Creating rather than destroying jobs

Tom Healy: The Nevin Economic Research Institute has published the Autumn Economic Observer here. The key messages are:
* We have choices
* A smaller fiscal consolidation (€2.7 bn) combined with an accelerated investment stimulus next year (of which €500m 'off the books') could create 21,000 additional jobs compared to 'Plan A'
* A Plan B would raise revenue starting with the highest income households (>€100K p.a.) and maintain front line services while re-investing any 'savings' into priority areas such as a Youth Guarantee for unemployed school and college leavers.
* Plan B envisages -7.5% government deficit in 2013.

We have used HERMIN to model the impacts. We have gone with Department of Finance projections and estimates and used the model to show how a reversal of planned cuts would be beneficial and just as efficient in reaching 'Troika' targets. A seminar will present the results today while my colleague Rory O'Farrell and I will present a paper on 'Alternative Fiscal Adjustment Pathways' at the Dublin Economics Workshop to be held this year in Galway next month.

Event on tax justice

As part of the Dóchas EU Presidency Project, and to coincide with the visit of Christian Aid's 'Tax Justice Bus' to Irelnad, Christian Aid is organising an event on 'Tax Dodging Hurts us All' on Thursday, September 27th, from 6 pm to 8.30 pm in the European Parliament Buildings, Molesworth Street. It will be chaired by Senator Katherine Zappone, and speakers will include Ricardo Barrientos (senior economist at ICEFI, former Deputy Minister of Taxation Guatemala), journalist Justice McCarthy and Professor David Jacobson, well-known to readers of PE.

Guest Post by Vic Duggan: Treading water beneath the surface

Vic Duggan: From its peak at the back end of 2007, the Irish economy sank like a stone for two solid years, seasonally-adjusted quarterly GDP falling 10.7% in real terms. Ever since, it has seemed alternately to be sinking more slowly or rising gradually. In reality, for two and a half years it has been treading water beneath the surface. Between the first three months and the second three months of 2012, estimated GDP was within a rounding error of zero growth, avoiding a technical recession – two quarters of successive GDP contraction – by less than one euro for every person in the country. In the 10 quarters since end 2009, GDP has increased just 2.6%, barely keeping pace with population growth. The unemployment rate remains stranded at 14.8%. The domestic economy is starved of the oxygen it needs to grow: consumers are overburdened with debt; businesses are either afraid to invest because of weak demand or unable to invest due to lack of credit; government is reinforcing the problem through ongoing, enforced austerity. The one bright light is Ireland’s continuing strong export performance, even in the face of a challenging external environment. Those who until recently were writing Ireland off as an ‘export laggard’, in need of aggressive austerity to restore competitiveness, must now surely see that the opposite is in fact the case. Cost competitiveness has been largely and painfully restored, and exports remain robust, but austerity is undermining confidence at home and sapping domestic demand. The CSO’s mid-September data dump tells us the following:

GDP was flat in the second quarter, but is half a percent lower than it was a year earlier.

GNP increased unexpectedly by 4.3% in the second quarter, clawing back some of its recent losses to reach almost exactly the same level it was at in Q3 2010.

The unemployment rate remained flat at 14.8%, but there were 13,700 fewer people employed than three months previously, and 33,400 fewer than a year ago.

Long-term unemployment surged to 8.8%, from 7.7% a year earlier, now accounting for 6 in 10 of all people unemployed and 1 in 11 members of the labour force.

The labour force – the number of people available for work – fell by 29,500, or 1.4%, due to a combination of increasing emigration and declining participation (i.e. people giving up on finding a job).

1 in 4 members of the labour force is now either unemployed or under-employed, working part-time because they can’t find a full-time job.

The Current Account hit a record surplus of EUR 3.2bn in Q2.

The Trade Balance for goods hit a record surplus of EUR 10bn.

The Trade Balance for services hit a record – and rare – surplus of EUR 1.3bn.

Quarterly national accounts are often an imperfect guide to the state of the economy. Quarterly numbers are volatile, and the latest data points are estimates subject to – sometimes substantial – revision. GNP figures, often labeled a convenient proxy for the domestic economy in Ireland, are notorious in this regard. While the debate on whether GDP or GNP is the best measure of wealth, output etc. may never be settled – in most economies they are near identical, but the large multinational presence in Ireland means they differ by about a fifth – but at least quarterly GDP figures are not susceptible to the profit repatriation policies -and their execution – of the multinational sector. One can argue the toss as to whether the economy is still sinking or slowly rising, but it’s crystal clear that the surface is still a long way off.Vic Duggan is a Consultant Economist with the World Bank, writing in a personal capacity.He blogs at vicduggan.wordpress.com

Local Government Fostering Job Creation

Nat O'Connor: The County and City Managers Association (CCMA), the umbrella group of the local authority head managers, has published a study showing 2,323 projects and initiatives where local authorities have helped boost job creation.

The press release and 30-page full report can be accessed on www.lgma.ie. There is also a spreadsheet list of the various initiatives.

Many of the initiatives are small scale (less than €10,000) although some major investments (€1m+) are included too.

It is an interesting exercise in both openness about spending plus showing where efforts are being made to foster employment. It would be worth detailed analysis at local level to see what initiatives are working well (or not), which ones are cost efficient and what different counties can learn from one another. Obviously, local authorities have been asked to play a role in the national Action Plan for Jobs. This report gives some indication of what might kinds of actions might be possible in that space.

Budget Transparency Reduced by Oireachtas Website Changes

Nat O'Connor: Public access to the official record of Oireachtas debates has been diminished by the bizarre decision of the Oireachtas website to cease publishing the record of debates using the universal standard format XML. This means that a popular website (KildareStreet.com) used for searching the official record no longer can be updated.

KildareStreet.com has issued an explanatory statement.

Whether by accident or design, this could not have come at a worse moment for anybody concerned with the upcoming budget, as well as the vital debate on matters of national importance (like Ireland's deal with the EU/IMF). Access to the offical record will be significantly hampered by the decision, as the Oireachtas website does not provide the same quality of search features as KildareStreet.com, which makes it easier to search for individual TDs and key phrases in the official record.

This Government is committed (in the Programme for Government) to the following: "We will open up the Budget process to the full glare of public scrutiny in a way that restores confidence and stability by exposing and cutting failing programmes and pork barrel politics." (page 23).

In fact, the Programme for Government is full of commitments to openness and transparency that are belied by this move (intentional or not):

"We will develop Ireland as a ‘digital island’ and first-mover when it comes to information technology by ensuring more progress on e-Government and moving Government services online, investing in ICT in schools, and investing in information technology in the healthcare sector." (page 9)

"Government is too centralised and unaccountable. We believe that there must also be a real shift in power from the State to the citizen. We will legislate on the issue of cabinet confidentiality. We will legislate to restore the Freedom of Information Act to what it was before it was underined by the outgoing Government, and we will extend its remit to other public bodies including the administrative side of the Garda Síochána, subject to security exceptions. We will extend Freedom of Information, and the Ombudsman Act, to ensure that all statutory bodies, and all bodies significantly funded from the public purse, are covered."(page 20)

"Real reform of the public sector will require a commitment from the whole of government to become more transparent, accountable and efficient. It will require: ... • Citizens having a basic right to key information on the performance of key services." (page 28)

"Open Government: Where there is secrecy and unaccountability, there is waste and extravagance. We will pin down accountability for results at every level of the public service – from Ministers down – with clear consequences for success and failure. Ministers will be responsible for policy and procurement and public service managers for delivery." (pages 28-29)

"Government services websites, public offices, telephone services, and helplines will be reconfigured to facilitate access to a broad range of government services through a single point of contact." (page 31)

"We will complete ratification of Aarhus Convention on access to information, public participation in decision-making and access to justice in environmental matters." (page 61)

What now for open and transparent government, and an open budget process?

It is an entirely reasonable expectation for public information not only to be available, but to be made available in standard, easy to use formats, which allow citizens to avail of contemporary information technology to access and search that information.

FEPS vacancy: economist

Nat O'Connor: FEPS (the Foundation for European Progressive Studies) is advertising the important post of Economic Policy Advisor. More details here: http://www.feps-europe.eu/en/vacancies.

German Call for EU Programme of Investment

Nat O'Connor: The major German social democratic foundation (Friedrich Ebert Stiftung) has circulated a cogent 24-page analysis outlining the case for an EU-wide investment programme which, they argue, "must emulate the successful Marshall Plan after the Second World War" in order "to arrest the downward spiral" that the EU currently faces.

National Income and Expenditure 2011

Michael Burke: The argument in favour of ‘austerity’ measures is that the overriding objective of policy must be to reduce the government deficit, that this must be done by cutting spending and that there is no alternative to current policies. The release of the latest Irish National Income and Expenditure for 2011 should serve to dispel the several fallacies contained in that argument.

GDP has contracted by €30bn since 2007 in nominal terms, down 6.8 per cent in real terms (Tables 5 and 6). GNP, which excludes the distortions of multi-national corporations who book profits in Ireland to avail of its ultra-low corporate taxes, has fallen by €35bn since 2007 - a contraction of 11.1 per cent in real terms. If the overriding objective of policy were the optimum sustainable prosperity and well-being for all citizens then clearly the current measures would be a spectacular failure.

However, the objective to cut government borrowing on a sustainable basis is also not being met. ‘Austerity’ measures began towards the end of 2008 (unprompted by any international agency, but as a domestic policy choice). From 2008 to 2011 government current receipts have fallen by €6.3bn while current expenditure has risen by just €0.5bn, a total increase in the deficit of a little over €6.8bn despite all the fierce ‘austerity’ measures (Table 21). Worse, in relation to GDP this current deficit (excluding capital spending and receipts) has risen from 2.2 per cent of GDP to 6.7 per cent. Even if debt interest payments are excluded, the ‘primary deficit’ has risen by €4bn.

The only reason supporters of current policy can claim success in deficit-reduction is because the huge one-off payments to rescue the bank bondholders have come to a halt. These ‘grants to enterprises’ have amounted to over €43bn in the 4 years to 2011. But, even if they have now come to an end (which is at least questionable), they cannot be taken as evidence of any underlying improvement in the deficit arising from economic policy. That can only be gauged with reference to the government current income and expenditure, which is deteriorating.

What Is Policy For?

These data are of course well known in the Department of Finance, whose officials advise Ministers. It is improbable that both government and the Troika are unaware of the underlying state of government finances. If current policy even closely matched the success claimed for it, there would hardly be any need for the threatened further ‘austerity measures in the forthcoming Budget.

Yet current policy will be maintained and even deepened. This is because there has been some success, of a kind, for policy. In Fig.1 below data from Table1.1 of the NIE is shown (click to enlarge).

Source: CSO

Even though GDP has been contracting throughout the period, profits have risen in the last two years. At the same time employees’ remuneration has fallen sharply. In a recession the natural tendency is for profits to fall. This is because profits are the surplus after fixed costs and costs of labour and other input costs are deducted. Since fixed costs for firms are often unchanged, the fact the wages do not fall faster than sales means profits decline. This is what happened to profits in both 2008 and 2009. However, after ‘austerity’ measures were introduced in 2008, wages fell in 2009 and have continued to fall since. This has allowed the natural fall in profits to be reversed, at the expense of wages.

To put this in perspective, labour’s share of national income has fallen so far in 2 years that it could be increased by 8.7 per cent over 2011 levels and this would still only have the effect of returning its share of national income to the crisis levels of 2009.

It is argued that the policy measures which have the effect of lowering wages and increasing profits are necessary in order to generate recovery, often described as ‘restoring competitiveness’ even while there is incessant and misplaced boasting about the rise in Irish exports.

But it is impossible to engineer a sustained recovery without an increase in investment. The decline in Gross Fixed Capital Formation (GFCF) is greater than the total decline in GDP, €32bn versus €30bn (Table 5). Yet, from 2009 onwards, when profits rose by €8.6bn, GFCF fell by €9.5bn. The policy of transferring incomes for labour and the poor to capital and the rich, which is the real content of austerity, has been an utter failure in reviving growth.

Policy ought to be aimed at the optimum sustainable growth in prosperity for all citizens. The policy of transferring incomes to capital and the rich does not achieve that, nor does it foster investment, the determinant of all future prosperity. Meanwhile the bluster about an improving deficit position should be recognised for what it is, just bluster.