Peter Connell: Writing in last Saturday’s Guardian, Ian Jack, bemoaning the irrelevance of the current party conference season in the UK, argued that the media, rather than providing publicity for stage managed political rallies, would better serve society and its citizens by focusing on the powerful institutions and corporations whose decisions shape our society, our economy and our lives. In his piece Jack laments the fact of high levels of economic and financial illiteracy and argues that ‘we don’t understand what controls us’. How can we address what is essentially a democratic deficit? How do we control what we don’t understand?
Given the high level of complexity of the financial system that is an integral part of modern capitalism it is, perhaps, unreasonable to expect that the average citizen will have a good handle on credit default swaps, contracts for difference and ten year bond yields. But that’s not really the problem. The real issue is how is a citizen in a democracy to assess the efficacy of their government’s economic management without some grasp of the context in which decisions are made? The government, naturally enough, have claimed credit, for renegotiating the terms of the EU/IMF bailout that will see a significant reduction in the country’s debt burden on the back of a 2% cut in the interest rate. It’s fair to say that most reasonably well-informed citizens will assess this claim in the context of the Minister for Finance indicating in early June that a 0.6% rate cut might be the best that could be hoped for. Very often, though, it’s much more difficult to make a judgement call.
A good example is the infamous promissory note which, under current arrangements, will cost the Irish taxpayer €65 billion over the next 14 years. Michael Burke, Tom McDonnell and Michael Taft performed a valuable public service when posting on PE on the promissory note and arguing that it should become a major political issue. The nature of the promissory note, the institutions and entities that are party to it and the implications of defaulting on or restructuring it are complex issues on which even professional economists differ. Prompted by the PE posting, a lot of these issues were teased out on irisheconomy.ie. The debate, though, remains one largely between ‘insiders’ when it deserves and demands the widest public audience. Given that the cost of Anglo-Irish/Irish Nationwide debt over the next few years completely dwarfs the gains that will be accrued from the reduced interest rate on the State’s EU/IMF bailout funds, it is an indictment of our mainstream media that it has largely failed to facilitate an informed public debate on this issue.
In assessing how the government deals with the promissory note in the coming weeks the bar needs to be set high. A complete restructuring of the debt, with a rescheduling of payments over a 30 or 50 year period, seems the least we should expect. And the least we should expect from our media is that is that it addresses the democratic deficit and helps us ‘understand what controls us’.
Showing posts with label Peter Connell. Show all posts
Showing posts with label Peter Connell. Show all posts
Wednesday, 5 October 2011
Tuesday, 9 November 2010
Public sector workers - some awkward facts
Peter Connell: Never let the facts get in the way of a good story. Surely a good epithet for much of what masquerades as analysis of our current crisis. And there’s no more eloquent commentator than Senator Eoghan Harris. Harris is passionate about ideas. From intellectual powerhouse of the Workers' Party to speech writer for David Trimble and public advocate for Bertie Ahern, ideas are his stock in trade.
And his latest big idea is to see high public sector wages as the obstacle to resolving our current economic crisis. Public sector pay and pensions is ‘the fattest of fat cats’. His solution, as outlined in last Sunday’s piece, is to bring public sector wages and penions back to their 2003 level. Harris dismisses Fintan O’Toole’s recently publish book Enough is Enough on the grounds that in offering solutions to the crisis the author fails to address the ‘scandal’ of high public sector pay. What we need, according to Harris are facts, or ‘awkward facts’ as he calls them. But all he offers are pronouncements and second hand, second rate analysis. Such as ‘Irish teachers are the best paid in Europe’. Of course this simply isn’t true. Harris doesn’t quote the source of his statement, he doesn’t do primary research. The awkward facts are available from the OECD (2008 data). Since 2008 teachers have had a 2.5% pay increase in October 2008 followed by pay cuts of, on average, 12-15%% (pension levy in March 2009 and pay cut in January 2010). So, if we examine the data published by the OECD, and assuming a modest 3% increase for teachers in other countries since 2008, we find that the starting salary for a primary school teacher in Ireland is below that of Luxemburg, Germany, Switzerland, Denmark, Netherlands, Spain, Norway, Scotland, England and Finland. At the top of a long incremental scale Irish national school teachers are well paid but less well paid than those in Luxemburg, Germany, Switzerland, Austria and Portugal. Exactly the same pattern is true of second level teachers. When I last checked my atlas all of these were European countries.
Harris’s ‘research’ also claims that Irish secondary school teachers ‘take the most holidays [in Europe]’. Again, let’s consult the OECD for some awkward facts regarding actual teaching hours. According to Chart D4 in Education at a Glance 2010, at lower secondary level Irish teachers spend 720 hours in class each year, above the OECD average of 703 and above that of 17 other European countries. His snide remarks about teacher’s holidays simply expose his bias.
When it comes to public sector pay Senator Harris is equally sloppy in his research. The public sector pay bill has increased significantly since 2003 but that’s more a reflection of increased public sector numbers than any pay bonanza for your average public sector worker. Let’s look at some more awkward facts. Our starting point is June 2003 when the first phase of the infamous benchmarking award was paid. Let’s say our employee is awarded a 10% increase under benchmarking. Between June 2003 and October 2008 (s)he enjoyed ten pay increases, three arising from benchmarking, three from the Sustaining Progress agreement and three from Towards 2016. The total percentage increase up to that point was 27%, when inflation over the same period was just over 20%. So, a 7% increase in real gross income. Not bad, but not a bonanza. Since October 2008 pay cuts amounting to about 13% have been imposed. Add in deflation of -5.5% and we find that the average public sector worker in 2010 has a gross salary 14% higher than in 2003 while inflation over the same period was 15%. So, in terms of gross income public sector workers are right back to where they were in 2003. Add in recently imposed income and health levies and Harris’s notion of the average public sector worker being a ‘fat cat’ is simply indefensible. He rightly feels empathy with private sector workers who have lost their jobs. He singularly fails to relate to the experience of low and middle income public sector workers who, like their private sector colleagues, are seeing their living standards assailed on all sides.
Harris claims that ‘the Government could find the €6bn it needs by simply cutting back public pay and pensions to 2003 levels’. The public sector pay and pensions bill is about €21.8 billion. To save a net €6 billion the gross bill would have to be cut by at least €8.5 billion or by almost 40%. The reason is that public servants pay PAYE, health levies, income levies, PRSI and make pension contributions to the State. Cut their pay and you cut all these sources of income to the State. Cuts don’t translate into savings. It’s a mistake repeated by most commentators. It’s simple maths. Senator Harris should try it some time.
And his latest big idea is to see high public sector wages as the obstacle to resolving our current economic crisis. Public sector pay and pensions is ‘the fattest of fat cats’. His solution, as outlined in last Sunday’s piece, is to bring public sector wages and penions back to their 2003 level. Harris dismisses Fintan O’Toole’s recently publish book Enough is Enough on the grounds that in offering solutions to the crisis the author fails to address the ‘scandal’ of high public sector pay. What we need, according to Harris are facts, or ‘awkward facts’ as he calls them. But all he offers are pronouncements and second hand, second rate analysis. Such as ‘Irish teachers are the best paid in Europe’. Of course this simply isn’t true. Harris doesn’t quote the source of his statement, he doesn’t do primary research. The awkward facts are available from the OECD (2008 data). Since 2008 teachers have had a 2.5% pay increase in October 2008 followed by pay cuts of, on average, 12-15%% (pension levy in March 2009 and pay cut in January 2010). So, if we examine the data published by the OECD, and assuming a modest 3% increase for teachers in other countries since 2008, we find that the starting salary for a primary school teacher in Ireland is below that of Luxemburg, Germany, Switzerland, Denmark, Netherlands, Spain, Norway, Scotland, England and Finland. At the top of a long incremental scale Irish national school teachers are well paid but less well paid than those in Luxemburg, Germany, Switzerland, Austria and Portugal. Exactly the same pattern is true of second level teachers. When I last checked my atlas all of these were European countries.
Harris’s ‘research’ also claims that Irish secondary school teachers ‘take the most holidays [in Europe]’. Again, let’s consult the OECD for some awkward facts regarding actual teaching hours. According to Chart D4 in Education at a Glance 2010, at lower secondary level Irish teachers spend 720 hours in class each year, above the OECD average of 703 and above that of 17 other European countries. His snide remarks about teacher’s holidays simply expose his bias.
When it comes to public sector pay Senator Harris is equally sloppy in his research. The public sector pay bill has increased significantly since 2003 but that’s more a reflection of increased public sector numbers than any pay bonanza for your average public sector worker. Let’s look at some more awkward facts. Our starting point is June 2003 when the first phase of the infamous benchmarking award was paid. Let’s say our employee is awarded a 10% increase under benchmarking. Between June 2003 and October 2008 (s)he enjoyed ten pay increases, three arising from benchmarking, three from the Sustaining Progress agreement and three from Towards 2016. The total percentage increase up to that point was 27%, when inflation over the same period was just over 20%. So, a 7% increase in real gross income. Not bad, but not a bonanza. Since October 2008 pay cuts amounting to about 13% have been imposed. Add in deflation of -5.5% and we find that the average public sector worker in 2010 has a gross salary 14% higher than in 2003 while inflation over the same period was 15%. So, in terms of gross income public sector workers are right back to where they were in 2003. Add in recently imposed income and health levies and Harris’s notion of the average public sector worker being a ‘fat cat’ is simply indefensible. He rightly feels empathy with private sector workers who have lost their jobs. He singularly fails to relate to the experience of low and middle income public sector workers who, like their private sector colleagues, are seeing their living standards assailed on all sides.
Harris claims that ‘the Government could find the €6bn it needs by simply cutting back public pay and pensions to 2003 levels’. The public sector pay and pensions bill is about €21.8 billion. To save a net €6 billion the gross bill would have to be cut by at least €8.5 billion or by almost 40%. The reason is that public servants pay PAYE, health levies, income levies, PRSI and make pension contributions to the State. Cut their pay and you cut all these sources of income to the State. Cuts don’t translate into savings. It’s a mistake repeated by most commentators. It’s simple maths. Senator Harris should try it some time.
Monday, 26 July 2010
Stimulus and austerity
Peter Connell: Over on irisheconomy.ie there has been an enlightening discussion on one of our favourite topics – austerity versus stimulus. The discussion, at least in parts, seems to represent a genuine engagement between those who believe a stimulus package would be misguided given the state’s fiscal deficit and open economy (a belief espoused by the overwhelming majority of economists, journalists and politicians) and those who argue that a properly targeted stimulus can start to address the critical issue of mass unemployment, depressed domestic demand and the fiscal deficit itself (the position we’re pretty familiar with here on progressive-economy).
Up to now there has been no debate. Part of the reason is that it’s extremely difficult the get the pro-stimulus arguments into the public domain. Those who comment on economic issues in the national media almost all subscribe to the ‘fiscal austerity’ consensus. Those who put forward the pro-stimulus position are routinely dismissed as not understanding the gravity of the State’s fiscal position or promoting narrow sectional interests. During the week, Paul Krugman bemoaned the quality of economic discourse on both sides of the Atlantic. In Ireland we should be so lucky to have the kind of discourse that’s taking place in the US and the UK, for example! So, in that context we should welcome the engagement that’s taking place between Karl Whelan, Michael Burke and Michael Taft on irisheconomy.ie. It’s a start.
What’s less encouraging is the content of the interview given by Eamon Gilmore on the Pat Kenny show last Monday morning. In the interview, Gilmore firmly nails his colours to the mast by affirming the Labour Party’s support for a €3 billion fiscal contraction in the forthcoming December budget. He goes on to express support for the government’s stated target of reducing the deficit to less than 3% of GDP by 2014.
On the latter point, this seems an ill-advised position for a prospective Taoiseach to adopt. If, as most progressives hope, Gilmore is Taoiseach after the next election, then his stated commitment to meeting this 3% target may be one he regrets making as most independent commentators now accept that Ireland has little prospect of meeting it in 2014. The IMF recently predicted that our deficit will be 5.9% in 2014 (see page 30 of the report). The Ernst & Young / Oxford Economics survey suggests we won't reach Maastrich compliance until 2018/2019. Further, two days later the ESRI report (see page 79) implied that additional fiscal contraction beyond that already planned by the government would be required to meet the 3% target.
From a policy point of view the realistic (and sensible) thing to do is set this 2014 – 3% straightjacket aside. That opens out the debate and helps focus on the fact that the deflationary policies pursued to date are strangling the domestic economy and suppressing the growth in revenue which has to be part of any solution that addresses the deficit in the medium term.
Eamon Gilmore’s stated support for a €3 billion ‘fiscal correction’ in the December budget is even more unfortunate. In fairness, in the interview he indicates that the €1 cut in the capital programme would be supplemented by funds from the Strategic Investment Bank the party proposes to establish (hardly realistic in the context of the December budget) and part of the cut in current spending would come from the reform of property and pension tax allowances. Unfortunately, in terms of the public discourse on macroeconomic policy, these details will receive little prominence. By supporting the €3 billion fiscal correction, the Labour Party ends up being co-opted on to the side of those arguing that there is no alternative to fiscal austerity. The result is that the range of ideas that gain prominence in the public domain is reduced, and we end up with an even more lop-sided debate on how to solve our problems. The consensus reigns.
Up to now there has been no debate. Part of the reason is that it’s extremely difficult the get the pro-stimulus arguments into the public domain. Those who comment on economic issues in the national media almost all subscribe to the ‘fiscal austerity’ consensus. Those who put forward the pro-stimulus position are routinely dismissed as not understanding the gravity of the State’s fiscal position or promoting narrow sectional interests. During the week, Paul Krugman bemoaned the quality of economic discourse on both sides of the Atlantic. In Ireland we should be so lucky to have the kind of discourse that’s taking place in the US and the UK, for example! So, in that context we should welcome the engagement that’s taking place between Karl Whelan, Michael Burke and Michael Taft on irisheconomy.ie. It’s a start.
What’s less encouraging is the content of the interview given by Eamon Gilmore on the Pat Kenny show last Monday morning. In the interview, Gilmore firmly nails his colours to the mast by affirming the Labour Party’s support for a €3 billion fiscal contraction in the forthcoming December budget. He goes on to express support for the government’s stated target of reducing the deficit to less than 3% of GDP by 2014.
On the latter point, this seems an ill-advised position for a prospective Taoiseach to adopt. If, as most progressives hope, Gilmore is Taoiseach after the next election, then his stated commitment to meeting this 3% target may be one he regrets making as most independent commentators now accept that Ireland has little prospect of meeting it in 2014. The IMF recently predicted that our deficit will be 5.9% in 2014 (see page 30 of the report). The Ernst & Young / Oxford Economics survey suggests we won't reach Maastrich compliance until 2018/2019. Further, two days later the ESRI report (see page 79) implied that additional fiscal contraction beyond that already planned by the government would be required to meet the 3% target.
From a policy point of view the realistic (and sensible) thing to do is set this 2014 – 3% straightjacket aside. That opens out the debate and helps focus on the fact that the deflationary policies pursued to date are strangling the domestic economy and suppressing the growth in revenue which has to be part of any solution that addresses the deficit in the medium term.
Eamon Gilmore’s stated support for a €3 billion ‘fiscal correction’ in the December budget is even more unfortunate. In fairness, in the interview he indicates that the €1 cut in the capital programme would be supplemented by funds from the Strategic Investment Bank the party proposes to establish (hardly realistic in the context of the December budget) and part of the cut in current spending would come from the reform of property and pension tax allowances. Unfortunately, in terms of the public discourse on macroeconomic policy, these details will receive little prominence. By supporting the €3 billion fiscal correction, the Labour Party ends up being co-opted on to the side of those arguing that there is no alternative to fiscal austerity. The result is that the range of ideas that gain prominence in the public domain is reduced, and we end up with an even more lop-sided debate on how to solve our problems. The consensus reigns.
Tuesday, 2 February 2010
AIB makes case for increased public spending
Peter Connell: Encouraging news from AIB. In its Economic Outlook for 2010 published last month the bank agrees with many of those writing on PE on the issue of Ireland’s sovereign debt.The report points out that ‘Ireland has one of the lowest debt ratios in the EU: 51% at the end of 2009, allowing for cash balances’ – which it states amounts to €22 billion (slide 12 in the presentation linked above). Like many on this blog, the bank argues that this relatively positive picture provides the State with options regarding investment and public spending.
Virtually all mainstream commentators argue that there is no alternative to fiscal consolidation, so this is important information as it is emanating from an unexpected source and certainly one not naturally sympathetic to the kind of analysis you’ll read on this blog. But, it’s there in black and white. AIB says it’s OK for the State to increase public spending. Let me see, how exactly does the report put it? Ah yes, ‘low public debt gives the State the capacity to support the banking sector’ (see slide 12)….
Virtually all mainstream commentators argue that there is no alternative to fiscal consolidation, so this is important information as it is emanating from an unexpected source and certainly one not naturally sympathetic to the kind of analysis you’ll read on this blog. But, it’s there in black and white. AIB says it’s OK for the State to increase public spending. Let me see, how exactly does the report put it? Ah yes, ‘low public debt gives the State the capacity to support the banking sector’ (see slide 12)….
Tuesday, 8 December 2009
League tables and losing the plot
This post was originally written on April 21st in response to an article in the Sunday Business Post. We are re-posting it following last night's Prime Time Investigates programme on social welfare fraud.
Peter Connell: As the Irish economy has spiralled downwards over the past six months, those with an interest in attempting to understand what’s happening and evaluating the solutions being proposed are, at least, being exposed to an increasing informative public discourse. You may not always agree with what economists write as opinion pieces in the national media, over at Irish Economy, here at PE or elsewhere in the blogosphere but, generally, you’re presented with reasoned, well informed arguments that represent genuine attempts to enlighten.
Instinctively when you prepare to read an opinion piece on the solutions to the country’s economic ills by Dr. Ed Walsh, ex-president of the University of Limerick (UL), you know it will be written from a particular ideological perspective. No problem there. We all have ideological perspectives, whether acknowledged or not. Dr. Walsh, since being appointed the first president of UL (then the National Institute for Higher Education) in 1970, has almost four decades of experience of public policy formation in Ireland and has held numerous influential positions in areas key to the country’s economic development including chairperson of the Irish Council for Science Technology and Innovation that advises the government on science policy. So, you could reasonably expect to find some good ideas in Dr. Walsh’s piece in the Sunday’s Business Post entitled ‘Back to when we were winners’.
According to Dr. Walsh it’s all about competitiveness. We were winners in 2000 when we were the fourth most competitive country in the world. Then we ‘lost the plot’. In 2007-8 we were back in 22nd place. And why are we down in 22nd place? The World Economic Forum said the poor quality of our infrastructure was the most problematic factor for those wanting to do business in Ireland. So, does Dr. Walsh identify some innovative ways in which we can fund investment in our infrastructure? Or perhaps he has some insights into how we might convert the significant state investment in fourth level education into innovative, hi-tech enterprises? The strange thing is he doesn’t mention the state of our infrastructure at all and, in this article at least, has nothing to say about the role that technology and innovation might play in growing jobs and creating wealth, an area in which he has considerable expertise. Instead, his piece identifies our overly generous welfare system, high wages in the public sector and failure to tax those on low incomes. Into the mix he adds rigid labour laws, the undue influence of teachers unions in curriculum development and the lack of reform in local and national governance as being the cause of our problems. That’s quite a list. And he backs his arguments up with some figures.
First of all, he suggests that we reduce the size of the public sector workforce by 85,600 to get us back to the level in 2000. Even at the crudest level we can say that, thankfully, we’ve about half a million more people in the country than we had in 2000. That’s about 70,000 more children of school-going age who require teachers in schools that have some of the highest class sizes in the OECD, and it’s up to 40,000 extra older people aged 70 and over who depend on public services more than other sections of the population. In 2000 our health service was just beginning to receive the investment it required to repair the damage done by cuts in the late 1980s. Since then an additional 9,000 nurses have been recruited, but I guess they’re surplus to requirements if we’re to ‘get back to when we were winners’. Certainly, there’s scope to reform the public sector, but not with a demolition ball.
Next up, public sector wages. Dr. Walsh argues that ‘benchmarking against other EU countries provides the framework within which Irish public sector salaries can be brought into line’. He goes on to claim that Irish teachers are paid 37% more than their British counterparts and 26% more than those in Germany. This claim appears to be a quote from Danny McCoy of IBEC writing in the Irish Independent in November 2007. The data is from 2004. But OECD data from 2005 shows something quite different (see pages 384-387). While Irish teacher’s salaries were towards the top of the table internationally, they were lower than in Germany, somewhat higher than in England, but lower than in Scotland. The OECD report also shows teacher’s salaries as a ratio of GDP per capita as a way of assessing the relative value of teacher’s salaries across countries. A secondary school teacher in Ireland with 15 years experience earns a salary equal to 1.2 times GDP per capita. This places the Irish teacher at 14th in the international league table of 30 countries reviewed by the OECD.
Next, Dr. Walsh, pleading the case of high earners, quotes the discredited statistic that the top 6.5% of earners contribute half of all income tax collected, and that 38% of the workforce paid no income tax at all. Colm Keena of the Irish Times, in an article I quoted in an earlier post, presents an alternative perspective on the data on which these statistics are based focusing on individual earners rather than revenue cases. If Dr. Walsh cares to examine the data, he will find that perhaps the most striking fact is that just 9,129 individuals earned €6.7 billion in income, while the lowest 1.2 million earners had an income of €13.3 billion between them.
And now we come to welfare fraud. According to Dr. Walsh ‘welfare fraud and welfare tourism are now a major burden on taxpayers’. And the evidence? Apparently, there are 1,044 welfare claimants at Ballyconnell Welfare Office and the town only has a population of 747 according to the 2006 census. This, he remarks, is an alarming statistic. The source of his information on the number of claimants is a Department of Social Welfare and Community Affairs press release issued by Mary Hanafin. And the implicit aim of the press release is to lay the blame for the doubling of unemployment rates in the border counties on fraudulent claimants.
Unfortunately the situation is worse than Dr. Walsh thinks. The most recent figure for March 2009 is 1,161. This information is readily available from the CSO website, which is generally a more reliable source of information than ministerial press releases. Anyone who has ever dealt with a Social Welfare Office would also know that they serve wide hinterlands, not just small towns. Preliminary research suggests that the Ballyconnell office serves a population of about 14,000. It’s one of two covering the whole of Co. Cavan. Unfortunately there are over 6,500 people now unemployed in the county, many of them young local men who worked in the construction industry.
Dr. Walsh suggests that this welfare tourism is down to our over-generous welfare payments. I suggest he reads Michael Taft’s excellent piece on this topic over at Notes From the Front. Referring to another league table, he shows that we’re in 13th position out of EU 15 when it comes to the level of unemployment benefit paid to a single claimant. Dr. Walsh chooses to compare Irish rates with wages in Lithuania and Romania.
So, unfortunately I wasted seven or eight minutes reading Dr. Walsh’s piece in Sunday’s Business Post. It’s disappointing that one of our brightest opinion formers didn’t do his homework, but presented an argument based on press releases and snippets of information chosen to bolster a particularly extreme view of where we’re at and how we can solve our problems.
In any case I’m not convinced that we should set our sights exclusively on climbing the competitiveness league table. We’re now 22nd. Above us, in 20th place, is Iceland.
Peter Connell: As the Irish economy has spiralled downwards over the past six months, those with an interest in attempting to understand what’s happening and evaluating the solutions being proposed are, at least, being exposed to an increasing informative public discourse. You may not always agree with what economists write as opinion pieces in the national media, over at Irish Economy, here at PE or elsewhere in the blogosphere but, generally, you’re presented with reasoned, well informed arguments that represent genuine attempts to enlighten.
Instinctively when you prepare to read an opinion piece on the solutions to the country’s economic ills by Dr. Ed Walsh, ex-president of the University of Limerick (UL), you know it will be written from a particular ideological perspective. No problem there. We all have ideological perspectives, whether acknowledged or not. Dr. Walsh, since being appointed the first president of UL (then the National Institute for Higher Education) in 1970, has almost four decades of experience of public policy formation in Ireland and has held numerous influential positions in areas key to the country’s economic development including chairperson of the Irish Council for Science Technology and Innovation that advises the government on science policy. So, you could reasonably expect to find some good ideas in Dr. Walsh’s piece in the Sunday’s Business Post entitled ‘Back to when we were winners’.
According to Dr. Walsh it’s all about competitiveness. We were winners in 2000 when we were the fourth most competitive country in the world. Then we ‘lost the plot’. In 2007-8 we were back in 22nd place. And why are we down in 22nd place? The World Economic Forum said the poor quality of our infrastructure was the most problematic factor for those wanting to do business in Ireland. So, does Dr. Walsh identify some innovative ways in which we can fund investment in our infrastructure? Or perhaps he has some insights into how we might convert the significant state investment in fourth level education into innovative, hi-tech enterprises? The strange thing is he doesn’t mention the state of our infrastructure at all and, in this article at least, has nothing to say about the role that technology and innovation might play in growing jobs and creating wealth, an area in which he has considerable expertise. Instead, his piece identifies our overly generous welfare system, high wages in the public sector and failure to tax those on low incomes. Into the mix he adds rigid labour laws, the undue influence of teachers unions in curriculum development and the lack of reform in local and national governance as being the cause of our problems. That’s quite a list. And he backs his arguments up with some figures.
First of all, he suggests that we reduce the size of the public sector workforce by 85,600 to get us back to the level in 2000. Even at the crudest level we can say that, thankfully, we’ve about half a million more people in the country than we had in 2000. That’s about 70,000 more children of school-going age who require teachers in schools that have some of the highest class sizes in the OECD, and it’s up to 40,000 extra older people aged 70 and over who depend on public services more than other sections of the population. In 2000 our health service was just beginning to receive the investment it required to repair the damage done by cuts in the late 1980s. Since then an additional 9,000 nurses have been recruited, but I guess they’re surplus to requirements if we’re to ‘get back to when we were winners’. Certainly, there’s scope to reform the public sector, but not with a demolition ball.
Next up, public sector wages. Dr. Walsh argues that ‘benchmarking against other EU countries provides the framework within which Irish public sector salaries can be brought into line’. He goes on to claim that Irish teachers are paid 37% more than their British counterparts and 26% more than those in Germany. This claim appears to be a quote from Danny McCoy of IBEC writing in the Irish Independent in November 2007. The data is from 2004. But OECD data from 2005 shows something quite different (see pages 384-387). While Irish teacher’s salaries were towards the top of the table internationally, they were lower than in Germany, somewhat higher than in England, but lower than in Scotland. The OECD report also shows teacher’s salaries as a ratio of GDP per capita as a way of assessing the relative value of teacher’s salaries across countries. A secondary school teacher in Ireland with 15 years experience earns a salary equal to 1.2 times GDP per capita. This places the Irish teacher at 14th in the international league table of 30 countries reviewed by the OECD.
Next, Dr. Walsh, pleading the case of high earners, quotes the discredited statistic that the top 6.5% of earners contribute half of all income tax collected, and that 38% of the workforce paid no income tax at all. Colm Keena of the Irish Times, in an article I quoted in an earlier post, presents an alternative perspective on the data on which these statistics are based focusing on individual earners rather than revenue cases. If Dr. Walsh cares to examine the data, he will find that perhaps the most striking fact is that just 9,129 individuals earned €6.7 billion in income, while the lowest 1.2 million earners had an income of €13.3 billion between them.
And now we come to welfare fraud. According to Dr. Walsh ‘welfare fraud and welfare tourism are now a major burden on taxpayers’. And the evidence? Apparently, there are 1,044 welfare claimants at Ballyconnell Welfare Office and the town only has a population of 747 according to the 2006 census. This, he remarks, is an alarming statistic. The source of his information on the number of claimants is a Department of Social Welfare and Community Affairs press release issued by Mary Hanafin. And the implicit aim of the press release is to lay the blame for the doubling of unemployment rates in the border counties on fraudulent claimants.
Unfortunately the situation is worse than Dr. Walsh thinks. The most recent figure for March 2009 is 1,161. This information is readily available from the CSO website, which is generally a more reliable source of information than ministerial press releases. Anyone who has ever dealt with a Social Welfare Office would also know that they serve wide hinterlands, not just small towns. Preliminary research suggests that the Ballyconnell office serves a population of about 14,000. It’s one of two covering the whole of Co. Cavan. Unfortunately there are over 6,500 people now unemployed in the county, many of them young local men who worked in the construction industry.
Dr. Walsh suggests that this welfare tourism is down to our over-generous welfare payments. I suggest he reads Michael Taft’s excellent piece on this topic over at Notes From the Front. Referring to another league table, he shows that we’re in 13th position out of EU 15 when it comes to the level of unemployment benefit paid to a single claimant. Dr. Walsh chooses to compare Irish rates with wages in Lithuania and Romania.
So, unfortunately I wasted seven or eight minutes reading Dr. Walsh’s piece in Sunday’s Business Post. It’s disappointing that one of our brightest opinion formers didn’t do his homework, but presented an argument based on press releases and snippets of information chosen to bolster a particularly extreme view of where we’re at and how we can solve our problems.
In any case I’m not convinced that we should set our sights exclusively on climbing the competitiveness league table. We’re now 22nd. Above us, in 20th place, is Iceland.
Wednesday, 5 August 2009
Social welfare cuts and NAMA
Peter Connell: Brian Lenihan is quoted in Saturday’s Irish Times as insisting that the banking crisis is ‘entirely separate’ to the financial crisis. This is patently untrue. It represents an attempt to decouple the two issues as the government realises that the simultaneous cuts in public spending that will form a large part of the December budget, and the bailing out of the banks via the NAMA gamble, will be politically toxic.
What links the financial and banking crises (Lenihan omitted to mention the crises in unemployment, growing poverty and plummeting GNP and domestic demand) is the fiscal deficit and the national debt. The government, with the support of the Dublin Consensus, regard these as setting the framework for all policy discussion relating to how the country can emerge from the crisis. Colm McCarty has helpfully provided the media with a shorthand for describing this with his pithy ‘€400 million a week’ catchphrase. David Murphy, RTE’s Business Correspondent, simplified things even further for us by stating that the government is ‘losing €400 million a week’. On the same Morning Ireland programme, he suggested we’re in the same position as a spendthrift teenager blowing his pocket money. The bond markets (our parents!) look on and are not impressed. Add in the wheeze of publishing ‘Ireland’s Debt Clock’, where ‘you can see Ireland’s debt mount before your own eyes’, and the case for slashing public spending seems irrefutable.
One of the saner voices in the national media over the past few weeks has been Dr. Michael Somers, director of the NTMA. The NTMA’s annual report for 2008 makes for very interesting reading and, in some respects, is a useful antidote to the wilder outpourings of the dismal scientists. The report doesn’t underestimate the scale of the rapid growth in the state’s indebtedness. What it does do, though, is set this financial crisis in context. Here are a few snippets from the report that are worth airing:
• the National Debt increased from €37.6 billion at end 2007 to €50.4 billion at end 2008. The National Debt/GNP ratio increased from 23.3 per cent at end 2007 to 32.2 per cent at end 2008.
• the General Government Debt/GDP ratio stood at 43.2 per cent at end 2008, up from 25 per cent at end 2007. This was well below the euro area average of 69.3 per cent. The General Government Debt measure does not allow the €21.4 billion in Exchequer cash balances (more than 10 per cent of GDP) to be offset against the gross position.
• deducting the value of the National Pensions Reserve Fund and other funds managed by the NTMA from the gross debt would give a Debt/GDP ratio of around 33 per cent at end 2008. Subtracting Exchequer cash balances reduces the ratio further to 23 per cent. (None of this is reflected in our debt clock).
• forecast debt ratios for 2009–2013, accepting for the moment the figures set by the Department of Finance in the April budget, would see the Gross Debt/GDP ratio rise to 77% (or 73% allowing for cash balances). Both of these figures would be well below the EU average.
• interest payments on the debt were 3.8 per cent of tax revenue in 2008; the equivalent figure was 26.7 per cent when the NTMA was established in 1990. In 2009 the forecast is for 9.4 per cent of tax revenue, reflecting higher interest costs on a larger debt and lower tax revenues. While the interest burden will increase substantially over the period 2009–13, it will be no greater than the levels experienced in the mid-1990s.
Allowing for the fact that the government’s projections for economic growth and tax revenue are almost certainly optimistic, it’s quite clear that the scale of the debt, while serious, is manageable in the medium term. And this is according to Michael Somers.
On the other hand, the Dublin Consensus and the ‘€400 million a week brigade’ insist that our international credit rating is slipping and point to reports issued over the summer by Standard & Poor’s, Moody’s and others, using this as a rationale for swingeing cuts in public spending. What’s interesting in these reports is the focus on the banking crisis and NAMA. Standard & Poor’s very explicitly links the downgrading of Ireland’s rating from AA+ to AA to the enormous risks associated with NAMA – ‘We consider that NAMA's ability to meet its financial objectives is uncertain because of the risk that cash flows from its assets could fall below its funding costs if their underlying performance worsens compared with NAMA's expectations at the time of purchase. At the same time, we believe the recently announced losses (for the six months to the end of March 2009) at nationalized Anglo Irish Bank Corp. Ltd. (A-/Watch Neg/A-1) highlight both the continued fragility of the Irish banking sector and its reliance on the government for ongoing financial support.’
As the government formulates the December budget during the autumn, and we’re repeatedly told that the country can no longer afford current levels of welfare spending, ministers will desperately seek to disguise the fundamental link between our fiscal and banking crises. And if the budget does implement those cuts then a bright light needs to shine on that grubby transaction that will see money taken from the unemployed to prop up our profligate banks.
What links the financial and banking crises (Lenihan omitted to mention the crises in unemployment, growing poverty and plummeting GNP and domestic demand) is the fiscal deficit and the national debt. The government, with the support of the Dublin Consensus, regard these as setting the framework for all policy discussion relating to how the country can emerge from the crisis. Colm McCarty has helpfully provided the media with a shorthand for describing this with his pithy ‘€400 million a week’ catchphrase. David Murphy, RTE’s Business Correspondent, simplified things even further for us by stating that the government is ‘losing €400 million a week’. On the same Morning Ireland programme, he suggested we’re in the same position as a spendthrift teenager blowing his pocket money. The bond markets (our parents!) look on and are not impressed. Add in the wheeze of publishing ‘Ireland’s Debt Clock’, where ‘you can see Ireland’s debt mount before your own eyes’, and the case for slashing public spending seems irrefutable.
One of the saner voices in the national media over the past few weeks has been Dr. Michael Somers, director of the NTMA. The NTMA’s annual report for 2008 makes for very interesting reading and, in some respects, is a useful antidote to the wilder outpourings of the dismal scientists. The report doesn’t underestimate the scale of the rapid growth in the state’s indebtedness. What it does do, though, is set this financial crisis in context. Here are a few snippets from the report that are worth airing:
• the National Debt increased from €37.6 billion at end 2007 to €50.4 billion at end 2008. The National Debt/GNP ratio increased from 23.3 per cent at end 2007 to 32.2 per cent at end 2008.
• the General Government Debt/GDP ratio stood at 43.2 per cent at end 2008, up from 25 per cent at end 2007. This was well below the euro area average of 69.3 per cent. The General Government Debt measure does not allow the €21.4 billion in Exchequer cash balances (more than 10 per cent of GDP) to be offset against the gross position.
• deducting the value of the National Pensions Reserve Fund and other funds managed by the NTMA from the gross debt would give a Debt/GDP ratio of around 33 per cent at end 2008. Subtracting Exchequer cash balances reduces the ratio further to 23 per cent. (None of this is reflected in our debt clock).
• forecast debt ratios for 2009–2013, accepting for the moment the figures set by the Department of Finance in the April budget, would see the Gross Debt/GDP ratio rise to 77% (or 73% allowing for cash balances). Both of these figures would be well below the EU average.
• interest payments on the debt were 3.8 per cent of tax revenue in 2008; the equivalent figure was 26.7 per cent when the NTMA was established in 1990. In 2009 the forecast is for 9.4 per cent of tax revenue, reflecting higher interest costs on a larger debt and lower tax revenues. While the interest burden will increase substantially over the period 2009–13, it will be no greater than the levels experienced in the mid-1990s.
Allowing for the fact that the government’s projections for economic growth and tax revenue are almost certainly optimistic, it’s quite clear that the scale of the debt, while serious, is manageable in the medium term. And this is according to Michael Somers.
On the other hand, the Dublin Consensus and the ‘€400 million a week brigade’ insist that our international credit rating is slipping and point to reports issued over the summer by Standard & Poor’s, Moody’s and others, using this as a rationale for swingeing cuts in public spending. What’s interesting in these reports is the focus on the banking crisis and NAMA. Standard & Poor’s very explicitly links the downgrading of Ireland’s rating from AA+ to AA to the enormous risks associated with NAMA – ‘We consider that NAMA's ability to meet its financial objectives is uncertain because of the risk that cash flows from its assets could fall below its funding costs if their underlying performance worsens compared with NAMA's expectations at the time of purchase. At the same time, we believe the recently announced losses (for the six months to the end of March 2009) at nationalized Anglo Irish Bank Corp. Ltd. (A-/Watch Neg/A-1) highlight both the continued fragility of the Irish banking sector and its reliance on the government for ongoing financial support.’
As the government formulates the December budget during the autumn, and we’re repeatedly told that the country can no longer afford current levels of welfare spending, ministers will desperately seek to disguise the fundamental link between our fiscal and banking crises. And if the budget does implement those cuts then a bright light needs to shine on that grubby transaction that will see money taken from the unemployed to prop up our profligate banks.
Wednesday, 8 April 2009
Budget 2009: A budget destined to deflate
Peter Connell: Over the past few weeks, the debate regarding the scale of the fiscal deficit that the government should aim for in today’s budget has been joined by economists and commentators of all persuasions. They seemed to range from those like Brian Lucey of TCD on the one hand who, on Monday night’s Questions and Answers seemed to argue for a package that would take €6 to €9 billion out of the economy, through to those on the left arguing for a smaller correction such as the Labour Party’s €2.8 billion package, and those arguing for a stimulus package mirroring policies in many other developed countries.
Seen in the context of this range of views, today’s budget with spending cuts and tax increases adding up to €3.3 could be viewed as falling somewhere in the middle. Quite a few commentators this evening are suggesting that the government may have got the balance more or less right by avoiding excessively deflationary measures and have avoided ‘killing the patient’.
That, I think, remains to be seen. A cursory examination of the projected impact of the tax increases (and cuts to the Early Childhood Supplement scheme) on low and middle income families presented on the Department of Finance website suggests that consumer spending is destined for further very sharp falls in the coming months. We know that about 35% of all income is earned by those earning between €20,000 and €40,000 a year. And we can be pretty sure that most of that income totalling about €37 billion is spent – on food, rent, mortgages, clothing, transport, household goods. A married couple, one in employment with two children under 5 and an income of €30,000, will have over €100 a month less to spend from May onwards – assuming the earner doesn’t loose their job due to the deflationary spiral this budget seems destined to exacerbate.
On that basis the Minister for Finance shouldn’t be surprised if his tax take from VAT and Excise turns out to be rather less than he anticipates.
Seen in the context of this range of views, today’s budget with spending cuts and tax increases adding up to €3.3 could be viewed as falling somewhere in the middle. Quite a few commentators this evening are suggesting that the government may have got the balance more or less right by avoiding excessively deflationary measures and have avoided ‘killing the patient’.
That, I think, remains to be seen. A cursory examination of the projected impact of the tax increases (and cuts to the Early Childhood Supplement scheme) on low and middle income families presented on the Department of Finance website suggests that consumer spending is destined for further very sharp falls in the coming months. We know that about 35% of all income is earned by those earning between €20,000 and €40,000 a year. And we can be pretty sure that most of that income totalling about €37 billion is spent – on food, rent, mortgages, clothing, transport, household goods. A married couple, one in employment with two children under 5 and an income of €30,000, will have over €100 a month less to spend from May onwards – assuming the earner doesn’t loose their job due to the deflationary spiral this budget seems destined to exacerbate.
On that basis the Minister for Finance shouldn’t be surprised if his tax take from VAT and Excise turns out to be rather less than he anticipates.
Friday, 27 March 2009
Preparing low and middle income earners for higher income tax
Peter Connell: In last Fridays’s Irish Times Colm Keena, in an article entitled ‘Income data understate contribution of lower and middle-income earners’, published a table showing income and income tax distribution for Irish earners in 2008. It makes for fascinating reading, particularly in the context of the forthcoming emergency budget and advice emanating from many economists to address the issue of many income earners paying little or no income tax. Such is the apparent generosity of the Irish state, we are told, that a worker on a salary of over €45,000, married with two children, is a net beneficiary of the State. As an aside, and to remind us of happier times – at least for the Progressive Democrats-, Michael McDowell’s election literature made great play of this fact just two short years ago during the 2007 general election campaign.
So, the public discourse on this issue appears to be preparing us for significant increases in income tax for low and middle income earners on April 7th. Sean Ardagh TD, commenting on Irish Economy, is perhaps giving us a preview of what we may expect when he states – ‘The political/ideological desire to have all people with an income paying tax and contributing to the general exchequer coffers has merit. When we apply for services we are entitled to, it is satisfying for us to be able to know and to say that we have paid our taxes when we had an income and what we seek is an entitlement, not a handout.’ Just how much satisfaction workers on €35,000 to €40,000 will derive from paying more income tax after April 7th is difficult to guess.
To return to Colm Kenna’s table, the data presented refutes the often quoted statistic that 50% of all income tax comes from earners with incomes of more than €100,000. The corollary of presenting this statistic as fact would appear to be that the Irish income tax system is highly progressive and that high earners are making more than their fair contribution to the national coffers. However, it turns out that the statistic is based on Revenue cases with many couples being treated as a single case. If the data is disaggregated into individual income earners a different picture emerges with those earning over €100,000 contributing 31% of all income tax. The data also reveals that those earning low to middle income incomes in the range €30,000 to €50,000 contribute 28% of all income tax despite earning only 30% of all taxable income.
This certainly does not sit with the received wisdom that seems to inform much of the debate on taxation leading into the April 7th budget.
So, the public discourse on this issue appears to be preparing us for significant increases in income tax for low and middle income earners on April 7th. Sean Ardagh TD, commenting on Irish Economy, is perhaps giving us a preview of what we may expect when he states – ‘The political/ideological desire to have all people with an income paying tax and contributing to the general exchequer coffers has merit. When we apply for services we are entitled to, it is satisfying for us to be able to know and to say that we have paid our taxes when we had an income and what we seek is an entitlement, not a handout.’ Just how much satisfaction workers on €35,000 to €40,000 will derive from paying more income tax after April 7th is difficult to guess.
To return to Colm Kenna’s table, the data presented refutes the often quoted statistic that 50% of all income tax comes from earners with incomes of more than €100,000. The corollary of presenting this statistic as fact would appear to be that the Irish income tax system is highly progressive and that high earners are making more than their fair contribution to the national coffers. However, it turns out that the statistic is based on Revenue cases with many couples being treated as a single case. If the data is disaggregated into individual income earners a different picture emerges with those earning over €100,000 contributing 31% of all income tax. The data also reveals that those earning low to middle income incomes in the range €30,000 to €50,000 contribute 28% of all income tax despite earning only 30% of all taxable income.
This certainly does not sit with the received wisdom that seems to inform much of the debate on taxation leading into the April 7th budget.
Tuesday, 10 March 2009
Who’s for some expansionary fiscal contraction?
Peter Connell: The mini-budget that we can look forward to in three weeks time will, I’m sure we’ll be told, ‘constitute a necessary first step on the road to economic recovery’. It will ‘position the economy to take advantage of the global upturn when it happens’. Apparently, the budget will ‘give us a renewed confidence in our ability to see out the recession’ and encourage us to go out and spend for Ireland. But wait, isn’t it also supposed to extract €4 billion out of the economy in the form of taxes rises and public expenditure cuts? And this is on top of the €2 billion in cuts already in place. So how will this piece of magic work? You take €6 billion out of people’s pockets but, somehow, they’ll feel more confident about the future and start spending their money.
The answer is – it’s all down to expansionary fiscal contraction. The theory is that cuts in public spending will lead citizens to believe that taxes will also fall and, on that basis, private spending will increase. In the current Irish context, given that there is a commitment to raise taxes, the most we can say is that consumers will belief that taxes will rise less than they might otherwise do if public spending were not cut. Some economists argue that expansionary fiscal contraction helps to explain the turn around in the Irish economy after 1987 when net government borrowing fell as a percentage of GDP from 10.4% in 1983-86 to 4.2% in 1987-90. Average GDP growth rose from 1.9% in the first period to 5.7% in 1987-90. QED. Well, maybe not. It’s now generally accepted the post 1987 recovery had a lot to do with external factors including falling international interest rates and an upturn in the global economy.
The point is that we need to be as clear as possible about the impact of a combined €6 billion cut in public expenditure and rise in taxation. Has anyone done the sums yet on the impact on government revenue? On how many businesses will be forced to close that otherwise might survive? On the damage that will be inflicted on the productive capacity of the economy? To what extent will the provisions of the mini budget deepen the real crisis which is in the real economy? The government appears to have made an absolute commitment to keep the deficit in 2009 below 10% of GDP, hence the mini budget. Across much of the media the need to stick to this figure is accepted without question. Given the likely impact of that budget in three weeks time on all our futures the public discourse needs to move to another level.
The answer is – it’s all down to expansionary fiscal contraction. The theory is that cuts in public spending will lead citizens to believe that taxes will also fall and, on that basis, private spending will increase. In the current Irish context, given that there is a commitment to raise taxes, the most we can say is that consumers will belief that taxes will rise less than they might otherwise do if public spending were not cut. Some economists argue that expansionary fiscal contraction helps to explain the turn around in the Irish economy after 1987 when net government borrowing fell as a percentage of GDP from 10.4% in 1983-86 to 4.2% in 1987-90. Average GDP growth rose from 1.9% in the first period to 5.7% in 1987-90. QED. Well, maybe not. It’s now generally accepted the post 1987 recovery had a lot to do with external factors including falling international interest rates and an upturn in the global economy.
The point is that we need to be as clear as possible about the impact of a combined €6 billion cut in public expenditure and rise in taxation. Has anyone done the sums yet on the impact on government revenue? On how many businesses will be forced to close that otherwise might survive? On the damage that will be inflicted on the productive capacity of the economy? To what extent will the provisions of the mini budget deepen the real crisis which is in the real economy? The government appears to have made an absolute commitment to keep the deficit in 2009 below 10% of GDP, hence the mini budget. Across much of the media the need to stick to this figure is accepted without question. Given the likely impact of that budget in three weeks time on all our futures the public discourse needs to move to another level.
Tuesday, 24 February 2009
The Swedish experience - lessons to be learned?
Peter Connell: Last week David Begg, in outlining ICTU's 10 point pact in response to the current economic crisis, referred to the Swedish experience of the 1990s and some of the strategies that contributed to its economic and fiscal crisis. He specifically referred to a paper by Jens Henriksson entitled 'Ten Lessons About Budget Consolidation' on how Sweden dealt with its fiscal crisis in the early 1990s. Henriksson worked as an advisor to the incoming social democratic government from 1994 onwards and, arising from that experience, constructed his ten lessons. The article is worth a read, but I suggest it shouldn't necessarily be taken as a template for how we get ourselves out of the mess we're in. The interesting thing is that his lessons are essentially political rather than economic or financial. Lesson 5, for example, is that consolidation should be designed as a package and this is one of the arguments in the paper that is reflected in ICTU's 10 point pact.
The point also found a huge resonance amongst many of the public sector workers who marched on Saturday's protest. Because the government failed to introduce the levy as part of a package (and apart from the fact its provisions are grossly inequitable) a huge amount of political energy has been misspent. Brian Cowen is unlikely to be a great fan of Henriksson's Lesson 3 either - 'the one responsible must put her or his job on the line'.
Since last week a number of commentators, including Jim O'Leary in the Irish Times of Feb 20th, have dug a little deeper and pointed out that Henriksson emphasises the key importance of 'sound public finances as a prerequisite for growth' (Lesson 1). Over at http://www.irisheconomy.ie/, O'Leary approvingly cites the Swedish government's cuts in social welfare benefits as part of its budget consolidation programme and links this policy to Henriksson's Lesson 2 - if you are in debt you are not free.
The question is, though, just how useful are these fairly general statements as policy tools in getting us out of the particular situation we're currently in? Sweden arrived at a situation in 1994 of having a budget deficit of 11% of GDP under a specific set of circumstances. The early 1990s witnessed an international economic downturn, but nothing like the global crisis we're experiencing today. Until just a few months ago the OECD preached fiscal consolidation and promoted pubic spending cuts as the way to do it. Now, governments have other priorities including saving enterprises and jobs, and avoiding the spectre of mass unemployment. It's fine to quote the neat maxim - if you are in debt you are not free - but exactly where that leaves the Irish economy over the next 5 - 7 years isn't exactly clear. And, of course, there are other perspectives on the Swedish experience. What role, for example, did Sweden's history of social solidarity play in how it addressed its crisis? Others have pointed out policy tools beyond fiscal consolidation that contributed to Sweden's success - see O. Emre Ergungor. He writes about how the Swedish government addressed the issue of creditworthiness in the real economy - how to get credit to perfectly viable businesses which can sustain and create jobs.
Dare one suggest that in the smart economy we're supposed to be building this might be a greater priority than cutting wages?
Peter Connell is a member of the TCD Pension Policy Research Group
The point also found a huge resonance amongst many of the public sector workers who marched on Saturday's protest. Because the government failed to introduce the levy as part of a package (and apart from the fact its provisions are grossly inequitable) a huge amount of political energy has been misspent. Brian Cowen is unlikely to be a great fan of Henriksson's Lesson 3 either - 'the one responsible must put her or his job on the line'.
Since last week a number of commentators, including Jim O'Leary in the Irish Times of Feb 20th, have dug a little deeper and pointed out that Henriksson emphasises the key importance of 'sound public finances as a prerequisite for growth' (Lesson 1). Over at http://www.irisheconomy.ie/, O'Leary approvingly cites the Swedish government's cuts in social welfare benefits as part of its budget consolidation programme and links this policy to Henriksson's Lesson 2 - if you are in debt you are not free.
The question is, though, just how useful are these fairly general statements as policy tools in getting us out of the particular situation we're currently in? Sweden arrived at a situation in 1994 of having a budget deficit of 11% of GDP under a specific set of circumstances. The early 1990s witnessed an international economic downturn, but nothing like the global crisis we're experiencing today. Until just a few months ago the OECD preached fiscal consolidation and promoted pubic spending cuts as the way to do it. Now, governments have other priorities including saving enterprises and jobs, and avoiding the spectre of mass unemployment. It's fine to quote the neat maxim - if you are in debt you are not free - but exactly where that leaves the Irish economy over the next 5 - 7 years isn't exactly clear. And, of course, there are other perspectives on the Swedish experience. What role, for example, did Sweden's history of social solidarity play in how it addressed its crisis? Others have pointed out policy tools beyond fiscal consolidation that contributed to Sweden's success - see O. Emre Ergungor. He writes about how the Swedish government addressed the issue of creditworthiness in the real economy - how to get credit to perfectly viable businesses which can sustain and create jobs.
Dare one suggest that in the smart economy we're supposed to be building this might be a greater priority than cutting wages?
Peter Connell is a member of the TCD Pension Policy Research Group
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