Tom O'Connor: Doomsday scenarios have been painted recently by Prof. Morgan Kelly and others concerning the need to abandon to EU/IMF deal on the one hand or totally repudiate the debt on the other. Kelly has suggested we abandon the bailout and balance the exchequer books immediately. Balancing the books immediately is not an option however.
The newly elected Fine Gael TD Paschal Donohoe has warned against abandoning the bailout, predicting huge cuts in social welfare. The Central Bank Governor, Paddy Honohan is defending the bailout and fighting to save his reputation. There is a huge amount of kneejerk-ism around and people taking sides. I attempt in this post to stand back and examine evidence which might inform the way forward.
Let’s start with the most radical scenario, Argentina: In 2002, it had developed a triple financial crisis in terms of its unmanageable fiscal deficit, banks which were broke and ultimately a government external debt crisis as a result. To a large extent, this is where Ireland is right now. In January 2002, Argentina essentially abruptly defaulted on $81.8 billion of its external debt without consultation with creditors.
This led to a run on the banks. It wiped out the savings of citizens. It dramatically increased the cost of borrowing by the government and deflated the size of the economy by 25% in one year from 2001 to 2002. The collapse of the currency greatly indebted the country also, as much of it was denominated in dollars.
For many years afterwards, Argentinean credit has been more costly in its bond spreads. Bond debt has been more costly there and in Ecuador, far higher than in other countries which had restructured their debt with creditors in advance, such as Ukraine (1998) and Uruguay (2003).
Argentina and Ecuador also imposed large haircuts on the debt on which it defaulted, far higher than that of countries which had negotiated in advance. Ukraine and Uruguay imposed lower haircuts and in the years that followed, their bond spreads were lower. This means that they could subsequently borrow more cheaply as a reflection of the greater level of international trust in these countries.
Nonetheless all four countries did eventually formally agree repayment terms with the IMF, either pre-default or post-default. This happened under the IMF’s Sovereign Debt Restructuring Mechanism (SDRM). According to Professor Nouriel Roublini, at this point the European Union should examine this mechanism as the way forward for debt restructuring, and not be wasting its time looking for new legal mechanisms.
Working on his evidence as well as that contained in work by De Paoli (2006), Gelos (2004) and others, there is strong evidence to suggest that the preferred option is a partial and negotiated restructuring of debt in advance of a default. The term ‘restructuring’ sounds more positive and is more advantageous.
Nonetheless, a negotiated ‘restructuring’ is still a default according to the eminent work of Reinhart and Rogoff (2009). The benefits of lower bond spreads in the years following a ‘restructuring’ or ‘exchange offer’ (Roubini) of a restructured debt are augmented by a significantly less negative impact on growth in the years ahead on the ability raise finance internationally. This negotiated mechanism (as in the SDRM) reduces ‘deadweight costs’ also such as costly legal proceedings. It is infinitely better than allowing a country to stumble towards default to the destruction of its economy. This resembles death by a thousand cuts.
Taking this eminent advice on board, I would suggest that the EU/IMF deal needs to rescinded and replaced with Ireland cutting a deal on external debt, including sovereign debt and the debts of the Irish Banks.
The current bailout offers bad terms for Ireland. The prospect of repaying 70 billion worth of bank debt without any deal on writing down the bonds involved, at a rate of interest of 5.8% cannot be done, particularly as it will have to be paid in conjunction with sovereign exchequer debt. The repayment of 8 billion a year in interest is off the scale.
On the basis of the evidence from international experience, the bailout needs to be replaced by an IMF led Sovereign Debt Restructuring Mechanism (SDRM). Many Irish economists have pointed to the fact that under the current bailout, Ireland will become insolvent by 2014. The country cannot sit back and wait for this to happen. Instead, it needs to offer, along with other euro zone countries in danger of default, what Roubini terms a ‘pre-emptive, pre-default exchange rate offer’.
Without a default, national debt will be 225 billion in 2014 and our GDP according to the Dept of Finance will be only 184, a debt/GDP ratio of 122%. This figure 225 does not include NAMA. This 184 debt would include 70 billion of bank debt if we include the recapitalisations from 2008 till then. At that point, the sustained debt would be over twice the international solvency rule of thumb whereby a country needs to keep its debt below 60% of GDP.
The Roubini Pre-Default Exchange Offer under existing IMF rules should be done in the same was as was done in Pakistan, Uruguay or Ukraine and in many other countries in recent years. The EU/IMF deal should be cast aside.
This would be a partial default. It needs to be planned with creditors. A haircut of at least 50% on the bank debt of 70 billion needs to be agreed right away. Haircuts of this magnitude have been proposed by Rogoff and Roubini.
Exchequer debt needs to be extended well beyond the 7.5 years of average maturity which exists under the EU/IMF deal. A significant cut in the interest rate on sovereign external debt will also be necessary alongside a possible haircut also. The 160 billion owed to the ECB by Irish banks will also need to be restructured. These are some of the areas of ‘offer’ that the Irish government needs to make to its creditors.
Another international model which might inform the default is that of South East Asia in the late 1990s. After receiving IMF funds, they opted out of their quasi-fixed exchange rate with the dollar and devalued significantly. They recovered economically far more quickly than Hong Kong which stuck with the dollar. If Ireland sticks with the euro under a default, its recovery will take longer, as happened in Hong Kong. By contrast, the devaluation of the currencies in Thailand, Indonesia and South Korea greatly added stimulation to their economic recovery.
This scenario would help greatly in avoiding severe cutbacks in wages, social welfare payments and public spending. The scale of future GNP increases is also key to preventing punitive measures been implemented by the Irish government on its population. A significant economic stimulus is needed in this regard.
Despite the warnings of some commentators however, the published evidence does not necessarily support the inevitability that pay rates in the public sector and social welfare payments will automatically be dramatically cut in the event of a default.
If a default is ‘offered’ pre-emptively by a country in negotiation with creditors and particularly under the IMF (SDRM), recovery may happen within three years according to the in-depth research by Reinhart and Rogoff of Harvard. With access to capital markets within months and growth restored quickly, penal cuts to public pay and welfare are not in any way an inevitable and may in fact be prevented.
After a default, countries are not ‘blacked’ for finance for long periods and usually can access market finance within four months in many cases, according to a study by Gelos (2004). An exhaustive World Bank study by Zettelmeyer and Sturzenegger (2007) also echoes the view that default is far from a doomsday scenario. Many countries recovered quickly despite the negative effects on economic growth and the increased cost of borrowing. Argentina and Russia are cases in point.
In addition, it may well be the case that the blanket austerity being demanded by the EU and IMF under the bailout plan would be a lot worse and more punitive on those not responsible for the problem, than would a structured default where Ireland exerts more control on its own affairs.
It is obvious that Greece Will negotiate a default very soon. It seems increasingly likely that the EU cannot hold back the tide of default. The Portuguese bailout may never fully even get off the blocks and it certainly does not look sustainable.
The Irish government needs to stop burying its head in the sand and posturing about a possible lowering of the interest rate in the bailout. This bailout will not work. Modelling from other countries demonstrates that a negotiated default needs to happen as soon as possible. This will give the economy a better chance of bouncing back quickly, a lesson that has been learned from Japan’s stubbornness in this regard heretofore.
A Debt Audit Commission was set up in Ecuador in 2007. Some unions, academics and civil society groups have been calling for one to be set up in Ireland. This will determine the fairest course of action on defaulting. This could inform the way forward.
this piece originally appeared in the Irish Examiner
Showing posts with label Tom O'Connor. Show all posts
Showing posts with label Tom O'Connor. Show all posts
Thursday, 12 May 2011
Friday, 1 April 2011
Tell me: Are we out of recession yet and what can be done?
Tom O'Connor: The banking crisis is topical. Unemployment isn't and hasn't been in the last three years. This blindness towards unemployment and monopolisation of everybody's efforts solely on the banks, needs to stop. Human misery, suicide, emigration and economic recession should not be displaced from the top of the agenda by anything. Unemployment should and can be dealt with in advance of a banking solution. Last week's Quarterly National Income figures demonstrate that Unemployment cannot wait. It has been waiting since 2008 until the banking mess has resolved.
A plan and a concrete investment strategy funded from our own unborrowed resources within the NPRF and NTMA needs to happen mow. What is happening now and in the last two years is that governments, most economists and the media have all but ignored unemployment, given the urgent necessity to fix the banks. Can I suggest that unemployment is even more urgent? It should have been, and should now be, dealt with, even before this banking crisis is resolved.
Most people will not read last week's CSO figures on economic growth which are designed to tell us whether or not we are still in recession. However, people in pubs, shops, clubs and workplaces really do want to know whether we are or not. They are hanging on for dear life and their children are emigrating. Will there be an improvement? If not, they want to know why not, and what is the Government going to do about it?
Let’s look at the figures: Based on the whole of 2010, they tell us we are still in recession because both measures of economic growth fell. GDP fell by 1% and GNP by 2%. This is bad news. But, policy makers will say that we are either out of recession or coming out of recession. Why? Because they will say that GNP grew by somewhere between 0 and 2% in each of the last three quarters of 2010.
People will say, however, that they can still really feel the recession and it’s not getting any better. The truth is that we are not out of recession! This indeed is also borne out by the figures for GDP, which fell by 1.6% in the last quarter of 2010. Ah, but policy makers will say that GNP is a better measure for Ireland, so that doesn’t matter!
They would be very wrong. During this recession, the GDP figures are a far better indication of whether or not the economy is out of recession. It is a better indicator of how many jobs are being lost and created. It is a better indicator of how much money people have in their pockets and also how many people will emigrate.
The figures tell us why: firstly, the fact that GDP has fallen by 1.6% in the last quarter of 2010, and GNP rose by 2%, is explained mainly by the profit repatriation practices of multinational companies. Essentially, some of the 2% growth in GNP in the last quarter of 2010 is a statistical aberration, and happened mainly because multinationals didn’t repatriate as many profits as normal in that quarter!
Nonetheless, much of the GNP increase has been fuelled by real exports which in gross terms rose by 13.6 billion from 2009-2010 and when imports are subtracted grew by 5.7 billion. This growth arose from the multinational sector in the main, which accounts for up to 90% of Irish exports. However, the jobs dividend from this growth will be very little. Why?
Much of the work on these exports has already been done in Bermuda or elsewhere and is only registered as an Irish export to take advantage of the low 12.5% corporation tax. Multinationals' employment levels have been relatively stable over that last number of years, fixed at around 100 to 120,000 workers. The new technology which continues to revolutionise these companies also reduces the numbers employed.
But hold on, there are 2 million people needing jobs! There are 444,000 people on the live register of unemployment. The figures tell us the continuingly depressing story of the demise of these people. We knew already that 150,000 have lost their jobs in construction or construction-related work.
The big drivers in creating Irish jobs have always been based on what people produce domestically. However, the figures tell us that all domestic output fell, apart from business output which rose, and which is strongly influenced by multinationals. For example: the value of building and construction to the Irish economy fell from 8.4 billion to 5.7 billion from 2009 to 2010; the value of agriculture and fishing has fallen by 227 million; the distribution, transport and communication sectors fell by 336 million; the value of other services fell by 2 billion. Incidentally, in 2007 the value of construction output stood at 13.6 billion compared to 5.7 billion at the end of 2010.
Taking all the above into consideration, the clear message is that the loss in jobs in the Irish economy, which is reflected in the fall of GDP in 2010 and particularly in the fourth quarter of 2010, is indicative of a deep recession. Apart from multinationals, Ireland is haemorrhaging jobs out of its economy and driving up emigration.
Examining the expenditure economic growth figures, the overall demand in the economy has fallen by 7.9 billion. The fact that multinational net exports grew by 5.7 billion makes little difference as it produces few extra jobs. It does nothing to improve the catastrophic effects of the loss of jobs in the sectors of the Irish economy mentioned above which actually do provide jobs, and which have all fallen.
The current GNP figures only statistically mask this huge problem which is obvious from the fall in GDP of almost one billion in the last quarter of 2010 alone. The masking of this by a statistical increase of over 2 billion in GNP terms, based on lower repatriation of multinational profits, shows that the GDP figures are giving the correct picture.
Last year I warned against trusting the predictions of a strong economic recovery at the end of last year and the dangers of growing unemployment and emigration. Unemployment has increased to 444,000 at present, and emigration is running at 80,000 a year. The reasons are obvious from the above. Unemployment and recession will not be solved by any government which lies to the population by quoting GNP figures. They mislead the people by promising that the economy is out of recession; that it has ‘turned the corner’; or that unemployment will drop significantly going forward.
As I have stated since June 2008, the government needs a sustained set of stimulus packages to provide job beneficial growth. It needs three stimulus packages worth 8 billion over two years and includes: A state development bank to lend money to viable businesses coming from the un-borrowed cash reserves of the government at the National Treasury Management Agency and at the National Pension Reserve Fund. This is crying out to happen as money invested by businesses fell by a staggering 27% in 2010 according to the current figures. This needs to prioritise indigenous business by investing 3 billion in social partner-vetted business growth and new ventures.
A further 2 billion needs to be invested in hundreds of new schools, primary care health centres and mental health facilities; finally, 100,000 houses need to be bought by the state at never-to-be-repeated bargain basement prices which would cost 3 billion in net terms. Through low cost affordable housing and social housing with reasonable rents, thousands can be taken out of unemployment traps and the black economy, and with economic stimulation, be brought in to taxpaying real jobs, also taking them off social welfare.
This piece is written from an ideological position that the economic consensus that operating up to now, called variously by terms such as total free market philosophy, has failed. In the words of a book by Paul Krugman, Nobel Prize Winner for Economics in 2008, “A Country is not a Company”. Each business leads its own business only; the government needs to lead overall. The current debacle will continue to fail as long as there is a failure by the state to lead economic development. The direction of change at this point should be firmly rooted in a new and lean Keynesian economic model.
A plan and a concrete investment strategy funded from our own unborrowed resources within the NPRF and NTMA needs to happen mow. What is happening now and in the last two years is that governments, most economists and the media have all but ignored unemployment, given the urgent necessity to fix the banks. Can I suggest that unemployment is even more urgent? It should have been, and should now be, dealt with, even before this banking crisis is resolved.
Most people will not read last week's CSO figures on economic growth which are designed to tell us whether or not we are still in recession. However, people in pubs, shops, clubs and workplaces really do want to know whether we are or not. They are hanging on for dear life and their children are emigrating. Will there be an improvement? If not, they want to know why not, and what is the Government going to do about it?
Let’s look at the figures: Based on the whole of 2010, they tell us we are still in recession because both measures of economic growth fell. GDP fell by 1% and GNP by 2%. This is bad news. But, policy makers will say that we are either out of recession or coming out of recession. Why? Because they will say that GNP grew by somewhere between 0 and 2% in each of the last three quarters of 2010.
People will say, however, that they can still really feel the recession and it’s not getting any better. The truth is that we are not out of recession! This indeed is also borne out by the figures for GDP, which fell by 1.6% in the last quarter of 2010. Ah, but policy makers will say that GNP is a better measure for Ireland, so that doesn’t matter!
They would be very wrong. During this recession, the GDP figures are a far better indication of whether or not the economy is out of recession. It is a better indicator of how many jobs are being lost and created. It is a better indicator of how much money people have in their pockets and also how many people will emigrate.
The figures tell us why: firstly, the fact that GDP has fallen by 1.6% in the last quarter of 2010, and GNP rose by 2%, is explained mainly by the profit repatriation practices of multinational companies. Essentially, some of the 2% growth in GNP in the last quarter of 2010 is a statistical aberration, and happened mainly because multinationals didn’t repatriate as many profits as normal in that quarter!
Nonetheless, much of the GNP increase has been fuelled by real exports which in gross terms rose by 13.6 billion from 2009-2010 and when imports are subtracted grew by 5.7 billion. This growth arose from the multinational sector in the main, which accounts for up to 90% of Irish exports. However, the jobs dividend from this growth will be very little. Why?
Much of the work on these exports has already been done in Bermuda or elsewhere and is only registered as an Irish export to take advantage of the low 12.5% corporation tax. Multinationals' employment levels have been relatively stable over that last number of years, fixed at around 100 to 120,000 workers. The new technology which continues to revolutionise these companies also reduces the numbers employed.
But hold on, there are 2 million people needing jobs! There are 444,000 people on the live register of unemployment. The figures tell us the continuingly depressing story of the demise of these people. We knew already that 150,000 have lost their jobs in construction or construction-related work.
The big drivers in creating Irish jobs have always been based on what people produce domestically. However, the figures tell us that all domestic output fell, apart from business output which rose, and which is strongly influenced by multinationals. For example: the value of building and construction to the Irish economy fell from 8.4 billion to 5.7 billion from 2009 to 2010; the value of agriculture and fishing has fallen by 227 million; the distribution, transport and communication sectors fell by 336 million; the value of other services fell by 2 billion. Incidentally, in 2007 the value of construction output stood at 13.6 billion compared to 5.7 billion at the end of 2010.
Taking all the above into consideration, the clear message is that the loss in jobs in the Irish economy, which is reflected in the fall of GDP in 2010 and particularly in the fourth quarter of 2010, is indicative of a deep recession. Apart from multinationals, Ireland is haemorrhaging jobs out of its economy and driving up emigration.
Examining the expenditure economic growth figures, the overall demand in the economy has fallen by 7.9 billion. The fact that multinational net exports grew by 5.7 billion makes little difference as it produces few extra jobs. It does nothing to improve the catastrophic effects of the loss of jobs in the sectors of the Irish economy mentioned above which actually do provide jobs, and which have all fallen.
The current GNP figures only statistically mask this huge problem which is obvious from the fall in GDP of almost one billion in the last quarter of 2010 alone. The masking of this by a statistical increase of over 2 billion in GNP terms, based on lower repatriation of multinational profits, shows that the GDP figures are giving the correct picture.
Last year I warned against trusting the predictions of a strong economic recovery at the end of last year and the dangers of growing unemployment and emigration. Unemployment has increased to 444,000 at present, and emigration is running at 80,000 a year. The reasons are obvious from the above. Unemployment and recession will not be solved by any government which lies to the population by quoting GNP figures. They mislead the people by promising that the economy is out of recession; that it has ‘turned the corner’; or that unemployment will drop significantly going forward.
As I have stated since June 2008, the government needs a sustained set of stimulus packages to provide job beneficial growth. It needs three stimulus packages worth 8 billion over two years and includes: A state development bank to lend money to viable businesses coming from the un-borrowed cash reserves of the government at the National Treasury Management Agency and at the National Pension Reserve Fund. This is crying out to happen as money invested by businesses fell by a staggering 27% in 2010 according to the current figures. This needs to prioritise indigenous business by investing 3 billion in social partner-vetted business growth and new ventures.
A further 2 billion needs to be invested in hundreds of new schools, primary care health centres and mental health facilities; finally, 100,000 houses need to be bought by the state at never-to-be-repeated bargain basement prices which would cost 3 billion in net terms. Through low cost affordable housing and social housing with reasonable rents, thousands can be taken out of unemployment traps and the black economy, and with economic stimulation, be brought in to taxpaying real jobs, also taking them off social welfare.
This piece is written from an ideological position that the economic consensus that operating up to now, called variously by terms such as total free market philosophy, has failed. In the words of a book by Paul Krugman, Nobel Prize Winner for Economics in 2008, “A Country is not a Company”. Each business leads its own business only; the government needs to lead overall. The current debacle will continue to fail as long as there is a failure by the state to lead economic development. The direction of change at this point should be firmly rooted in a new and lean Keynesian economic model.
Monday, 29 November 2010
Implications of the IMF deal
Tom O'Connor: The IMF deal which has just being announced should be filed under fairy stories. It is economically unrealistic and would be an impossible burden on the country.
Let’s take the figures. The interest rate on the deal is 5.8% and the deal takes €17 billion from National Pension Reserve Fund and National Treasury Management Agency. Remember, the Greek deal was only 5.2% over five years. The longer time period on the Irish deal forces a significant hike in interest rate. The longer time frame increases the amount of interest significantly also.
Let’s put this figure in to the macroeconomic framework. In 2014 our national income measured by GDP, the measure used by the EU, will be €183 billion. At the end of 2009 our national debt stood at €75 billion. This year’s deficit plus the deficits to 2014 plus the bank recapitalisation will bring the national debt up to 183 billion by 2014, 100% of GDP, according to the government’s four year plan.
Now this 183 billion is the principal owed and doesn’t include the interest. This bailout will fund the 35 billion bank recapitalisation and 50 billion in deficit repayments and is in line with the governments own projections in its four year plan.
The interest on the deal will be €45 billion. The total €69 billion plus interest amounts to €114 billion. This is to be paid by the start of 2020 and covers 9 years. This forms part of the national debt from next year onwards. A further €50 billion will be added to the €100 billion which is not part of the IMF deal and which already exists. The total government debt in 2019 without anything paid off it will be €264 billion.
Now, the government’s own four year national recovery plan shows it will run a deficit by until 2014. It will be lucky to break even in 2015. Even during the best year of the Celtic tiger, the maximum surplus run by the government was €3 billion.
So, the government would be lucky to gather €1 billion a year in surplus from 2016 to 2019. This will give them a tiny repayment capacity of €4 billion to the IMF who with interest will be owed €114 billion. Even the sale of all semi-state companies would only pay off another €5 billion.
The fact that we will owe €114 of our national debt to a ruthless organisation like the IMF is a very worrying prospect indeed, given its track record in Eastern Europe, Africa and Latin America.
Given that all the taxation increases will have been used up to bring down the deficit to 3% by 2014 to please the EU and taxes will then by quite high, there is no other avenue for the government to raise the rest of the money. The government cannot come even remotely close to paying. There are no Houdini tricks.
The government projects GDP will be €183 billion in 2014, based on its growth projections. Now, taking the very optimistic scenario that the economy will grow by an average of 3% in GDP terms to 2019, nominal GDP at that stage would be 205 billion. At that stage the €264 billion in national debt will be 129% of GDP.
This figure would include nine years of economic hardship and cutbacks. At the end of the period, Ireland would still owe one and a third of everything we produce in the country in one year, with the IMF being by far the biggest creditor.
The justification for the bailout is to save the euro and bring our economic figures in to synch with the EU’s Stability and Growth Pact. This is nonsense. True, we will be down to 3% in terms of our general government deficit by 2014. However, in that year our debt will still be 100% of GDP. Five years later it will be 129% of GDP. To achieve a worsening debt, we will have sacrificed hundreds of thousands to the emigration markets and unemployment will stay high.
In addition, at 2014, the government’s own four year plan shows that the amount of taxes going to service the interest on the national debt will be 20%. This is based on a rate of interest of 4.7%. This will rise to 25% just to pay the national/IMF interest bill only!
To make matters worse, by 2019 the pension bill will have risen considerably, given the ageing of the population. In fact, the National Pension Reserve Fund was set up to cover some of this cost. Even when the NPRF hadn’t been rifled by the government to recapitalise 7 billion to AIB/BOI and Anglo in the past two years, its total assets then of 25 billion was only equivalent to covering 25% of the pension bill by 2025.
This means that taking the NPRF money to pay the banks under this plan is ludicrous. There would be a strong case to take 8 billion from the fund to stimulate the economy and replace it in five years. This would drive down unemployment by 10,000 for every 1 billion spent and would improve the government finances. Squandering it on the banks, having already taken 11 billion from it for them, is nothing short of a national disgrace.
Even if we achieved an interest rate of 2% from the IMF, sold our semi state companies and ran an exchequer surplus of 6 billion by 2019, our debt GDP ratio would be still 107%. We need to fully nationalise the banks, burn the bondholders, amalgamate the big two banks and start afresh. Only depositors should be guaranteed.
We need to use some our NTMA and NPRF cash reserves of €40 billion to stimulate the economy. A partial long term loan without interest with our own un-borrowed reserves needs to be used to cover the deficits. Any partial EU loan should be without conditions over 20 years.
These are real alternatives - this deal isn’t. This deal is a monumental mistake. The deal cannot be passed until legislation goes through the Dail after Christmas to legalise it. It would be a national scandal if this government’s last sting of a dying wasp was to legally impose this deal on Ireland.This is an edited version of an article published in today's Irish Examiner
Let’s take the figures. The interest rate on the deal is 5.8% and the deal takes €17 billion from National Pension Reserve Fund and National Treasury Management Agency. Remember, the Greek deal was only 5.2% over five years. The longer time period on the Irish deal forces a significant hike in interest rate. The longer time frame increases the amount of interest significantly also.
Let’s put this figure in to the macroeconomic framework. In 2014 our national income measured by GDP, the measure used by the EU, will be €183 billion. At the end of 2009 our national debt stood at €75 billion. This year’s deficit plus the deficits to 2014 plus the bank recapitalisation will bring the national debt up to 183 billion by 2014, 100% of GDP, according to the government’s four year plan.
Now this 183 billion is the principal owed and doesn’t include the interest. This bailout will fund the 35 billion bank recapitalisation and 50 billion in deficit repayments and is in line with the governments own projections in its four year plan.
The interest on the deal will be €45 billion. The total €69 billion plus interest amounts to €114 billion. This is to be paid by the start of 2020 and covers 9 years. This forms part of the national debt from next year onwards. A further €50 billion will be added to the €100 billion which is not part of the IMF deal and which already exists. The total government debt in 2019 without anything paid off it will be €264 billion.
Now, the government’s own four year national recovery plan shows it will run a deficit by until 2014. It will be lucky to break even in 2015. Even during the best year of the Celtic tiger, the maximum surplus run by the government was €3 billion.
So, the government would be lucky to gather €1 billion a year in surplus from 2016 to 2019. This will give them a tiny repayment capacity of €4 billion to the IMF who with interest will be owed €114 billion. Even the sale of all semi-state companies would only pay off another €5 billion.
The fact that we will owe €114 of our national debt to a ruthless organisation like the IMF is a very worrying prospect indeed, given its track record in Eastern Europe, Africa and Latin America.
Given that all the taxation increases will have been used up to bring down the deficit to 3% by 2014 to please the EU and taxes will then by quite high, there is no other avenue for the government to raise the rest of the money. The government cannot come even remotely close to paying. There are no Houdini tricks.
The government projects GDP will be €183 billion in 2014, based on its growth projections. Now, taking the very optimistic scenario that the economy will grow by an average of 3% in GDP terms to 2019, nominal GDP at that stage would be 205 billion. At that stage the €264 billion in national debt will be 129% of GDP.
This figure would include nine years of economic hardship and cutbacks. At the end of the period, Ireland would still owe one and a third of everything we produce in the country in one year, with the IMF being by far the biggest creditor.
The justification for the bailout is to save the euro and bring our economic figures in to synch with the EU’s Stability and Growth Pact. This is nonsense. True, we will be down to 3% in terms of our general government deficit by 2014. However, in that year our debt will still be 100% of GDP. Five years later it will be 129% of GDP. To achieve a worsening debt, we will have sacrificed hundreds of thousands to the emigration markets and unemployment will stay high.
In addition, at 2014, the government’s own four year plan shows that the amount of taxes going to service the interest on the national debt will be 20%. This is based on a rate of interest of 4.7%. This will rise to 25% just to pay the national/IMF interest bill only!
To make matters worse, by 2019 the pension bill will have risen considerably, given the ageing of the population. In fact, the National Pension Reserve Fund was set up to cover some of this cost. Even when the NPRF hadn’t been rifled by the government to recapitalise 7 billion to AIB/BOI and Anglo in the past two years, its total assets then of 25 billion was only equivalent to covering 25% of the pension bill by 2025.
This means that taking the NPRF money to pay the banks under this plan is ludicrous. There would be a strong case to take 8 billion from the fund to stimulate the economy and replace it in five years. This would drive down unemployment by 10,000 for every 1 billion spent and would improve the government finances. Squandering it on the banks, having already taken 11 billion from it for them, is nothing short of a national disgrace.
Even if we achieved an interest rate of 2% from the IMF, sold our semi state companies and ran an exchequer surplus of 6 billion by 2019, our debt GDP ratio would be still 107%. We need to fully nationalise the banks, burn the bondholders, amalgamate the big two banks and start afresh. Only depositors should be guaranteed.
We need to use some our NTMA and NPRF cash reserves of €40 billion to stimulate the economy. A partial long term loan without interest with our own un-borrowed reserves needs to be used to cover the deficits. Any partial EU loan should be without conditions over 20 years.
These are real alternatives - this deal isn’t. This deal is a monumental mistake. The deal cannot be passed until legislation goes through the Dail after Christmas to legalise it. It would be a national scandal if this government’s last sting of a dying wasp was to legally impose this deal on Ireland.This is an edited version of an article published in today's Irish Examiner
Tuesday, 9 November 2010
Unemployment, emigration and growth
Tom O'Connor: The seasonally adjusted unemployment figures show a fall of 6,500 signing on the live register. This is totally due to emigration. In fact, it is highly likely that the figures would have risen and not fallen, were it not for the scale of emigration right now, which is now at its highest annual level in living memory.
In the year to last April, the CSO show that emigration stood at 65,300 and the net figure when we subtract the numbers entering the country was 34,500. These immigrants numbered 30,800, a very sharp fall.
Taking the first figure, 5,441 people per month up to last April were leaving the country presumably due to unemployment. Allowing for the outside possibility that 12,000 of the 30,800 immigrants were coming here to draw the dole, which the government would say is outside its control, the numbers leaving the live register due to emigration , up to April last, was 4,441 per month. Over that period, unemployment rose by 51,000 and would have risen thus to 104,292 were it not for emigration. This is in one year!
Now, if we look at the most recent ESRI predictions, things have gotten worse: In the year up to next April, they are predicting net migration to be 60,000 people. This means that the numbers leaving the country minus the numbers coming in will be 60,000 leaving.
If we take it that the numbers coming back will be a maximum of 30,000 per year up to next April, then this would indicate emigration of 90,000. Consequently, 7,500 people are leaving these shores every month at the moment.
Even if we adjust this figure downwards on the off chance that 12,000 of the 30,000 immigrants will come here to draw the dole, the numbers of people being removed from the live register due to net emigration stands at 6,500. This is exactly the same figure as the seasonally adjusted fall in unemployment for the month of October.
So there is no real drop in unemployment, and even with the illusion of a fall of 6,500, there are still 443,000 people on the live register. To make matters worse, were it not for emigration since April, this figure would now stand at 482,000, only 17,000 shy of a half a million people.
Ah, but the government will say that the public finances are stabilising. This is stretching the limits of credulity even further. The government paid €7 billion to the Anglo Irish Bank and the National Pension Reserve Fund last year, bringing the deficit to 25 billion. Netting out this 7 billion to compare last year’s deficit with this year where this 7 billion spending won’t occur, shows that the deficit will widen considerably at the end of this year.
The deficit net of Anglo/NPRF at the end of 2010 was €18 billion last year and it will be €22 billion at the end of this year. Consequently, the government will have saved 4.3 billion mostly by cutting services to those such as old people, children with special needs, community groups, home helps and social welfare recipients and it will have increased the deficit by 4 billion!
Of course the answer is to grow the economy and not deflate it. A whopping 15 billion of the 18 billion deficit last year was due to the fall in tax receipts from €48 to 33 billion from Dec 07 to Dec 09. This was due to unemployment which the government has done nothing about.
In this context, the Irish Congress of Trades Unions have made a very compelling observation this week, that it is the government’s inability to grow the economy and reduce unemployment that is causing the bond interest cost of government borrowing to rise.
The markets know the government is making no headway and the solution is to bring down unemployment. They can see the abject failure of government policy in this regard, which is driving down their confidence and driving up the cost of borrowing.
So, the endorsement by business groups of front loading cuts of 6 billion to reduce borrowing costs is based on the incorrect premise that the markets are looking for this deflationary course of action, when instead they would prefer to see a solution to unemployment and the deflationary cycle in order to grow the economy!
This would reduce unemployment, grow taxes and reduce the deficit alongside a move out of recession and markets know that this would be a far superior result to the current deflation and borrowing policies.
Consequently, the Irish Congress of Trade Unions has called for a wide ranging six billion fiscal stimulus to get the economy growing, reduce unemployment and thus reduce the deficit. This is something that I have been calling for since the summer of 2008 to halt the government’s suicide pact in driving the economy continuously down in to a debt-deflationary cycle.
The Nobel Prize winning economists, Joseph Stiglitz and Paul Krugman have also been advocating this approach and the latter has strongly criticised the failure of the Irish government not to stimulate the economy. TASC has also called for fiscal stimulus. The evidence is overwhelming. Government policy must be radically altered and fast. These are lessons for any alternative incoming government also.
This is a slightly edited version of an opinion piece published in yesterday's Irish Examiner
In the year to last April, the CSO show that emigration stood at 65,300 and the net figure when we subtract the numbers entering the country was 34,500. These immigrants numbered 30,800, a very sharp fall.
Taking the first figure, 5,441 people per month up to last April were leaving the country presumably due to unemployment. Allowing for the outside possibility that 12,000 of the 30,800 immigrants were coming here to draw the dole, which the government would say is outside its control, the numbers leaving the live register due to emigration , up to April last, was 4,441 per month. Over that period, unemployment rose by 51,000 and would have risen thus to 104,292 were it not for emigration. This is in one year!
Now, if we look at the most recent ESRI predictions, things have gotten worse: In the year up to next April, they are predicting net migration to be 60,000 people. This means that the numbers leaving the country minus the numbers coming in will be 60,000 leaving.
If we take it that the numbers coming back will be a maximum of 30,000 per year up to next April, then this would indicate emigration of 90,000. Consequently, 7,500 people are leaving these shores every month at the moment.
Even if we adjust this figure downwards on the off chance that 12,000 of the 30,000 immigrants will come here to draw the dole, the numbers of people being removed from the live register due to net emigration stands at 6,500. This is exactly the same figure as the seasonally adjusted fall in unemployment for the month of October.
So there is no real drop in unemployment, and even with the illusion of a fall of 6,500, there are still 443,000 people on the live register. To make matters worse, were it not for emigration since April, this figure would now stand at 482,000, only 17,000 shy of a half a million people.
Ah, but the government will say that the public finances are stabilising. This is stretching the limits of credulity even further. The government paid €7 billion to the Anglo Irish Bank and the National Pension Reserve Fund last year, bringing the deficit to 25 billion. Netting out this 7 billion to compare last year’s deficit with this year where this 7 billion spending won’t occur, shows that the deficit will widen considerably at the end of this year.
The deficit net of Anglo/NPRF at the end of 2010 was €18 billion last year and it will be €22 billion at the end of this year. Consequently, the government will have saved 4.3 billion mostly by cutting services to those such as old people, children with special needs, community groups, home helps and social welfare recipients and it will have increased the deficit by 4 billion!
Of course the answer is to grow the economy and not deflate it. A whopping 15 billion of the 18 billion deficit last year was due to the fall in tax receipts from €48 to 33 billion from Dec 07 to Dec 09. This was due to unemployment which the government has done nothing about.
In this context, the Irish Congress of Trades Unions have made a very compelling observation this week, that it is the government’s inability to grow the economy and reduce unemployment that is causing the bond interest cost of government borrowing to rise.
The markets know the government is making no headway and the solution is to bring down unemployment. They can see the abject failure of government policy in this regard, which is driving down their confidence and driving up the cost of borrowing.
So, the endorsement by business groups of front loading cuts of 6 billion to reduce borrowing costs is based on the incorrect premise that the markets are looking for this deflationary course of action, when instead they would prefer to see a solution to unemployment and the deflationary cycle in order to grow the economy!
This would reduce unemployment, grow taxes and reduce the deficit alongside a move out of recession and markets know that this would be a far superior result to the current deflation and borrowing policies.
Consequently, the Irish Congress of Trade Unions has called for a wide ranging six billion fiscal stimulus to get the economy growing, reduce unemployment and thus reduce the deficit. This is something that I have been calling for since the summer of 2008 to halt the government’s suicide pact in driving the economy continuously down in to a debt-deflationary cycle.
The Nobel Prize winning economists, Joseph Stiglitz and Paul Krugman have also been advocating this approach and the latter has strongly criticised the failure of the Irish government not to stimulate the economy. TASC has also called for fiscal stimulus. The evidence is overwhelming. Government policy must be radically altered and fast. These are lessons for any alternative incoming government also.
This is a slightly edited version of an opinion piece published in yesterday's Irish Examiner
Tuesday, 14 September 2010
Community Platform proposals on taxation
Tom O'Connor spoke at yesterday's launch of the Community Platform's proposals for progressive tax reform, 4 Steps 2 Recovery. Below is his response to the proposals.
• The government’s fiscal plan has failed. The exchequer figures in August misled the public: there was an Exchequer balance in Aug of €12 billion, actually almost 1 billion more than Aug 2009 if we subtract Anglo and NPRF from the 09 figures. These don’t occur in 2010. Comparing like with like, the Exchequer deficit has widened by almost €1 billion
• The EB at the end of 2010 - and there is no Anglo or NPRF spending - will be €22 billion. The corresponding figure (without Anglo and NPRF) for last year was €18 billion. We are €4 billion worse off after the cuts.
• So, after €4 billion in cuts, €3 billion in current and €1 billion in capital for this year and all the hardship, we will finish up €4 billion worse off than last year.
• Cuts don’t work
• We are spending over €3 billion in social welfare spending due mainly to increased unemployment due to the deflation of the economy. We will finish this year with taxes €2 billion less than the end of 2009.
• Taxes at the end of this year will be €17 billion less than they were at the end of 2007
• The government is deflating the economy. It has driven up unemployment to 466,000. Correspondingly, it has driven down taxes and driven up the deficit as a result. It’s shaving of €3-4 billion a year is causing immense hardship and spiralling the economy downwards, while being eaten up by lower taxes and increased social welfare payments of €3 billion this year.
• The proposals by the Community Platform will help the economy to recover in 2011
• The €3 billion in tax increases will prevent further cuts in current and capital spending, which will help job creation and will stem job losses.
• It will prevent workers earning under €20,000 from entering the tax net, which would create a surge in to the black economy. If this is allowed to happen, then poverty and unemployment traps will be created whereby it would become more expensive to go to work. Taxing the very low paid will ultimately trap them on the dole, increase unemployment and increase the cost to the state of welfare payments. These proposals would prevent this happening.
• In addition, it would be thoroughly inequitable to have these low paid workers enter the tax net, given that we know 3,800 people earning over €100,000 are getting away with paying no taxes (Irish Times Sept 2010)
• The scale of tax avoidance in this country has been a big factor in not allowing Irish governments to build up cash reserves in the good times to allow it to cushion the effect of the current recession: From 1999-2005, the government squandered €11 billion of taxpayers’ money on tax breaks to the rich and wealth (Goodbody’s and Indecon 2006)
• The fact that up to €11 billion of these tax expenditures are still in the system (Commission on Taxation) means that the government is engaging in cutbacks in current and capital spending which have been deflating the economy, dramatically curtailing the tax take and creating huge levels of unemployment.
• These proposals will start a process that will halt unemployment escalation.
• Also, these proposals will address the inequities in the tax system: It will start four year programme of taking €5 billion a year back of the 11 billion in tax breaks, giving the government €1.5 billion extra revenue a year. This will go some way to preventing the cuts that have driven up unemployment and the exchequer deficit.
• It will introduce a tax on property (over €1 million value of property, €100k in income) and wealth as there is in France, Norway and Switzerland. This will have the twin benefits of restoring equity in to the system, while at the same time preventing cutbacks. This will, in turn, help the economy to recover.
• The extension of PRSI and income levies to all income, regardless of source will have the same affect. The abolition of the PRSI ceiling has been something that has been suggested for many years.
• The compliant taxpayers in this country have abhorred the ability of the super rich to avoid tax. The extension to levy tax on citizenship will gather in hundreds if not thousands of extra millions in tax revenue. It will also inspire hope in normal compliant earners that at last everybody will pay their fair share.
• Ruairi Quinn suggested at the launch of the report that non-resident Irish citizens would be expected to obtain a tax clearance certificate before getting an Irish passport. The Community Platform accepted this suggestion.
• The tax increases will only hit a relatively small number of income and wealth holders. As such, these tax increases will not have a negative effect on the economy. In fact, they will allow the preservation of jobs funded by the state in badly needed areas such as community care, disability care, education, primary care and other vital areas. In addition, it will allow capital spending not to be cut by at least €1 billion, which will allow infrastructure projects to go ahead which will increase employment.
• An end to spending cuts this year on the back of these proposals will be a huge psychological and economic benefit to hard pressed Irish people. It will increase consumer confidence and likely increase spending. It will start to renew the economy, and people will breed a sigh of relief that fairness has at last started to shine through. It will prevent savage cuts to programmes for disabled people, children and will prevent any further cuts in welfare payments. It will allow the most marginalised to retain what dignity they have left.
• I strongly recommend these proposals.
• The government’s fiscal plan has failed. The exchequer figures in August misled the public: there was an Exchequer balance in Aug of €12 billion, actually almost 1 billion more than Aug 2009 if we subtract Anglo and NPRF from the 09 figures. These don’t occur in 2010. Comparing like with like, the Exchequer deficit has widened by almost €1 billion
• The EB at the end of 2010 - and there is no Anglo or NPRF spending - will be €22 billion. The corresponding figure (without Anglo and NPRF) for last year was €18 billion. We are €4 billion worse off after the cuts.
• So, after €4 billion in cuts, €3 billion in current and €1 billion in capital for this year and all the hardship, we will finish up €4 billion worse off than last year.
• Cuts don’t work
• We are spending over €3 billion in social welfare spending due mainly to increased unemployment due to the deflation of the economy. We will finish this year with taxes €2 billion less than the end of 2009.
• Taxes at the end of this year will be €17 billion less than they were at the end of 2007
• The government is deflating the economy. It has driven up unemployment to 466,000. Correspondingly, it has driven down taxes and driven up the deficit as a result. It’s shaving of €3-4 billion a year is causing immense hardship and spiralling the economy downwards, while being eaten up by lower taxes and increased social welfare payments of €3 billion this year.
• The proposals by the Community Platform will help the economy to recover in 2011
• The €3 billion in tax increases will prevent further cuts in current and capital spending, which will help job creation and will stem job losses.
• It will prevent workers earning under €20,000 from entering the tax net, which would create a surge in to the black economy. If this is allowed to happen, then poverty and unemployment traps will be created whereby it would become more expensive to go to work. Taxing the very low paid will ultimately trap them on the dole, increase unemployment and increase the cost to the state of welfare payments. These proposals would prevent this happening.
• In addition, it would be thoroughly inequitable to have these low paid workers enter the tax net, given that we know 3,800 people earning over €100,000 are getting away with paying no taxes (Irish Times Sept 2010)
• The scale of tax avoidance in this country has been a big factor in not allowing Irish governments to build up cash reserves in the good times to allow it to cushion the effect of the current recession: From 1999-2005, the government squandered €11 billion of taxpayers’ money on tax breaks to the rich and wealth (Goodbody’s and Indecon 2006)
• The fact that up to €11 billion of these tax expenditures are still in the system (Commission on Taxation) means that the government is engaging in cutbacks in current and capital spending which have been deflating the economy, dramatically curtailing the tax take and creating huge levels of unemployment.
• These proposals will start a process that will halt unemployment escalation.
• Also, these proposals will address the inequities in the tax system: It will start four year programme of taking €5 billion a year back of the 11 billion in tax breaks, giving the government €1.5 billion extra revenue a year. This will go some way to preventing the cuts that have driven up unemployment and the exchequer deficit.
• It will introduce a tax on property (over €1 million value of property, €100k in income) and wealth as there is in France, Norway and Switzerland. This will have the twin benefits of restoring equity in to the system, while at the same time preventing cutbacks. This will, in turn, help the economy to recover.
• The extension of PRSI and income levies to all income, regardless of source will have the same affect. The abolition of the PRSI ceiling has been something that has been suggested for many years.
• The compliant taxpayers in this country have abhorred the ability of the super rich to avoid tax. The extension to levy tax on citizenship will gather in hundreds if not thousands of extra millions in tax revenue. It will also inspire hope in normal compliant earners that at last everybody will pay their fair share.
• Ruairi Quinn suggested at the launch of the report that non-resident Irish citizens would be expected to obtain a tax clearance certificate before getting an Irish passport. The Community Platform accepted this suggestion.
• The tax increases will only hit a relatively small number of income and wealth holders. As such, these tax increases will not have a negative effect on the economy. In fact, they will allow the preservation of jobs funded by the state in badly needed areas such as community care, disability care, education, primary care and other vital areas. In addition, it will allow capital spending not to be cut by at least €1 billion, which will allow infrastructure projects to go ahead which will increase employment.
• An end to spending cuts this year on the back of these proposals will be a huge psychological and economic benefit to hard pressed Irish people. It will increase consumer confidence and likely increase spending. It will start to renew the economy, and people will breed a sigh of relief that fairness has at last started to shine through. It will prevent savage cuts to programmes for disabled people, children and will prevent any further cuts in welfare payments. It will allow the most marginalised to retain what dignity they have left.
• I strongly recommend these proposals.
Monday, 26 July 2010
Selling the family silver: bad for the economy and citizens
Tom O'Connor: The newly established government Review Group on State Assets and Liabilities has been assigned a task: ‘To draw up a list of possible asset disposals’. The range of state owned enterprises which could be up for grabs is breathtaking and includes: all the main Irish ports; Bord Gais; the ESB; RTE; An Post; CIE; Dublin Bus; Irish Rail, the National Oil Reserves Agency and many others.
The plan is to raise billions for the state coffers from the sale of many of these companies. The hope is that this could be set off against the projected exchequer deficit of €26 billion for next year and the national debt which now stands at €84 billion. Many of these companies are indeed valuable. The values put on Bord Gais and ESB are €3.5 and €5 billion respectively.
However, it would be a serious mistake to sell off these state owned enterprises. The proposed sales are a smash and grab exercise aimed at raising quick money for the government without any real consideration of the consequences. The problems which the sale of Eircom continues to cause for the Irish economy highlight the dangers of privatisation.
The sale of Eircom raised €8.4 billion for the government but has done untold damage to the competitiveness of the Irish economy: the company has been bought and sold several times, and has had four different owners in recent years. The sale has resulted in the company not been able to develop its broadband infrastructure to anything like the level which is required in the modern business environment, and this has hampered the development of high speed internet in Ireland ever since.
In the aftermath of the various sales of the company in the hands of ruthless venture capitalists, it now owes nearly €2 billion. Previously it owed very little. It has also started to shed considerable numbers of workers and has only limited ability, as a result of its debt, to finance the rolling out of high speed broadband.
The privatisation of state enterprises is based on an ideological position which assumes that private companies achieve higher levels of performance than state owned enterprises. However, a study of companies privatised by the Irish government from 1991 to 2003 by Reeves and Palcic (2005) found no evidence for this assertion. They also found that shareholders and employees who receive 15% of the shares tend to be the main winners in privatisation, not the government.
Perhaps one of the most compelling arguments against the sale of State Owned Enterprises is the loss of national control overall in hugely strategic areas which determine our economic viability and competitiveness. If the two largest energy producing companies where sold to private investors, industry and consumers could end up being at the mercy of super-profit-seeking business owners which could drive up costs and make Irish businesses uncompetitive. At present, the government by way of the energy regulator can control the price of energy.
It is precisely due to super-profit-seeking privately owned businesses controlling goods and services that should be kept in state ownership, that health care is so expensive in the USA. There, private Health Management Companies (HMOs) own most hospitals and charge exorbitant fees. The result is that basic health insurance is at least 800 dollars a month per person in the USA. The same argument can be cited to oppose the privatisation of the countries ports, RTE and others. It has been reported that Ruport Murdoch is interested in purchasing RTE. In that event, once in an almost monopoly position, the cost of TV viewing would be likely to rise significantly.
The sale of ports would put the country at a huge strategic disadvantage. The UK government in recent years has privatised its ports for a return of 6 billion and has sold the London-based Thames Water company for 9 billion. If Ireland were to sell its ports and its domestic water infrastructure, it is likely that these utilities would be run as public-private partnerships (PPS). These are exceptionally costly for the state and the taxpayer in the long term, and it is likely that hefty charges for water and the use of ports would ensue to the hardship of consumers and the disadvantage of businesses. One might also argue that the loss of ownership and strategic control of a country’s ports strongly compromises national sovereignty.
Also, in Ireland at present, the ESB is responsible for integrating its supply grid with that in Northern Ireland in a move towards closer economic co-operation, which was been lauded only this week by Northern Ireland’s Deputy First Minister Martin Mc Guinness at the Magill Summer School. If the ESB were owned by private shareholders, there is no guarantee that this would happen.
Of course, the biggest problem is the loss of employment. In the wake of the privatisation of ACC Bank and Aer Lingus (amongst others) since 2005, the Central Statistics Office has shown that the numbers employed in state owned enterprises fell from 57,400 to 52,300 by 2009, a loss of 5,100 jobs, which the CSO attributes mainly to privatisation.
The privatisation of Bord Gais, ESB, An Post and other semi-state companies would result in a dramatic downsizing of the workforces in these companies. At a time when unemployment stands at 450,000 and where the government is content to sit out the recession without stimulating the economy, the prospect of the state itself putting thousands or even tens of thousands people out of work, due to privatisations, would seem to be unthinkable.
Interestingly, it is the opposite course of action which is now being proposed in the global post-financial meltdown world: Prof. Aldo Mustacchio of Harvard Business School has written several papers in the past two years in which he highlights the need to use state owned enterprises as vehicles for employment creation and to help significantly in national economic recovery.
Many large state owned enterprises have been performing exceptionally throughout the world, he says, from the state owned oil company Petrobas in Brazil to Statoil in Norway and the State owned Gazprom company in Russia. There are many other companies in other economic sectors also in countries such as Singapore and India. The mistake in Ireland has been to allow private interests to take control of valuable natural resources with no return to the exchequer. The case of the Erris gas field in Mayo, which was essentially given away free of charge by then Minister for Energy, Ray Burke in the mid 1990s, is a case in point.
However, it would be a mistake to think that new state owned enterprises would be flabby and inefficient which many politicians and economists from a right-wing persuasion would have us believe. There is a future for lean and competitive state owned enterprises in Ireland where performance and productivity would be high and where performance management systems would predominate.
State owned companies of this type have existed in Sweden for many years. At present there are 55 state owned enterprises in Sweden. In 2006 these companies turned over 50 billion and generated net profits of 8 billion for the exchequer.
It is for these reasons that any hasty attempt by government to sell the family silver in an ill thought out and hasty fashion to reduce indebtedness should be strenuously opposed by Irish society.
This piece first appeared in the Irish Examiner
The plan is to raise billions for the state coffers from the sale of many of these companies. The hope is that this could be set off against the projected exchequer deficit of €26 billion for next year and the national debt which now stands at €84 billion. Many of these companies are indeed valuable. The values put on Bord Gais and ESB are €3.5 and €5 billion respectively.
However, it would be a serious mistake to sell off these state owned enterprises. The proposed sales are a smash and grab exercise aimed at raising quick money for the government without any real consideration of the consequences. The problems which the sale of Eircom continues to cause for the Irish economy highlight the dangers of privatisation.
The sale of Eircom raised €8.4 billion for the government but has done untold damage to the competitiveness of the Irish economy: the company has been bought and sold several times, and has had four different owners in recent years. The sale has resulted in the company not been able to develop its broadband infrastructure to anything like the level which is required in the modern business environment, and this has hampered the development of high speed internet in Ireland ever since.
In the aftermath of the various sales of the company in the hands of ruthless venture capitalists, it now owes nearly €2 billion. Previously it owed very little. It has also started to shed considerable numbers of workers and has only limited ability, as a result of its debt, to finance the rolling out of high speed broadband.
The privatisation of state enterprises is based on an ideological position which assumes that private companies achieve higher levels of performance than state owned enterprises. However, a study of companies privatised by the Irish government from 1991 to 2003 by Reeves and Palcic (2005) found no evidence for this assertion. They also found that shareholders and employees who receive 15% of the shares tend to be the main winners in privatisation, not the government.
Perhaps one of the most compelling arguments against the sale of State Owned Enterprises is the loss of national control overall in hugely strategic areas which determine our economic viability and competitiveness. If the two largest energy producing companies where sold to private investors, industry and consumers could end up being at the mercy of super-profit-seeking business owners which could drive up costs and make Irish businesses uncompetitive. At present, the government by way of the energy regulator can control the price of energy.
It is precisely due to super-profit-seeking privately owned businesses controlling goods and services that should be kept in state ownership, that health care is so expensive in the USA. There, private Health Management Companies (HMOs) own most hospitals and charge exorbitant fees. The result is that basic health insurance is at least 800 dollars a month per person in the USA. The same argument can be cited to oppose the privatisation of the countries ports, RTE and others. It has been reported that Ruport Murdoch is interested in purchasing RTE. In that event, once in an almost monopoly position, the cost of TV viewing would be likely to rise significantly.
The sale of ports would put the country at a huge strategic disadvantage. The UK government in recent years has privatised its ports for a return of 6 billion and has sold the London-based Thames Water company for 9 billion. If Ireland were to sell its ports and its domestic water infrastructure, it is likely that these utilities would be run as public-private partnerships (PPS). These are exceptionally costly for the state and the taxpayer in the long term, and it is likely that hefty charges for water and the use of ports would ensue to the hardship of consumers and the disadvantage of businesses. One might also argue that the loss of ownership and strategic control of a country’s ports strongly compromises national sovereignty.
Also, in Ireland at present, the ESB is responsible for integrating its supply grid with that in Northern Ireland in a move towards closer economic co-operation, which was been lauded only this week by Northern Ireland’s Deputy First Minister Martin Mc Guinness at the Magill Summer School. If the ESB were owned by private shareholders, there is no guarantee that this would happen.
Of course, the biggest problem is the loss of employment. In the wake of the privatisation of ACC Bank and Aer Lingus (amongst others) since 2005, the Central Statistics Office has shown that the numbers employed in state owned enterprises fell from 57,400 to 52,300 by 2009, a loss of 5,100 jobs, which the CSO attributes mainly to privatisation.
The privatisation of Bord Gais, ESB, An Post and other semi-state companies would result in a dramatic downsizing of the workforces in these companies. At a time when unemployment stands at 450,000 and where the government is content to sit out the recession without stimulating the economy, the prospect of the state itself putting thousands or even tens of thousands people out of work, due to privatisations, would seem to be unthinkable.
Interestingly, it is the opposite course of action which is now being proposed in the global post-financial meltdown world: Prof. Aldo Mustacchio of Harvard Business School has written several papers in the past two years in which he highlights the need to use state owned enterprises as vehicles for employment creation and to help significantly in national economic recovery.
Many large state owned enterprises have been performing exceptionally throughout the world, he says, from the state owned oil company Petrobas in Brazil to Statoil in Norway and the State owned Gazprom company in Russia. There are many other companies in other economic sectors also in countries such as Singapore and India. The mistake in Ireland has been to allow private interests to take control of valuable natural resources with no return to the exchequer. The case of the Erris gas field in Mayo, which was essentially given away free of charge by then Minister for Energy, Ray Burke in the mid 1990s, is a case in point.
However, it would be a mistake to think that new state owned enterprises would be flabby and inefficient which many politicians and economists from a right-wing persuasion would have us believe. There is a future for lean and competitive state owned enterprises in Ireland where performance and productivity would be high and where performance management systems would predominate.
State owned companies of this type have existed in Sweden for many years. At present there are 55 state owned enterprises in Sweden. In 2006 these companies turned over 50 billion and generated net profits of 8 billion for the exchequer.
It is for these reasons that any hasty attempt by government to sell the family silver in an ill thought out and hasty fashion to reduce indebtedness should be strenuously opposed by Irish society.
This piece first appeared in the Irish Examiner
Wednesday, 7 July 2010
Fine Gael health proposals
Tom O'Connor: The Fine Gael political party has recently launched a comprehensive set of proposals aimed at creating a fair health system in Ireland which would also be cost effective and efficient. This has been publicised on billboards all over the country in recent months. The Fine Gael policy document concerned is entitled ‘Fair Care: Fine Gael Proposals to Reform the Health Service and Introduce Universal Health Insurance’. In what follows, this set of proposals is critically evaluated.
Throughout the report, ample evidence is provided for the contention that the Irish health services are essentially broken. The evidence consists of a long litany of failings: in terms of success, Ireland is ranked as low as number 15 across Europe according to the European Health Consumer Index (Fine Gael 2009:8).
Primary Care
The Irish government in 2001 promised that by 2009 a total of 400 Primary Care Health Teams, which are designed to prevent many from having to be in hospital and are configured by a team of health care professionals, would amount to 400 nationwide. The reality is that “there are now only 97 teams in place, only 10 of which are fully functional and only 10 centres have been built to date”(Fine Gael 2009: 10). The report also highlights the shortage of GPs in Ireland: quoting a report from the Adelaide Hospital Society (2004), they show that there are only 52 GPs per 100,000 of the Irish population which is extremely low by international standards. For example, in Austraia, France and Germany, the corresponding figures are 144, 164 and 102 GPs per 100,000 respectively.
Hospital Care
The report details how the government’s policy to transfer 1,000 patients occupying private beds in public hospitals into co-located private hospitals has not yet provided a single bed, even though the policy was rolled out in 2005. The current waiting list times for treatment highlighted by the report are quite shocking, despite improvements in recent years:
“Inpatient waiting lists (over 3 months) = 40,000 approx.
Outpatient waiting lists are > 150,000.
Average number of A&E patients on long-term waits on trolleys = 300” (Fine Gael 2009: 10).
More generally, the report paints a picture of a huge demographic time bomb, where, due to the huge rise in the older population by 2030, the already inefficient public health system will be swamped and incapable of delivering unless it is reformed. The report is strongly critical of the government in failing to address the future demographic time bomb in health care. At the moment, the report points out, only 11% of the population is over 65 but this will rise to over 59% in 2021. The government is not addressing this challenge, the report claims, with the government being accused of only ‘tinkering’:
“If Ireland is to meet both of these challenges – severe budgetary pressures now, and a demographic time bomb in the future - we need to substantially change the current model of healthcare. Tinkering with the system at the margins will accomplish nothing”(Fine Gael 2009: 5)
Efficiency and Spending
The report works from a clearly stated position that the Irish health system is hopelessly inefficient and much of the spending within it is wasteful. It suggests that the public health system is uncompetitive and the fact that the public health system is both the purchaser of health services and the provider of the same services serves to make it more inefficient. The report is continuously pushing its arguments in the direction of the separation of these two functions, and calling for more competition within the sector.
Fine Gael Solutions
The Fine Gael proposals in the broad sweep are about increasing the efficiency of health spending and the introduction of universal health insurance over a period of five years. These seem reasonable and fair objectives which concur with the ‘Fair Care’ title of the document. However, on closer inspection, as will be displayed below, they may not be very fair at all and may, to quote the old adage, resemble the ‘wolf in sheep’s clothing’.
In the first two years, the plan is focused on gaining increased productivity and efficiencies through the use of existing resources. These are, however, vague and aspirational and there are no clear plans outlined as to how this will happen. The main hope is that the cost to the state of providing hospital care can be driven down in the early years by treating more patients in the community: “Fine Gael recognises that significant bed capacity in hospitals could also be freed-up if patients facing delayed discharge or requiring rehabilitation could be treated in the Community”(Fine Gael 2009: 2). However, apart from going on state that these will be funded through the introduction of universal healh insurance, they don’t explain how the bed reductions will happen, simply because they don’t explain how primary care and community care will be expanded. The authors of the document seem to realise this shortcoming when they state, immediately after the above statement, that: “We will publish specific proposals on this issue over the next few months to address the current deficits in long-term care and rehabilitation” (Fine Gael 2009: 2). This is clearly unsatisfactory. It casts doubt on the proposals from the outset and the reader is left with the impression that the proposals might be more laden with rhetoric than with real and feasible plans.
However, the Fine Gael policy on the on the introduction of universal health insurance is where the biggest problem arises. At face value, the argument they make that everybody in the country would have health insurance and there would be no two tier service sounds exceptionally fair. It sounds even fairer that all children and old people would be covered, even though these groups would not be in a position to pay.
However, clear dangers emerge from there onwards. The report highlights that there are two ways that universal health insurance can be implemented. The first is the widely used Rhineland model which operates in France and Germany. In this system, taxes are levied on people’s incomes which are dedicated specifically to a health insurance fund. This fund is used to buy health insurance at the cheapest market price from dozens or even hundreds of competing providers across Europe in order to get the cheapest price. Health insurance is then provided for all members of the population, man woman and child. People who are not working, such as children, disabled and older people are covered by the fund. Thus, the two tier service no longer exists because everybody is covered. This is a ‘single tier’ health system. In March this year, a detailed TCD report in conjunction with the Adelaide Hospital Society showed how universal health care, including geriatric care, could be provided in Ireland for as little as 2% of gross pay.
However, Fine Gael rejects this model of health insurance delivery and instead goes for the Dutch model. Realistically, however, this Dutch model is more about making all citizens who are working buy health insurance privately. It involves all citizens being essentially mandated by the government to buy private health insurance, and the 50% of the Irish population who already have insurance could stay with their existing providers if they wished! There is no health fund, even though the Fine Gael commits that the government would cover children and old people separately. This plan is far closer to the USA model of private insurance-based health funding for most of the population. That is why it is entitled ‘managed competition’.
The report castigates the government for not implementing its co-location plans, which suggests that it is in favour of private hospital expansion. This is totally consistent with their plan to roll out private health insurance, which is essentially masquerading as universal health insurance, which in all true cases of its operation involves people paying 5-7% of their gross income in social insurance contributions to cover health care. However, Fine Gael seems to be averse to raising taxes to cover a genuine universal health insurance system. The plan also involves the calculation of cost savings in staff from transferring people in to community health care, and does not talk about increasing bed capacity. The report also recommends a ‘Money Follows the Patient’ (MFTP) scheme for funding hospitals. This is a performance-based system where hospitals will only receive adequate funding if they can show that they are treating more patients.
Conclusion
To conclude, Fine Gael’s policies resemble-market based and neoliberal responses to reforming the Irish health care system. They are not about ‘fairness’, because most people will have to buy health insurance privately. There is no mention about what happens if people can’t afford private health insurance. Instead, this is dressed up as a ‘fair’ universal health insurance system. They are attempting to sell these policies to the population through the promise of free GP care. However, it is not free if people have to purchase health insurance to cover the cost. In many respects, Fine Gael’s policy document, while doing a good job explaining the problems in the health system, is extremely duplicitous and dishonest in the solutions it provides. In this regard, it would be a shame if ordinary people were fooled by their promises.
Throughout the report, ample evidence is provided for the contention that the Irish health services are essentially broken. The evidence consists of a long litany of failings: in terms of success, Ireland is ranked as low as number 15 across Europe according to the European Health Consumer Index (Fine Gael 2009:8).
Primary Care
The Irish government in 2001 promised that by 2009 a total of 400 Primary Care Health Teams, which are designed to prevent many from having to be in hospital and are configured by a team of health care professionals, would amount to 400 nationwide. The reality is that “there are now only 97 teams in place, only 10 of which are fully functional and only 10 centres have been built to date”(Fine Gael 2009: 10). The report also highlights the shortage of GPs in Ireland: quoting a report from the Adelaide Hospital Society (2004), they show that there are only 52 GPs per 100,000 of the Irish population which is extremely low by international standards. For example, in Austraia, France and Germany, the corresponding figures are 144, 164 and 102 GPs per 100,000 respectively.
Hospital Care
The report details how the government’s policy to transfer 1,000 patients occupying private beds in public hospitals into co-located private hospitals has not yet provided a single bed, even though the policy was rolled out in 2005. The current waiting list times for treatment highlighted by the report are quite shocking, despite improvements in recent years:
“Inpatient waiting lists (over 3 months) = 40,000 approx.
Outpatient waiting lists are > 150,000.
Average number of A&E patients on long-term waits on trolleys = 300” (Fine Gael 2009: 10).
More generally, the report paints a picture of a huge demographic time bomb, where, due to the huge rise in the older population by 2030, the already inefficient public health system will be swamped and incapable of delivering unless it is reformed. The report is strongly critical of the government in failing to address the future demographic time bomb in health care. At the moment, the report points out, only 11% of the population is over 65 but this will rise to over 59% in 2021. The government is not addressing this challenge, the report claims, with the government being accused of only ‘tinkering’:
“If Ireland is to meet both of these challenges – severe budgetary pressures now, and a demographic time bomb in the future - we need to substantially change the current model of healthcare. Tinkering with the system at the margins will accomplish nothing”(Fine Gael 2009: 5)
Efficiency and Spending
The report works from a clearly stated position that the Irish health system is hopelessly inefficient and much of the spending within it is wasteful. It suggests that the public health system is uncompetitive and the fact that the public health system is both the purchaser of health services and the provider of the same services serves to make it more inefficient. The report is continuously pushing its arguments in the direction of the separation of these two functions, and calling for more competition within the sector.
Fine Gael Solutions
The Fine Gael proposals in the broad sweep are about increasing the efficiency of health spending and the introduction of universal health insurance over a period of five years. These seem reasonable and fair objectives which concur with the ‘Fair Care’ title of the document. However, on closer inspection, as will be displayed below, they may not be very fair at all and may, to quote the old adage, resemble the ‘wolf in sheep’s clothing’.
In the first two years, the plan is focused on gaining increased productivity and efficiencies through the use of existing resources. These are, however, vague and aspirational and there are no clear plans outlined as to how this will happen. The main hope is that the cost to the state of providing hospital care can be driven down in the early years by treating more patients in the community: “Fine Gael recognises that significant bed capacity in hospitals could also be freed-up if patients facing delayed discharge or requiring rehabilitation could be treated in the Community”(Fine Gael 2009: 2). However, apart from going on state that these will be funded through the introduction of universal healh insurance, they don’t explain how the bed reductions will happen, simply because they don’t explain how primary care and community care will be expanded. The authors of the document seem to realise this shortcoming when they state, immediately after the above statement, that: “We will publish specific proposals on this issue over the next few months to address the current deficits in long-term care and rehabilitation” (Fine Gael 2009: 2). This is clearly unsatisfactory. It casts doubt on the proposals from the outset and the reader is left with the impression that the proposals might be more laden with rhetoric than with real and feasible plans.
However, the Fine Gael policy on the on the introduction of universal health insurance is where the biggest problem arises. At face value, the argument they make that everybody in the country would have health insurance and there would be no two tier service sounds exceptionally fair. It sounds even fairer that all children and old people would be covered, even though these groups would not be in a position to pay.
However, clear dangers emerge from there onwards. The report highlights that there are two ways that universal health insurance can be implemented. The first is the widely used Rhineland model which operates in France and Germany. In this system, taxes are levied on people’s incomes which are dedicated specifically to a health insurance fund. This fund is used to buy health insurance at the cheapest market price from dozens or even hundreds of competing providers across Europe in order to get the cheapest price. Health insurance is then provided for all members of the population, man woman and child. People who are not working, such as children, disabled and older people are covered by the fund. Thus, the two tier service no longer exists because everybody is covered. This is a ‘single tier’ health system. In March this year, a detailed TCD report in conjunction with the Adelaide Hospital Society showed how universal health care, including geriatric care, could be provided in Ireland for as little as 2% of gross pay.
However, Fine Gael rejects this model of health insurance delivery and instead goes for the Dutch model. Realistically, however, this Dutch model is more about making all citizens who are working buy health insurance privately. It involves all citizens being essentially mandated by the government to buy private health insurance, and the 50% of the Irish population who already have insurance could stay with their existing providers if they wished! There is no health fund, even though the Fine Gael commits that the government would cover children and old people separately. This plan is far closer to the USA model of private insurance-based health funding for most of the population. That is why it is entitled ‘managed competition’.
The report castigates the government for not implementing its co-location plans, which suggests that it is in favour of private hospital expansion. This is totally consistent with their plan to roll out private health insurance, which is essentially masquerading as universal health insurance, which in all true cases of its operation involves people paying 5-7% of their gross income in social insurance contributions to cover health care. However, Fine Gael seems to be averse to raising taxes to cover a genuine universal health insurance system. The plan also involves the calculation of cost savings in staff from transferring people in to community health care, and does not talk about increasing bed capacity. The report also recommends a ‘Money Follows the Patient’ (MFTP) scheme for funding hospitals. This is a performance-based system where hospitals will only receive adequate funding if they can show that they are treating more patients.
Conclusion
To conclude, Fine Gael’s policies resemble-market based and neoliberal responses to reforming the Irish health care system. They are not about ‘fairness’, because most people will have to buy health insurance privately. There is no mention about what happens if people can’t afford private health insurance. Instead, this is dressed up as a ‘fair’ universal health insurance system. They are attempting to sell these policies to the population through the promise of free GP care. However, it is not free if people have to purchase health insurance to cover the cost. In many respects, Fine Gael’s policy document, while doing a good job explaining the problems in the health system, is extremely duplicitous and dishonest in the solutions it provides. In this regard, it would be a shame if ordinary people were fooled by their promises.
Monday, 31 May 2010
Mortgage arrears and the case for assistance
Tom O'Connor: The comments last week by the Financial Regulator Matthew Elderfield display a callous indifference to the plight of 77,000 people currently in arrears with their mortgages. Mr Elderfield rejects government help for these people, as it would cost the taxpayer money. This is astonishing when we consider that he is supportive of the €33 billion in recapitalisation of the banks and the overall cost (including NAMA) of €73 billion according to the ESRI. This includes €10.44 billion to Anglo Irish Bank, which has very few ordinary people as customers and is well known as the bank of the property developers.
We are not being told of the extent of arrears. However, there are 77,000 householders in arrears. Even if every single one of these housholders had arrears totalling €20,000, this would still only add up to 1.54 billion. This is just 2% of the €73 billion being given to the banks. Now, even though it is the taxpayer who will be liable for the €73 billion, they are being denied what amounts to 2% of this figure to keep 77,000 people in homes.
The government’s 12 month moratorium on repossessions has ended for many, and will end for all in September. The truth of the matter is that if we are to take Mr.Elderfield's advice, then the government should stand idly by and watch the unfolding of a social catastrophe.
Mr Elderfield's justification is that other mortgage payers have 'gritted their teeth and are meeting their obligations'. So he is essentially blaming the 77,000 for their plight. This is an outlandish comment because: the vast majority of defaulters are victims of poor government policy arising from its cosy relationship with the construction industry which forced them to buy houses at hugely inflated prices; the government gave people no other option, building only 4,000 social and affordable housing units of the 80,000 a year demanded by the population over the period Celtic Tiger; and the mismanagement of the economy and the bursting of the housing bubble has seen unemployment hit 435,000 while the government does nothing to solve the problem. In fact, its taskforce met once last year before being disbanded.
Surely €1.54 billion could be set aside to pay these arrears. This could be given as re-mortages to defaulters by the Irish government. The defaulters could be asked to make minimum payments, covering interst on mortages at most, if possible, until they are in better financial circumstances. A further €460 million fund could cover the difference between the minimum payment and the actual monthly mortgage payment over the next 12 months until people get back on their feet. The situation could be reviewed at that stage. This is only one obvious way to tackle this problem. There are others.
The government would be foolish to listen to Mr.Elderfield. He is a financial regulator, not a policy maker, and has no democratically elected mandate. It is really time for people to demand a payback from the state, given the risk that they as taxpayers are being asked to take to solve the financial mess which they did not create themselves. The minium is to allow people stay in their homes. People need to stand up and not allow themselves be trampled on any further.
We are not being told of the extent of arrears. However, there are 77,000 householders in arrears. Even if every single one of these housholders had arrears totalling €20,000, this would still only add up to 1.54 billion. This is just 2% of the €73 billion being given to the banks. Now, even though it is the taxpayer who will be liable for the €73 billion, they are being denied what amounts to 2% of this figure to keep 77,000 people in homes.
The government’s 12 month moratorium on repossessions has ended for many, and will end for all in September. The truth of the matter is that if we are to take Mr.Elderfield's advice, then the government should stand idly by and watch the unfolding of a social catastrophe.
Mr Elderfield's justification is that other mortgage payers have 'gritted their teeth and are meeting their obligations'. So he is essentially blaming the 77,000 for their plight. This is an outlandish comment because: the vast majority of defaulters are victims of poor government policy arising from its cosy relationship with the construction industry which forced them to buy houses at hugely inflated prices; the government gave people no other option, building only 4,000 social and affordable housing units of the 80,000 a year demanded by the population over the period Celtic Tiger; and the mismanagement of the economy and the bursting of the housing bubble has seen unemployment hit 435,000 while the government does nothing to solve the problem. In fact, its taskforce met once last year before being disbanded.
Surely €1.54 billion could be set aside to pay these arrears. This could be given as re-mortages to defaulters by the Irish government. The defaulters could be asked to make minimum payments, covering interst on mortages at most, if possible, until they are in better financial circumstances. A further €460 million fund could cover the difference between the minimum payment and the actual monthly mortgage payment over the next 12 months until people get back on their feet. The situation could be reviewed at that stage. This is only one obvious way to tackle this problem. There are others.
The government would be foolish to listen to Mr.Elderfield. He is a financial regulator, not a policy maker, and has no democratically elected mandate. It is really time for people to demand a payback from the state, given the risk that they as taxpayers are being asked to take to solve the financial mess which they did not create themselves. The minium is to allow people stay in their homes. People need to stand up and not allow themselves be trampled on any further.
Tuesday, 13 April 2010
Tackling unemployment is the central challenge
Tom O'Connor: In a paper delivered last month to the Labour Party economic conference in Cork, I argued that any return to economic growth would not have any significant effect on reducing unemployment. I also argued that it was unemployment which caused nearly three quarters of the exchequer deficit which net of Anglo recapitalisation amounted to 21 billion at the end of 2010.
In order to increase employment and reduce unemployment starting almost immediately and further reduce unemployment in the years to come, I suggest(ed) three stimulus packages costing €5.23 billion between them.
The first involves the government injecting money directly into viable new high- knowledge industries as put forward by the Expert Strategy Group report Ahead of the Curve (2006). These are in biomedical devices, sustainable energy, food ingredients and high quality food products, telematics, and Information and communications technology. There are currently 250 research clusters which have spent almost €3 billion in government funding for research under Science Foundation Ireland, and very few are being mainstreamed. The best of these should be mainstreamed and vetted in advance. They must start very big to compete with foreign competitors, and should be looking to employ several hundred people. As such, each should receive tens of millions in state investment through the quadrupling of the budget of Enterprise Ireland and the establishment of a state development bank. These indigenous exporting companies would not repatriate profits, and there would be very little leakage of resources out of the economy.
Package I
Package II
The second arm of the stimulus package involves investment in social, health and educational infrastructure:
The third stimulus package exploits the low cost of housing for the government, and proposes having the banks fund €100,000 per housing unit enabling the Government to purchase 50,000 low-cost affordable homes to eliminate the housing waiting list. The government would initially provide over €5 billion, and when the saving in rent allowance and the recouping of the cost of €35,000 in mortgage proceeds by the banks is taken into consideration, the net cost to the state would be about €1.5 billion. This would equate to the cost of the state holding on to 15,000 of the 50,000 housing units to increase the local authority housing stock for those who would not be in a position to pay €800 a month to afford the mortgage of €100,000 in respect of the 35,000 affordable housing units provided by the state and mortgaged with the banks. Given that the government is injecting an extra €9 billion at least into the two big banks, with the government now becoming the biggest shareholder, one quid pro quo would be for the banks to grant 35,000 mortgages to those on the housing waiting lists. The data is as follows:
Package III
In order to increase employment and reduce unemployment starting almost immediately and further reduce unemployment in the years to come, I suggest(ed) three stimulus packages costing €5.23 billion between them.
The first involves the government injecting money directly into viable new high- knowledge industries as put forward by the Expert Strategy Group report Ahead of the Curve (2006). These are in biomedical devices, sustainable energy, food ingredients and high quality food products, telematics, and Information and communications technology. There are currently 250 research clusters which have spent almost €3 billion in government funding for research under Science Foundation Ireland, and very few are being mainstreamed. The best of these should be mainstreamed and vetted in advance. They must start very big to compete with foreign competitors, and should be looking to employ several hundred people. As such, each should receive tens of millions in state investment through the quadrupling of the budget of Enterprise Ireland and the establishment of a state development bank. These indigenous exporting companies would not repatriate profits, and there would be very little leakage of resources out of the economy.
Package I
- Government needs to invest at least €5 billion in stimulus 2010 + 2011
- Companies should be vetted and viable ones aided within 3 months
- Government should give 50% in grants in return for shares to be redeemed over 10 years and 50% in loans
- High quality retraining should be provided in parallel through state training agencies to match the relevant skills needs
- Re-training allowance of €330
- Priority should be given to indigenous enterprises
- Should include viable and strong state-owned enterprises which would pay dividends to the state
- A state Development Bank should be established, working alongside higher budgets for Enterprise Ireland
Package II
The second arm of the stimulus package involves investment in social, health and educational infrastructure:
- Schools building programmes (extra €400 million)
- Revolutionising mental health services as provided for in Vision for Change (2006) = €750 million.
- Publicly provided geriatric facilities (extra €300 million)
The third stimulus package exploits the low cost of housing for the government, and proposes having the banks fund €100,000 per housing unit enabling the Government to purchase 50,000 low-cost affordable homes to eliminate the housing waiting list. The government would initially provide over €5 billion, and when the saving in rent allowance and the recouping of the cost of €35,000 in mortgage proceeds by the banks is taken into consideration, the net cost to the state would be about €1.5 billion. This would equate to the cost of the state holding on to 15,000 of the 50,000 housing units to increase the local authority housing stock for those who would not be in a position to pay €800 a month to afford the mortgage of €100,000 in respect of the 35,000 affordable housing units provided by the state and mortgaged with the banks. Given that the government is injecting an extra €9 billion at least into the two big banks, with the government now becoming the biggest shareholder, one quid pro quo would be for the banks to grant 35,000 mortgages to those on the housing waiting lists. The data is as follows:
Package III
- Government purchases 50,000 housing units for 5 billion @100k each
- 35,000 sold to those on waiting lists at 100k each.
- 15,000 rented by local authority
- Banks finance the purchase of 35,000:
- Govt gets back €3.5 billion, and saves € 270 mill on rent allowance. Net cost = €1.23 billion
Friday, 19 March 2010
Jobs and recovery
Tom O'Connor: The Labour Party are holding a public seminar in Cork tomorrow on solutions to Ireland's economic crisis. The speakers including myself will look at the causes of Ireland’s economic crisis and solutions to it with a particular emphasis on job creation and national recovery.
I will be focusing on jobs and national recovery. My starting position is that to tolerate 430,000 unemployed on the live register is economically disastrous for the economy. Just as importantly, it is morally and socially unacceptable.
Two years ago this June I predicted in the national media that unless the economy received a significant short term stimulation, that it would spiral downwards in to recession.
I said (Summer 2008) on national radio that this would be accompanied by constant increases in unemployment and a resultant falling tax take and widening hole in the public finances. It was obvious two years ago that this perilous situation, in the absence of economic stimulation, would necessitate further cuts, more economic depression, more unemployment, more falls in tax takes, increased deficits and then more cuts......in a spiral downwards.
In the summer of 2008 a huge hole was opening in the government finances: reports at that time were that it was running a deficit of 4 billion. By the start of December, the government stated that it’s deficit for the first 11 months of 2008 was 8 billion. In fact, its end of year deficit for 2008 was 12.7 billion.
The government announced in its October 2008 budget that it expected the end of year deficit for 2009 to be 13.4 billion. In the extra budget in April, the government forecasted and far bigger end of 2009 deficit of 20.35 billion. On the sixth of January 2010, the government announced that the final end of year deficit for 2009 was 24.6 billion.
In May 2008 as the government’s finances started to deteriorate, live register unemployment stood at 201,800 (deficit 4 billion). In February 2009 live register unemployment was 352,453 (deficit of 12.7 billion). In January 2010, this figure was 436,936 (deficit of 24.6 billion) and in February it was 436,956.
That amounts to clear evidence for the cuts- economic depression- unemployment- falling tax takes- ballooning budget deficit prediction. The overall government tax take at end of 2007 amounted to around 47.8 billion (unemployment 198,000 Feb 08). At the end of 2008, with the recession after starting in June, this figure was 41.6 billion (Feb 09 352,000 unemployed). By the end of 2009, the tax take came in at 33 billion (unemployment 437,000 Jan 2010).
So, the government tax take fell by 15 billion over the 24 months in 2008 and 2009 accompanied by a rise in unemployment of 240,000 over the period. Over that period, the budget deficit rose from 1.6 billion to 24.6 billion. In 2009, the government also spend 4 billion out of exchequer funds to recapitalise Anglo Irish Bank. Consequently, 19 billon of the total accumulated deficit from the end of 2007 to 2009 can be accounted for by a huge tax fall, due to untreated unemployment and 4 billion spent on Anglo Irish Bank.
This is a critical observation: it shows that the government’s finances are mostly caused by a fall in aggregate demand due to the recession. Were it not for unemployment and Anglo Irish Bank, our government deficit would have accumulated only to 6 billion over 2 years, which does mean that some tightening is needed, but this is not the main problem. The main problem is unemployment.
The government should have tackled this head on. It still needs to. All the opposition parties and social partners in the past two years have called for the government to stimulate the economy: Fine Gael and Labour proposed stimulus packages in last summer’s local elections worth around 13 and 5 billion respectively. The Greens called for a 2 billion sustainable energy stimulus package last autumn. The Irish Congress of Trades Unions, the Construction Industry Federation and the Irish Small and Medium sized Enterprise associations have all called for similar interventions.
But the Irish government will is ignoring these and the experience of other countries such as the USA, the UK and Australia. It is doing this principally because it wants to ‘correct ‘what it and others perceive as a structural weakness in the economy, living wages. Its solution is to leave unemployment high and with no or negative inflation alongside cuts in social welfare, people will work for a lower minimum wage and wage cuts will become widespread. This will not succeed as countries in Eastern Europe, China and elsewhere will always work for a fraction of even these lower wages.
The solution is not to have very high wages either but living wages. These wages can be maintained by securing a competitive advantage and technological advantage over other countries engaged in lower knowledge work. Productivity and profits for business can be kept up in this way. Significant government investment is needed in high knowledge areas coupled with synchronised up skilling. This is one part of the stimulus package which will be sustainable. The other is the investment in key infrastructural areas which are badly needed: mental health services with the implementation of Vision for Change (700 million); schools building programmes and others.
This can work as follows: There are about 350 incubated companies mainly in the high knowledge area at the moment and the government has been and continues to pour 1 billion a year in to them from exchequer funding. There are over 10,000 researchers, including PhDs working here. The areas which a high proportion of these are researching are new areas for global demand for the next 12 years according to the government’s Expert Strategy Group Report: Ahead of the Curve. Some of the areas identified are:
• Sustainable energy (govt cut SEI budget in April!!)
• Telematics
• Biomedical devices
• Biopharma (govt cut funding for courses!!)
• High quality food exports
• Health and education services for export
Research clusters here need to be mainstreamed or ‘spun out’ in to the Irish economy. Other business ideas should also be considered. There were 13 companies ‘spun out’ as fully fledged trading companies. However, once they are spun out, they are at the mercy of venture capitalists to secure capital. This restricts their growth to employing only about 8 people per company, as they need to grow slowly, resulting from venture and other capital investment in them as businesses, which is far too low. Indigenous small high knowledge companies of this type are kept small or else bought up by huge global companies who can then make handsome gains on the research and development that was paid for by the Irish state.
This then further weakens our indigenous company base and makes us more and more susceptible to global economic shocks where global companies shut down and set up elsewhere. It also involves a knowledge stripping of Irish companies which the Irish taxpayer has paid for which delivers the innovation profits to companies based in New York or elsewhere. This may make a handful of Irish entrepreneurs immensely wealth overnight after the takeover of one of these Irish companies but this delivers poor returns to the country.
Paradoxically, given the recession, we have an opportunity to try to redress this problem to some extent. If the Irish government were to use some or all of the 5 billion left in the National Pension Reserve Fund to spin hundreds of high knowledge companies on the market with sufficient capital to allow them to become large players rather than fledgling ones employing less than 10 people, a significant opportunity for long-term sustainability of Irish owned high knowledge companies could for the first time be created.
Fledgling companies are currently bought out by huge global companies because they are too small to survive despite their excellent business ideas. They do not have the economies of scale to compete seriously. The government now has an opportunity to spin out large companies with a large capital and asset base to allow them to compete on their own on International markets.
These in turn, within a reasonably short period of time, can employ hundreds of workers each at the very least and become internationally sustainable. In turn, his would contribute to an improvement in our balance of payments as these Irish companies would not engage in either transfer pricing or profit repatriation, which most of the large global Trans National Corporations do.
The chain of events needed might look like the following:
• Government needs 5 billion at least stimulus 2010 + 2011
• Companies should be vetted and viable one’s aided within 3 months
• Government should give 50% grants in return for shares to be redeemed over 10 years and 50% in loans
• High quality retraining should happen in parallel through state training agencies to match the skills needs necessary
• Re-training allowance of 330 euros
• Priority should be given to indigenous
• Viable and strong State Owned Enterprises which would pay dividends to state and should be part of this
• A state Development Bank should be set and work alongside higher budgets for Enterprise Ireland.
The alternative of not investing significant resources from the NPRF and significant employment creation is: most of the 10,000 researchers including PhDs will continue to do more post docs as they do now or emigrate; there will still be only a trickle of a dozen or less than 20 most which will be spun out in to the market and because of their small venture capital funding and small size they will employ less than 10 people and then get taken over by TNCS who will reap the benefits of years of Research and Development which will have cost the state up to 3 billion Euros and where the Irish state acts as a nursery for global capital. Once knowledge has been harvested, these companies may then site elsewhere.
A plan of this nature could create thousands of jobs. It would create sustainable employment and start the process of making Ireland a leader and not a follower. It would be attractive to all social partners, benefitting workers and entrepreneurs. It would also give to country an opportunity to start breaking the high risk twin dependence on both construction and global capital
Global companies will always play a huge part in Irish economic development, but we need to start the process of taking control of our own economic affairs and through large Irish companies, in high knowledge areas going forward, such as sustainable energy, biomedical, telematics and food, we can start to insulate the country from the economic shocks which cause recessions. In this way, the current recession can be used as an economic opportunity.
I will be focusing on jobs and national recovery. My starting position is that to tolerate 430,000 unemployed on the live register is economically disastrous for the economy. Just as importantly, it is morally and socially unacceptable.
Two years ago this June I predicted in the national media that unless the economy received a significant short term stimulation, that it would spiral downwards in to recession.
I said (Summer 2008) on national radio that this would be accompanied by constant increases in unemployment and a resultant falling tax take and widening hole in the public finances. It was obvious two years ago that this perilous situation, in the absence of economic stimulation, would necessitate further cuts, more economic depression, more unemployment, more falls in tax takes, increased deficits and then more cuts......in a spiral downwards.
In the summer of 2008 a huge hole was opening in the government finances: reports at that time were that it was running a deficit of 4 billion. By the start of December, the government stated that it’s deficit for the first 11 months of 2008 was 8 billion. In fact, its end of year deficit for 2008 was 12.7 billion.
The government announced in its October 2008 budget that it expected the end of year deficit for 2009 to be 13.4 billion. In the extra budget in April, the government forecasted and far bigger end of 2009 deficit of 20.35 billion. On the sixth of January 2010, the government announced that the final end of year deficit for 2009 was 24.6 billion.
In May 2008 as the government’s finances started to deteriorate, live register unemployment stood at 201,800 (deficit 4 billion). In February 2009 live register unemployment was 352,453 (deficit of 12.7 billion). In January 2010, this figure was 436,936 (deficit of 24.6 billion) and in February it was 436,956.
That amounts to clear evidence for the cuts- economic depression- unemployment- falling tax takes- ballooning budget deficit prediction. The overall government tax take at end of 2007 amounted to around 47.8 billion (unemployment 198,000 Feb 08). At the end of 2008, with the recession after starting in June, this figure was 41.6 billion (Feb 09 352,000 unemployed). By the end of 2009, the tax take came in at 33 billion (unemployment 437,000 Jan 2010).
So, the government tax take fell by 15 billion over the 24 months in 2008 and 2009 accompanied by a rise in unemployment of 240,000 over the period. Over that period, the budget deficit rose from 1.6 billion to 24.6 billion. In 2009, the government also spend 4 billion out of exchequer funds to recapitalise Anglo Irish Bank. Consequently, 19 billon of the total accumulated deficit from the end of 2007 to 2009 can be accounted for by a huge tax fall, due to untreated unemployment and 4 billion spent on Anglo Irish Bank.
This is a critical observation: it shows that the government’s finances are mostly caused by a fall in aggregate demand due to the recession. Were it not for unemployment and Anglo Irish Bank, our government deficit would have accumulated only to 6 billion over 2 years, which does mean that some tightening is needed, but this is not the main problem. The main problem is unemployment.
The government should have tackled this head on. It still needs to. All the opposition parties and social partners in the past two years have called for the government to stimulate the economy: Fine Gael and Labour proposed stimulus packages in last summer’s local elections worth around 13 and 5 billion respectively. The Greens called for a 2 billion sustainable energy stimulus package last autumn. The Irish Congress of Trades Unions, the Construction Industry Federation and the Irish Small and Medium sized Enterprise associations have all called for similar interventions.
But the Irish government will is ignoring these and the experience of other countries such as the USA, the UK and Australia. It is doing this principally because it wants to ‘correct ‘what it and others perceive as a structural weakness in the economy, living wages. Its solution is to leave unemployment high and with no or negative inflation alongside cuts in social welfare, people will work for a lower minimum wage and wage cuts will become widespread. This will not succeed as countries in Eastern Europe, China and elsewhere will always work for a fraction of even these lower wages.
The solution is not to have very high wages either but living wages. These wages can be maintained by securing a competitive advantage and technological advantage over other countries engaged in lower knowledge work. Productivity and profits for business can be kept up in this way. Significant government investment is needed in high knowledge areas coupled with synchronised up skilling. This is one part of the stimulus package which will be sustainable. The other is the investment in key infrastructural areas which are badly needed: mental health services with the implementation of Vision for Change (700 million); schools building programmes and others.
This can work as follows: There are about 350 incubated companies mainly in the high knowledge area at the moment and the government has been and continues to pour 1 billion a year in to them from exchequer funding. There are over 10,000 researchers, including PhDs working here. The areas which a high proportion of these are researching are new areas for global demand for the next 12 years according to the government’s Expert Strategy Group Report: Ahead of the Curve. Some of the areas identified are:
• Sustainable energy (govt cut SEI budget in April!!)
• Telematics
• Biomedical devices
• Biopharma (govt cut funding for courses!!)
• High quality food exports
• Health and education services for export
Research clusters here need to be mainstreamed or ‘spun out’ in to the Irish economy. Other business ideas should also be considered. There were 13 companies ‘spun out’ as fully fledged trading companies. However, once they are spun out, they are at the mercy of venture capitalists to secure capital. This restricts their growth to employing only about 8 people per company, as they need to grow slowly, resulting from venture and other capital investment in them as businesses, which is far too low. Indigenous small high knowledge companies of this type are kept small or else bought up by huge global companies who can then make handsome gains on the research and development that was paid for by the Irish state.
This then further weakens our indigenous company base and makes us more and more susceptible to global economic shocks where global companies shut down and set up elsewhere. It also involves a knowledge stripping of Irish companies which the Irish taxpayer has paid for which delivers the innovation profits to companies based in New York or elsewhere. This may make a handful of Irish entrepreneurs immensely wealth overnight after the takeover of one of these Irish companies but this delivers poor returns to the country.
Paradoxically, given the recession, we have an opportunity to try to redress this problem to some extent. If the Irish government were to use some or all of the 5 billion left in the National Pension Reserve Fund to spin hundreds of high knowledge companies on the market with sufficient capital to allow them to become large players rather than fledgling ones employing less than 10 people, a significant opportunity for long-term sustainability of Irish owned high knowledge companies could for the first time be created.
Fledgling companies are currently bought out by huge global companies because they are too small to survive despite their excellent business ideas. They do not have the economies of scale to compete seriously. The government now has an opportunity to spin out large companies with a large capital and asset base to allow them to compete on their own on International markets.
These in turn, within a reasonably short period of time, can employ hundreds of workers each at the very least and become internationally sustainable. In turn, his would contribute to an improvement in our balance of payments as these Irish companies would not engage in either transfer pricing or profit repatriation, which most of the large global Trans National Corporations do.
The chain of events needed might look like the following:
• Government needs 5 billion at least stimulus 2010 + 2011
• Companies should be vetted and viable one’s aided within 3 months
• Government should give 50% grants in return for shares to be redeemed over 10 years and 50% in loans
• High quality retraining should happen in parallel through state training agencies to match the skills needs necessary
• Re-training allowance of 330 euros
• Priority should be given to indigenous
• Viable and strong State Owned Enterprises which would pay dividends to state and should be part of this
• A state Development Bank should be set and work alongside higher budgets for Enterprise Ireland.
The alternative of not investing significant resources from the NPRF and significant employment creation is: most of the 10,000 researchers including PhDs will continue to do more post docs as they do now or emigrate; there will still be only a trickle of a dozen or less than 20 most which will be spun out in to the market and because of their small venture capital funding and small size they will employ less than 10 people and then get taken over by TNCS who will reap the benefits of years of Research and Development which will have cost the state up to 3 billion Euros and where the Irish state acts as a nursery for global capital. Once knowledge has been harvested, these companies may then site elsewhere.
A plan of this nature could create thousands of jobs. It would create sustainable employment and start the process of making Ireland a leader and not a follower. It would be attractive to all social partners, benefitting workers and entrepreneurs. It would also give to country an opportunity to start breaking the high risk twin dependence on both construction and global capital
Global companies will always play a huge part in Irish economic development, but we need to start the process of taking control of our own economic affairs and through large Irish companies, in high knowledge areas going forward, such as sustainable energy, biomedical, telematics and food, we can start to insulate the country from the economic shocks which cause recessions. In this way, the current recession can be used as an economic opportunity.
Monday, 8 February 2010
Government policies
Tom O'Connor: The exchequer figures published last week show that government tax revenues have fallen by €700 million from €3.7 billion in January 2009 to €3 billion in January 2010. Also, the CSO published figures this week showing unemployment had risen sharply by 13,341 in one month. We are also now led to believe that NAMA may result in very little lending by the banks, according to media reports on a leaked memo by the IMF to Brian Lenihan at the NAMA instigation stage.
These results and revelations are very bad. However, a new spin has been put on them by government to show the opposite. Brian Lenihan has said that the fall in tax revenues is in line with the government’s expectations, and the sharp rise in unemployment was also what they expected. He assured the public on the media that there isn’t any problem simply because he expected it!
It would seem that the 436, 936 workers signing on the live register at the moment needn’t worry because Brian Lenihan expects them to be there. Because he expected unemployment to rise, he obviously expected tax receipts to be down, which may mean that more cutbacks will be necessary. But that would seem to be o.k. Why? Because Brian Lenihan expected it.
This type of economic reasoning will do nothing to reduce unemployment and will leave poverty-stricken families, many on the verges of having their homes repossessed; exasperated, frustrated, angry and fearful for the future of their families. It sends a clear message to them that the government doesn’t care.
However, there is a very clearly discernible economic policy at work here: Brian Lenihan is content because he knows that the draconian cutbacks for this year may still help stabilise the economy, despite the fall in tax receipts. He has clearly chosen to ignore making any serious efforts to solve unemployment and get tax receipts up, simply because he is implementing enough cutbacks in the coming year.
Why would a government not prioritise reducing unemployment, virtually give up on tax receipts and instead go for a one-dimensional solution of cutting back government expenditure? The answer is well-known in economic models: Lenihan is implementing a classical monetarist, expectations-augmented Phillips Curve solution to the Irish economy.
These fancy words mean that: the government is taking the view that,, with huge unemployment workers expectations will be very modest and they will feel they are lucky to have a job at all. In fact, they will be softened up in to accepting wage cuts.
This softening-up exercise was confirmed last Monday with Colm Mc Carthy stating that his ‘Mc Carthy Report’ was simply a ‘political exercise’. For those whose jobs have been lost due to the government accepting the veracity of Mc Carthy, they now know that it was a political exercise to soften up the population for cuts in all directions.
In order to shock the population in to accepting lower wages, you will need the recession and a huge army of unemployed people to carry this through, with workers expecting pay cuts to stay in a job. The next stage in this reasoning is that, once workers have become more ‘competitive’, than the conditions will be ripe to hire more of them.
In addition, severe cutbacks in public services allow the government to stay in a strong bargaining position by not relying on increased tax receipts due to cutback savings. It further increases the supply of nurses, speech and language therapists and special needs assistants so that they will accept lower wages if they are lucky enough to be re-employed in the future.
Then, with workers wages significantly reduced in both the public and private sectors, sufficient economic incentives will be restored to employers who may then employ some workers to produce increased amounts of goods and services. At this stage, economic growth, employment and tax receipts grow again and this has the knock-on effect of improving the government’s finances.
There are huge problems with this approach: firstly, it is in effect an IMF type structural adjustment programme and has no respect for the social hardship it creates. The fact that speech and language therapists, occupational therapists, nurses, special needs assistants and other personnel are being laid off is seen as a necessary part of the plan, even though thousands of children and sick adults urgently need them. In some cases, it is a matter of life and death.
Secondly, once the plan is complete and some workers are re-hired, they will have to accept wages which may be so low as to force them in to poverty. They may also have to work more hours to make the same wages they made previously, either with their old employer or with an added part-time job just to pay the mortgage. This is exactly what has happened in the USA in the past 20 years, where low-skilled workers have to work two minimum wage jobs to afford the cost of living in a trailer.
The third point is that it is economically unsustainable. This approach is not really about inventing any new, highly productive and highly skilled well paid jobs. It is about making the economy competitive without moving towards the knowledge economy. The problem here is that with 50% of taxpayers earning less than 30,000, and 25% who haven’t completed a leaving cert, the government is trying to force these to accept less by competing for wages in an increasingly low cost environment.
These workers will not be able to compete with low cost countries. Instead, they need to be re-trained and redeployed in high skilled areas where wages can still remain at the level of the economically developed countries of the EU. This requires state investment in both retraining and productive capacity.Wages can be reasonably good if the worker has increased productivity and skills gains to give her a competitive advantage over workers in cheaper, low skilled countries. To achieve this, the government needs to invest in technologically advanced infrastructure, high skilled industries and in high grade services areas. Increased productivity levels for those at the higher end of the income distribution also need to happen in both the public and private sectors.
Fourthly, by leaving unemployment to rise, to achieve, what is in effect, a rather merciless agenda, the government will almost certainly cause unemployment to stay stubbornly high for at least five years after 2010, and will cause the emigration of tens of thousands of workers whom the government itself has spend thousands training. It also continues to ignore 30,000 families whose homes are in danger of being re-possessed, many of whom are out of work.
Fifthly, these policies are the antithesis to investing in the productive and competitive capacity of the economy to stay competitive and allow for decent wages. For example, the government’s huge investment in research, if not mainstreamed, will result in hundreds of incubated companies being bought out by huge global high knowledge companies who will subsequently reap the rewards of billions of state money. They will also take hard earned ideas, technological advances and associated personnel of the Irish universities and Institutes of Technology.
Sixthly, even though social partnership has been pronounced dead, the current policies do little for any of the social partners. Several businesses are closing every day, banks are not lending, the government has reined in its investment in the economy. Businesses are suffering. Workers are suffering. Community groups are suffering. Farmers are suffering from lower prices on the grounds of depressed consumer demand. In addition to the opposition parties, large numbers of FF TDs do not favour the current agenda. We are left with the cabinet and less than a half dozen academic advisors pushing this agenda. So much for democracy Irish style.
In short, Brian Lenihan’s approach is economically and socially retrograde and will serve the economy and society very badly unless changed. To make matters even worse, in the light of noises coming from the banking sector itself in recent months and the news of the IMF memo to Brian Lenihan on NAMA, there is a clear need to reverse the irresponsible policy of structural adjustment and the associated complacency on the part of the government in running down of the economy and accepting continued increases unemployment.
If not, any growth in the second half of the year will be too little, too late to avoid misery for hundreds of thousands of people, and the skills/productivity weaknesses in the economy will persist for many years afterwards. In doing nothing right now, the government is burying its head in the sand.
These results and revelations are very bad. However, a new spin has been put on them by government to show the opposite. Brian Lenihan has said that the fall in tax revenues is in line with the government’s expectations, and the sharp rise in unemployment was also what they expected. He assured the public on the media that there isn’t any problem simply because he expected it!
It would seem that the 436, 936 workers signing on the live register at the moment needn’t worry because Brian Lenihan expects them to be there. Because he expected unemployment to rise, he obviously expected tax receipts to be down, which may mean that more cutbacks will be necessary. But that would seem to be o.k. Why? Because Brian Lenihan expected it.
This type of economic reasoning will do nothing to reduce unemployment and will leave poverty-stricken families, many on the verges of having their homes repossessed; exasperated, frustrated, angry and fearful for the future of their families. It sends a clear message to them that the government doesn’t care.
However, there is a very clearly discernible economic policy at work here: Brian Lenihan is content because he knows that the draconian cutbacks for this year may still help stabilise the economy, despite the fall in tax receipts. He has clearly chosen to ignore making any serious efforts to solve unemployment and get tax receipts up, simply because he is implementing enough cutbacks in the coming year.
Why would a government not prioritise reducing unemployment, virtually give up on tax receipts and instead go for a one-dimensional solution of cutting back government expenditure? The answer is well-known in economic models: Lenihan is implementing a classical monetarist, expectations-augmented Phillips Curve solution to the Irish economy.
These fancy words mean that: the government is taking the view that,, with huge unemployment workers expectations will be very modest and they will feel they are lucky to have a job at all. In fact, they will be softened up in to accepting wage cuts.
This softening-up exercise was confirmed last Monday with Colm Mc Carthy stating that his ‘Mc Carthy Report’ was simply a ‘political exercise’. For those whose jobs have been lost due to the government accepting the veracity of Mc Carthy, they now know that it was a political exercise to soften up the population for cuts in all directions.
In order to shock the population in to accepting lower wages, you will need the recession and a huge army of unemployed people to carry this through, with workers expecting pay cuts to stay in a job. The next stage in this reasoning is that, once workers have become more ‘competitive’, than the conditions will be ripe to hire more of them.
In addition, severe cutbacks in public services allow the government to stay in a strong bargaining position by not relying on increased tax receipts due to cutback savings. It further increases the supply of nurses, speech and language therapists and special needs assistants so that they will accept lower wages if they are lucky enough to be re-employed in the future.
Then, with workers wages significantly reduced in both the public and private sectors, sufficient economic incentives will be restored to employers who may then employ some workers to produce increased amounts of goods and services. At this stage, economic growth, employment and tax receipts grow again and this has the knock-on effect of improving the government’s finances.
There are huge problems with this approach: firstly, it is in effect an IMF type structural adjustment programme and has no respect for the social hardship it creates. The fact that speech and language therapists, occupational therapists, nurses, special needs assistants and other personnel are being laid off is seen as a necessary part of the plan, even though thousands of children and sick adults urgently need them. In some cases, it is a matter of life and death.
Secondly, once the plan is complete and some workers are re-hired, they will have to accept wages which may be so low as to force them in to poverty. They may also have to work more hours to make the same wages they made previously, either with their old employer or with an added part-time job just to pay the mortgage. This is exactly what has happened in the USA in the past 20 years, where low-skilled workers have to work two minimum wage jobs to afford the cost of living in a trailer.
The third point is that it is economically unsustainable. This approach is not really about inventing any new, highly productive and highly skilled well paid jobs. It is about making the economy competitive without moving towards the knowledge economy. The problem here is that with 50% of taxpayers earning less than 30,000, and 25% who haven’t completed a leaving cert, the government is trying to force these to accept less by competing for wages in an increasingly low cost environment.
These workers will not be able to compete with low cost countries. Instead, they need to be re-trained and redeployed in high skilled areas where wages can still remain at the level of the economically developed countries of the EU. This requires state investment in both retraining and productive capacity.Wages can be reasonably good if the worker has increased productivity and skills gains to give her a competitive advantage over workers in cheaper, low skilled countries. To achieve this, the government needs to invest in technologically advanced infrastructure, high skilled industries and in high grade services areas. Increased productivity levels for those at the higher end of the income distribution also need to happen in both the public and private sectors.
Fourthly, by leaving unemployment to rise, to achieve, what is in effect, a rather merciless agenda, the government will almost certainly cause unemployment to stay stubbornly high for at least five years after 2010, and will cause the emigration of tens of thousands of workers whom the government itself has spend thousands training. It also continues to ignore 30,000 families whose homes are in danger of being re-possessed, many of whom are out of work.
Fifthly, these policies are the antithesis to investing in the productive and competitive capacity of the economy to stay competitive and allow for decent wages. For example, the government’s huge investment in research, if not mainstreamed, will result in hundreds of incubated companies being bought out by huge global high knowledge companies who will subsequently reap the rewards of billions of state money. They will also take hard earned ideas, technological advances and associated personnel of the Irish universities and Institutes of Technology.
Sixthly, even though social partnership has been pronounced dead, the current policies do little for any of the social partners. Several businesses are closing every day, banks are not lending, the government has reined in its investment in the economy. Businesses are suffering. Workers are suffering. Community groups are suffering. Farmers are suffering from lower prices on the grounds of depressed consumer demand. In addition to the opposition parties, large numbers of FF TDs do not favour the current agenda. We are left with the cabinet and less than a half dozen academic advisors pushing this agenda. So much for democracy Irish style.
In short, Brian Lenihan’s approach is economically and socially retrograde and will serve the economy and society very badly unless changed. To make matters even worse, in the light of noises coming from the banking sector itself in recent months and the news of the IMF memo to Brian Lenihan on NAMA, there is a clear need to reverse the irresponsible policy of structural adjustment and the associated complacency on the part of the government in running down of the economy and accepting continued increases unemployment.
If not, any growth in the second half of the year will be too little, too late to avoid misery for hundreds of thousands of people, and the skills/productivity weaknesses in the economy will persist for many years afterwards. In doing nothing right now, the government is burying its head in the sand.
Thursday, 17 December 2009
Using the recession as an opportunity for Irish economic development
Tom O'Connor: The ESRI expect national income GNP to fall by 9.4% overall in 2009, and by a further 1.8% in 2010, with growth returning in the last quarter of 2010. Accompanying these are falls in investment of 15.5% in 2009 and 30.5% in 2010. The ESRI prediction of a return to growth at the end of 2010 is consistent with Brian Lenihan’s statement that at the end of 2010 we will have turned the corner economically.
There is a dangerous complacency about these projections. Firstly, it is hard to see how growth will resume in the end of 2010 when the fall in investment is double what it was in 2010. The four billion Euro taken out of the economy next year, given that it is in wages and social welfare, is likely to have the effect of taking €8 billion in spending power out of an economy which is also predicted to see investment fall by a massive 30%.
The more likely outcome for 2010 is that GNP growth will not resume in the last quarter, and the outturn for the year is likely to see GNP fall by 4%. The figure of a 30% fall in investment would signal that there is no real expectation that the banks will start lending strongly in 2010. In fact, this has been strongly hinted at by senior bankers themselves.
As a consequence, we are unlikely to see live register unemployment fall below 400,000. The danger here is that, with combined business investment falls of 45% over 2009 and 2010, positive investment may only start in 2011 from a position where it has been going backwards for two years. This will delay significant reductions in unemployment as existing and new businesses are starved of cash.
Prof. Patrick Honohan of the Irish Central Bank told a Dail Committee yesterday that the banks would need further capitalisation. He wasn’t prepared to put a figure on this, or state whether it would be a 50% ownership by the state or more. It is believed by many that the banks will need another 9 billion, and that this will come from the National Pension Reserve Fund.
The Bank of Ireland and Allied Irish Banks have been recapitalised by €7 billion to date. This is written down as an ‘investment’ by the NPRF in the banks. A further investment of €9 billion would leave 5 billion in the National Pension Reserve Fund. This capital injection is seen as the final intervention to fully stabilise the banks.
As a result of the choreography needed to put NAMA and recapitalisation in place, money will not start to flow; this which underlies the ESRI projection of a 30% fall in investment. In the meantime, there are viable investment opportunities available which will not happen unless a new source of investment is found.
There are about 350 incubated companies at the moment, mainly in the high knowledge area, and the government has been and continues to pour €1 billion a year into them from exchequer funding. There are over 10,000 researchers, including PhDs, working here.
13 companies were ‘spun out’ as fully fledged trading companies. However, once they are spun out, they are at the mercy of venture capitalists to secure capital. This restricts their growth to employing only about 8 people per company, as they need to grow slowly, resulting from venture and other capital investment in them as businesses - which is far too low. Indigenous small high-knowledge companies of this type are either kept small or else bought up by huge global companies who can then make handsome gains on the research and development that was paid for by the Irish state.
This then further weakens our indigenous company base, and makes us more and more susceptible to global economic shocks where global companies shut down and set up elsewhere. It also involves a knowledge-stripping of Irish companies which the Irish taxpayer has paid for, which delivers the innovation profits to companies based in New York or elsewhere. This may make a handful of Irish entrepreneurs immensely wealthy overnight after the takeover of one of these Irish companies, but it delivers poor returns to the country.
Paradoxically, given the recession, we have an opportunity to try to redress this problem to some extent. If the Irish government were to use some or all of the €5 billion left in the National Pension Reserve Fund to spin hundreds of high knowledge companies on the market with sufficient capital to allow them to become large players rather than fledgling ones employing less than 10 people, a significant opportunity for long-term sustainability of Irish-owned high knowledge companies could be created for the first time.
Fledgling companies are currently bought out by huge global companies because they are too small to survive, despite their excellent business ideas. They do not have the economies of scale to compete seriously. The government now has an opportunity to spin out large companies with a large capital and asset base to allow them to compete on their own on International markets.
These in turn, within a reasonably short period of time, can employ hundreds of workers each at the very least, and become internationally sustainable. In turn, this would contribute to an improvement in our balance of payments as these Irish companies would not engage in either transfer pricing or profit repatriation, which most of the large global Trans National Corporations do.
The alternative to not investing significant resources from the NPRF and generating significant employment creation is that most of the 10,000 researchers, including PhDs, will continue to do more post docs as they do now, or emigrate; there will still be only a trickle of a dozen or less than 20 companies at most which will be spun out into the market, and because of their small venture capital funding and small size they will employ less than 10 people - and then get taken over by TNCS who will reap the benefits of years of Research and Development which will have cost the state up to €3 billion. Thus, the Irish state acts as a nursery for global capital. Once knowledge has been harvested, these companies may then site elsewhere.
A plan of this nature could create thousands of jobs. It would create sustainable employment and start the process of making Ireland a leader and not a follower. It would be attractive to all social partners, benefitting workers and entrepreneurs. It would also give the country an opportunity to start breaking the high-risk twin dependence on both construction and global capital.
Global companies will always play a huge part in Irish economic development, but we need to start the process of taking control of our own economic affairs. Through large Irish companies, in high-knowledge areas going forward, such as sustainable energy, biomedical, telematics and food, we can start to insulate the country from the economic shocks which cause recessions. In this way, the current recession can be used as an economic opportunity.
There is a dangerous complacency about these projections. Firstly, it is hard to see how growth will resume in the end of 2010 when the fall in investment is double what it was in 2010. The four billion Euro taken out of the economy next year, given that it is in wages and social welfare, is likely to have the effect of taking €8 billion in spending power out of an economy which is also predicted to see investment fall by a massive 30%.
The more likely outcome for 2010 is that GNP growth will not resume in the last quarter, and the outturn for the year is likely to see GNP fall by 4%. The figure of a 30% fall in investment would signal that there is no real expectation that the banks will start lending strongly in 2010. In fact, this has been strongly hinted at by senior bankers themselves.
As a consequence, we are unlikely to see live register unemployment fall below 400,000. The danger here is that, with combined business investment falls of 45% over 2009 and 2010, positive investment may only start in 2011 from a position where it has been going backwards for two years. This will delay significant reductions in unemployment as existing and new businesses are starved of cash.
Prof. Patrick Honohan of the Irish Central Bank told a Dail Committee yesterday that the banks would need further capitalisation. He wasn’t prepared to put a figure on this, or state whether it would be a 50% ownership by the state or more. It is believed by many that the banks will need another 9 billion, and that this will come from the National Pension Reserve Fund.
The Bank of Ireland and Allied Irish Banks have been recapitalised by €7 billion to date. This is written down as an ‘investment’ by the NPRF in the banks. A further investment of €9 billion would leave 5 billion in the National Pension Reserve Fund. This capital injection is seen as the final intervention to fully stabilise the banks.
As a result of the choreography needed to put NAMA and recapitalisation in place, money will not start to flow; this which underlies the ESRI projection of a 30% fall in investment. In the meantime, there are viable investment opportunities available which will not happen unless a new source of investment is found.
There are about 350 incubated companies at the moment, mainly in the high knowledge area, and the government has been and continues to pour €1 billion a year into them from exchequer funding. There are over 10,000 researchers, including PhDs, working here.
13 companies were ‘spun out’ as fully fledged trading companies. However, once they are spun out, they are at the mercy of venture capitalists to secure capital. This restricts their growth to employing only about 8 people per company, as they need to grow slowly, resulting from venture and other capital investment in them as businesses - which is far too low. Indigenous small high-knowledge companies of this type are either kept small or else bought up by huge global companies who can then make handsome gains on the research and development that was paid for by the Irish state.
This then further weakens our indigenous company base, and makes us more and more susceptible to global economic shocks where global companies shut down and set up elsewhere. It also involves a knowledge-stripping of Irish companies which the Irish taxpayer has paid for, which delivers the innovation profits to companies based in New York or elsewhere. This may make a handful of Irish entrepreneurs immensely wealthy overnight after the takeover of one of these Irish companies, but it delivers poor returns to the country.
Paradoxically, given the recession, we have an opportunity to try to redress this problem to some extent. If the Irish government were to use some or all of the €5 billion left in the National Pension Reserve Fund to spin hundreds of high knowledge companies on the market with sufficient capital to allow them to become large players rather than fledgling ones employing less than 10 people, a significant opportunity for long-term sustainability of Irish-owned high knowledge companies could be created for the first time.
Fledgling companies are currently bought out by huge global companies because they are too small to survive, despite their excellent business ideas. They do not have the economies of scale to compete seriously. The government now has an opportunity to spin out large companies with a large capital and asset base to allow them to compete on their own on International markets.
These in turn, within a reasonably short period of time, can employ hundreds of workers each at the very least, and become internationally sustainable. In turn, this would contribute to an improvement in our balance of payments as these Irish companies would not engage in either transfer pricing or profit repatriation, which most of the large global Trans National Corporations do.
The alternative to not investing significant resources from the NPRF and generating significant employment creation is that most of the 10,000 researchers, including PhDs, will continue to do more post docs as they do now, or emigrate; there will still be only a trickle of a dozen or less than 20 companies at most which will be spun out into the market, and because of their small venture capital funding and small size they will employ less than 10 people - and then get taken over by TNCS who will reap the benefits of years of Research and Development which will have cost the state up to €3 billion. Thus, the Irish state acts as a nursery for global capital. Once knowledge has been harvested, these companies may then site elsewhere.
A plan of this nature could create thousands of jobs. It would create sustainable employment and start the process of making Ireland a leader and not a follower. It would be attractive to all social partners, benefitting workers and entrepreneurs. It would also give the country an opportunity to start breaking the high-risk twin dependence on both construction and global capital.
Global companies will always play a huge part in Irish economic development, but we need to start the process of taking control of our own economic affairs. Through large Irish companies, in high-knowledge areas going forward, such as sustainable energy, biomedical, telematics and food, we can start to insulate the country from the economic shocks which cause recessions. In this way, the current recession can be used as an economic opportunity.
Thursday, 10 December 2009
Budget 2010 will do nothing to get the economy out of recession
Tom O'Connor: Budget 2010 will cause immense hardship and will do nothing to get the economy out of recession. The four billion in savings could have been found in a variety of ways which would not drive people in to unemployment, poverty and housing repossessions, as this one will.
The current approach has been driven by a business group agenda which is hell-bent on driving down wages and social welfare across the economy. More of the same will be sought next year, with further demands for wage reductions and cuts in welfare spending. If left unchallenged, this will ultimately bring Ireland in to the low wage and poor welfare state model of the USA.
The government has cut public service pay by 5% on a €30,000 earner with a sliding scale of further cuts on extra slices of income between 7.5 and 15% ranging over incomes from 40,000 up to 200,000 and beyond.
A young fireman or nurse will be earning 34,000. At present, before their tax credits are applied, they pay 36.5 % of their income in taxes: In addition to the 20% basic tax rate, they pay an income levy of 2%, a pension levy at 6.2%, a health levy of 4% and PRSI at 4%. The budget pay cut will now reduce his and her income by 1,800 to 32,200. All of the above deductions will now still apply.
The tax take on this 32,200 will now amount to 7,932, so (s)he will come home with 22,268. Before last year’s budget 09 and the supplementary budget, at Oct 08, (s)he would have taken home 28,650. In 14 months to date, the nurse and fireman have lost 6,382 which is 22.3% of their disposable income. They will also have read on the papers that only 30% of private sector workers have taken any pay cut all.
Now consider the man or woman who earns over 500,000 per annum and who is self employed. Up to now (s)he has been able to avoid paying taxes through taking advantage of the 111 tax avoidance schemes that were in operation. Over the Celtic Tiger, s/he may have earned millions per year. Irrespective of how many millions he earned, s/he would only have paid a maximum of 20% in tax by taking advantage of tax shelters.
Now given that s/he has fallen on hard times and his/her income is down to maybe 500,000, s/he will have to pay 30% while still using many of the same avoidance schemes. The government only hopes to save 55 million in these schemes in 2010 even though, it is estimated that the current value of all of these is about 4.5 billion.
We can compare this position to a physiotherapist in a public hospital who now earns about 54,000. In the past 14 months, she has seen her overall tax burden, including the pension levy of 7%, PRSI, health levy and income levy grow to 57% on income over 35,400. So she wonders why now the self employed income earner only pays 30% on income of half a million or even 10 million.
Now her income after the cuts of 5%-7.5% is 50,700. She now also has a total tax and deductions bill of 18,159, taking home now only 32,541 paying tax and other levies at 58% on the income over 35,400. Going back 14 months, her total deductions were 14,370 out of her then income of 54,000, when she paid marginal tax and PRSI at 46%. Her net income then was 39,630. She has now lost 7,000 of her disposable income, a cut of 22% in little over a year.
The fireman, nurse and physiotherapist are now led to believe that pay cuts of the same order are in store for next year, and even a further pay cut the year after. It is more than likely that many of them have already become part of the 27,000 people who are currently defaulting on their mortgages. The public are also being told that they are part of the problem with the public finances.
However, people have forgotten that 13 billion Euros were spent on tax breaks to the wealthy up to 2006 which was over half the exchequer deficit this year. Essentially, if these tax breaks were not delivered, then our exchequer deficit now would be only 12 billion.
These public servants know that they did not cause the current crisis in public finances. So also do the 425,000 people on the dole who worked hard to fuel the Celtic tiger. Many of these were young people who worked in construction at 18-19 years of age, and who are now being offered 100 or 150 per week, less than half of what they were getting, even though they are not able to find work, given the collapse of construction.
These are part of the hundreds of thousands of unemployed who know that despite cutting their dole massively, the government is doing nothing to create jobs. The so called ‘stimulus package’ in the budget amount s to a modest cut in alcohol prices and a paltry scrappage scheme. This will keep the 425,000 people on the dole.
What these jobseekers don’t know is that the government has 14 billion in reserve in the National Pension Reserve Fund, and they won’t use a single cent of it to stimulate the economy. It is clear that 7 billion of this has been given to the banks but the government will spend nothing to get the economy going.
Why? Insiders in the financial world have stated that it is the government’s intention to give this 14 billion to the banks to bolster their share capital base, while leaving hundreds of thousands on dole queues and cutting welfare payments to the point where people may even suffer ‘food poverty’, the fancy name for hunger.
The huge loss of income to the public service, welfare cutbacks and the huge cut in capital spending of over 7 billion from the government capital spending programme will prevent any possible move out of recession next year. It will drive growth next year down well beyond the 3% fall projected to at least double that number. It may well prevent the economy recovering even by 2011.
The social cost of this budget in terms of massive unemployment, a definite sharp rise of those in serious poverty, a likely strong rise in emigration, cuts in community services, and its certain effect of increasing housing repossessions will be enormous. Hundreds or even thousands of young unemployed people living in rent allowance accommodation will almost certainly be driven to homelessness.
The reason for this unthinkable harshness has been the government’s pandering to those in the high echelons of international financial markets and large business groups in Ireland. The breakdown of the public service pay talks has now been shown to be a result of a desire to please IBEC.
The government could have introduced a wealth tax and raised 1.5 billion, and could have ended 1.5 billion worth of tax breaks. It could have raised the PRSI Ceiling to force those earning over 75,000 to pay PRSI earning about 700 million. It could have doubled the income levies across the public and private service for those earning over 50,000, and this would have brought in 1 billion. It could have agreed the ICTU proposals saving 1 billion and avoiding strikes and public service reform, including lower numbers and higher productivity would have been agreed.
The government chose to do none of those things. This budget is pushing Ireland towards a Hong Kong or Taiwan model of economic and social development. It will cause immense hardship, strikes and push half the population to the brink. This is both economically and socially unnecessary. In fact it is disastrous on both counts.
The current approach has been driven by a business group agenda which is hell-bent on driving down wages and social welfare across the economy. More of the same will be sought next year, with further demands for wage reductions and cuts in welfare spending. If left unchallenged, this will ultimately bring Ireland in to the low wage and poor welfare state model of the USA.
The government has cut public service pay by 5% on a €30,000 earner with a sliding scale of further cuts on extra slices of income between 7.5 and 15% ranging over incomes from 40,000 up to 200,000 and beyond.
A young fireman or nurse will be earning 34,000. At present, before their tax credits are applied, they pay 36.5 % of their income in taxes: In addition to the 20% basic tax rate, they pay an income levy of 2%, a pension levy at 6.2%, a health levy of 4% and PRSI at 4%. The budget pay cut will now reduce his and her income by 1,800 to 32,200. All of the above deductions will now still apply.
The tax take on this 32,200 will now amount to 7,932, so (s)he will come home with 22,268. Before last year’s budget 09 and the supplementary budget, at Oct 08, (s)he would have taken home 28,650. In 14 months to date, the nurse and fireman have lost 6,382 which is 22.3% of their disposable income. They will also have read on the papers that only 30% of private sector workers have taken any pay cut all.
Now consider the man or woman who earns over 500,000 per annum and who is self employed. Up to now (s)he has been able to avoid paying taxes through taking advantage of the 111 tax avoidance schemes that were in operation. Over the Celtic Tiger, s/he may have earned millions per year. Irrespective of how many millions he earned, s/he would only have paid a maximum of 20% in tax by taking advantage of tax shelters.
Now given that s/he has fallen on hard times and his/her income is down to maybe 500,000, s/he will have to pay 30% while still using many of the same avoidance schemes. The government only hopes to save 55 million in these schemes in 2010 even though, it is estimated that the current value of all of these is about 4.5 billion.
We can compare this position to a physiotherapist in a public hospital who now earns about 54,000. In the past 14 months, she has seen her overall tax burden, including the pension levy of 7%, PRSI, health levy and income levy grow to 57% on income over 35,400. So she wonders why now the self employed income earner only pays 30% on income of half a million or even 10 million.
Now her income after the cuts of 5%-7.5% is 50,700. She now also has a total tax and deductions bill of 18,159, taking home now only 32,541 paying tax and other levies at 58% on the income over 35,400. Going back 14 months, her total deductions were 14,370 out of her then income of 54,000, when she paid marginal tax and PRSI at 46%. Her net income then was 39,630. She has now lost 7,000 of her disposable income, a cut of 22% in little over a year.
The fireman, nurse and physiotherapist are now led to believe that pay cuts of the same order are in store for next year, and even a further pay cut the year after. It is more than likely that many of them have already become part of the 27,000 people who are currently defaulting on their mortgages. The public are also being told that they are part of the problem with the public finances.
However, people have forgotten that 13 billion Euros were spent on tax breaks to the wealthy up to 2006 which was over half the exchequer deficit this year. Essentially, if these tax breaks were not delivered, then our exchequer deficit now would be only 12 billion.
These public servants know that they did not cause the current crisis in public finances. So also do the 425,000 people on the dole who worked hard to fuel the Celtic tiger. Many of these were young people who worked in construction at 18-19 years of age, and who are now being offered 100 or 150 per week, less than half of what they were getting, even though they are not able to find work, given the collapse of construction.
These are part of the hundreds of thousands of unemployed who know that despite cutting their dole massively, the government is doing nothing to create jobs. The so called ‘stimulus package’ in the budget amount s to a modest cut in alcohol prices and a paltry scrappage scheme. This will keep the 425,000 people on the dole.
What these jobseekers don’t know is that the government has 14 billion in reserve in the National Pension Reserve Fund, and they won’t use a single cent of it to stimulate the economy. It is clear that 7 billion of this has been given to the banks but the government will spend nothing to get the economy going.
Why? Insiders in the financial world have stated that it is the government’s intention to give this 14 billion to the banks to bolster their share capital base, while leaving hundreds of thousands on dole queues and cutting welfare payments to the point where people may even suffer ‘food poverty’, the fancy name for hunger.
The huge loss of income to the public service, welfare cutbacks and the huge cut in capital spending of over 7 billion from the government capital spending programme will prevent any possible move out of recession next year. It will drive growth next year down well beyond the 3% fall projected to at least double that number. It may well prevent the economy recovering even by 2011.
The social cost of this budget in terms of massive unemployment, a definite sharp rise of those in serious poverty, a likely strong rise in emigration, cuts in community services, and its certain effect of increasing housing repossessions will be enormous. Hundreds or even thousands of young unemployed people living in rent allowance accommodation will almost certainly be driven to homelessness.
The reason for this unthinkable harshness has been the government’s pandering to those in the high echelons of international financial markets and large business groups in Ireland. The breakdown of the public service pay talks has now been shown to be a result of a desire to please IBEC.
The government could have introduced a wealth tax and raised 1.5 billion, and could have ended 1.5 billion worth of tax breaks. It could have raised the PRSI Ceiling to force those earning over 75,000 to pay PRSI earning about 700 million. It could have doubled the income levies across the public and private service for those earning over 50,000, and this would have brought in 1 billion. It could have agreed the ICTU proposals saving 1 billion and avoiding strikes and public service reform, including lower numbers and higher productivity would have been agreed.
The government chose to do none of those things. This budget is pushing Ireland towards a Hong Kong or Taiwan model of economic and social development. It will cause immense hardship, strikes and push half the population to the brink. This is both economically and socially unnecessary. In fact it is disastrous on both counts.
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