Fine Gael's Economics

Nat O'Connor: Fine Gael leader Enda Kenny is quoted as saying that Richard Bruton will be Minister for Finance under any FG-led government and that this is "non-negotiable". While this may simply be political posturing, and the outcome of any possible future coalition negotiations will depend on the numbers of seats each party brings to the table, the message to any possible future coalition partners would appear to be that Fine Gael will control the economic paradigm that will guide them in government. So what's different from the present paradigm, if anything, about Fine Gael's economics?

Fine Gael has published a number of economic policy papers recently, including New ERA (its stimulus plan - revised November 2009), A Fresh Start for Jobs in Small Businesses and Hope for a Lost Generation (a plan to cut youth unemployment by a third). These documents are a fair place to start, to look at what Fine Gael proposes to do in office and to see to what extent this represents a break from the economic paradigm that got us to where we are today.

This is not intended to be a point-by-point critique, as I am only looking to identify Fine Gael's economics, not dispute the detailed costings, etc.

NewERA is essentially about managing the semi-state sector better, including using them to borrow money for investment in infrastructure (and creating 105,000 jobs), for which they will seek a commerical return through charges on customers. The major plank of this is renewable energy (Ireland to use 50 per cent renewable energy by 2020). A major broadband roll-out is envisaged, as is upgraded water infrastructure.

So far, this could be a policy objective from the left, right or centre. However, the proposed mechanism is a commercially driven semi-state company (NewERA Ltd) which will manage five merged/restructured semi-states. It will operate commercially, with the CEO and board appointed by the Taoiseach. A big, cross-utility merged regulator will ensure more powerful, "pro-consumer" regulation.

Fresh Start is sub-titled "18 ways to support small business and save jobs". In an introductory message from Enda Kenny, Fine Gael "commit to preserving our low tax model as the best means to promote growth, enterprise and employment." The 18 specific measures include: employers PRSI exemptions/subsidies; a national recovery bank; reducing VAT; abolishing the travel tax; reviewing Employment Regulation Orders (legally-binding pay agreements in hotels, retail, etc); prompt payment from State bodies; cutting red tape; business and employment units in local authorities; reducing energy costs; freezing local authority rates; and supporting start ups.

Hope for a New Generation includes: a national internship programme; a back to education schmeme; Community Employment schemes; workshare; and the above 'jobs tax cuts' (on employers PRSI).

From this snapshot, I can conclude that Fine Gael intend to refocus the State's involvement in the economy towards jobs. There is a recognition of the high multiplier effect of State investment in capital projects. Likewise, the policies also recognise the fact that SMEs provide many Irish jobs and that supporting them is important. There seems to be a reliance on tax cuts or tax expenditure (credits, allowances, etc.) to stimulate economic activity. There is also some long-term thinking about Ireland's energy security and the potential of a good return from investment in renewable energy generation.

The economics underlying the proposals seem orthodox and do not address the major problems shown by the global economic crisis. Although the decisions of recent government added miseries to the Irish case, the global crisis still requires all parties to re-think the received wisdom of economics in a much more fundamental way.

As an example of such a rethink, Social Justice Ireland have published "An Agenda for a New Ireland" (Full PDF here). They argue that "Ireland’s policy-making for more than a decade was guided by many false assumptions" including the assumptions such as: "Economic growth was good in itself"... "Infrastructure and social services at an EU-average level could be delivered with one of the lowest total tax-takes in the EU." ... "The growing inequality and the widening gaps between the better-off and the poor that followed from this approach to policy-development were not important as everyone was gaining something." ... "Low taxation was good." ... etc.

The failures which stem from these false assumptions include: "Failure to take action to broaden the tax base or to promote tax equity."... "Failure to overcome infrastructure deficiencies,"... "Failure to adequately address high energy costs or to promote competition in sheltered sectors of the economy," ... and "Failure to appropriately regulate the banking and financial services sector or to manage the growth of personnel numbers in the public service."

The SJI document alone poses questions for the Fine Gael policies. And the criticisms of recent Government economics cannot all be dismissed as part of 'crony capitalism'. There are genuine questions to be answered by advocates of the orthodoxy. For example, if Fine Gael are commited to Ireland's low tax model, how do they define that? Does it leave scope for a restructuring of the tax system to make it more egalitarian? Does it leave room for some increase in tax, as you simply can't have average European level of services without average European levels of tax?

Indeed, Social Justice Ireland proposes retaining relatively low tax (35 per cent of GDP, p. 26), versus recent suggestions by the ESRI's Prof. John Fitz Gerald, who would prefer Ireland to move to EU average levels (45 per cent of GDP). Where is Fine Gael on this issue?

On a more fundamental level, what about economic growth? Have Fine Gael seriously considered alternative ways of measuring economic progress, including quality of life, health, education, environment, distribution of wealth, etc? What about suggestions that the economic situation of most people could improve, despite a fall in GDP, if there was better organisation of the economy? In the long-term, a green economy cannot rely on continued growth models.

Fine Gael's policies seem to reflect a belief in the commercial sector and market forces that is not based on the evidence of the global crash. For example: banking regulation failed; corporate governance failed; long-term planning did not occur; and wealth was further concentrated in the hands of fewer people. So, why should we have faith in a "commercially driven" semi-state sector or in continued adherence to Ireland's disreputable low tax strategy?

Looking for more insight into the above, Richard Bruton's blog posts add some more detail. In March 2009 he posts the press release for the launch of the NewERA idea. The familiar buzz word "competitiveness" seems to be the driving force behind it. More recently, in January 2010 he discusses the Competitiveness Council’s Reports. These are referenced as reasons underpinnng the NewERA proposals. For example, "dissipation of responsibility across 34 separate public authorities has resulted in poor planning and appalling waste"... "it is no longer essential that the State owns all of the capacity for producing gas or electricity, though the grids must remain publicly owned." ... "All of the investments will be on strictly commercial terms. The companies involved will commit to servicing their loans without a State guarantee. This will bring a new element of commercial realism into the operation of companies and force new disciplines into their operation." This post has a press release feel to it too, nevertheless it further clarifies what Fine Gael envisage 'competitiveness' means.

A serious consequence of the above policies seems to be a shift from taxation to charges - charges for water, waste, energy at "commercially driven" rates. How will waiver schemes work in this context? Currently, private commercial waste collection firms don't always offer them. There is a real risk of a set of charges being levied on household incomes in lieu of a more broad-based and progressive tax system. This would be regressive in effect, as those on lower incomes would pay proportionately more of their incomes.

Another logical consequence of the above policies include weakening local authorities - by freezing rates for five years and limiting their role in water services to being "agents" of the proposed Irish Water national utility company. There is a pressing need to reform local authority funding, and a rates freeze sends the message of 'no change' for five years, while local services (like roads) continue to deteriorate. How can we have new local politics without funding reform? Also, it is glib to suggest that water leakage stemmed from "dissipation of responsibility" across the authorities. There has been a lack of capital investment in water (and other basic infrastructure provided by local authorities, like sewage and flood protection), which in turn was due to Ireland's low tax base and, in particular, the inadequate funding of local government.

Also, in terms of injecting "commercial realism" into the provision of utilities, what is to stop the State being stuck as the 'insurer of last resort' if commercial power plants threaten to turn off the lights? How will the commercial operation of firms be regulated to prevent short-term profiteering or asset stripping at the expense of long-term investment?

Whether a general election occurs in 2012 or sooner, Fine Gael is reasonably likely to lead the next government. If so, Fine Gael's focus on jobs and stimulus is welcome. But the above documents are more about suggestions for how FG would manage the State's role in the economy, broadly based within current constraints and without challenging the dominant economic orthodoxy.

Hence it is important to begin a more in-depth, open, public discussion about the assumptions Fine Gael (and other parties) make about economics. As a number of posters on this blog have commented, alternative or progressive economics is not the sole preserve of the 'left' (howsoever defined).

If Fine Gael are seeking to control Ireland's Ministry of Finance for the five or ten years after the next general election, then - especially in the context their proposals on New Politics, including open government - I hope that Fine Gael will publish more about their economic perspective and assumptions so that we can examine alternative options and discuss what economics represent the long-term public interest.

One thing Richard Bruton blogged in December 2009 about the budget was "To successfully implement change, you have to build a broad-based coalition to implement it." I hope this is Fine Gael's belief about economics, because any claim to offer "new politics" is an illusion if the economic paradigm to be adopted is "non-negotiable".

Report card for the parties in opposition

Sli Eile: Over recent weeks I assessed the various economic proposals of some political parties – see previous posts on this site for Fine Gael, Labour and Sinn Féin. The choice of parties is to do with their current status as parties enjoying the liberty of opposition. As for the three two Government parties – we know where they stand on strategy from day to day. Just read the newspapers.

So, where do the three opposition parties stand on the economy? What they currently say and what they might do in a future Government are not the same – clearly. But, for now lets assume that what they say is what they will attempt to apply in policy if they find themselves in Government. The ‘report card’ suggested in my post of 1 April was based on four core principles:

Fairness and equity (do the proposals effectively address inequality and advance a redistribution of income and opportunities towards the less well-off)?

Public, social and community infrastructure (do the proposals provide an adequate basis for delivering vital social services)?

Sustainable economic growth and competitiveness (do the proposals represent a sensible strategy to position Ireland for the inevitable upswing - eventually)?

Public finances (do the proposals address the need to re-structure taxation and improve the effectiveness of public spending in meeting key economic and social goals)?

1 Fairness and Equity

Of the three parties, Fine Gael seem to be by far the slowest to raise taxes on the very wealthy (remember controversies about capital taxes in the 1970s and 1980s). Labour is coy about how much tax it would raise and from whom. The bulk of fiscal adjustments would come from tax increases – capital, tax relief reductions, carbon taxes, excise taxes, higher top tax rate and targetting of tax exiles. Sinn Féin takes a similar approach. However, none of these parties have called for a reduction in social welfare payments.

2 Public, social and community infrastructure

All three parties emerge as strong supporters of investment in public infrastructure. Fine Gael seems to have put in the most work in costing it and has made some interesting proposals in regard to green technology and the use of a new State Holding Company for infrastructural investment. All three parties are sitting on the question of bank nationalisation. However, events may overtake them before they have a clear policy line. Interestingly, FG, LP and SF each in their own way favour the establishment of some type of public credit institution to compete in the market place.

3 Sustainable economic growth and competitiveness

All parties focus on supply-side adjustments including investment in education including school buildings. Fine Gael want reductions in public sector numbers and wage restraint. All parties agree on the need for a generous economic stimulus. So, on paper at least, the opposition is Keynesian.

4 Public finances

A key issue, here, is a long-term commitment to tax reform, and along with it reform of local democracy and reform of public service. Labour and Fine Gael say that they are clearly committed to public sector reform.

Leaving aside issues to do with Europe and the national question (which of course can’t be done in the real world) – where is Labour on the ideological plane vis-à-vis FG and SF? Much closer to SF, it would seem, than FG. However, for now, LP is ruling out a left alliance before an election and is not contemplating getting into bed with FF after any general election (which theoretically is not to say they wouldn’t if it were the only bed available). Where does that leave Labour? Back to the 1980s?

Its all about choices

Listening to the RTE News at 9 pm some evenings is not a healthy night cap for those worried about jobs – their own or those of their loved ones. Between Rating Agencies, banking economist forecasters, Government ministers and political pundits, you could be forgiven for thinking that the end of the world is nigh. At least three features of this hysteria stand out:

• There is a terribly narrow and short-term focus: the latest closure, the latest shocking live register figures, the latest rumour about more cuts and budgets on the way (does anyone think that April 7^th is the end of it?)

• Evidence is selective (picking those facts that suit and brushing over inconvenient facts)

• The recipe is similar: cut wages, cut public spending, leave some lucrative tax reliefs in place and - not infrequently - open the way to more public asset-stripping.

To redress the balance, one should look at a working paper by the Economic and Social Research Institute. Bergin, Conefrey, Fitzgerald and Kearney make the case that things are not so bad that we do not have opportunities to address the disorder in public finances while continuing to invest in key areas such as health and education. Yes, the ESRI researchers do call for public spending cuts, including cuts in wages and salaries (as does Henricksson), but they also point out that:

• If the international economy recovers as early as 2011 Ireland is set to bounce back and possibly grow faster than other countries, given the estimated size of the Output Gap (actual to potential following the 2008-09 recession) in Ireland (page 7);

• When allowance is made for financial assets held at the National Treasury Management Agency, our debt to GDP ratio is not as bad as its seems – in fact it is closer to 20% and not 40%; and

• The Balance of Payments is heading for surplus in 2009 (as imports fall).

So we are still some distance from a sovereign default and the IMF, ECB, Germany, etc coming into ‘sort us out’. The ESRI make a useful conceptual distinction between the structural and cyclical components of the Government deficit – a point picked up swiftly by Fine Gael and Labour in their pre-budget submissions. However, in practice, such a distinction is difficult to put into operation as the structural component, itself, is contaminated by cyclical elements (the skewed nature of our tax base and its inter-action with the Construction sector) and is related to the unusually low level of direct taxes (by international and EU level). Nevertheless, the ESRI paper says that Government should seek to address the structural component – which they estimate to be between 6 and 8 % of GDP) and the not cyclical one.

The ESRI authors make the case for a front-loading of fiscal adjustment ‘just in case’ the international recession lasts longer than two years. Clearly, they are on the side of cutting nominal wages (but not necessarily real?) as well as well public spending. They support new sources of revenue including taxes on carbon and on property. Tellingly, they comment:

If the public wishes to preserve the current level of public services, then revenues will have to be raised to between 35 per cent and 40 per cent of GNP

(not to divert to a technical discussion at this point – they should be relating taxes to GDP and not GNP since taxes are levied on all income or output generated within the State and, potentially, taxable before it flows out through profit and other income repatriation).

This is a key point and one that the political parties – by and large – have evaded since the onset of the Celtic Tiger. What level of public services do people want and how do they want to fund it? For a long time, some interests tried to evade the issue by pretending that vast improvements in public service delivery could be made through efficiencies without significantly touching the tax base and tax rates. This fallacy is being exposed in the clear light of the new economic realities. Ireland lags behind most European countries in terms of tax take as a percentage of national income – whether measured by GNP or GDP.

CORI Justice argues that Ireland’s total tax take should be raised to a level that is 1.5% below the EU-average between now and 2013 – providing two thirds of the adjustment sought by Government and the European Commission. This is a very modest but realisable goal.

Support for domestic stimulus

The Fine Gael document ‘Rebuilding Ireland a NewEra for the Irish Economy’ was published on 26 March but has received comparatively little attention in the media as commentators focus, narrowly, on the string of bad news and impending budget adjustments. Like the curate’s egg, the Fine Gael document has many ‘excellent parts’. It also contains a few suggestions that raise serious issues and concerns.

In summary:

1. The proposals by Fine Gael have considerable merit and are worth considering not only in the medium-term but immediately given the need to rebuild the economy and start generating new employment this year;

2. The document is well grounded empirically without being overly technical and the case for a targeted domestic stimulus is well made – countering the pessimism of many commentators with regard to the efficacy of a domestic stimulus in general in Ireland; however:

3. The main drawbacks relate to the narrow focus on just two sectors as well as the propensity to follow its sister party in the UK in regard to privitisation.

Read on ………

On a first read the document strikes the reader as being:

State activist in the role it assigns to a new public body ‘The New Economy and Recovery Authority’ (NewEra) along with no less than six other proposed semi-state companies – Smart Grid (following re-structuring of ESB), Broadband 21, BioEnergy Ireland, Renewable Energy Ireland, Irish Water; Greener Home Bank (involving a ‘significant Government recapitalisation of EBS - Education Building Society - to convert it into a state-supported mutual bank, with a particular focus on mortgage lending and home environmental improvements’).

Green in the weight it gives to environment-friendly initiatives (stating that ‘the winners of global competition will be those countries that move quickly to low carbon and resource efficient economies’)

One detects a green-blue-red alliance in the making? However, the devil is in some of the details. It should be noted that:

• NewEra would be a State Holding Company comprising existing companies such as Bord Gáis and ESB along with others and would, ‘over time’ sell ‘existing and new state assets no longer considered strategic to the goals of the NewEra initiative (starting with Bord Gáis and ESB International)’ – in other words, NewEra along with other holding companies would be vehicles for gradual privitisation of existing (or newly created) state assets;

• The Board and CEO of the proposed Authority would be political appointments (refer to page 7 where the ‘Taoiseach of the day’ would appoint these);

The Fine Gael proposals focus on two key sectors: energy/environment and broadband. Areas not addressed include capital spending on schools (e.g. cited in the Sinn Féin document), early childhood education and care, social housing and infrastructural provision for primary healthcare.

One of the key goals set by Fine Gael is to break the link between fossil fuels and car use by setting a target of 50% by 2025 and 100% electric cars by 2030 (p13). By contrast, Fine Gael say that the current Government target is to reach 10% electrically powered vehicles by 2020. It also places a big emphasis on Ireland becoming a world leader in ocean energy technology – both in terms of generating power as well as selling it on international markets.

The failure of privitisation to deliver sufficiently on broadband in the case of Eircom is acknowledged by Fine Gael (p16):

‘…in countries like Ireland with low population densities, widespread roll-out of high-speed fibre networks is too expensive, and the pay-back period too long, to be quickly delivered by the private sector. Eircom has announced a scaling-back of its already limited investment plans, and all private telcos are struggling to raise capital for new investment. It is crucial that the State now take the lead in this area.’

The projected additional 100,000 jobs by 2013 are based on what are described as ‘conservative assumptions, drawn from empirical evidence of the economic impact of investment in construction and infrastructure’ (page 11). The document goes on to estimate the likely public spending (on social welfare) and borrowing reductions (arising from reduced current spending on welfare and reduced exchequer financing of infrastructure since funding of the various new initiatives would be ‘off the Government’s balance sheet. The projected reduction in Government borrowing would be as much as €4.1 billion by 2013 (but only €1.2 billion in 2010).

The multiplier effects are as large as 2.2 in the fourth year of the four-year projection. Two significant sources of empirical research are cited:

• An IMF Staff Position Note – ‘Fiscal Policy for the Crisis’ December 2008; and

• ‘The Impact of Fiscal Shocks on the Irish Economy’ – Benetrix and Lane, Institute for International Integration Studies, February 2009.

The funding of the scheme would come through: loans from the European Investment Bank and financial markets (echoes of matching private equity for the banks’ Government recapitalisation scheme), the National Pension Reserve Found, NewEra bonds for the Irish public (echos of the ICTU proposed national recovery bond) and asset sales ‘in the medium-term’ beginning with ESB International and Bord Gáis (echos of New Labour and UK Conservatism).