Tag Archives: taft on tuesday

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

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

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

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

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

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

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

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

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

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

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

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

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

But this comes at a price.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Rollingnews

Top pic: Sam Boal/Rollingnews

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

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

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

Too true.

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

Cost Rental Housing

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

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

Affordable Childcare

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

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

Public Transport

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

Security against Unemployment

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

* * * *

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

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

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

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

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

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

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

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

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

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

And it’s not like this money disappears.

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

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

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

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

Rollingnews

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

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

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

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

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

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

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

Free Public Transport

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

Car-Free City Centres

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

Free Retrofitting

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

Electric Cars

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

Green Our Cities

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

Make Just Transition Truly Just

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

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

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

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

Let a 1000 Ideas Bloom

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

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

* * * *

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Rollingnews

From top: ATM in central Dublin; Michael Taft

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

Let’s look at some of the relevant indicators.

Domestic Demand

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

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

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

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

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

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

Purchasing Manager’s Indexes

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

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

Manufacturing PMI

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

Services PMI

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

Employment

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

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

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

Looking Under the Hood

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

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

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

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

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

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

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

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

Rollingnews

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

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

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

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

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

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

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

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

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

But what would the economic impact be of rising wages?

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

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

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

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

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

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

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

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

What difference does this make?

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

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

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

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

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

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

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

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

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

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

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

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

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