Showing posts with label Sinéad Pentony. Show all posts
Showing posts with label Sinéad Pentony. Show all posts
Wednesday, 30 May 2012
Has the State any Business in Business?
Sinéad Pentony: TASC held its first lunchtime seminar yesterday. Paul Sweeney considered the question - ‘Has the State any business in business?’. Paul’s presentation put the issue of privatisation in the current context; identified the winners and losers in privatisation; and how/where it fits into industrial policy. The presentation draws a number of conclusions including the need for a more nuanced approach – privatisation is not a black and white issue; and there is a need for more diversity in the forms of ownership, as set out in the recent report by The Ownership Commission, which was chaired by Will Hutton.
Wednesday, 7 March 2012
Gender equality and the economy
Sinéad Pentony: As we face into years of more austerity, it will be no surprise to learn that the European Union birth rate is dropping, highlighting a longer-term trend of women in developed countries having less children in the countries that help them least.
While Ireland is experiencing a baby boom at the moment the overall trajectory for birth rates is downwards. The OECD average (total) fertility rate is 1.6 births per woman, when 2.1 is needed to stay stable. Immigration will offset some of this decline, but not completely.
In the UK, the Resolution Foundation’s new research, The Price of Motherhood, shows how vital women’s work is to household income: in 1968, women provide 11 per cent of household income while men provided 70 per cent. In 2009, men provided 40 per cent of household income and women provided 24 per cent. The lack of good part-time jobs means that nearly half of mothers take lower-grade jobs than their qualifications – and lose out forever.
The latest report from the European Commission on the Gender Pay Gap shows that the gender pay gap is alive and well, with women in the EU earning 17 per cent less per hour than men. Ireland’s gender pay gap is the same as the EU average. The impact of the gender pay gap means that women earn less over their lifetime and this results in lower pensions and a greater risk of poverty in old age.
A recent study on Older Women Workers’ Access to Pensions clearly illustrates the difficulty of contributing towards pensions due to low pay. Current pension policy also reinforces income inequality in old age due to the regressive nature of pension tax reliefs whereby those who earn more benefit more from such reliefs. The report’s recommendations echo those made by TASC and the NWCI in relation to a universal state pension equal to 40 per cent of average earnings and reducing tax reliefs in a way that eliminates the inequities in this system.
However, ensuring that women do not experience income inequality and poverty in old age means that the right policies need to be in put in place when women start their working lives. The three studies mentioned above identify a wide range of policy responses that are needed to address gender inequality. These include the following:
- A comprehensive gendered approach across all social welfare policies, such as childcare, maternity benefits, paternity leave etc..., along with the introduction of family friendly employment policies aimed at helping parents minimise childcare costs by allowing them to balance caring responsibilities between themselves. The provision of affordable quality childcare and afterschool care, is a decisive factor in improving fertility rates. Most women want and need to work: if having more children prevents them from this they will stop having babies.
- The lack of flexibility offered by full-time employment makes it very difficult to juggle work and family commitments. Access to well paid, high skilled employment on a part-time basis also has form part of the policy mix.
- Even in the midst of the current economic crisis it is important to keep the issue of gender equality and the closing of the gender pay gap alive. Policies aimed at addressing the gender pay gap include legislative measures, transparent pay systems, collective pay agreements the establishment of Equal Pay Commissions along with a range of awareness raising campaigns aimed at closing the gap.
- It is vital that gender equality is not further undermined by budget cuts. TASC’s equality audit of Budget 2011 – Winners and Losers clearly shows how women on low incomes lost proportionately more of their income than other groups following the budgetary measures that were introduced. This research highlights the need for the budget to be equality proofed.
Gender equality is essential for achieving employment growth, competitiveness and economic recovery, so any strategy for growth must include the range of policy measures listed above, as part of the economic engine.
While Ireland is experiencing a baby boom at the moment the overall trajectory for birth rates is downwards. The OECD average (total) fertility rate is 1.6 births per woman, when 2.1 is needed to stay stable. Immigration will offset some of this decline, but not completely.
In the UK, the Resolution Foundation’s new research, The Price of Motherhood, shows how vital women’s work is to household income: in 1968, women provide 11 per cent of household income while men provided 70 per cent. In 2009, men provided 40 per cent of household income and women provided 24 per cent. The lack of good part-time jobs means that nearly half of mothers take lower-grade jobs than their qualifications – and lose out forever.
The latest report from the European Commission on the Gender Pay Gap shows that the gender pay gap is alive and well, with women in the EU earning 17 per cent less per hour than men. Ireland’s gender pay gap is the same as the EU average. The impact of the gender pay gap means that women earn less over their lifetime and this results in lower pensions and a greater risk of poverty in old age.
A recent study on Older Women Workers’ Access to Pensions clearly illustrates the difficulty of contributing towards pensions due to low pay. Current pension policy also reinforces income inequality in old age due to the regressive nature of pension tax reliefs whereby those who earn more benefit more from such reliefs. The report’s recommendations echo those made by TASC and the NWCI in relation to a universal state pension equal to 40 per cent of average earnings and reducing tax reliefs in a way that eliminates the inequities in this system.
However, ensuring that women do not experience income inequality and poverty in old age means that the right policies need to be in put in place when women start their working lives. The three studies mentioned above identify a wide range of policy responses that are needed to address gender inequality. These include the following:
- A comprehensive gendered approach across all social welfare policies, such as childcare, maternity benefits, paternity leave etc..., along with the introduction of family friendly employment policies aimed at helping parents minimise childcare costs by allowing them to balance caring responsibilities between themselves. The provision of affordable quality childcare and afterschool care, is a decisive factor in improving fertility rates. Most women want and need to work: if having more children prevents them from this they will stop having babies.
- The lack of flexibility offered by full-time employment makes it very difficult to juggle work and family commitments. Access to well paid, high skilled employment on a part-time basis also has form part of the policy mix.
- Even in the midst of the current economic crisis it is important to keep the issue of gender equality and the closing of the gender pay gap alive. Policies aimed at addressing the gender pay gap include legislative measures, transparent pay systems, collective pay agreements the establishment of Equal Pay Commissions along with a range of awareness raising campaigns aimed at closing the gap.
- It is vital that gender equality is not further undermined by budget cuts. TASC’s equality audit of Budget 2011 – Winners and Losers clearly shows how women on low incomes lost proportionately more of their income than other groups following the budgetary measures that were introduced. This research highlights the need for the budget to be equality proofed.
Gender equality is essential for achieving employment growth, competitiveness and economic recovery, so any strategy for growth must include the range of policy measures listed above, as part of the economic engine.
Wednesday, 25 January 2012
The Debt Trap
Sinéad Pentony: The dust has hardly settled from the Troika’s departure when we are facing the repayment of €1.25 billion in unsecured bonds that are not covered by the bank guarantee to Anglo bondholders today.
Last week the Troika asserted that the “front loaded fiscal consolidation is on track, with the 2011 deficit significantly below the programme target”. Recent growth has been on the back of a strong performing export sector, but as forecasts for global growth are reduced, this channel for growth will diminish and it is going to become increasingly difficult to achieve the deficit reduction targets set out in the EU/IMF Programme of Financial Support for Ireland.
The deficit stood at 10.1 per cent (€16 billion) in 2011 and Budget 2012 is intended to reduce this to 8.6 per cent (€13.5 billion). In an attempt to reduce the deficit by €2.5 billion, cuts of €3.8 billion are being imposed. In the absence of strong growth domestically and globally, the government will have to face the prospect of having to cut more to achieve a smaller reduction in the deficit.
This is before we factor in the servicing/repayments of (sovereign and banking) debts, which includes today’s repayment of €1.25 billion in unsecured bonds and a further €3.1 billion in Anglo promissory notes at the end of March. Given the current state of our finances, these repayments will have to be financed through borrowing, which adds a further cost – interest.
The Anglo–Not Our Debt campaign which TASC is supporting has been raising awareness and generating much-needed debate on the issue. These debts are strangling our economy and we cannot begin the process of recovery until they are re-negotiated and re-structured.
We are borrowing to pay/service debts and we are borrowing to run the country, but repayments all come from the same source – government revenue (mostly taxes and charges). If we continue down this road we will see an ever-increasing proportion of taxation revenue being diverted to service/repay debt. This will result in further reductions in the revenue used to maintain and upgrade our infrastructure, finance health services and provide schools and housing – unless of course taxes and charges are increased.
Increasing tax revenue can only be achieved if the economy is growing and more people are working, but we are missing one essential ingredient - investment. The Troika identified “subdued” domestic demand and lower GDP growth projections of 0.5 per cent as the major challenges facing Ireland in 2012, both of which can be solved through significant investment in physical infrastructure and human capital. The question that is always asked is ‘where will the money come from?’.
There have been lots of creative proposals and suggestions put forward on where finance could be found. A quick look at the 2010 European Investment Bank (EIB) Activity and Financial Reports show that EIB lending reached €72 billion in 2010 and it made a net profit of over €2 billion in 2010. The EIB is a triple A-rated bank and can therefore borrow at very low rates of interest.
Member states are required to provide matching funding averaging 50 per cent. But given the scale of the crisis, it would make sense to reduce the level of matching funds required. This would facilitate increased lending and much great leveraging of EU resources, particularly by the countries utilising the EFSF (Ireland, Greece and Portugal): while our scope for investment is much more limited, such investment is essential for recovery. However, this will require the agreement of member states.
The latest report from the International Labour Organisation (ILO) on Global Employment Trends 2012 should provide all political leaders with much needed motivation to start coming up with policy responses that will put struggling economies on a sustainable path to recovery.
The ILO report is called “Preventing a Deeper Jobs Crisis” and it states that the world faces the “urgent challenge of creating 600 million productive jobs over the next decade in order to generate sustainable growth and maintain social cohesion.”
The report also calls for fiscal consolidation efforts to be carried out in a socially responsible manner, with growth and employment prospects as guiding principles. Budget 2012 and the decision to repay unsecured bondholders today, provide ample evidence that these guiding principles are not being applied in Ireland.
Last week the Troika asserted that the “front loaded fiscal consolidation is on track, with the 2011 deficit significantly below the programme target”. Recent growth has been on the back of a strong performing export sector, but as forecasts for global growth are reduced, this channel for growth will diminish and it is going to become increasingly difficult to achieve the deficit reduction targets set out in the EU/IMF Programme of Financial Support for Ireland.
The deficit stood at 10.1 per cent (€16 billion) in 2011 and Budget 2012 is intended to reduce this to 8.6 per cent (€13.5 billion). In an attempt to reduce the deficit by €2.5 billion, cuts of €3.8 billion are being imposed. In the absence of strong growth domestically and globally, the government will have to face the prospect of having to cut more to achieve a smaller reduction in the deficit.
This is before we factor in the servicing/repayments of (sovereign and banking) debts, which includes today’s repayment of €1.25 billion in unsecured bonds and a further €3.1 billion in Anglo promissory notes at the end of March. Given the current state of our finances, these repayments will have to be financed through borrowing, which adds a further cost – interest.
The Anglo–Not Our Debt campaign which TASC is supporting has been raising awareness and generating much-needed debate on the issue. These debts are strangling our economy and we cannot begin the process of recovery until they are re-negotiated and re-structured.
We are borrowing to pay/service debts and we are borrowing to run the country, but repayments all come from the same source – government revenue (mostly taxes and charges). If we continue down this road we will see an ever-increasing proportion of taxation revenue being diverted to service/repay debt. This will result in further reductions in the revenue used to maintain and upgrade our infrastructure, finance health services and provide schools and housing – unless of course taxes and charges are increased.
Increasing tax revenue can only be achieved if the economy is growing and more people are working, but we are missing one essential ingredient - investment. The Troika identified “subdued” domestic demand and lower GDP growth projections of 0.5 per cent as the major challenges facing Ireland in 2012, both of which can be solved through significant investment in physical infrastructure and human capital. The question that is always asked is ‘where will the money come from?’.
There have been lots of creative proposals and suggestions put forward on where finance could be found. A quick look at the 2010 European Investment Bank (EIB) Activity and Financial Reports show that EIB lending reached €72 billion in 2010 and it made a net profit of over €2 billion in 2010. The EIB is a triple A-rated bank and can therefore borrow at very low rates of interest.
Member states are required to provide matching funding averaging 50 per cent. But given the scale of the crisis, it would make sense to reduce the level of matching funds required. This would facilitate increased lending and much great leveraging of EU resources, particularly by the countries utilising the EFSF (Ireland, Greece and Portugal): while our scope for investment is much more limited, such investment is essential for recovery. However, this will require the agreement of member states.
The latest report from the International Labour Organisation (ILO) on Global Employment Trends 2012 should provide all political leaders with much needed motivation to start coming up with policy responses that will put struggling economies on a sustainable path to recovery.
The ILO report is called “Preventing a Deeper Jobs Crisis” and it states that the world faces the “urgent challenge of creating 600 million productive jobs over the next decade in order to generate sustainable growth and maintain social cohesion.”
The report also calls for fiscal consolidation efforts to be carried out in a socially responsible manner, with growth and employment prospects as guiding principles. Budget 2012 and the decision to repay unsecured bondholders today, provide ample evidence that these guiding principles are not being applied in Ireland.
Wednesday, 21 December 2011
The Pension System in Ireland: Current Issues and Reform
Sinéad Pentony: The TCD Pension Policy Research Group has recently published a Working Paper written by Jim Stewart called The Pension System in Ireland: Current Issues and Reform.
The paper provides a very useful overview of the key features of the Irish pension system and it examines five key issues:
• The sources of income of retired persons.
• The value of pension fund assets.
• The National Pension Reserve Fund.
• Implications for pension funds of the rise in long bond yields.
• Policy responses and reform.
The paper highlights the inadequacy of recent policy responses and reforms in dealing with the structural problems in our pension system which have been brought into sharp focus by the financial and economic crises. The need for fundamental reform of our pension system and the development of a new model of pension provision has been highlighted by TASC and the TCD Pension Policy Research Group.
The paper provides a very useful overview of the key features of the Irish pension system and it examines five key issues:
• The sources of income of retired persons.
• The value of pension fund assets.
• The National Pension Reserve Fund.
• Implications for pension funds of the rise in long bond yields.
• Policy responses and reform.
The paper highlights the inadequacy of recent policy responses and reforms in dealing with the structural problems in our pension system which have been brought into sharp focus by the financial and economic crises. The need for fundamental reform of our pension system and the development of a new model of pension provision has been highlighted by TASC and the TCD Pension Policy Research Group.
Monday, 12 December 2011
Euro lacks a government banker, not a lender of last resort
This article by Thomas Palley, of the New America Foundation's Economic Growth Programme, was published in the FT Economists' Forum on December 9th
Sinéad Pentony: It crunch time (again) for the Eurozone, so this article by Thomas Palley is timely, as he articulates the causes of the Eurozone debt crisis and the solutions that are needed, differently from many of the other voices in the debate.
Palley argues that the euro has a lender of last resort – the ECB – but what’s lacking is a government banker, like the Federal Reserve or Bank of England, which helps finance budget deficits and keeps rates low on government debt. Thus explaining why the US and UK can borrow at lower rates than countries such as Spain, which has a similar deficit and debt profile, but its under speculative attack.
Palley points the finger at the “euro’s neoliberal birthmark”, which laid the foundation for a diminished role of the state and enhanced power of the market. He goes on to argue that previously, national banking systems were masters of the bond market, but the euro’s architecture makes bond markets masters of national governments – and this is the problem that must be solved through the creation of a government banker.
Sinéad Pentony: It crunch time (again) for the Eurozone, so this article by Thomas Palley is timely, as he articulates the causes of the Eurozone debt crisis and the solutions that are needed, differently from many of the other voices in the debate.
Palley argues that the euro has a lender of last resort – the ECB – but what’s lacking is a government banker, like the Federal Reserve or Bank of England, which helps finance budget deficits and keeps rates low on government debt. Thus explaining why the US and UK can borrow at lower rates than countries such as Spain, which has a similar deficit and debt profile, but its under speculative attack.
Palley points the finger at the “euro’s neoliberal birthmark”, which laid the foundation for a diminished role of the state and enhanced power of the market. He goes on to argue that previously, national banking systems were masters of the bond market, but the euro’s architecture makes bond markets masters of national governments – and this is the problem that must be solved through the creation of a government banker.
Monday, 10 October 2011
Inequality and Budget 2012
Sinéad Pentony: In the run up to Budget 2012, the discourse is going to be dominated by the scale of the fiscal adjustment (€3.6 billion) and the breakdown of taxation and spending cuts. Currently, the position is that the adjustment will be made up of €2.5 billion in cuts (€2.1 billion in current and €0.4 billion in capital spending) and €1.1 billion in taxation measures. The adjustment is part of the agreement with ‘troika’ – EU/IMF/ECB. However, the breakdown of the adjustment is at the discretion of the government.
On the basis of the current breakdown of taxation measures and spending cuts, we are likely to see further cuts to social welfare as well as reductions in health and education services. If this comes to pass, the budgetary measures will have a disproportionate impact on low income groups – again. These measures are also likely to reduce aggregate demand even further, lengthen the dole queues and suck more money and confidence out of the Irish economy. So we will have growing inequality combined with a stagnant economy, with the exception of the export sector, which has the features of an ‘enclave economy’. And even the export sector is also under threat with the uncertainties that exists across the global economy.
Income inequality has been shown by the IMF to be one of the major contributing factors to the onset of the crisis. More recently, Stiglitz has said that “to understand what needs to be done, we have to understand the economy’s problems before the crisis hit”. He identifies a number of problems including the fact that “shifting income from those who would spend it, to those who won’t, lowers aggregate demand”. He also identifies the need for the “structural transformation of the advanced economies, implied by the need to move labour out of traditional manufacturing branches”, but notes that this is occurring too slowly. He goes on to say that “the prescription for what ails the global economy follows directly from the diagnosis: strong government expenditure, aimed at facilitating restructuring [of the economy], promoting energy conservation, and reducing inequality, and a reform of the global financial system...”.
On the issue of inequality, FEPS has recently publish a paper on the relationship between inequality and wealth, and it finds that a comparison of the levels of wealth and inequality in different countries shows that countries with a high degree of inequality in general have lower levels of wealth. While this might sound counter-intuitive, the paper sets out the empirical evidence that supports the hypothesis. It finds that rising inequality results in a lower level of prosperity. In addition, higher inequality also results in a lower level of economic prosperity, lower levels of education and poor institutions that have more corruption, more political instability and lower levels of democracy.
The government is undoubtedly in an economic straightjacket – but there is always wriggle room. The government may not be Houdini, but there is most certainly sufficient wriggle room to make budgetary decisions that can reduce inequality and start the process of reversing economic decline.
On the basis of the current breakdown of taxation measures and spending cuts, we are likely to see further cuts to social welfare as well as reductions in health and education services. If this comes to pass, the budgetary measures will have a disproportionate impact on low income groups – again. These measures are also likely to reduce aggregate demand even further, lengthen the dole queues and suck more money and confidence out of the Irish economy. So we will have growing inequality combined with a stagnant economy, with the exception of the export sector, which has the features of an ‘enclave economy’. And even the export sector is also under threat with the uncertainties that exists across the global economy.
Income inequality has been shown by the IMF to be one of the major contributing factors to the onset of the crisis. More recently, Stiglitz has said that “to understand what needs to be done, we have to understand the economy’s problems before the crisis hit”. He identifies a number of problems including the fact that “shifting income from those who would spend it, to those who won’t, lowers aggregate demand”. He also identifies the need for the “structural transformation of the advanced economies, implied by the need to move labour out of traditional manufacturing branches”, but notes that this is occurring too slowly. He goes on to say that “the prescription for what ails the global economy follows directly from the diagnosis: strong government expenditure, aimed at facilitating restructuring [of the economy], promoting energy conservation, and reducing inequality, and a reform of the global financial system...”.
On the issue of inequality, FEPS has recently publish a paper on the relationship between inequality and wealth, and it finds that a comparison of the levels of wealth and inequality in different countries shows that countries with a high degree of inequality in general have lower levels of wealth. While this might sound counter-intuitive, the paper sets out the empirical evidence that supports the hypothesis. It finds that rising inequality results in a lower level of prosperity. In addition, higher inequality also results in a lower level of economic prosperity, lower levels of education and poor institutions that have more corruption, more political instability and lower levels of democracy.
The government is undoubtedly in an economic straightjacket – but there is always wriggle room. The government may not be Houdini, but there is most certainly sufficient wriggle room to make budgetary decisions that can reduce inequality and start the process of reversing economic decline.
Thursday, 25 August 2011
Dealing with Mortgage Over-Indebtedness
Sinéad Pentony: The issue of mortgage indebtedness has re-emerged. The number of mortgage holders in arrears for more than 3 months has reached 50,000 and this figure will continue to rise. Although we often hear that the level of repossessions in Ireland is low compared to our nearest neighbour the UK, the latest Global Distressed Property Monitor survey from the Royal Institution of Chartered Surveyors published today puts the scale of the problems in the Irish property market in a global context.
The survey finds “that Ireland has the highest projected number of foreclosures and sales by owners who cannot meet rising repayment fees”. The RICS survey also highlights the problems in the Euro periphery (Ireland, Spain and Portugal) where “the property market in these countries is riddled with both a high number of foreclosures and brand new homes which can't attract buyers. To boot, investment funds have lost interest in these markets as their economies try to balance bank bailouts and rising government deficits.”
The issue of mortgage over-indebtedness has been exacerbated by austerity measures, with more and more people going into arrears as their income declines through pay cuts and through unemployment or underemployment. Unsustainable mortgages are not just a problem for individual mortgage holders; they are a problem for the wider economy - given the scale of the debt overhang. Over-indebtedness has a strangling effect on the economy as a growing proportion of spending goes towards trying to service debts from a declining income.
The economy is caught in just such a debt deflation stranglehold. Historical experience has shown that lingering private debt overhangs delay the exit from stagnation because private spending takes longer to recover. The next three years of cuts will amplify this phenomenon.
Although Ireland is not unique in experiencing the problem of unsustainable mortgages the vast scale of the problem requires some fresh thinking and consideration of measures that have been tried and tested in other countries. Debt forgiveness (write-down) and debt restructuring are just two such measures.
In recent months there have been reports of individuals negotiating a write-down of their mortgage debt following the sale of distressed properties. However, these measures need to be part of a robust policy framework that mortgage holders and lending institutions can work within. Radical problems sometimes require radical remedies, and while proper analysis of the likely knock-on effects is required, it makes no sense to take any option off the table at this point.
The survey finds “that Ireland has the highest projected number of foreclosures and sales by owners who cannot meet rising repayment fees”. The RICS survey also highlights the problems in the Euro periphery (Ireland, Spain and Portugal) where “the property market in these countries is riddled with both a high number of foreclosures and brand new homes which can't attract buyers. To boot, investment funds have lost interest in these markets as their economies try to balance bank bailouts and rising government deficits.”
The issue of mortgage over-indebtedness has been exacerbated by austerity measures, with more and more people going into arrears as their income declines through pay cuts and through unemployment or underemployment. Unsustainable mortgages are not just a problem for individual mortgage holders; they are a problem for the wider economy - given the scale of the debt overhang. Over-indebtedness has a strangling effect on the economy as a growing proportion of spending goes towards trying to service debts from a declining income.
The economy is caught in just such a debt deflation stranglehold. Historical experience has shown that lingering private debt overhangs delay the exit from stagnation because private spending takes longer to recover. The next three years of cuts will amplify this phenomenon.
Although Ireland is not unique in experiencing the problem of unsustainable mortgages the vast scale of the problem requires some fresh thinking and consideration of measures that have been tried and tested in other countries. Debt forgiveness (write-down) and debt restructuring are just two such measures.
In recent months there have been reports of individuals negotiating a write-down of their mortgage debt following the sale of distressed properties. However, these measures need to be part of a robust policy framework that mortgage holders and lending institutions can work within. Radical problems sometimes require radical remedies, and while proper analysis of the likely knock-on effects is required, it makes no sense to take any option off the table at this point.
Wednesday, 24 August 2011
Social Impact Bonds - Thinking Outside the Box
Sinéad Pentony: At a time when public and private investment is badly needed it’s important to think outside the box and look at different investment vehicles and the outcomes we want to achieve.
Investment tends to be equated with upgrading and improving our physical infrastructure - such as better roads, school buildings, health centres, and energy and communications infrastructure. Investment in human capital is also essential because economic growth in the 21st century is likely to be built on the exploitation of new knowledge and technology.
While investment in physical and human capital is essential for a sustainable and job-rich recovery, it’s important that investment which is ring-fenced for better social outcomes also forms part of the mix of investment. Social impact bonds (SIBs) have the potential to provide much needed investment in the areas of unemployment, health, housing, etc.
A SIB is a defined as “a contract with the public sector in which the public sector entity commits to pay when significant improvements in social outcomes for a defined population are achieved.” Private capital is raised to fund interventions that aim to deliver these improved social outcomes. Financial returns to investors are dependent on the degree to which these interventions improve the target social outcomes. If the interventions fail, the investors may lose their money. If the intervention succeeds, the public sector pays the investors a return financed from a share of the public sector benefit and/or exchequer savings made as a result of the improved social outcomes.
Further details on how the SIB works is provided by Clann Credo, which is a social investment fund and they have recently put out a call for ideas to identify social issues and interventions that may fit the criteria for SIBs in Ireland. The UK has taken the lead in this area and Social Finance, a non-profit organisation, launched the first SIB in 2010, to reduce re-offending among short-sentence offenders. Social Finance is developing SIBs across a number of other areas including children’s services, drug rehabilitation and health. SIBs are also being developed in the USA and Australia.
At a time when the community and voluntary sector has been decimated by cuts and our public services are being starved of investment, creative responses to financing initiatives that focus on social outcomes are more important than ever.
Investment tends to be equated with upgrading and improving our physical infrastructure - such as better roads, school buildings, health centres, and energy and communications infrastructure. Investment in human capital is also essential because economic growth in the 21st century is likely to be built on the exploitation of new knowledge and technology.
While investment in physical and human capital is essential for a sustainable and job-rich recovery, it’s important that investment which is ring-fenced for better social outcomes also forms part of the mix of investment. Social impact bonds (SIBs) have the potential to provide much needed investment in the areas of unemployment, health, housing, etc.
A SIB is a defined as “a contract with the public sector in which the public sector entity commits to pay when significant improvements in social outcomes for a defined population are achieved.” Private capital is raised to fund interventions that aim to deliver these improved social outcomes. Financial returns to investors are dependent on the degree to which these interventions improve the target social outcomes. If the interventions fail, the investors may lose their money. If the intervention succeeds, the public sector pays the investors a return financed from a share of the public sector benefit and/or exchequer savings made as a result of the improved social outcomes.
Further details on how the SIB works is provided by Clann Credo, which is a social investment fund and they have recently put out a call for ideas to identify social issues and interventions that may fit the criteria for SIBs in Ireland. The UK has taken the lead in this area and Social Finance, a non-profit organisation, launched the first SIB in 2010, to reduce re-offending among short-sentence offenders. Social Finance is developing SIBs across a number of other areas including children’s services, drug rehabilitation and health. SIBs are also being developed in the USA and Australia.
At a time when the community and voluntary sector has been decimated by cuts and our public services are being starved of investment, creative responses to financing initiatives that focus on social outcomes are more important than ever.
Monday, 15 August 2011
"This is a system in deep trouble"
Sinéad Pentony: In The Guardian, Larry Elliott argues that “only a new way of managing the global economy can prevent more mayhem in the market and on the streets”.
He identifies a number of ingredients that have contributed to the crisis, namely the US decision to break-up the Bretton Wood system and abandon the ‘gold standard’. While this system wasn’t perfect, it acted as an anchor for the global economy. Its demise paved the way for the liberalisation of financial markets in the 1970’s.
He describes the currency system as “an utter mess”, particularly since almost every country in the world is now trying to manipulate its currency downwards in order to make exports cheaper and imports more expensive. The role of sub-prime mortgage scandal in the current crisis is well documented – the conditions for which were created through the liberalisation of financial markets.
Finally, Elliott points to the breakdown of the social contract under which the individual was guaranteed a job, with decent pay that rose as the economy grew. Over the last 40 years, the benefits from growth have been disproportionately accruing to companies and the wealthy.
This point is reinforced by research recently published by the Resolution Foundation (UK think tank), which found that workers in the bottom half of the earnings scale received £12 out of every £100 rise in national income in 2010, compared with £16 in 1977, while the top 10 per cent received £14 out of every £100 in 2010, up from £12 in 1977.
Elliott says that growing inequality, global imbalances, manic-depressive stock markets, high unemployment, naked consumerism and the riots are telling us something – that the system is in deep trouble and it is waiting to blow.
While we haven’t had any riots in Ireland, we are part of the same system, which is displaying many of the same symptoms. Policies to address these symptoms domestically and globally remain in short support.
He identifies a number of ingredients that have contributed to the crisis, namely the US decision to break-up the Bretton Wood system and abandon the ‘gold standard’. While this system wasn’t perfect, it acted as an anchor for the global economy. Its demise paved the way for the liberalisation of financial markets in the 1970’s.
He describes the currency system as “an utter mess”, particularly since almost every country in the world is now trying to manipulate its currency downwards in order to make exports cheaper and imports more expensive. The role of sub-prime mortgage scandal in the current crisis is well documented – the conditions for which were created through the liberalisation of financial markets.
Finally, Elliott points to the breakdown of the social contract under which the individual was guaranteed a job, with decent pay that rose as the economy grew. Over the last 40 years, the benefits from growth have been disproportionately accruing to companies and the wealthy.
This point is reinforced by research recently published by the Resolution Foundation (UK think tank), which found that workers in the bottom half of the earnings scale received £12 out of every £100 rise in national income in 2010, compared with £16 in 1977, while the top 10 per cent received £14 out of every £100 in 2010, up from £12 in 1977.
Elliott says that growing inequality, global imbalances, manic-depressive stock markets, high unemployment, naked consumerism and the riots are telling us something – that the system is in deep trouble and it is waiting to blow.
While we haven’t had any riots in Ireland, we are part of the same system, which is displaying many of the same symptoms. Policies to address these symptoms domestically and globally remain in short support.
Thursday, 11 August 2011
NESC Report on Responses to Unemployment Crisis
Sinéad Pentony: Earlier this week NESC published its latest Report on Supports and Services for Unemployed Jobseekers: Challenges and Opportunities in a Time of Recession. The report states that the labour market will take years to recover and it rightly points out that “the exporting sectors play an indispensible but limited role in attaining high employment rates...until there is a revival of domestic demand, a large proportion of those now unemployed face bleak employment prospects.” Solving the jobs crisis requires interventions that address issues relating to the demand and supply of labour.
On the demand side, the jobs crisis cannot be solved in the absence of maintaining and increasing demand in the domestic economy. The current programme of austerity continues to ravage the domestic economy, which will lead to further job losses, ever-growing queues and accelerated emigration. Efforts to achieve short-term financial gain will have long-term social and economic costs.
In the context of the current phase of the global financial and economic crisis there are renewed calls for measures to stimulate economic activity. Demand can be maintained and increased by protecting incomes, especially those at the lowest level because they have the highest propensity to spend everything they earn in order to meet their basic needs; maintaining and increasing the rates of social spending e.g. Iceland. There are also the old reliables of increasing investment in human and physical capital.
On the supply-side, the NESC report highlights the need for improved activation strategies and acknowledges that changes are underway with the reconfiguration of delivering employment services. However, the report states that further reforms should be guided by a long-term vision of what constitutes an effective unemployment regime in a knowledge-based economy, and be imbued “with greater empathy and less suspicion towards those who have lost their jobs or the misfortune to be seeking a first one” at this time.
A long-term vision of an effective unemployment regime should be informed by a wider goals of achieving strong economic performance and combining it with a welfare state that offers comprehensive protection against social risks and investment in lifelong learning. There is a large body of literature in this area, and a recent paper on Scandinavian Labour and Social Policy provides a useful overview of how it is possible to integrate employment policy with active labour market measures and social services that support families and healthcare policy. Of course all of this comes at a price “...Nordic tax and finance policy extracts enormous sums from the economy and redistributes them in accordance with policy guidelines.” Is it not a price worth paying?
On the demand side, the jobs crisis cannot be solved in the absence of maintaining and increasing demand in the domestic economy. The current programme of austerity continues to ravage the domestic economy, which will lead to further job losses, ever-growing queues and accelerated emigration. Efforts to achieve short-term financial gain will have long-term social and economic costs.
In the context of the current phase of the global financial and economic crisis there are renewed calls for measures to stimulate economic activity. Demand can be maintained and increased by protecting incomes, especially those at the lowest level because they have the highest propensity to spend everything they earn in order to meet their basic needs; maintaining and increasing the rates of social spending e.g. Iceland. There are also the old reliables of increasing investment in human and physical capital.
On the supply-side, the NESC report highlights the need for improved activation strategies and acknowledges that changes are underway with the reconfiguration of delivering employment services. However, the report states that further reforms should be guided by a long-term vision of what constitutes an effective unemployment regime in a knowledge-based economy, and be imbued “with greater empathy and less suspicion towards those who have lost their jobs or the misfortune to be seeking a first one” at this time.
A long-term vision of an effective unemployment regime should be informed by a wider goals of achieving strong economic performance and combining it with a welfare state that offers comprehensive protection against social risks and investment in lifelong learning. There is a large body of literature in this area, and a recent paper on Scandinavian Labour and Social Policy provides a useful overview of how it is possible to integrate employment policy with active labour market measures and social services that support families and healthcare policy. Of course all of this comes at a price “...Nordic tax and finance policy extracts enormous sums from the economy and redistributes them in accordance with policy guidelines.” Is it not a price worth paying?
Friday, 27 May 2011
The Gloves are Off!
Sinead Pentony: When the Report of the Independent Review of EROs and REA Wage Setting Mechanisms was published on Wednesday, there was a general view that it’s a well researched report that puts forward a set of evidence-based recommendations that aim to “....create a framework within which greater efficiencies and necessary adjustments in payroll costs can be achieved in the affected sectors”. While I may not agree with all of the recommendations, there are certainly plenty of sensible proposals that will lead to benefits for all stakeholder groups. However, IBEC were obviously disappointed that it did not call for the abolition of the JLC system and said that the Review “...was totally out of touch with the need to create and sustain jobs.”
The following day (Thursday), the Minister for Enterprise, Jobs and Innovation published his own set of proposals that aim to pursue the agenda for “radical overhaul”; many of which are at odds with the carefully researched recommendations in the Report. Again, the message was about creating and sustaining jobs. However, the Report makes clear the finding that the balance of evidence does not support the assertion that lowering pay will lead to the creation of more jobs. The problem in the domestic economy is lack of demand - not competitiveness - and the wage cutting agenda will only exacerbate the problems in the domestic economy further. The Global Competitiveness Report 2010-2011 identified our small market size; poor infrastructure; macroeconomic instability and dysfunctional financial markets as factors inhibiting competitiveness.
In the absence of any serious efforts to address the full range of costs of doing business in the domestic economy – commercial rents, waste charges, professional fees, energy costs and the price of food - the focus is firmly on the easy target – low paid workers. The only protection many of these workers have, is the JLC system, but even within this system there is widespread abuse and derogation of responsibilities on the part of the employers. The NERA report shows that only about 20 per cent of investigated firms were compliant with the rules.
In TASC’s Submission to the Independent Review we identified the need to monitor, evaluate and review low paying sectors on a regular basis, which should be used to identify the labour market and competitive impacts of the various wage floors and the equality and poverty impacts of these wage floors. This is how evidence-based policy making works.
In Budget 2011, the budgetary measures included a cut in the minimum wage and the abolition of Section 23 tax reliefs for those renting private accommodation. The former is due to be reversed in the coming weeks. However, the implementation of the latter was postponed, following concerns about the impact of ending the reliefs and that an impact assessment was needed to ascertain the effect of phasing out such reliefs. The Programme for Government (p.23) is also committed to publishing cost-benefit analyses for major infrastructure proposals and “tax expenditure”. All of this points us in the direction of evidence-based policy analysis and formulation, albeit belatedly.
The labour market is central to the economy and any changes therein must be carefully considered. The government now has a well-researched 117 page report on the various wage setting mechanisms. Why would it not apply the same level of rigour to this aspect of the economy that is being applied to other parts of the economy? And why would it ignore the findings in this report in favour of anecdotal assertions that are being portrayed as fact? We must do our best to ensure that the facts win out over fiction, in the interests of evidence-based approaches to policy making and in the battle to protect the incomes of low paid workers
The following day (Thursday), the Minister for Enterprise, Jobs and Innovation published his own set of proposals that aim to pursue the agenda for “radical overhaul”; many of which are at odds with the carefully researched recommendations in the Report. Again, the message was about creating and sustaining jobs. However, the Report makes clear the finding that the balance of evidence does not support the assertion that lowering pay will lead to the creation of more jobs. The problem in the domestic economy is lack of demand - not competitiveness - and the wage cutting agenda will only exacerbate the problems in the domestic economy further. The Global Competitiveness Report 2010-2011 identified our small market size; poor infrastructure; macroeconomic instability and dysfunctional financial markets as factors inhibiting competitiveness.
In the absence of any serious efforts to address the full range of costs of doing business in the domestic economy – commercial rents, waste charges, professional fees, energy costs and the price of food - the focus is firmly on the easy target – low paid workers. The only protection many of these workers have, is the JLC system, but even within this system there is widespread abuse and derogation of responsibilities on the part of the employers. The NERA report shows that only about 20 per cent of investigated firms were compliant with the rules.
In TASC’s Submission to the Independent Review we identified the need to monitor, evaluate and review low paying sectors on a regular basis, which should be used to identify the labour market and competitive impacts of the various wage floors and the equality and poverty impacts of these wage floors. This is how evidence-based policy making works.
In Budget 2011, the budgetary measures included a cut in the minimum wage and the abolition of Section 23 tax reliefs for those renting private accommodation. The former is due to be reversed in the coming weeks. However, the implementation of the latter was postponed, following concerns about the impact of ending the reliefs and that an impact assessment was needed to ascertain the effect of phasing out such reliefs. The Programme for Government (p.23) is also committed to publishing cost-benefit analyses for major infrastructure proposals and “tax expenditure”. All of this points us in the direction of evidence-based policy analysis and formulation, albeit belatedly.
The labour market is central to the economy and any changes therein must be carefully considered. The government now has a well-researched 117 page report on the various wage setting mechanisms. Why would it not apply the same level of rigour to this aspect of the economy that is being applied to other parts of the economy? And why would it ignore the findings in this report in favour of anecdotal assertions that are being portrayed as fact? We must do our best to ensure that the facts win out over fiction, in the interests of evidence-based approaches to policy making and in the battle to protect the incomes of low paid workers
Friday, 29 April 2011
OECD Policy Responses to Unemployment
Sinead Pentony: The OECD has pre-released a chapter from its forthcoming Economic Outlook 2011 Report on the Persistence of High Unemployment: What Risks? What Policies? The report finds that at the end of 2010, “the average OECD unemployment rate was still close to historical peak reached during the crisis”. In countries (such as Ireland and Spain) that have been severely hit, persistently high levels of unemployment will eventually result in widespread deterioration of human capital (skills and competencies), discouragement and labour market withdrawal. This Report puts the scale of Ireland’s unemployment crisis in an OECD context and it makes three main policy proposals that are certainly worth considering as part of the Government's planned ‘Jobs Initiative’ which is due to be launched in May.
First of all, the report shows us how Spain and Ireland have been particularly badly hit by increases in unemployment. While Ireland is a few percentage points behind Spain (see Figure 1 reproduced below), it can be argued that net outward migration is having a dampening effect on the figure for Ireland. The drain of highly skilled workers out of Ireland, who are also of course members of families and communities, will have major long-term social and economic costs for the country.
Figure 1: The Increase in unemployment rates following the crisis (2007 Q3 – 2010 Q4)
The Report argues that aggregate demand policies continue to have a role to play in supporting economic recovery and in stimulating job growth. And monetary policy has been used by many OECD countries to increase aggregate demand by keeping interest rates low. However, the recent interest rate increase by the ECB - with indications given that there are more increases to come in 2011 – will hamper the efforts of policy makers in the three countries in the Euro Area (Spain, Ireland and Greece) that have seen the largest increases in the rate of unemployment in the OECD.
The Report also identifies a number of measures that have protected some countries employment levels from the worst effects of the crisis. “Labour hoarding” in particular, is singled out through the introduction of state subsidised ‘short-time working’ arrangements. The OECD place a lot of emphasis on the effectiveness of this measure in protecting employment levels, notwithstanding the risks which are outlined in the report.
The OECD also demonstrate the adjustment in labour markets in terms of the decline in output. As we can see (Figure 2 reproduced below), Ireland is an outlier in this regard. The OECD contends that “in the majority of countries, total hours worked declined less than GDP as the output shock was partly absorbed through labour hoarding.” Higher levels of job losses were also concentrated in low-productivity sectors such as construction. Countries such as Ireland, USA and Spain were identified as having higher than average proportions of workers in these sectors, which is reflected in higher than average reductions in hours worked.
Figure 2: Percentage decline in GDP and total hours worked from peak to trough
The OECD also examine nominal wage and labour costs. In most countries, wages decelerated sharply with labour costs also largely decelerating. The data presented in Figure 5 in the OECD report (reproduced below) shows changes to wages and labour costs before and after the crisis. What we find is that increases in nominal wages and unit labour costs just before the crisis hit were broadly in line with increases in the OECD. See here for a further discussion on unit labour costs. The OECD data shows that Ireland had the second lowest growth in nominal wages in the OECD between 2009Q1-2010Q2, and the largest fall in labour costs in the OECD during the same period.
Figure 5: Annualised average percentage change in nominal wages and unit labour costs before and after the crisis.
The three main policy proposals in the OECD report are as follows:
1. Temporarily extend unemployment benefits in countries where such systems are weak so as to provide needed income support ensuring that unemployed workers currently facing bleak jobs prospects do not fall into poverty or lose attachment to the labour market. This should be combined with active labour market policies that are adequately resourced to provide appropriate levels of job-search assistance and training.
The timing of the break-up and re-branding of FÁS is unfortunate given the unprecedented need and demand for targeted active labour market supports and services. The OECD identified effective and efficient services for the unemployed as “a structural determinant of outflows” from unemployment into jobs. Active labour market policies are an essential component of resolving the jobs crisis.
2. The second policy proposal relates to providing temporary hiring subsidies. The OECD highlights the fact that in many countries, the most difficult cases to match - long-term unemployed with low levels of skills - are often addressed through jobs subsidies or direct public-sector job creation targeted at specific groups. Policies aimed at stimulating labour demand included temporary cuts to employer social security contributions.
The OECD found this measure to be cost effective and involve a smaller deadweight loss. Current policy here includes PRSI exemption for taking on new employees and cuts to employer PRSI are expected as part of the forthcoming Jobs Initiative. However, Ireland already had the second lowest level of employer social security contributions in the EU 15 in 2008, which means that taxes on labour (from the employer perspective) are already very low.
The OECD identifies longer term taxation policy measures that are less damaging on employment and growth. These include a property tax, environmental taxes and consumption taxes – there is no mention of the regressive nature of consumption taxes, however, different rates of VAT could be used to lessen the regressive effects, with luxury items being liable for higher rates of VAT than items used to meet basic needs.
3. The third area relates to investment in training and education. The OECD found that younger workers have been much harder hit by the crisis than older workers and that it is younger workers who are now most at risk of chronic long term unemployment. With youth unemployment currently running at over 25 per cent in Ireland there is clearly a need for targeted interventions and supports for this group, especially those with low levels of education and skills, which puts them at a much higher risk of becoming long term unemployed.
While the number of traineeships and internships for new graduates and recently qualified workers has been expanded, they may well be insufficient to meet demand. Also, there remains a large cohort of young people that need a variety of education and training supports for the purpose of up-skilling /re-skilling if they are going to have any chance of success in re-entering the labour market.
First of all, the report shows us how Spain and Ireland have been particularly badly hit by increases in unemployment. While Ireland is a few percentage points behind Spain (see Figure 1 reproduced below), it can be argued that net outward migration is having a dampening effect on the figure for Ireland. The drain of highly skilled workers out of Ireland, who are also of course members of families and communities, will have major long-term social and economic costs for the country.
Figure 1: The Increase in unemployment rates following the crisis (2007 Q3 – 2010 Q4)
The Report argues that aggregate demand policies continue to have a role to play in supporting economic recovery and in stimulating job growth. And monetary policy has been used by many OECD countries to increase aggregate demand by keeping interest rates low. However, the recent interest rate increase by the ECB - with indications given that there are more increases to come in 2011 – will hamper the efforts of policy makers in the three countries in the Euro Area (Spain, Ireland and Greece) that have seen the largest increases in the rate of unemployment in the OECD.
The Report also identifies a number of measures that have protected some countries employment levels from the worst effects of the crisis. “Labour hoarding” in particular, is singled out through the introduction of state subsidised ‘short-time working’ arrangements. The OECD place a lot of emphasis on the effectiveness of this measure in protecting employment levels, notwithstanding the risks which are outlined in the report.
The OECD also demonstrate the adjustment in labour markets in terms of the decline in output. As we can see (Figure 2 reproduced below), Ireland is an outlier in this regard. The OECD contends that “in the majority of countries, total hours worked declined less than GDP as the output shock was partly absorbed through labour hoarding.” Higher levels of job losses were also concentrated in low-productivity sectors such as construction. Countries such as Ireland, USA and Spain were identified as having higher than average proportions of workers in these sectors, which is reflected in higher than average reductions in hours worked.
Figure 2: Percentage decline in GDP and total hours worked from peak to trough
The OECD also examine nominal wage and labour costs. In most countries, wages decelerated sharply with labour costs also largely decelerating. The data presented in Figure 5 in the OECD report (reproduced below) shows changes to wages and labour costs before and after the crisis. What we find is that increases in nominal wages and unit labour costs just before the crisis hit were broadly in line with increases in the OECD. See here for a further discussion on unit labour costs. The OECD data shows that Ireland had the second lowest growth in nominal wages in the OECD between 2009Q1-2010Q2, and the largest fall in labour costs in the OECD during the same period.
Figure 5: Annualised average percentage change in nominal wages and unit labour costs before and after the crisis.
The three main policy proposals in the OECD report are as follows:
1. Temporarily extend unemployment benefits in countries where such systems are weak so as to provide needed income support ensuring that unemployed workers currently facing bleak jobs prospects do not fall into poverty or lose attachment to the labour market. This should be combined with active labour market policies that are adequately resourced to provide appropriate levels of job-search assistance and training.
The timing of the break-up and re-branding of FÁS is unfortunate given the unprecedented need and demand for targeted active labour market supports and services. The OECD identified effective and efficient services for the unemployed as “a structural determinant of outflows” from unemployment into jobs. Active labour market policies are an essential component of resolving the jobs crisis.
2. The second policy proposal relates to providing temporary hiring subsidies. The OECD highlights the fact that in many countries, the most difficult cases to match - long-term unemployed with low levels of skills - are often addressed through jobs subsidies or direct public-sector job creation targeted at specific groups. Policies aimed at stimulating labour demand included temporary cuts to employer social security contributions.
The OECD found this measure to be cost effective and involve a smaller deadweight loss. Current policy here includes PRSI exemption for taking on new employees and cuts to employer PRSI are expected as part of the forthcoming Jobs Initiative. However, Ireland already had the second lowest level of employer social security contributions in the EU 15 in 2008, which means that taxes on labour (from the employer perspective) are already very low.
The OECD identifies longer term taxation policy measures that are less damaging on employment and growth. These include a property tax, environmental taxes and consumption taxes – there is no mention of the regressive nature of consumption taxes, however, different rates of VAT could be used to lessen the regressive effects, with luxury items being liable for higher rates of VAT than items used to meet basic needs.
3. The third area relates to investment in training and education. The OECD found that younger workers have been much harder hit by the crisis than older workers and that it is younger workers who are now most at risk of chronic long term unemployment. With youth unemployment currently running at over 25 per cent in Ireland there is clearly a need for targeted interventions and supports for this group, especially those with low levels of education and skills, which puts them at a much higher risk of becoming long term unemployed.
While the number of traineeships and internships for new graduates and recently qualified workers has been expanded, they may well be insufficient to meet demand. Also, there remains a large cohort of young people that need a variety of education and training supports for the purpose of up-skilling /re-skilling if they are going to have any chance of success in re-entering the labour market.
Friday, 4 March 2011
Progressive London conference
Sinéad Pentony: Progressive London is a broad alliance for progressive policies, and they hosted their annual conference on 19th February, bringing together leading figures from the British Labour party, local government, the trade union movement, civil society organisations, academics and many others to discuss building the widest possible alliance against the British Government’s policy of cuts to public spending and services in London and beyond, and to show that there is an alternative. Sound familiar? They were keen to know what lies in store for them should their government continue on its current path and one of the parallel sessions focussed on ‘lessons of the Irish economy’; other speakers included PE bloggers Michael Burke and Michael Taft.
I was particularly interested in the analysis being put forward by those opposing the cuts in the UK, and the active campaign that has emerged in response to government policy that has put itself on the path of reducing the deficit at all costs – jobs, growth and equality...
While there are certainly differences between Ireland and the UK – such as the scale of the fiscal and economic crisis; a banking crisis and monetary policy - there are interesting comparisons that can be drawn between the responses of progressives on both sides.
Progressives in the UK have put forward a clear analysis of why they reject the assumptions underpinning the government’s policy (the main assumption being that cutting spending is the best way of cutting the deficit), and of how the cuts will make Britain more unequal. Intellectual support for this position is being provided by a long list of experts ranging from Nobel Prize Winners in Economics (Stiglitz, Krugman and Pissarides) to Financial Times columnists. This analysis is the driving force behind a growing campaign that is resisting the cuts and highlighting the tangible impacts of cuts to public spending and services across the UK.
Political leadership is being provided by various actors, and the trade union movement is mobilising its constituency. Presentations at the Progressive London conference put forward the view that the current government’s fiscal policy is a ‘choice’ which is ideologically motivated, and that the real agenda is a dismantling of the welfare state, privatisation and deregulation.
The economic analysis of the current situation in the UK is underpinned by a strong class analysis, which is being borne out when the impact of the cuts is being felt most by low paid workers, women and migrant communities. This analysis has not emerged to any great degree during our own home grown crisis, but may yet do so depending on the policies pursued by the next Government.
I was particularly interested in the analysis being put forward by those opposing the cuts in the UK, and the active campaign that has emerged in response to government policy that has put itself on the path of reducing the deficit at all costs – jobs, growth and equality...
While there are certainly differences between Ireland and the UK – such as the scale of the fiscal and economic crisis; a banking crisis and monetary policy - there are interesting comparisons that can be drawn between the responses of progressives on both sides.
Progressives in the UK have put forward a clear analysis of why they reject the assumptions underpinning the government’s policy (the main assumption being that cutting spending is the best way of cutting the deficit), and of how the cuts will make Britain more unequal. Intellectual support for this position is being provided by a long list of experts ranging from Nobel Prize Winners in Economics (Stiglitz, Krugman and Pissarides) to Financial Times columnists. This analysis is the driving force behind a growing campaign that is resisting the cuts and highlighting the tangible impacts of cuts to public spending and services across the UK.
Political leadership is being provided by various actors, and the trade union movement is mobilising its constituency. Presentations at the Progressive London conference put forward the view that the current government’s fiscal policy is a ‘choice’ which is ideologically motivated, and that the real agenda is a dismantling of the welfare state, privatisation and deregulation.
The economic analysis of the current situation in the UK is underpinned by a strong class analysis, which is being borne out when the impact of the cuts is being felt most by low paid workers, women and migrant communities. This analysis has not emerged to any great degree during our own home grown crisis, but may yet do so depending on the policies pursued by the next Government.
Thursday, 12 August 2010
US Lessons on the Failure of Pension Tax Arrangements
Sinéad Pentony: Last week, Professor Teresa Ghilarducci's spoke at a pensions seminar co-hosted by TASC, TCD Pension Policy Research Group and the INTO. See her presentation here. Professor Ghilarducci is the Bernard and Irene Schwartz Chair of Economic Policy Analysis and the Director of the Schwartz Center for Economic Policy Analysis at the New School for Social Research, New York.
Her presentation focused on the 401k pension system and showed that pension tax reliefs, as presently structured, result in a significant increase in inequality in the US and that a change in the balance of pension provision in favour of public rather than private pensions is necessary to provide a guaranteed income in retirement. As Ireland starts the process of implementing the National Pensions Framework, we need to take a step back and examine the experience in other jurisdictions. The 401k system has clearly not worked in the US, yet we are proposing to go down a very similar road here.
Ghilarducci’s research on the 401k (defined contribution) system of pension provision clearly shows that this system has failed to provide an adequate replacement income in retirement for millions of Americans. This system of pension provision is similar to Ireland’s PRSAs and they tell a very similar story:
• They are voluntary.
• They have failed to increase pension coverage - half of all workers in Ireland do not have a private pension and 64 million Americans at retirement age are without adequate pension provision.
• They are costly - because of the fees and charges of private providers.
• Tax reliefs have failed to increase pension coverage and they disproportionately benefit high earners -in Ireland 80 per cent of pension tax reliefs accrue to the top 20 per cent of earner; in the US, Ghilarducci contends that while pension tax reliefs in the USA are regressive, they are less regressive than in Ireland.
• They fail to provide an adequate income in retirement - as increasing the value of pension funds is largely dependent on the performance of the stock market and to a large degree, the gains in value are eroded by fees and charges, which is the case in both Ireland and the US.
Having researched 30 years of defined contribution pensions in the USA, Ghilarducci has developed a proposal for a Guaranteed Retirement Account (GRA), which resonates very stongly with the TASC/TCD model of pension provision. Her proposal highlights the importance of the social security pension, as this is what most people rely on for an income in retirement.
Her proposals are:
• A supplementary, mandatory and state-led system that requires all workers and employers to contribute through the social insurance system.
• The state also contributes through tax credits.
• Investments are managed by the State.
• People are provided with a guaranteed income (adjusted for inflation) in retirement.
Ghilarducci has estimated that state contributions to GRAs would be cost neutral if tax reliefs were redistributed (through tax credits) in favour of low and middle income earners.
The aim of the National Pension Framework is to deliver choice – but real choice can only be delivered if people are given the option of saving in a state-led and state-guaranteed supplementary system of pension provision. The evidence clearly supports the need for such a system. The proposals set out in the NPF are centred on a pension system based on tax reliefs which are costly, inefficient and inequitable, even at 33%; and managed by the private pension industry – an industry that has demonstratably failed to deliver security for many Irish workers in retirement.
Her presentation focused on the 401k pension system and showed that pension tax reliefs, as presently structured, result in a significant increase in inequality in the US and that a change in the balance of pension provision in favour of public rather than private pensions is necessary to provide a guaranteed income in retirement. As Ireland starts the process of implementing the National Pensions Framework, we need to take a step back and examine the experience in other jurisdictions. The 401k system has clearly not worked in the US, yet we are proposing to go down a very similar road here.
Ghilarducci’s research on the 401k (defined contribution) system of pension provision clearly shows that this system has failed to provide an adequate replacement income in retirement for millions of Americans. This system of pension provision is similar to Ireland’s PRSAs and they tell a very similar story:
• They are voluntary.
• They have failed to increase pension coverage - half of all workers in Ireland do not have a private pension and 64 million Americans at retirement age are without adequate pension provision.
• They are costly - because of the fees and charges of private providers.
• Tax reliefs have failed to increase pension coverage and they disproportionately benefit high earners -in Ireland 80 per cent of pension tax reliefs accrue to the top 20 per cent of earner; in the US, Ghilarducci contends that while pension tax reliefs in the USA are regressive, they are less regressive than in Ireland.
• They fail to provide an adequate income in retirement - as increasing the value of pension funds is largely dependent on the performance of the stock market and to a large degree, the gains in value are eroded by fees and charges, which is the case in both Ireland and the US.
Having researched 30 years of defined contribution pensions in the USA, Ghilarducci has developed a proposal for a Guaranteed Retirement Account (GRA), which resonates very stongly with the TASC/TCD model of pension provision. Her proposal highlights the importance of the social security pension, as this is what most people rely on for an income in retirement.
Her proposals are:
• A supplementary, mandatory and state-led system that requires all workers and employers to contribute through the social insurance system.
• The state also contributes through tax credits.
• Investments are managed by the State.
• People are provided with a guaranteed income (adjusted for inflation) in retirement.
Ghilarducci has estimated that state contributions to GRAs would be cost neutral if tax reliefs were redistributed (through tax credits) in favour of low and middle income earners.
The aim of the National Pension Framework is to deliver choice – but real choice can only be delivered if people are given the option of saving in a state-led and state-guaranteed supplementary system of pension provision. The evidence clearly supports the need for such a system. The proposals set out in the NPF are centred on a pension system based on tax reliefs which are costly, inefficient and inequitable, even at 33%; and managed by the private pension industry – an industry that has demonstratably failed to deliver security for many Irish workers in retirement.
Tuesday, 27 July 2010
Minimum wage - facts, fiction and flights of fancy
Sinéad Pentony: The minimum wage rate is €8.65 per hour and it has been frozen since 2007. The introduction of the two per cent income levy in the 2009 supplementary budget resulted in an effective cut to the minimum wage reducing it to €8.48, because if your income is greater than the minimum threshold of €15,028 per year or €289 per week, you pay the levy on the full amount of your income. There have recently been calls by the Restaurant Association of Ireland (RAI) for JLC rates to be reduced to the minimum wage level, and from other business lobbies for a reduction in the minimum wage by one euro.
It was in that context that TASC made a presentation to the Oireachtas Joint Committee on Enterprise, Trade and Employment on ‘The Minimum Wage’. TASC’s evidence demonstrated that any reduction to the minimum wage would exacerbate the deflationary situation and have a negative impact on the public finances. In the media debate following TASC’s submission, the business lobbies focused on the cost of the minimum wage and how it is ‘unsustainable’, ‘preventing businesses from hiring’ and ‘a major contributor to a loss in competitiveness’. Once again, it’s important to identify the facts from the fiction in relation to the minimum wage and to look at the latest evidence on competitiveness.
Despite what you may read or hear, the minimum wage rate is not the second highest in Europe for the following reasons:
1. First, when comparing minimum wages across a number of countries you can only do so by taking the Purchasing Power Parities into consideration i.e. calculating how much you can buy with your minimum wages. This is done by expressing the minimum wage in terms of a common unit called the Purchasing Power Standard (PPS). When expressed in PPS terms, Ireland’s ranking drops from second to sixth place, reflecting our higher cost of living. Ireland’s monthly minimum wage is €1,152 in PPS. The UK is in fifth place with a monthly minimum wage of €1,154 (in PPS) and France in fourth place with a monthly minimum wage of €1,189 (in PPS)(details here).
2. Second, Eurostat data calculates wages per month. Ireland’s monthly rates are calculated on the basis of a 39 hour week, France on the basis of a 35 hour week and the UK on the basis of the 38.1 hour week. If we differentiate for the number of hours worked in the three countries we find that the hourly minimum wage is €7.84 (PPS) in France; €6.99 (PPS) in the UK and €6.82 (PPS) in Ireland.
3. Third, the data only refers to those European Members that have statutory minimum wages. This means that the dataset does not include the Scandinavian countries. Collective bargaining is used to set minimum wages in these countries and an October 2008 study by Swedish economists showed that Sweden, Finland and Denmark all had higher hourly minimum wages in 2006 than Ireland, as did Norway which is not a member of the EU.
4. Eurostat also calculates the minimum wage as a per cent of average monthly earnings. The minimum wage in Ireland was 42 per cent of average industrial earnings in 2008, which puts Ireland in ninth place in the EU, or in twelfth place if we include the corresponding 2006 percentages for the Scandinavian countries
When calculating the cost of employing a person, it is more accurate to look at the overall cost of labour which is made up of labour and payroll taxes (PRSI). Ireland has one of the lowest levels of employers’ social protection contribution in the OECD. The Irish rate (10.8 per cent) is significantly lower than the OECD average (15.2 per cent) and the euro area average (27 per cent), which reduces the total cost of employing workers in Ireland. The hospitality sector is the largest employer of low wage workers and labour costs in Ireland in this sector are the third lowest in the EU 15. Only Greece and Portugal had lower costs per employee than Ireland.
When we look at the facts in the cold light of day it is clear that the minimum wage is not out of step with other European countries and when we consider the total costs of employing people, Ireland is indeed very competitive. However, if the minimum wage is causing serious problems for businesses, surely it would be highlighted in any analysis of competition?
Last week the National Competitiveness Council published its annual report on competitiveness for 2010, and it demonstrates that the minimum wage is not a factor impacting on business’s capacity to survive the current challenging trading environment. They found that Ireland’s cost competitiveness has improved considerably for a range of key business inputs such as energy, property and a number of business services. However, the areas where key inputs in Ireland remain relatively expensive include broadband, waste disposal and legal fees. There is no mention of the minimum wage being prohibitive for business ... and in fact the report found that “Irish salary levels are broadly in line with the euro area average across the benchmarked occupations”(p.22.)
Business lobby groups have also been arguing that the minimum wage is preventing them from hiring, and that the costs associated with hiring minimum wage workers is putting business under pressure. This argument is not supported by a single shred of evidence. In fact, the evidence supports the opposite – that the minimum wage has little or no impact on employment. David Metcalf at the London School of Economics undertook empirical research and a wide ranging review of the literature in 2007 and found that the British National Minimum Wage has little or no impact on employment (see also here).
There is no doubt that the recession has impacted on businesses and has led to many businesses having to close their doors and cease trading. However, these difficulties have not been caused by the minimum wage. Factors such as access to credit, high commercial rents, professional fees, waste charges, the price of food and the collapse in demand, in particular, have had a devastating effect on the SME sector. These are the factors that need to be addressed to support businesses in these difficult times – rather than an unsubstantiated attack on the lowest paid workers in our economy.
It was in that context that TASC made a presentation to the Oireachtas Joint Committee on Enterprise, Trade and Employment on ‘The Minimum Wage’. TASC’s evidence demonstrated that any reduction to the minimum wage would exacerbate the deflationary situation and have a negative impact on the public finances. In the media debate following TASC’s submission, the business lobbies focused on the cost of the minimum wage and how it is ‘unsustainable’, ‘preventing businesses from hiring’ and ‘a major contributor to a loss in competitiveness’. Once again, it’s important to identify the facts from the fiction in relation to the minimum wage and to look at the latest evidence on competitiveness.
Despite what you may read or hear, the minimum wage rate is not the second highest in Europe for the following reasons:
1. First, when comparing minimum wages across a number of countries you can only do so by taking the Purchasing Power Parities into consideration i.e. calculating how much you can buy with your minimum wages. This is done by expressing the minimum wage in terms of a common unit called the Purchasing Power Standard (PPS). When expressed in PPS terms, Ireland’s ranking drops from second to sixth place, reflecting our higher cost of living. Ireland’s monthly minimum wage is €1,152 in PPS. The UK is in fifth place with a monthly minimum wage of €1,154 (in PPS) and France in fourth place with a monthly minimum wage of €1,189 (in PPS)(details here).
2. Second, Eurostat data calculates wages per month. Ireland’s monthly rates are calculated on the basis of a 39 hour week, France on the basis of a 35 hour week and the UK on the basis of the 38.1 hour week. If we differentiate for the number of hours worked in the three countries we find that the hourly minimum wage is €7.84 (PPS) in France; €6.99 (PPS) in the UK and €6.82 (PPS) in Ireland.
3. Third, the data only refers to those European Members that have statutory minimum wages. This means that the dataset does not include the Scandinavian countries. Collective bargaining is used to set minimum wages in these countries and an October 2008 study by Swedish economists showed that Sweden, Finland and Denmark all had higher hourly minimum wages in 2006 than Ireland, as did Norway which is not a member of the EU.
4. Eurostat also calculates the minimum wage as a per cent of average monthly earnings. The minimum wage in Ireland was 42 per cent of average industrial earnings in 2008, which puts Ireland in ninth place in the EU, or in twelfth place if we include the corresponding 2006 percentages for the Scandinavian countries
When calculating the cost of employing a person, it is more accurate to look at the overall cost of labour which is made up of labour and payroll taxes (PRSI). Ireland has one of the lowest levels of employers’ social protection contribution in the OECD. The Irish rate (10.8 per cent) is significantly lower than the OECD average (15.2 per cent) and the euro area average (27 per cent), which reduces the total cost of employing workers in Ireland. The hospitality sector is the largest employer of low wage workers and labour costs in Ireland in this sector are the third lowest in the EU 15. Only Greece and Portugal had lower costs per employee than Ireland.
When we look at the facts in the cold light of day it is clear that the minimum wage is not out of step with other European countries and when we consider the total costs of employing people, Ireland is indeed very competitive. However, if the minimum wage is causing serious problems for businesses, surely it would be highlighted in any analysis of competition?
Last week the National Competitiveness Council published its annual report on competitiveness for 2010, and it demonstrates that the minimum wage is not a factor impacting on business’s capacity to survive the current challenging trading environment. They found that Ireland’s cost competitiveness has improved considerably for a range of key business inputs such as energy, property and a number of business services. However, the areas where key inputs in Ireland remain relatively expensive include broadband, waste disposal and legal fees. There is no mention of the minimum wage being prohibitive for business ... and in fact the report found that “Irish salary levels are broadly in line with the euro area average across the benchmarked occupations”(p.22.)
Business lobby groups have also been arguing that the minimum wage is preventing them from hiring, and that the costs associated with hiring minimum wage workers is putting business under pressure. This argument is not supported by a single shred of evidence. In fact, the evidence supports the opposite – that the minimum wage has little or no impact on employment. David Metcalf at the London School of Economics undertook empirical research and a wide ranging review of the literature in 2007 and found that the British National Minimum Wage has little or no impact on employment (see also here).
There is no doubt that the recession has impacted on businesses and has led to many businesses having to close their doors and cease trading. However, these difficulties have not been caused by the minimum wage. Factors such as access to credit, high commercial rents, professional fees, waste charges, the price of food and the collapse in demand, in particular, have had a devastating effect on the SME sector. These are the factors that need to be addressed to support businesses in these difficult times – rather than an unsubstantiated attack on the lowest paid workers in our economy.
Tuesday, 2 February 2010
Taxbreak hotels
Sinéad Pentony: The report by Peter Bacon on the Irish Hotel Industry highlights the sorry state of the industry, which has been insolvent since 2008. By the end of that year, there were a total of 59,000 hotel rooms in the country – and according to the Report, a quarter (15,000) of these rooms need to be closed down urgently. The Report also estimates that €1bn of debt in the hotel industry is not covered by assets. Peter Bacon makes a large number of recommendations in the Report that, if implemented, would effectively restructure the industry. However, it is worth taking a closer look at his recommendations in relation to the accelerated capital allowances for hotels (tax breaks), because it would result in a significant bailout of developers if implemented.
The Report on the hotel industry identifies a number of factors that have contributed to the virtual collapse of the industry. In the first instance, it points the finger at hotel tax breaks and the damage they have caused by distorting the market. The tax breaks resulted in the creation of a huge over-supply of hotels whose viability was questionable from the outset. Bacon concludes that the stock of new hotels has been seriously insolvent since 2005, and the analysis shows that in every year since 2002, new hotels on average have been insolvent from the year of their construction. The economic crisis has compounded the situation and has brought the industry to the brink of collapse.
Secondly, the Report highlights the practices of financial institutions and banks in contributing to the problems in the industry. It would appear that the banks and financial institutions are supporting a large number of insolvent hotels to remain in business. Bacon identifies a number of reasons for this in the Report, including “... the need of hotels to remain open for seven years to allow investors to avail of capital allowances and to avoid the creation of a tax liability due to a clawback of allowances that have been claimed already; the reluctance of banks to realise losses and write off loans granted to hotels with no prospect of recovery because of the additional pressure this would place on the capital adequacy of their own balance sheets; and the reluctance to act in advance of the introduction of NAMA.”
The result of these factors is that the insolvency problem is being spread through the industry, and solvent hoteliers now find themselves having to compete against ‘zombie’ hotels, many of which were created specifically to take advantage of tax breaks, and this is threatening to destroy fundamentally sound businesses. At the same time, the reluctance of banks to provide sufficient working capital is leading to liquidity problems that further undermine the businesses of solvent hotels. Peter Bacon points to the possibility that the banks have less incentive to keep viable hotels with relatively low levels of debt open, than is the case for hotels with high levels of debt, for the reasons stated above – having to realise losses and write off loans.
So how do we solve this problem? The recommendations contained in the Report outline the restructuring that needs to take place within the industry, to put it back on the road to solvency and viability. One of the key recommendations relates to the issue of over-supply and removing 15,000 rooms from the market – it goes on to specify that the reduction of excess capacity should be facilitated by the adjustment of tax regulations concerning tax allowances for new hotels.
Incredibly, the Report recommends “...that a special provision be introduced in the Finance Act 2010 to allow relevant hotels to exit the industry without disadvantaging the initial investors in terms of capital allowance. It is further recommended that an accompanying provision be introduced to the effect that capital allowances that have already been claimed in respect of any hotel should not be subject to any claw back by the Revenue should that hotel exit the industry within seven years”.
Essentially, the Report is recommending that developers who took advantage of tax breaks to build hotels that were never going to be viable should not be subject to the clawback of those capital allowances - because they won’t have an incentive to close these hotels but rather, keep them open for the seven years, which will further undermine the hotel industry. There are two questions that arise here: the first is an economic question, and the second relates to how insolvent hotels continue to be financed.
We live in a market economy and the Report clearly demonstrates the detrimental consequences of market-distorting tax breaks. The economic logic would see the removal of the tax breaks and, if the hotel ceases trading within seven years, tax allowances would be clawed back. The tax breaks for hotels have been discontinued along with other property-based tax incentive schemes. However, the Commission on Taxation Report 2009 notes that many live on for existing projects and “for pipeline projects”, as in the case of hotel accelerated capital allowances (tax breaks).
The recommendation contained in the Report in relation to the treatment of the claw back can only be described as a further market distortion and raises serious questions in relation to ‘moral hazard’, whereby failed investors are in fact freed from the consequences of their actions. If implemented, this recommendation can only be described as a bailout for hotel developers, when they should, in fact, be subject to the same rules as everyone else who operates in a market economy. This leads us to the second question.
How can struggling developers and investors afford to keep insolvent hotels open? The answer is - the banks. The Report identified the actions of banks as being “particularly damaging” because they are avoiding the need to realise losses due to bad loans on hotels that are not viable by providing a “drip feed of working capital”. Meanwhile, hotels with low debt levels and viable businesses are experiencing liquidity problems because they are having difficulty in accessing sufficient working capital. The Report recommends that the banks need to fully recognise bad loans within the hotel sector and face any capital adequacy issues which might follow.
John Power, CEO of the Irish Hotels Federation, in an interview on Drivetime on the 5th January clearly articulated the problem with the banks keeping insolvent hotels open and the detrimental effect this is having on the industry as a whole. But how can the banks, which have such serious liquidity problems afford to keep these insolvent hotels open – when we hear countless stories of viable businesses going into liquidation because of credit restrictions?
We can only assume that part of the capital that has been injected into the banks from the State (€11bn to date) is being used to keep insolvent hotels open, so that they can be transferred to NAMA and/or to prevent the developers from incurring tax clawback liabilities, should the hotel be forced to close within 7 years of being built.
The Report puts the costs to the Exchequer of removing this barrier to exit the industry at zero. Hotel-related capital allowances which remain to be claimed have an estimated value of €527 million to investors. More importantly, allowances already claimed, which potentially could be clawed back by the Revenue, have a value estimated at €1bn. The total potential loss to the Exchequer adds up to over €1.5bn.
The Finance Bill is due to be published in the coming days, so we will have to wait and see if hotel developers are next in line to be bailed out by the taxpayer. Hotel developers would not be able to keep these hotels open were it not for the support of the banks, who in turn, have questions to answer - in relation to continuing to finance insolvent hotels and the extent to which capital injected by the State is being used to support this activity. It would appear that the taxpayer is being used to prop up the whole system and is keeping the banks, speculative developers and other vested interests afloat.
But who is propping up the tax payer?
Sinéad Pentony is Head of Policy at TASC
The Report on the hotel industry identifies a number of factors that have contributed to the virtual collapse of the industry. In the first instance, it points the finger at hotel tax breaks and the damage they have caused by distorting the market. The tax breaks resulted in the creation of a huge over-supply of hotels whose viability was questionable from the outset. Bacon concludes that the stock of new hotels has been seriously insolvent since 2005, and the analysis shows that in every year since 2002, new hotels on average have been insolvent from the year of their construction. The economic crisis has compounded the situation and has brought the industry to the brink of collapse.
Secondly, the Report highlights the practices of financial institutions and banks in contributing to the problems in the industry. It would appear that the banks and financial institutions are supporting a large number of insolvent hotels to remain in business. Bacon identifies a number of reasons for this in the Report, including “... the need of hotels to remain open for seven years to allow investors to avail of capital allowances and to avoid the creation of a tax liability due to a clawback of allowances that have been claimed already; the reluctance of banks to realise losses and write off loans granted to hotels with no prospect of recovery because of the additional pressure this would place on the capital adequacy of their own balance sheets; and the reluctance to act in advance of the introduction of NAMA.”
The result of these factors is that the insolvency problem is being spread through the industry, and solvent hoteliers now find themselves having to compete against ‘zombie’ hotels, many of which were created specifically to take advantage of tax breaks, and this is threatening to destroy fundamentally sound businesses. At the same time, the reluctance of banks to provide sufficient working capital is leading to liquidity problems that further undermine the businesses of solvent hotels. Peter Bacon points to the possibility that the banks have less incentive to keep viable hotels with relatively low levels of debt open, than is the case for hotels with high levels of debt, for the reasons stated above – having to realise losses and write off loans.
So how do we solve this problem? The recommendations contained in the Report outline the restructuring that needs to take place within the industry, to put it back on the road to solvency and viability. One of the key recommendations relates to the issue of over-supply and removing 15,000 rooms from the market – it goes on to specify that the reduction of excess capacity should be facilitated by the adjustment of tax regulations concerning tax allowances for new hotels.
Incredibly, the Report recommends “...that a special provision be introduced in the Finance Act 2010 to allow relevant hotels to exit the industry without disadvantaging the initial investors in terms of capital allowance. It is further recommended that an accompanying provision be introduced to the effect that capital allowances that have already been claimed in respect of any hotel should not be subject to any claw back by the Revenue should that hotel exit the industry within seven years”.
Essentially, the Report is recommending that developers who took advantage of tax breaks to build hotels that were never going to be viable should not be subject to the clawback of those capital allowances - because they won’t have an incentive to close these hotels but rather, keep them open for the seven years, which will further undermine the hotel industry. There are two questions that arise here: the first is an economic question, and the second relates to how insolvent hotels continue to be financed.
We live in a market economy and the Report clearly demonstrates the detrimental consequences of market-distorting tax breaks. The economic logic would see the removal of the tax breaks and, if the hotel ceases trading within seven years, tax allowances would be clawed back. The tax breaks for hotels have been discontinued along with other property-based tax incentive schemes. However, the Commission on Taxation Report 2009 notes that many live on for existing projects and “for pipeline projects”, as in the case of hotel accelerated capital allowances (tax breaks).
The recommendation contained in the Report in relation to the treatment of the claw back can only be described as a further market distortion and raises serious questions in relation to ‘moral hazard’, whereby failed investors are in fact freed from the consequences of their actions. If implemented, this recommendation can only be described as a bailout for hotel developers, when they should, in fact, be subject to the same rules as everyone else who operates in a market economy. This leads us to the second question.
How can struggling developers and investors afford to keep insolvent hotels open? The answer is - the banks. The Report identified the actions of banks as being “particularly damaging” because they are avoiding the need to realise losses due to bad loans on hotels that are not viable by providing a “drip feed of working capital”. Meanwhile, hotels with low debt levels and viable businesses are experiencing liquidity problems because they are having difficulty in accessing sufficient working capital. The Report recommends that the banks need to fully recognise bad loans within the hotel sector and face any capital adequacy issues which might follow.
John Power, CEO of the Irish Hotels Federation, in an interview on Drivetime on the 5th January clearly articulated the problem with the banks keeping insolvent hotels open and the detrimental effect this is having on the industry as a whole. But how can the banks, which have such serious liquidity problems afford to keep these insolvent hotels open – when we hear countless stories of viable businesses going into liquidation because of credit restrictions?
We can only assume that part of the capital that has been injected into the banks from the State (€11bn to date) is being used to keep insolvent hotels open, so that they can be transferred to NAMA and/or to prevent the developers from incurring tax clawback liabilities, should the hotel be forced to close within 7 years of being built.
The Report puts the costs to the Exchequer of removing this barrier to exit the industry at zero. Hotel-related capital allowances which remain to be claimed have an estimated value of €527 million to investors. More importantly, allowances already claimed, which potentially could be clawed back by the Revenue, have a value estimated at €1bn. The total potential loss to the Exchequer adds up to over €1.5bn.
The Finance Bill is due to be published in the coming days, so we will have to wait and see if hotel developers are next in line to be bailed out by the taxpayer. Hotel developers would not be able to keep these hotels open were it not for the support of the banks, who in turn, have questions to answer - in relation to continuing to finance insolvent hotels and the extent to which capital injected by the State is being used to support this activity. It would appear that the taxpayer is being used to prop up the whole system and is keeping the banks, speculative developers and other vested interests afloat.
But who is propping up the tax payer?
Sinéad Pentony is Head of Policy at TASC
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