NAMA: And then there are the unknown unknowns

Slí Eile: In the immortal words of Donald Rumsfeld: "There are the known knowns and the unknown knowns. And then there are the known unknowns. And then there are the unknown unknowns". Rumsie may have been referring to Iraq but it could have been NAMA.We urgently need a debate now - on what sort of public ownership and control is required.

A curious feature of the debate on NAMA is the extent to which uncertainty, risk and flexibility apply. Notions of 'paying over the true value', 'writing down', flexible bond-equity swaps to free up cash, discretion to impose levies or not. Fintan O'Toole has already pointed to the odd fact that payments into the National Pension Reserve Fund have been fast-forwarded to cover this year and next.

What is odd about this is that we are borrowing to pay into a Fund out of which, already, money is being re-directed temporarily from long-term pension liabilities to recapitlisation of the Banks. What about the fuss over borrowing and the need to bring it down to 3% of GDP quickly and the impossibility of extra borrowing and the risk associated with same (whether off-balance sheet or on). It is all very odd. One rule for bankers (and developers) and another for welfare recipients and users of public services.

If this isn't the biggest reverse bank robbery in history what is it?

Gambling with a total annual budget of around €60billion Euro and a total national (Government) debt of the same amount and more, we are now taking on a cocktail of toxic assets whose book value is €90billion and real value is unknown and purchase value (for you and me) is somewhere in between. It is Rumsfeld's 'unknown unknowns' that scare me. 'What has posterity ever done for us" is one way of dealing with the matter (i.e. transfer the risk and the tax burden to the next generation). But, that is not moral.

Quite clearly, the whole business is an immoral mess. In fairness to those tasked with legislating and dealing with the current mess (for which of course they cannot avoid significant responsibility) it is not so clear exactly what should be done. Nobody is saying that doing nothing is an option. Delaying action is not an option, either (although the NAMA process is extroardinarily long considering the pace of economic events and the credit crunch on businesses). Roughly there are the following options (readers may wish to add a few more or re-phrase these):

Proceed as the Government is doing now through the draft NAMA legislation with all the risks involved;

Change NAMA (e.g. version 2.0 per Patrick Honohan);

Let the banks go to the wall post-guarantee or get taken over by some foreign bank, merge, clean up etc etc;

Set up a new State Bank (and leave the existing banks under guarantee until 2010 without fresh capitalisation);

Nationalise (or take majority interest in) the remaining Irish banks - either temporarily or long-term;

Writing on 22 May, Jim Stewart said (NAMA or nationalisation unlikely to work)

But there is one area in which it is vital that immediate action is taken, and that is to ensure that credit and loans flow to small and medium sized enterprises, and not just those involved in exporting. Large corporate entities and the multinational corporate sector have other sources of finance. Some large firms have no need for additional borrowing. What is needed is a new entity designed to lend funds to the SME sector. Such an entity cannot be “for profit”. It cannot be run on strictly commercial lines, because in the current crisis lending to SMEs is certain to result in losses. This new entity could be funded on the basis that 20% of loans would fail. Lending is thus made with the knowledge that there is an explicit subsidy. The return to the State (and the economy) is indirect in terms of job preservation, so that when the economy recovers there is an existing base which is a potential source of growth and job creation. Such a policy could also act as a certification device to other banks. It would reduce risk to other banks provided claims on collateral were ranked below that of additional funding from other banks

Well, Fine Gael, at least, concur on the need for a new State Bank. Richard Bruton commented, today:

Furthermore, there is no guarantee that this huge gamble will result in a resumption of normal credit flows to struggling Irish businesses. Irish banks will remain poorly capitalised and concern will turn to new categories of non-performing loans. If restoring credit flows is the prime objective of banking policy, taxpayer investment in a new, State-owned bank with a clean balance sheet and an appetite to lend, such as Fine Gael’s proposed National Recovery Bank, would be far more likely to succeed at a fraction of the risk.

My view is that, given the absolutely critical nature of banking and finance to the economy and society and the complete failure of the Irish financial system to fulfil its social role, there is no just alternative to nationalisation at this point. As I argued, previously:

An extremely low level of share prices provides the best of all opportunities to nationalise now. Allied to a National Recovery Bank credit needs to be put on a new footing driven by social need and not profit. What you don't own you cannot control - at least properly. Banking is too important to be left - ever again - in the hands of those who have wrecked the Irish economy and forfeited our children's future.

Draft NAMA legislation

Click here to download the proposed legislation, and here to download the explanatory memorandum. The Minister's accompanying statement is available here.

In case you missed it first time around, click here to read Jim Stewart's post on NAMA, published in May.

Update:

Simon Carswell has a useful piece on the draft legislation in today's Irish Times, and Brendan Keenan's take in the Independent in available here. For political reaction, click here to read the statement by Labour's Ruari Quinn (Joan Burton is on holliers), and here to read the reaction from Sinn Fein's Finance Spokesperson Arthur Morgan. The Green Party's Dan Boyle has tweeted that it is the 'least worst of a number of bad options'. A statement by Fine Gael's Finance Spokesperson Richard Bruton is available here. Finally, SIPTU's Jack O'Connor's reaction is available here.

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Guest post by Donal Palcic: Next Generation Broadband and the Smart Economy

Donal Palcic: I read with interest the recent first report of the DCENR’s Knowledge Society Strategy process (entitled Technology Actions to Support the Smart Economy). The report claims that Ireland is now one of the “most advanced countries in the world for wireless and mobile broadband technologies” and that a “competitive market is delivering broadband speeds for Irish consumers from a range of broadband providers”. The report goes on to detail a number of action areas that will deliver the critical next generation network (NGN) infrastructure necessary for the development of a smart economy. The majority of the report then devotes most of its space to describing initiatives such as the recently announced Exemplar network.

Nowhere in this report are any of the key issues surrounding the development of a true NGN mentioned or discussed. The report’s claim that we have a competitive broadband market is also highly questionable given Eircom’s dominance of the fixed-line market and Ireland’s perennial position towards the lower end of most EU/OECD broadband scorecards. The Forfás response to last year’s NGN consultation paper shows that Ireland is currently not well placed to take advantage of future trends in broadband. Although the number of broadband subscribers has increased significantly since 2005, Ireland’s relative position has not improved as other countries are moving ahead at an even faster rate. The fastest speeds available in Ireland currently lag those of our European counterparts while the cost of our fastest broadband services is relatively higher.

A quick perusal of the latest ComReg quarterly market data (for Q1 2009) shows that there are now over 1.27 million broadband subscribers in Ireland. An examination of the breakdown of broadband subscriber numbers by subscription type presents some interesting facts:

DSL subscribers make up approximately 53% of overall broadband subscribers in Ireland, while the mobile broadband market, which has recorded explosive growth in recent years (over 90% increase in subscribers over the past year alone), accounts for some 28% of subscribers. Eircom dominates the DSL market where it provides 96.6% of DSL access either directly (Eircom retail) or indirectly (wholesale bitstream). Only 3.4% of DSL access is from unbundled local loops (LLU), which is significantly behind the EU average where LLU constitutes 44% of all lines supplied by competitors (ECTA Broadband Scorecard Q3 2008). The lack of local loop unbundling and the high price of line rental charged by Eircom is arguably a significant factor behind the considerable growth in mobile broadband subscribers (particularly in the residential market) and further evidence of Eircom’s dominance in the fixed-line market.

So where do we actually stand in terms of developing a next generation network? The Knowledge Society Strategy report ignores the most important obstacle to developing a NGN in Ireland, namely Eircom’s fixed-line network and the critical local loop (last mile) infrastructure. The last mile is a key area of concern given the lack of investment by Eircom in this area. The current local loop infrastructure, which is largely twisted pair copper, is fast becoming incapable of delivering currently available bandwidth-intensive services. The services of the future (3D TV etc.) will require even higher levels of bandwidth. While cable operators such as UPC are investing in infrastructure capable of providing speeds of up to 100Mbps, such services are only available to a relatively small (mainly urban) portion of society. In order to develop a true NGN, the deeper rollout of fibre across the national network (i.e. to the kerb (cabinet), to the home etc.) is necessary. Eircom’s local loop infrastructure thus constitutes the most significant bottleneck in the future development of next generation broadband services.

Two possible options available to the Government are:

1) Take Eircom’s network infrastructure back under public ownership (or if a deal on obtaining the network alone cannot be reached, take Eircom as a whole back under public ownership, separate the network element from the remaining business elements which can then be sold off while retaining the network). Eircom’s fixed line network should then be amalgamated with the entire portfolio of State telecoms assets (MANs, NBS, and the telecoms networks of the ESB, Bord Gáis, Irish Rail etc.) and managed by a new State-owned telecoms network company. The new company can then provide network services to private operators on an open-access basis across every level of infrastructure (first, middle and last mile).

2) Amalgamate all of the existing State telecoms assets under a new public network utility as above and construct a new national NGN in a greenfield approach.

Option 1 need not cost the Exchequer significant sums of money. A new State-owned telecoms network utility will be able to finance investment through revenues generated and its own borrowings. Eircom is currently up for grabs for approximately €100 million. While there are obvious issues surrounding the level of Eircom’s approximate €4 billion debt, the strategic importance of Eircom’s network is simply too large for the Government not to take radical action now and bring Eircom’s network back under public ownership. A failure to do so will simply ensure that Ireland falls further behind her European and international counterparts. Even if the Government has to take on some part of Eircom’s debt in order to obtain the network, this does not have to add to our ever increasing national debt and can be managed by the new State-owned network. When Telecom Éireann was corporatised from the Civil Service back in 1984 it inherited a loss-making business, approximately IRP£1 billion in debt and a network in dire need of investment. As a commercial public enterprise, it returned the company to profitability within four years, spent significant sums of money upgrading the network and managed to deleverage its balance sheet, all without any assistance from the Exchequer.

While Option 2 does not involve taking Eircom’s network back under public ownership (and therefore taking on some/all of Eircom’s considerable debt), the problem of access to, and investment in, the local loop infrastructure remains. Given that the local loop is currently one of the key barriers to the development of high speed broadband services, Option 1 is arguably superior to Option 2.

Provision of access to a fully integrated national telecoms network on an open wholesale basis would facilitate increased customer choice without any requirement for the Government to re-enter the business of telecoms service provision. It would also facilitate improved competition amongst service providers and equitable investment in infrastructure, whereby a State-owned network company can be mandated to invest in rural areas, preventing the deepening ‘digital divide’ which is already occurring as private operators only invest in more economically attractive, densely populated urban areas.

Given the rapid pace of technological development and the constantly increasing information needs of business and society, our telecoms infrastructure is as important, if not more important, than other strategically important infrastructure such as our road and rail networks. Simply put, high-speed broadband is now a necessity for everything from economic growth to social inclusion. While the initiatives outlined in the DCENR’s latest Smart Economy report are to be welcomed, the issue with the local loop infrastructure is far more important. If the Government acts now it can create a realistic physical platform for a truly competitive telecoms market and the basis for growth towards a smart economy, and in doing so facilitate Ireland’s future economic growth once it emerges from the current crisis.
Dr. Donal Palcic lectures in economics at the University of Limerick

Dublin Consensus rattled by Begg article

Slí Eile: Nothing better to create some heat over on irisheconomy.ie or in follow-up comments to an op ed on the Irish Times than an article by ICTU General Secretary, David Begg, arguing against deflation and for a fiscal stimulus. Fulminations followed in quick succession. Interesting to see such passion, conviction and certitude. Remember, a key point of the Dublin Consensus is that There Is No Other Way. Say it often enough, loud enough and confidently enough and the message will stick especially when it is backed by stylised and 'obvious facts'. One commentator on irisheconomy.ie even commented: 'Begg’s quoting of Joe Stiglitz’s comments on the US fiscal stimulus in support of his (Begg’s) critique of Irish fiscal policy is quite ridiculous.' Others were even more strident and impolite.

Michael Taft has been contesting some of these 'obvious facts'.

David Begg was spot on in drawing attention to the very dangerous policy currently pursued. Analysis based on modelling of the Irish economy shows how various policy scenarios including pay cuts, public spending cuts and international recovery would impact on GDP, public sector borrowing and consumption (which I will hasten to add doesn't deter the ESRI from joining the Dublin Consensus). Public sector pay cuts offer extremely limited returns in terms of borrowing reductions.

Two key point that should not be lost in today's article by David Begg are the following:

1 "A very formidable deflationary coalition has been assembled in support of current policy. This was in evidence at the MacGill Summer School – an irony given Patrick MacGill’s commitment to working people – and it includes many of the State agencies like the ESRI and IDA."

2 ".... there is a growing chasm of scepticism between the elite and the population at large concerning the efficacy of the policy prescription."

The first point is vital because I sense that the room for rational debate based on evidence, research and values is very limited because:

• openess to debate and conflicting ideas is not as welcome as it should be in state organisations
• the Irish economics profession is predominantly ... well, right-wing (how else can one put it)
• issues which have a long-term implication (environment, social equality, democractic reform) are crowded out due to an unusually high degree of short-termism - hence, for example, Oireachtas reform is reduced to a discussion about how many T.D.s we should have.
  

Begg's second point is particularly salient and relevant. The 'population at large' is not convinced. It may be that we are are living on borrowed time, but I have a sense that the current mood could swing very suddenly and dramatically against ... the Dublin Consensus. Iceland was a very nice, phlegmatic and respectable place until recently. Hence, our passivity engendered, perhaps, by an initial shock and awe will give way to more public protest. Last year's demonstration by our seniors (the medical card issue) could be the thin edge. Ireland has yet to generate a Margaret Thatcher, to face down this opposition and no candidate is in the offering.

In conclusion - the switching to terminology of 'devaluation' over on irisheconomy.ie is very misleading. The 1986 and 1993 currency devaluations adjusted the prices of Irish exports on world markets and imports on Irish markets. It also kept inflation high for a time. Many differences apply between now and then, one of which was the extent to which product and labour markets internationally played a role in helping - eventually - Irish recovery. A so-called real devaluation now based, on wage-cutting, is a dangerous and possibly ruinous gamble. This was the point of Begg's article. The alternative is targetted stimulus based on recovery bonds in the context of a high national savings rate (as consumers are scared to spend) and the beginnings of a strategic investment in skills, jobs, innovation, new traded services. Otherwise, we may face a missed decade like we had in the 1950s, and like Finland initially underwent in 1991-94. Can we not learn from this? There is another way.

Guest post by Eoin O Broin: Time to raise taxes

Eoin O Broin: The Commission on Taxation is due to complete its work later this week.

Established in February 2008, its remit was to ‘review the structure, efficiency and appropriateness of the Irish taxation system’. Its report is expected to help the government set the framework for tax reform for the coming decade.

Its terms of reference included a commitment to ‘keep the overall tax burden low’ and a ‘guarantee that the 12.5% corporation tax rate will remain’.

Sources close to the Commission indicate that, while the report will go some way to simplifying the notoriously complex system currently in place, it will keep its word on maintaining a low tax take.

If this proves to be the case, should we welcome the report? Absolutely not!

One of the great myths of our time is that low-tax economies are more competitive. There is no evidence to support this claim.

A quick look at the World Competitiveness Scoreboard for any recent year demonstrates that there are more high tax countries in the top ten than there are low tax countries. In particular Norway, Sweden and Finland always feature prominently as amongst the world most competitive economies, despite their relatively high tax takes.

The real determinants of competitiveness are science, technology, education and affordable health and childcare all of which require investment by the state.

And where does the state get the cash to invest? It gets it from taxation of course.

And here’s our problem. Ireland has one of the lowest tax takes of any the EU’s 27 member states. In 2007, the total tax revenue as a percentage of GDP was 31%. Only Latvia, Slovakia, Lithuania and Romania took less.

At the other end of the scale, world leaders in competitiveness such as Sweden, Denmark and Finland had tax revenues from 44% to 51% of GDP.

You don’t have to be an economist to conclude that if you have Latvian levels of taxation you can't have Scandinavian levels of investment in job creation or public services.

In the same year, Ireland had the third lowest level of government expenditure as a percentage of GDP in the EU at 34% of GDP. Only Lithuania and Estonia fared worse. Again, at the top end of the spectrum, the Scandinavian countries ranged from 49% to 54%.

There is also a clear link between a country’s total tax take and the levels of inequality. The larger a country's tax take, the more money it has to invest in various forms of social protection and wealth redistribution. In 2008, Ireland spent 18% of GDP on social protections compared to Sweden’s 32%.

So what does all of this tell us?

If you want greater competitiveness and less inequality, you need to have enough money to invest in research and development, education, job creation, public services and social protection.

If you don’t, then your economy will be weak and your society crippled with inequality.

It is time to make start making the argument to raise taxes, for the good of the economy and the good of society. If the report from the Commission on Taxation fails to do this, then it should be thrown in the bin.
Eoin O Broin is the Chairperson of Dublin Sinn Fein, a member of the party's Ard Comhairle and author of Sinn Fein and the Politics of Left Republicanism (Pluto 2009)

Guest post by Mike Allen: NAMA must generate social dividend

Mike Allen: Most of the debate on NAMA, both from the left and the right, has concentrated on questions of nationalisation or good bank/bad bank strategies. Several commentators have stated that ‘the left’ thinks that NAMA should have a social remit – but you would have to look very hard to find anyone actually arguing it, let along saying what this would mean.

Focus Ireland entered the debate over the weekend, arguing that NAMA must have a ‘social dividend’, and in particular that ‘social objectives’ need to be recognised in the legislation that governs the new agency. There are broad arguments that can sustain this case (about the need to link social and economic objectives), but the real issue is more pressing: NAMA is about to become the owner of a vast property portfolio of land and housing.

The vacant housing, which is the distressed assets of developers, can be used to salvage a vestige of equality from the tail end of the housing boom. The land is a crucial asset in ensuring that the next wave of housing development proceeds on a more equitable and sustainable (in all its meanings) manner - for, despite the current collapse, Ireland will need more new homes over the next decade.

Focus Ireland’s contribution drew on earlier work by the Irish Council of Social Housing. Beyond calling for the ‘social dividend’, Focus proposes that there should be a full audit of the potential social value of homes and land which come under NAMA control, that appropriate housing and land should be transferred to Local Authorities, that there should be a ’Land Management Strategy’, and that a special unit in the Department of Environment should act as the holding body for this.

We will have to wait until Thursday to find out whether these considerations penetrated to the Cabinet Table but even if they did not, there is the summer to bring this argument much more to the fore.
Mike Allen is Director of Advocacy with Focus Ireland.

Brendan Keenan on wages and competitiveness: A late link

Brendan Keenan had an interesting opinion piece in the Sunday Independent, following on from the decision by Shannon-based Element Six to relocate jobs abroad - a decision blamed on high wage costs.

Keenan notes that:

We do know that workers in Element Six (formerly de Beers) earn €12 an hour more than those in South Africa. We also know there's no way to match that. So why doesn't everyone de-camp to South Africa? Actually, why don't they go to neighbouring Zimbabwe, where wages are even lower than in South Africa?

That extreme example answers the question. There is more to competitiveness than wages. There is more to it, even, than costs. Trouble is, it is all very hard to measure. Especially, wouldn't you know, in Ireland.

Read the full story here.

Any comments?

The IDA and the wages debate

Michael Taft: A couple of weeks ago, the Chief Executive of the IDA, Barry O’Leary, jumped into the debate about wages – suggesting they were undermining our ability to attract multi-national companies. He proposed they should be cut (though later he backtracked somewhat, suggesting that he was only referring to a few companies, a few sectors). Still, it was one more hailstone in a hailstorm that has been pummelling us – we must cut our wages to ‘restore competitiveness’.

I could suggest that Mr. O’Leary read some of the posts on this site, or UNITE’s ‘The Truth About Irish Wages’, or research by both ICTU and SIPTU. But I can appreciate he is a busy man. So I’ll just suggest that he read his own website. The IDA makes wonderful play over the fact that we are a relatively low-waged country when compared to other EU countries. From their Vital Statistics webpage they show just how low our labour costs are, using data from the European Federation of Employers. The IDA is so proud of this table that they feature it twice on their website.

They also present comparative data with the UK. On this measurement, Irish wages are higher for all the non-managerial categories. This is not so much a function of actual higher wages, as of Sterling’s depreciation. When the UK and Irish wages are compared through purchasing power parities- Irish wages trail behind as well.

None of this should be too surprising. The OECD recently published its 2007 update of its Benefit and Wages database. It showed Irish private sector wages trailing the EU-15 average by over 7 percent. And when one takes the average of our peer group – the Top-10 economies (excluding the poorer Mediterranean economies) – we trail by over 14 percent.

The question is not whether Irish wage are too high – they’re obviously not. The real question is – on what basis, on what empirical evidence, do the real devaluationists base their contention that our wages are too high?

Dublin Consensus backed by Garret

Slí Eile: The Dublin Consensus is solid. Garret the Good has added his voice to the Consensus in his most recent Saturday column. He writes:

It is now crucially important that the Government secure sufficient Dáil support in the December budget to deliver on its 2010/2011 commitment to reduce current and capital spending by €3 billion and €1.75 billion respectively, as well as to raise tax revenue by €4.6 billion. Failure to secure this support would gravely damage our financial credibility.

He also goes on to support - reluctantly - some reductions in social welfare:

While I am certainly not happy about that proposal, the alternative of up to €2 billion in cuts in the total cost of health and education means that I cannot rationally reject the need to take some action in relation to social welfare.

Again, it is part of the old Dublin Consensus line that 'There Is No Alternative'. It's a zero sum game: if you don't agree to slash A you are, effectively, supporting a slashing of B and/or C. The 'markets' have already ruled out any discretion on borrowing and any increases in taxes must be moderated (even though we continue to tax the very wealthy very lightly).
In the same edition, Noel Whelan ('Lee's economic solutions look unrealistic') suggests a type of clock:

...a “national debt clock” should be erected in Dublin city centre as a means of focusing minds on how rapidly our national debt is rising....

Like 'Today we are borrowing €70 million' as the digits keep rising.
Something similar has been suggested by Swedish economist Jens Henricksson.

Yet again, we are served a diet of mild hysteria and tilted ideology. Taking a figure of €50m per day (dividing €18bn net borrowing by 365 days) - approximately €25m of that goes for capital spending. The remaining €25m arises largely from cyclical factors associated with the surge in payments of unemployment benefit. These may be viewed as partial stabilisers.

We don't hear a prominent chorus for a 'national unemployment clock' on our thoroughfares. Neither do we hear calls for a 'tax relief clock' showing an estimate of how much Government is losing in taxes on subsidised private health, pensions for super-earners etc.

Political and union forces on the left need to stand up to this.

Pensions

According to the Sunday Business Post yesterday, the Commission on Taxation may propose introducing a common rate for pension tax relief of around 30 per cent, thus reducing the tax benefit currently enjoyed by higher earners while increasing the relief for those in the 20 per cent income tax bracket. Writing on PE earlier this year, Dr. Jim Stewart - a member of the TCD Pension Policy Research Group, which collaborated with TASC on its pension reform proposals - pointed out that any reform of pension tax reliefs must be accompanied by reform of the pension system as a whole.

Meanwhile, if anyone was in any regarding about the inability of private pensions schemes to provide a secure retirement income into the future, PriceWaterhouse Coopers has just released the results of a survey indicating that - of those employers currently operating Defined Benefit schemes - 20 per cent are winding up, or considering winding up, their DB schemes, while 49 per cent are considering introducing a salary freeze or cap, and 39 per cent are considering removing pension increases.

With regard to Defined Contribution schemes, 9 per cent of employers surveyed indicated that they had reduced their contributions, while 32 per cent of employees have either reduced or ceased their contributions.

Any comments?

Where have all the people gone?

An Saoi: Bus journeys in Dublin have become pleasant again. There is nearly always a seat and while there may have been a reduction in the number of buses on some routes, those of us lucky enough to be served by a number of routes are not unduly discommoded by waiting an extra minute or two.

There is also a distinct lack of non-nationals. So where have all the people gone?

While searching for answers, Vodafone helpfully announced a 46,000 or 2.4% drop in mobile phone customers in the three months to 30th June in Ireland and this confirms a trend decline noted in Comreg’s report for the first quarter. There was a total decline of 74,000 in the first quarter and based on the Vodafone figure, subscriber losses in the second quarter may be as high as 100,000. Now, the first thing every new arrival to Ireland gets - even before their PPS No. - is that essential of modern life, a mobile phone.

A number of academics who post regularly on Irish Economy have expressed fears about their graduating students being forced to emigrate, and certainly conversations overheard on buses seem to confirm that many see no future here.

The CSO also published recently the Retail Sales Index for May. The volume decline in car sales and household furniture has been well covered elsewhere, but what about food (-6.6%), or even fuel (-11.2%), let alone clothing (-17.1%)? I accept that people may have cut back to a degree on many items, but food? The decline between April & May alone was 2% but the decline in the previous three months was 4.1%, suggesting a clear pattern in the decline in the number of consumers is contributing to the decline.

The CSO was due to publish, before the end of July, migration figures for the early part of the year. Date of publication has been deferred until the end of August. Can it be that they are rechecking their figures?

Net Emigration in the 1950s was in the region of 412,000 or about 13% of the resident population at the end of the decade. In two years it exceeded 70,000. In the late 1980s, it averaged over 35,000 per annum. 2009 may yet break all records, for the wrong reasons.

“This country is too small to support all her people” as someone called Brian Lenihan once said in 1991, but is that true?

How much is a Billion Euro in Irish terms?

Nat O'Connor: One of the effects of the financial crisis is that it is forcing us to deal with very big numbers. We now regularly hear or read about vast sums of money being discussed, whether it is in terms of money required to maintain the banking system, proposed cuts in public spending or lost tax revenue. There is a danger that through the repetition of these big numbers we are becoming immune to their impact, similarly to how we can become inured to violence on television.

Without getting into what policies the Irish Government should or shouldn’t pursue, I would like to simply clarify what a billion euro means in real terms, in Ireland, today. I think we need a clearer picture in order to understand the enormity of the situation and the potential impact of the wide variety of policies that are being proposed.

I am going to give three brief examples to illustrate what a billion euro means and I would welcome feedback on which bits are most useful.

1/
One way to look at what a billion euro means is to see it in terms of the Government’s income and spending. The end-June 2009 Exchequer returns estimates the state’s annual revenue at €34.4 billion and its annual expenditure at €47.4 billion (divided between €40.5 billion current expenditure and €6.9 billion capital expenditure).

In these terms, one billion euro is roughly equivalent to 3% of Government revenue or 2% of its expenditure.

More specifically, one billion is more than the Government will raise in revenue from stamp duty (€980m), it is over a quarter of likely revenue from corporation tax (€3.7bn) and it is nearly 9% of VAT receipts (€11.4bn). In other words, no matter what way you look at it, one billion euro represents a sizable chunk of Ireland’s annual revenue.

Similarly, in expenditure terms, one billion euro is nearly twice the total voted expenditure of the Department of Arts, Sport and Tourism (€535m), it is more than the budget of the Department of Defence (€988m) and it is over 9% of the budget of the Department of Social and Family Affairs (€10.9bn), which is one of the three major spending Departments. So, one billion euro obviously buys a lot of what the Irish state spends money on every year.

2/
Another way to look at a billion euro is to divide it out among the Irish population. Based on Census 2006, a billion euro represents €236 for every man, woman and child in Ireland. If we restrict the population to those aged 15-64, a billion euro represents €344 per person. And perhaps more realistically, it represents €680 for every household in the country (including single person households as well as couples and households with children or other dependents). In other words, every time the Irish Government wants to spend a billion euro, this is how much money on average it needs to raise in revenue from the taxpayer.

Although, of course, it must be remembered that the Government does not only generate revenue directly from private households, but also from businesses through corporation tax, VAT, etc and from other sources.

3/
A billion euro can also be seen in terms of the distribution of wealth in Ireland.

It is equivalent to the annual earnings of 33,433 persons on the 2006 average industrial wage. And to put this number in perspective in turn: that’s about as many people who were at work in Galway City in 2006 (34,023).

A billion euro is also the equivalent to the income of 84,104 persons living on the 2007 poverty threshold of €11,890 per year.

In other words, you could employ a lot of people for a billion euro or move a great number of people out of poverty.

In contrast, one billion euro is only 1% of the €100 billion asset base (excluding residential property) of the top 1% of the Irish population in 2007, according Bank of Ireland’s Wealth of the Nation report. That is to say, a billion euro taken from the top 1% of the population would mean that this group owned 33.7% of Ireland’s wealth instead of 34%.

A business take on minimum wages

“A fair minimum wage is a sound investment in the future of our communities and our nation.”

and

“Now, more than ever, it’s imperative that employees are paid a fair minimum wage.”

Or even:

“Low minimum wages do NOT help small business.”

Statements by Irish trade union leaders?

No. Actually, these quotes are from business leaders cited in press releases issued by the ‘Business for a Minimum Wage’ project in the United States. The project is run by ‘Business for a Shared Prosperity’, which describes itself as “a network of forward-thinking business owners, executives and investors committed to building enduring economic progress on a strong foundation of opportunity, equity and innovation.”

Compare and contrast with this from Patricia Callan of the Small Firms Association, calling for an immediate €1 cut in the minimum wage last July:

“Establishing a minimum level of pay by dictat rather than market forces is proving to be a negative employment strategy.”

Meanwhile, writing in today's Irish Times, Paul Sweeney notes that:

"Wage cuts will lead to deflation and exacerbate the crisis. Further, wages are but a small part of competitiveness." You can read the full article here.

Cutting Off your Nose to Spite Your Face – Mc Carthy and the Revenue

An Saoi: The Revenue Commissioners get off lightly in McCarthy’s Report. It is suggested that savings of around €26M could be made. However as €8.6M of that relates to a computer project (e-stamping) which is coming to a conclusion by year-end anyway, it seems surprising that it is included.

Much of the balance of the proposed savings are littered with “could”, “would” and “should” and show little understanding of the Office’s operation, with the exception of reducing the number Revenue’s offices. However, many of the offices he wishes to be closed were opened up in recent years at the behest of Mr. McCarthy’s paymasters!

While considering a possible response, I came across an excellent short report produced by an IMF employee, Mr. John Brondolo, called "Collecting Taxes during an Economic Crisis: Challenges & Policy Solutions”, published on 14th July 2009. This of course explained Mr. McCarthy’s ignorance on the subject – he never got a chance to read Mr. Brondolo’s report!

While Mr. McCarthy calls for staff reductions of a further 350, or approximately 5%, (this is after a reduction of 350 already), Mr. Brondolo points out, “Sustaining revenue collection over the medium term will require tax agencies to address their most fundamental weaknesses (e.g., poor organisational and staffing arrangements, weak taxpayer services and enforcement programmes ,and outdated information systems).” (page 9) Also on Page 17 he refers to the need to, “implement proper organisational and staffing arrangements for collection enforcement...”

He makes reference to the need for tax authorities to develop their services to assist taxpayers but not to take the eye off the ball by reducing enforcement and audits. He points out – which every person ever involved in collecting debts knows – that once arrears exceed 90 days, success of collection falls dramatically.

The report provides more than enough reasons to allow the Revenue to go out into the jobs market and recruit many of the unemployed accountants now available. But, rather than continuing to read me further, read the report!

Minimum wages and low pay

Michael Taft: The latest swing in the debate has turned on those earning the minimum wage, though in truth this is a continuation of the call last year by the Small Firms Association to cut the statutory minimum wage by €1 (or an 11.6 percent cut). We shouldn’t expect this phase of the debate to be any more illuminating than what we’ve been used to.

Take one example: comparative levels of minimum wages. It is a fact that Ireland has the second highest statutory level in the EU-15 (there are only eight other countries that have statutory minimum wages). But there’s a complementary measurement that is important to note. Using purchasing power parities helps quantify what each wage level means in a particular country (the how-much-bread-you-can-buy-with-a-€1 measurement). When we look at this, we find Ireland falling down the league tables.


We no longer have the ‘second highest’ minimum wage. We fall to fifth place, behind our economic peer group barring the UK . This is unsurprising – Ireland has higher living costs so that a Euro goes further in most other countries than here.

There are other facts. For instance, there are few workers on the minimum wage employed in the traded sectors (except for outsourced functions such as cleaning, etc.). Given the concern over cost competitiveness in this key sector, it should be noted that cutting the minimum wage will have little if any impact – and that’s even if you buy into the highly contestable argument that Irish wages are uncompetitively high.


Unfortunately, the debate over minimum wages – like the debate over the McCarthy Committee proposals – will be detached from the economic impact any proposal that such wage cuts will have. We will get some employers asserting they need wage levels cut (though not all – as one restaurant owner made clear on Live Line, opposing wage cuts as being inequitable and irrelevant to business costs). But where will be the commentators to point out the deflationary impact on the economy – reduced consumption (which will hit businesses) and reduced tax revenue.

Still, there are many who are genuinely concerned that Irish workers are raking it in – putting economic recovery in peril. We should try to comfort them. The OECD tracks the incidence of low pay (below two-thirds of median wage). Ireland ranks at the top of the EU-15 – along with that other Anglo-American economy, the UK. That should gladden the hearts of even the most robust of real devaluationists.

An Bord Snip Nua and the Active Citizenship Office

Colm O'Doherty: While I have previously argued that the active citizenship agenda of the Cowen and Ahern governments has lacked policymaking substance and commitment to positive social change, I take issue with the recommendation in the McCarthy Report that the Active Citizenship Office be wound up and its work halted. The paltry savings to be gained from this cutback – the 2009 allocation for this programme is just €56,000 – suggests that the sub text here is the removal of the symbolic threat which the Active Citizenship agenda poses to the pivotal role of money in our society.

As Ingham (Ingham, I. (2008) Capitalism, Cambridge: Polity Press) makes clear “It is the money-capital of capitalism that drives the endless pursuit of profit and gives the system its dynamism and flexibility; in short, the creation and control of money-capital is the locus of power in capitalism. It is here that the decisions about when and where the material provisioning for human wants are taken” (p. 206).

Despite its limitations, the State’s Active Citizenship project has affirmed social value as a counterbalance to individual utility maximisation. As Bauman (Bauman, Z. (2008) The Art of Life, Cambridge ; Polity Press) suggests, “pretending that the volume of and depth of human happiness can be taken care of and properly served by fixing attention on just one index –GNP – is grossly misleading. When it is made into a principle of governance, such a pretence may become harmful as well , bringing consequences opposite to those intended and allegedly pursued”(p. 8). The Active Citizenship Agenda recognises that social capital theory does point towards the need for a different approach to governance when markets and the apparatus of the state fail to renew civic involvement and produce those “collective goods which enable beneficial cooperation and restrain self-defeating hedonism and opportunism in social exchanges” (Jordan, B. (2008) Welfare and Well-being –Social Value in Public Policy, Bristol, Policy Press, p.89).

Active citizenship is synonymous with community governance. Community governance is manifested as – voluntary effort, community participation, community development, educational /training initiatives. These collective goods which underpin the interpersonal economy are needed more than ever to reduce the damage to our society brought about by the subordination of social to economic value under the flawed governance structures of the financial and speculative property markets. The retention of the Active Citizenship Office and the continuation of its work will provide a “space” for articulating and dispensing coherent collective systems of meaning , purpose and integrity, capable of creating cultures of social, rather than purely individualistic monetary, value.
Dr. Colm O’Doherty lectures in Applied Social Studies at the Institute of Technology, Tralee

Why wage cuts are not a good thing

This post was written by Professor Terrence McDonough of the Department of Economics in NUIG in May. Given the current debate on pay levels (whether in the public sector or for those on the minimum wage), it seems appropriate to bring it to the top again.
Terry McDonough: When Ronald Reagan wanted to send a message to unionized workers across the American economy, he picked a group of public employees, the air traffic controllers, and broke their union. Ironically, this union was one of the few that had endorsed his candidacy for president. Margaret Thatcher followed a similar strategy with the miners. When the current coalition government decided that their only strategy for recovery was repairing Ireland’s competitiveness through across the board wage cuts, there was only one way to announce their intentions. They picked on public sector workers and announced a wage cut.

Brian Lenihan has bragged that we Irish have an amazing capacity to take pain and that if such a cut had been announced in France there would have been riots. How did he get away with this in Ireland?

First, a carefully orchestrated campaign in the media stirred up begrudgery about public sector pensions. The pay cut was labelled a pension levy and the impression was given that it would go to help pay for these ‘Rolls Royce’ public sector pensions. Public sector unions felt exposed by the lack of support from fellow citizens in the private sector and accepted the cut. Support for the pension levy by private sector workers ignored the fact that they were next in the crosshairs. Irish private sector employers had got the message. It was now open season on wages.

Just as an ESRI report had earlier announced the start of the Irish recession, their latest report predicting a 17 percent unemployment rate amounts to official notice of an Irish depression. The ESRI’s solution? They joined a chorus of other economists and commentators calling for a fall in wages. Garret Fitzgerald’s recent column in the Irish Times was headlined “reduced pay could be silver lining of crisis.” Despite this apparent consensus there are sound economic reasons why wage cutting in the Irish economy is far from a good thing.

First, stable wage rates provide an anchor in the economy. All other prices are tied to them. Falling wages can cause falling prices which can trigger further falls in wages and prices. This is called deflation by economists. What’s wrong with falling prices? Would you buy a product now if you expected it to be cheaper in the future? Would you pay today’s prices to invest now if you could only eventually sell your product at tomorrow’s lower prices? Deflation has the potential to seize up an economy.

Secondly, falling wages directly damage demand, cutting sales and creating further unemployment. An environment of wage cutting creates insecurity and reduced spending.

Thirdly, falling wages will compound the problem of our high levels of indebtedness. Falling incomes means that debt payments will take an ever larger percentage of income.

Fourthly, inequality is at the root of the international crisis. Across the board wage cutting will make the problems worse. Stagnant wages led to low levels of demand for consumer goods, leading investors to put their money into financial markets instead of productive investment. This led to a flood of lending to cash strapped consumers and fuelled the housing bubble. When this bubble burst a credit crisis combined with stagnant wages to create a demand crisis. This demand crisis will still be with us even if the banks are repaired.

Fifth and finally, falling wages will not recreate the Celtic Tiger. It is true that lower Irish wages initially contributed to attracting foreign investment. But it is not possible to wind the clock back to 1987. Much has changed. There are even lower wages available elsewhere and, with the enlargement of the EU, available not so far away. In the age of globalization, transnational corporations locate different parts of the production and distribution process in different kinds of places. Where they will find attractive for a particular function in the future is very hard to predict.

There are two lessons here. The first is that Ireland must be more self-reliant in the future. The second is that, against all the conventional wisdom, we should stop worrying about competitiveness. Rather we should set about building the society we want. We should be seeking high levels of equality and well-being (recent scientific studies show the two are closely connected), high levels of health, high levels of education, high levels of culture and self-expression. If we have a well functioning society, not just an economy, we will find that we have no trouble participating in the international economy and even attracting foreign investment if that is one of the things we want. Now that social partnership is in trouble, there is no reason unions and other social organizations can’t still do their bit for recovery. They can contribute a great deal by doing their day job – defending working people’s living standards and fighting for greater levels of social justice.

The logic of living in a 'free' market economy

Slí Eile: An interesting feature of the Special Group’s deliberations is the extent to which it went beyond its strict remit and expectations. It said:

Against the background of the fiscal realities outlined in Chapter 1, the Group is strongly of the view that these budgetary consolidation targets should be seen as a minimum to be achieved, not as an upper ceiling, and that the scope for realising expenditure savings should be availed of to the fullest extent possible.

One would have thought that given the appetite and enthusiasm of the Special Group to roll back the role of the State that they would have attended to the significant direct and indirect costs of administrative relocation of central government staff, otherwise known as decentralization. Not a word except to acknowledge in passing that the Office of Public Works will require five fewer staff as ‘decentralisation’ proceeds more slowly. Clearly, some issues are just not touchable politically even now.

Would full implementation of the Report of the Special Group seriously dismantle public services? Let the Report speak for itself:

On this basis, the Group is putting forward proposals for initial reductions in public service numbers of over 17,300 (inclusive of reductions of around 6,000 in the Health sector under the Employment Control Framework introduced in 2008). Initial reductions on this scale are the minimum that must be achieved. These savings will require inter alia a commitment to the nonreplacement of staff and the down-sizing of the public service. Critically, while work efficiencies and redeployment should allow for broad continuity in the delivery of key public services, in other cases full savings will only be delivered where there is a political and public acceptance that the State can no longer afford to continue some services at previous levels, or at all.

One of the bizarre aspects of the Report is the way in which it proposes large reductions of investment in science and technology. It claims:
The Group considers that any further STI investment must yield clear economic returns. The evidence adduced to date for the impact of State STI investment on actual economic activity has not been compelling.

In the absence of a clear business need for the doubling of PhDs currently being funded, the Group is concerned that graduates will be underemployed or forced to emigrate.

No mention of education, research and learning serving anything other than measurable, economic, business returns. Sad.

Standing back from the detail and considering the larger picture. Bord Snip sits within a new and challenging context – internationally as well as nationally. It seems to me that if we think and operate entirely within ’given structures’ – in other words the constraints imposed by international and domestic capitalism and the whole range of assumptions and institutional givens that are not up for discussion then we are forced into the kind of policy response that we now see emerging. To put it plainly, if we live by the rules of free market capitalism then we are forced to rise and fall by its workings. When times turn very rough, as they have, we are constrained to go along with its deadly logic:

• Income cuts for the bottom two thirds of the population to restore profitability;
• Privitisation of services and assets previously provided by the State;

In short if we live by capitalism alone then we must live by its logic. Any progressive movement wishing to operate from within that logic – especially in the context of a small, open economy and member of the European Union its scope for policy discretion is severely limited.

A more helpful starting point

Michael Taft: There are few subjects that can create dispute and contention quite like public-private pay differentials (Manus O’Riordan’s article linked on this site and the subsequent comments is a case in point). While a number of studies have attempted to provide the last word – using complex variables – the problem here is the weight given any particular input. This is not to dismiss these exercises – they are helpful. However, it only shows that even statistical analysis can be politically-laden.

I’d like to propose a new starting point in pay comparisons. It’s not the last word, but it makes a good ‘first word’ upon which further analysis can be constructed on. That comparator – or like-with-like – is enterprises of similar size. This is not only because of the obvious issue of scale (employees in larger enterprises earn more than those in smaller ones on average). There are other similarities:

• There is likely to be a more varied skill, occupational age and educational base
• There are likely be formalised pay scales
• In-house career paths are likely to be more prevalent, with more employees remaining in jobs for longer – length of employment equals higher pay
• There is likely to be a greater human-resource infrastructure
• There is higher union density with collective bargaining rights – three times more than in smaller enterprises – benefiting from the trade union premium
• A greater proportion of employees have occupational pension coverage – seven times that of small enterprises: this is where you will find most defined benefit schemes

When we use this like with like comparator, we find that public sector wages are less than in the financial sector but on a par with the industrial sector. We shouldn’t find this surprising. In the industrial sector, employees in smaller enterprises would need a 50 percent wage increase to reach the wage level pertaining in larger companies.



I have focussed on the industrial and financial sector because they’re the only sectors for which the CSO provides a breakdown by size, along with a weekly average wage. But these two sectors are useful. Combined, they comprise over 300,000 employees (the public sector employs 373,000, including public enterprise). Over 55 percent of employees in these two sectors work in the largest enterprises.

This makes no comment on the related issue of whether public sector wages should be cut. But it is important to note that the ESRI’s simulation of the economic impact of cutting public sector wages by 5 percent showed that it would result in reduced GNP and consumption while increasing, albeit marginally, unemployment. And the impact on the fiscal deficit would be negligible: reducing it by 0.4 percent (and this simulation was taken before the deflationary April budget – so the fiscal ‘benefit’ could well be even less).

I have gone into more detail on this here.

Sarah Carey looks at economic inequality

Sarah Carey has been mentioned in dispatches on PE before but, leaving aside her slightly problematical historical analysis, today she’s on the right track when she notes that:

“[...] this relative equality was undone during the Tiger years. [....] Inequality made a comeback not because the poor got poorer, but because the rich got richer and the number of rich people increased enormously.”

This thesis is borne out by much of the data in TASC’s recent briefing document The Solidarity Factor, issued to coincide with the release of survey results showing that 85 per cent of respondents believe wealth is distributed unfairly in Ireland, while the same proportion – 85 per cent – believe that the Government should take active steps to reduce the gap between high and low earners.

However, one can certainly quibble with Ms. Carey’s conclusion that:

“Statistics will probably show that in the next three or four years Ireland will be a more equal society than it has been for the last 10. Not because the poor are catching up, but because the wealthy are falling back.”

Given the current attacks on the incomes of those at the bottom of Ireland’s money pyramid (ranging from the proposal in the An Bord Snip Nua Report that Social Welfare rates be cut, to Finance Minister Brian Lenihan’s statement at the McGill Summer School last night that “if the minimum wage becomes an obstacle to job creation the Government will have to look at it”), it seems unlikely that the gap between high and low earners (never mind the gap in terms of asset wealth)is going away any time soon.

Incidentally, with regard to the minimum wage it’s worth having a read again of Paul Sweeney’s very first post on this blog, back in February, when he looked at the whole issue of wages and competitiveness, as well as Terry McDonough’s post illustrating why wage cuts are not a good thing.

Is public spending in Ireland too high?

Slí Eile: Simple question. But not so straight forward when it comes to it. Too high relative to ‘what we can afford?’, ‘too high relative to what we get out of it?’, ‘too high relative to taxes, borrowing and EU rules on borrowing?’, ‘too high relative to some ideal balance of public and private endeavour?’ It’s a loaded question especially in current-day Irish political economy. Discussion about ‘economics’ used to be kind of nerdy. Now, its not only hot but very political as well.
The OECD Review of the Irish Public Service published in 2008 found that the overall level of public sector employment and spending was modest in Ireland compared to other OECD countries.

Let me answer the question first – no – public spending in Ireland is not too high. Human beings deserve five basic things in life:
1. Love
2. Health
3. Education
4. Work
5. A chance to contribute and participate to society, culture and politics

Now, ‘the State’ (not such a clear-cut concept) can’t do everything nor should it try. Neither can the ‘Market’ (not so clear-cut either). Where the balance lies is a matter of personal and societal choice, at least in democracies.

The Bord Snip/’Special Group’ Report is ideologically loaded. It starts from the simple idea that the State’s role should be kept to a minimum and proceeds on the assumption that much of existing state spending is inefficient and wasteful. Some folks on the left – I fear – have fallen for the argument that:

• Things are bad, very bad;
• We have to cut, we have to cut;
• Sure there is lots of wasteful public sector spending and employment arrangements;
• We should come across as the Nice, Respectable, Responsible and Realistic people that we are, and welcome the broad outline of the Report; and
• We will accept some cuts as necessary (and in any case tactically unavoidable) in exchange for some progressive concessions.

This is dangerous and false reasoning. In my view we should be

• defending the public services and public service workers line by line;
• defending the gains made by public sector workers in terms of employment, tenure, conditions (rather than play off one sector of society against another);
• promoting more public spending and not less in the current economic downturn in order to (i) further close the gap in terms of public services which remain very inadequate here compared to what should be considered right for a country at our level of economic development and (ii) stimulate domestic consumption and investment demand;
• reforming a public service that is inefficient, not well run in many cases, bureaucratically and centrally managed and overly politicised; and
• reducing spending in some areas only to divert it to other areas and increase the overall spending level.

The point is that public spending in Ireland is too low and not too high. We need a Bord Athbheo to:

• Revitalise public services through reform and reallocation of spending from areas and activities of waste to areas of need and new opportunity
• Completely change the existing way of organising work away from inflexible, top-down and bureaucratic work organisation practices.
At the same time, there is scope for an orderly increase in taxes on:
• Property including local-based taxes
• High-income earners via ending non-standard tax reliefs and other tax breaks not necessary for economic activity
• Carbon taxes.

An irony of the current restrictions on employment in the public sector is that a whole industry of control, sanctions and upward delegation of responsibility from lower to higher grades and from line Departments to Department of Finance is happening. This runs exactly counter to what the OECD Review team on the reform of the Irish public service recommended last year. We are going back not forward, in this regard

Here's to economic recovery

Michael Taft: Maybe Colm McCarthy doesn’t drink Carlsberg. He certainly has not taken on board their recent ad campaign which suggests:

‘It’s not just A or B. There’s probably always a C.’

On News at One, McCarthy gave us the A and the B:

‘We have to get the borrowing down. There’s only two ways of doing it. One is by increasing taxes . . and the other is by controlling expenditure far better that we have been doing in recent years.’

Of course, there are problems with A and B. Increasing general taxation on low and average income earners and cutting public expenditure, especially social transfers, are deflationary and potentially self-defeating. What’s more, seemingly substantial tax increases and cuts may have little impact on the fiscal deficit – the very reason for income levies and An Bord Snips. Indeed, the piece de resistance of the McCarthy Committee – reducing public sector employment by 17,000 – will deepen the recession, cut consumption and increase unemployment; but it will only reduce the fiscal deficit by 0.2 percent.

So is there a C? Yes – and here it is in shorthand. According to the ESRI’s latest quarterly report, Ireland will have a gross/debt ratio of 74 percent in 2010 (this doesn’t include provisions for NAMA) while the net/debt ratio will be a mere 58 percent after Pension Fund assets and the NTMA’s free cash balances are included. Compare this ratio to the Eurozone’s which is expected to average 84 percent according to the EU Commission’s Spring Forecast.

So just at the gross level – Ireland could borrow €16 billion over the two years and still be ‘average’ in terms of debt. With this sum, Ireland could invest it into physical and social infrastructural modernisation and enterprise development measures. This would not only stimulate growth and improve our productivity – it would create thousands of jobs in the process. This would increase tax revenue, lower social welfare costs and stimulate consumption – assisting enterprises reliant upon domestic demand. We could turn a vicious cycle into a virtuous one.

This is admittedly a simplified version of an investment stimulus programme (but no more simplified than McCarthy’s A and B options) and it would also face problems – chief of which is, could we ensure that such investment would be efficiently and forensically spent with minimal leakage and maximum benefit?

But it does constitute a third option – one that almost all other industrialised countries are pursuing in one form or another. However, not to refer to it, even if only to dismiss it; to ignore it, to pretend it doesn’t exist as an option – and to continually insist there is only A and B is to do the public debate a grave disservice.

There is an alternative to what, essentially, are pro-cyclical policies – raising taxes and cutting expenditure in a desperate and ever failing attempt to close the fiscal deficit in the middle of the biggest contraction of economic output of any EU country since the war.

At least take a taste.

When is spam not spam? When it's As Gaeilge ...

Last Thursday morning, shortly after The Report had been released and our bloggers were preparing to comment, we received the following message from Blogger:

"Your blog at: http://www.progressive-economy.ie/ has been identified as a potential spam blog. To correct this, please request a review by filling out this form. Your blog will be deleted in 20 days if it isn't reviewed, and your readers will see a warning page during this time. After we receive your request, we'll review your blog and unlock it within two business days."

The e-mail included a link to a page informing us that:

"spam blogs [...] can be recognized by their irrelevant, repetitive, or nonsensical text, along with a large number of links, usually all pointing to a single site"

After some head-scratching - not to mention several frantic e-mails requesting that the site be unlocked so we could continue blogging The Report - we realised what the problem was: Sli Eile's first post on The Report was entitled Bord Snip Nua = Gearr siar-agus-doigh. And Blogger's robots, not programmed to recognise Irish, immediately flagged PE as spam ....

Thankfully, Blogger responded to our pleas and unlocked the site within a couple of hours ...

Debate on public sector pay ...

SIPTU's Manus O'Riordan - writing in the Irish Independent last week - noted that: "In the three years to December 2008, the money values of average public sector earnings increased by 11.3pc, as against 10.9pc for manual workers in industry -- essentially the same rate of increase for each, and both in turn being completely offset by the 11.0pc increase in the Consumer Price Index over the same three-year period."

Predictably, Ed Walsh - writing in yesterday's Sunday Business Post - takes a different tack: "The once-useful social partnership process transformed itself into a damaging mechanism that has fostered a bloated public sector and pay scales that bear no relationship to those of our competitors".

PE's own Sli Eile has deconstructed public sector pay figures here and here.

Any comments?

When is a baseline figure .... not a baseline figure?

The Irish Times has a report today quoting a slightly bemused Michael Somers, head of the NTMA. It seems The Report recommended cutting NTMA staff numbers by 40 from 217. Except ... it seems staff levels weren't at 217 to start with.

According to the Irish Times:

Dr Michael Somers said the NTMA, which manages the State’s debt, employs a staff of 168 and not the 217 cited in the report by the review group chaired by economist Colm McCarthy.

Mr McCarthy’s group recommended that staff numbers at the NTMA be reduced by 40.

“We never had 217 staff, so cutting us from 217 is absolutely not a problem because we are below that,” said Dr Somers. “We would be delighted to cut 40 jobs on that basis.”

You can read the full story here.

An Bord Snip - An attack on the health of the nation

Sara Burke: The Bord Snip Nua report has the potential to undermine the health of the Irish people and specifically those who already have the poorest health.

Proposing a cut in social welfare rates of 5% shows no understanding of the day to day realities of living on €200 a week. Already the vast majority of the 1.2 million social welfare recipients have received a 2% cut in their annual income when their Christmas bonus was taken away from them in the April budget.

Over 90,000 households who receive rent supplement have also received a further cut through the changes introduced in the October and April budgets which mean they have to contribute about €11 more per week, this is in effect an 8% cut. Basic social welfare rates are already below the poverty line of €228 per week.

Does this government really want to push more people on social welfare further and deeper into poverty and poor health? It is well established that the most important contributory factors to poor health are one's income, housing, education and work opportunities. Cutting social welfare rates will not just impact on people's day to day lives and pockets, but also on their health.

The proposals for the health sector are also an attack on the public health service which has been built up over the last ten years. McCarthy et al outline €1.2 billion in cuts in the health area.

The three biggest contributory factors to achieving this massive sum are:

1. Reducing HSE staff in by 6,000 (€300 million) plus additional efficiencies in the HSE (€90 million)
2. Opening up contracts with GPs, opticians, pharmacists and dentists to tender and presumably negotiating better deals for those covered by medical cards (€370 million)
3. Revising down income eligibility for medical cards (€100 million) and introducing a range of new co-payments or increasing extra payments which will hit the pockets of patients (e.g. €5 charge for a prescription for all medical card holders (€70 m); making the 70% of the population who pay for their own drugs pay €125 a month not €100 a month as is currently the care (€37 m); increasing admission charges to A&E from €100 to €125 (€6)).

These measures, if introduced, will hit the people who depend on the public health services the most - the sick, the disabled, the young, the old, the poor.

Cutting 6,000 staff from the HSE is bound to impact upon patient care. The HSE by its own estimations is already trying to cut about 3,000 staff, so what impact will 6,000 fewer staff have on front line services?

The report does suggest that these job losses be achieved in the administration and support areas. However, finding 6,000 of such posts is hardly possible. We are already seeing ward closures, difficulties in getting home care packages, longer waits for some treatments: cuts such as these will only exacerbate pressure on a health system already under pressure.

There is no doubt that there is waste in the system, and the report clearly states that without union co-operation such measures must be introduced with 'compulsory redeployment and if necessary, redundancy'. Given the stand off already in place between HSE management and the unions on a previously announced redundancy programme and paid leave, achieving such cuts in staff will inevitably result in industrial relations turmoil, unless a very different strategy is embarked upon.

Similarly, the report is very critical of deals done with the unions and professional bodies which have hampered so-called 'reform' to date. Both the minister and the HSE management have an enormous capacity to alienate every group they are seeking to 'reform'. Achieving better use of public money and new contracts with professionals is essential if the delivery of health and social care is to be sustainable but, once again, the track record in achieving this to date is non-existent. Remember the consultants' contract deal that was heralded by the minister, which took five years to agree and is a very bad deal for the public purse?

Revising the income guidelines downwards for medical cards and introducing charges on prescriptions for medical card holders is a sure way of hitting the people who need, and are entitled to, these services most.

We know from research carried out by the ESRI that the medical card is an effective pro-poor measure. We know from an international body of evidence that introducing charges for health care and services dissuades people who need those services from accessing and utilising them. We also know that cutting essential health and social care services now can be more costly, both economically and health-wise, in the long term.

Many of the measures detailed in the health section of An Bord Snip may save money in the short term, but are sure to cost more in the not too distant future.

On a more positive note, there are some good ideas on the health section. Getting rid of senior managers and administrators that were duplicated rather than rationalised when the HSE was established is welcome, but nothing new. Reducing the staff in the Dept. of Health by 10% a year for three years also seems to make sense. Restricting the National Treatment Purchase Fund to private facilities is a step in the right direction (however, if I were on An Bord Snip I would shift that €100 million into the public health system). Eliminating all bonuses to HSE managers is also welcome, but again nothing new in that idea. Unfortunately, none of these measures add up to a significant amount of savings.

Other political and economic choices could be made in the health area which could save hundreds of millions of euros, without hitting those who need and are entitled to quality public health services, e.g. more use of generic drugs, revisiting the consultants' contract, spending all public money on public health services, really targeting waste in the system identified in a myriad of reports already out there.
More on this anon....

Sara Burke is the author of Irish Apartheid: Healthcare Inequality in Ireland, which has just been published by New Island. www.saraburke.com

The cuts and children

“There’s a definite stink of class war off these documents.”
An tSaoi: So commented “ec” on Irish Economy at 3.34 p.m. yesterday this afternoon. This is a fair summary of the cumulative waves of cuts, proposed by Mr. McCarthy and the rest of his committee.

However, get used to it. The Commission on Taxation will report very shortly and is likely to produce more of the same. The two groups have a common member, Ms Mary Walsh a former partner in PWC. Those with long memories may remember her from appearances in front of the Public Accounts Committee as Tax Advisor to AIB.

Rather than look at Mr. McCarthy’s reports in their entirety, I want to consider the way it will affect just one group, children. Children are proposed to take hits under various headings, some small others much larger and more public, but all moving in one ideological direction.

Sport: Irish children already have poor participation rates in sporting activities, whether at school or through community clubs. Sport in schools was already under severe pressure from staffing adjustments in place and many schools are dependent on Development officers working with local clubs, but employed through their parent bodies. There is a suggested cut of 34% (page 16, volume 2) in current funding proposed, which would wipe out this service, as the sports bodies are not in a position to cover the complete cost. Sport for all becomes Sport for all who can afford it.

Education: The total reduction in spending proposed is €746M. The report validly asks many questions about the management of Irish education, which as a current member of a Board of Management of a 2nd Level school and a former member of a BOM of a Primary School, I have asked myself in the past.

One third of primary teachers are not assigned classroom teachers, but rather have a variety of other functions, leaving a substantial discrepancy between the ratio of teachers to pupils and class size. There is also a considerable discrepancy between the pupil teacher ratio and class size between urban and rural areas.

The proposals therefore to merge many smaller schools makes sense and will improve the educational experience for children. I would go perhaps slightly further than Mr McCarthy. My own view is that the optimum size of a primary school is in the region of 200 – 250 pupils. There will always be areas where distance, cultural and religious issues will make that impossible, however they are the exception.

At secondary level, he proposes cutting 25% of the €101M subsidies provided to fee paying schools. I would suggest that it is time to go the whole way. Likely savings are perhaps just €50M, as children and perhaps some schools would return to the voluntary free sector, but this is surely about fairness.

Cuts which have no logic and will hit children include:

• Reducing capitation grants by 10% to save €25M will cost more in the long-term. Schools in poorer areas will not be able to cover the additional by fund-raising.
• Cutting the numbers of Special Needs Assistants by 20% to save €60M and increasing class sizes will substantially dis-improve the educational experience for the whole class. It will also prevent school trips by reducing the number of adult supervisors.
• I understand that the Dept. of Education’s existing projections are based on the wildly optimistic hope that 50% of the children of migrants are going “home”.

Social Family Affairs (SFA): Approx. 35% of the total cuts are expected to come from this area and, as many of the payments are related to children, they are clearly in the firing line.

There is a proposal to cut Child Benefit by 18% for the first and second child and 33% for third and subsequent children. This is a simple clean standardising cut and far less bureaucratic than most of the other proposals including taxation.

Let me make an alternative proposal. There are approx. 100,000 children who are put on their parents’ payroll to obtain single tax credits. That family therefore can benefit from both the tax credits and child benefit. I would suggest that we do away with Child Benefit completely and allow for the refund of the single person’s tax credit for all children, Under 18, resident in the State and in full-time education. No double claiming by the business classes would save approx €200M, and as the payment is not a SW payment anymore, it would not be covered by EU Regulation 1408/71, saving payments for children not resident in the State.

Mr McCarthy does state “Care will need to be taken to avoid the inadvertent accumulation of measures in individual cases,” but his approach is likely to make the position of many families with more than two children significantly worse, without providing any encouragement for one or both parents to return to the formal workforce. A universally paid Child Benefit is neutral in that respect. I have always been suspicious of the operation of Family Income Supplement and I am surprised that he has not looked at the streamlining of payments into a single universal payment for children, which would not negatively distort the workplace market.

Conclusion: This report is an extremely good example of the complete lack of joined up thinking in relation to Government expenditure. The proposed adjustments may make short-term savings but will only lead to increased problems in the future. I have no doubt better use could be made of resources, but this report provides little by way of proposals to do so. If implemented, it will ensure that we remain one of the most unequal societies in Europe.

Report is expression of a paradox

David Jacobson: Rather than discuss the details of the report, I’d like to make four more general points about the situation.

First, the report itself is an expression of a ridiculous paradox. In the context of a crisis arising from the fact that markets did not work and were inadequately regulated by the state, the job of recommending cuts has been given to a neoclassical economist. Like others of his ilk, he believes in markets and this underlies his proposals. Surely a strategy for the way forward should focus on radical new ways of generating output in the economy in such a way as to support the people who live in this country.

Second, the McCarthy report provides a huge range of possible cuts. The selection of which ones are to be implemented will be done politically. This again calls for political economy in the analysis of the report.

Third, given the short-termism of political perspectives – with a time horizon of about as long as the period between elections! – the cuts selected will be those resisted by the weak. Arguably politicians are influenced by their key supporters, the powerful and the rich. To the extent that this is so, the cuts implemented will be those in the interests of the powerful and the rich.

Fourth, consideration of the report will have to be balanced with the forthcoming report of the Commission on Taxation. In the end the choice of what to do will have to balance an increase in taxation with a reduction in government expenditure.

An Bord Snip Nua: reactions

In the blogosphere, World by Storm - over at Cedar Lounge - has been trawling through the Bord Snip Nua Report: you can read his post on the cuts you may have missed (as well as a nice plug for Progressive Economy) here. Irish Election is also carrying reactions, including this on the cuts as they affect the Dept. of Health.

On the political front, the only statements available online so far are from Labour Leader Eamon Gilmore here, and Sinn Fein's Aengus O Snodaigh here. We'll link to other statements as they become available.

An initial reaction from TASC Director Paula Clancy is available here.

Statements available so far from advocacy groups include this from Age Action Ireland, while Focus Ireland is quoted in the Irish Times as saying it is "vital for the Government to establish a true picture of the impact of recent welfare cuts before considering any of the proposals of An Bord Snip Nua in relation to further cuts in welfare spending".

A spkesperson for the National Disability Authority is quoted as expressing concern at the suggestion in the report that responsibility for disability policy would revert to the Department of Health and Children rather than remain under the remit of the Department of Justice Equality and Law Reform.

Finally, an extended interview with Colm McCarthy, Chair of the Special Group, can be watched here.

We'll be linking to further news and reactions as they become available.