even more desperate to find extra revenue.

This will accelerate (and rightly so) the clampdown on international corporate tax avoidance. Given that we are a beneficiary of such avoidance, this will hit Irish tax revenue.

And while there is nothing wrong with soaking the rich (or giving them a good splash), higher tax rates on high incomes, withdrawal of tax credits, etc. would make up about 1 percent of total Government revenue. A

nd a new wealth tax would have to take into account the fact that most wealth is tied up in people’s homes, business and farming assets. So, yes, increase progressive taxes but don’t think it will be sufficient to fund a new dispensation.

There are no easy solutions. A key part of progressives’ response should be to explore all the potential and ramifications of fiscal reform. In particular, we should develop a medium-term strategy based on deficit-spending that can still reduce the debt ratio.

But this could be hemmed in or curtailed by the return of the fiscal rules and their enforcement by conditional European Central Bank funding.

However, the response cannot be limited to fiscal measures. The fiscal is a consequence of the economic, and the economic is the totality of power relationships.We need to look at systemic reforms which can lay the foundation for a successful fiscal policy.

At the end of the day, getting a few hundred million Euros from the rich, or even a couple of billion, is not the key question (though, please, let’s have it). It is the system that privileges the rich – whether we understand that as individuals, corporate and financial institutions, or simply the logic of capital accumulation.

And if you think the latter is a bit esoteric, just track where the money being pumped in by governments and created by central banks eventually ends up.

If we want to ensure the new normal doesn’t end up looking like the old normal, this is the territory we must occupy.

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

Rollingnews

From top: Minister for Social Affairs Regina Doherty; Michael Taft

The Tánaiste, Simon Coveney, stated on RTÈ Radio One’s This Week:

“If people have sensible proposals that are costed and thought through, that they believe are necessary and will make a difference, we want to hear about them.”

ICTU and SIPTU have done just that, proposing a wage compensation scheme whereby the Government would take over 75 percent of employee wages in sectors and companies that are facing closure, with the employer providing the remaining 25 percent.

This is based on the Danish initiative and is being rolled out in a number of EU countries. Even the UK is putting together a wage compensation scheme.

SIPTU has also called for those who have been laid off to also receive 75 percent of their wage at the time they lost their job, with employers being allowed to top up.

The Government has stated it is working on such a scheme and the Minister for Employment Affairs and Social Protection Regina Doherty  has promised to unveil their own programme in a matter of days.

Good. A number of commentators have lined up behind such wage compensation proposals. It has within a few days become the common sense of the economic emergency we’re facing.

So what is the cost of the benefit this income support will bring? Because let’s be clear, protecting people’s income is a benefit that will pay democratic dividends when the emergency subsides. It will protect households from falling into deprivation and debt and, so, will hasten the recovery.

Let’s start with a baseline of 100,000 employees. Further, let’s assume the average weekly earnings of €688 in the private sector for 2018 and add another 4.5 percent to bring it up to spring of this year. That comes to €719 weekly.

For every 100,000 unemployed, it will cost the state €59 million. Minister Doherty has acknowledged that as many as 400,000 could lose their jobs as a result of the pandemic.

Let’s assume that 300,000 will remain in their jobs as a result of this scheme. That’s 700,000 – who have lost their job or whose employers are at risk of closure; hopefully, a worst case scenario.

This raises the weekly cost to €377 million per week, or €1.6 billion per month. If this emergency runs four months, this scheme could cost up to €6.5 billion. That would appear to be a significant amount. But it isn’t.

First, the hospitality sector took the initial hit and average weekly earnings are much lower (€347 per week) so the cost of wage compensation would be lower. Many of the high-income sectors are unlikely to be hit as hard – financial sector, ICT and big tech, professional services and modern manufacturing.

Second, under a wage compensation scheme, workers’ income would still be taxed (just as Jobseekers’ and Illness Benefit are). So the net cost would be lower.

Third, we have to estimate the cost of unemployment benefit in the absence of this wage compensation scheme. For the 400,000 that may become unemployed, the state would still have to pay Jobseekers’ Benefit.

If we assume the current full rate of €203 per week (not all would get this after the first six weeks, while others with adult and child dependents would get more), the cost would be €1.4 billion.

Taking all this into account, the total cost could be in the area of €5 billion, and could be less depending on the composition of the unemployed and protected workers under the scheme.

€5 billion – how would we pay for this?

We have cash balances of over €20 billion. We have a rainy day fund of €1.5 billion. We can borrow at nearly 0 percent. €5 billion represents only 2.5 percent of the national income (GNI*) that we generated last year.

National income is likely to fall, but even if it collapsed by 25 percent in nominal terms (the amount it fell during the bank recession), it would still only be a relatively small 3.3 percent. I don’t think I need to compare this cost with that of the bank creditors’ bail out.

Keeping businesses in business, supporting people’s incomes, avoiding debt and deprivation, putting the economy in a position to quickly recover after the pandemic emergency – the cost of a wage compensation scheme shouldn’t be seen as a cost. It is an investment, economically sound and socially equitable.

Let’s go for it. And start the conversation of how we put income protection on a permanent footing when the emergency passes.

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