Sinéad Pentony: Today’s news that class sizes are set to increase highlights the shortsightedness of responses to the fiscal crisis.
As in many areas of public expenditure, Ireland has consistently lagged behind other OECD and EU countries both in terms of spending and performance. Ireland spends 4.7 per cent of GDP on education compared to the OECD average of 6.2 per cent. Even during the boom, education spending remained one of the lowest in the OECD. Our class size average is 24 pupils, compared with an EU average of 20, which is the second largest in the EU. The Minister for Education has said that our education system is not ‘fit for purpose’ and he’s right – our reading levels (OECD/Pisa survey results) have fallen from 5th place in 2000 to 17th place in 209. Our ranking in mathematics tumbled from 16th in 2006 to 26th in 2009. So the proposal to increase class sizes will reduce our low level of spending even further and will undoubtedly have a knock-on effect on our performance. Also, the impact of increased class sizes will be felt disproportionately in schools and communities that are already struggling with reduced resources. These schools tend to be concentrated in deprived areas where there is limited scope for parents to make “voluntary contributions” to their local schools.
However in the medium-long term, cutbacks in education will impact on our ability to compete at a global level in new industries that are driven by innovation. An education system that is ‘fit for purpose’ requires:
• a major reduction in class sizes at all levels in the education system
• proper equipping of all schools with educational technology
• a radical movement away from rote learning and mass testing at all levels of the system towards group-based project work.
Our recovery is predicated on investment in our future – education.
Showing posts with label cuts. Show all posts
Showing posts with label cuts. Show all posts
Thursday, 4 August 2011
Thursday, 4 November 2010
View from the front line: impacts of cuts to community employment
Guest post by Dr Rory Hearne
In an effort to highlight what are the potential real human and economic impacts of some of the proposed December budget cuts I asked a few young women on the FAS-funded Community Employment scheme in the area where I work if they would tell me their approximate weekly income and expenditure.
One woman, with three young children, explained that her total weekly income is €517. That included a ‘double payment’ of €305 a week from FAS and €212 from Social Welfare. Her total weekly basic expenditure, at the minimum, is €461. This included €90 a week on the crèche, €25 on bus fare, €38 on rent, €30 on ESB, €30 on Gas, €200 on food shopping, not including kids lunches, €20 on mobile phones, €28 a week on football and other kid’s training costs. That leaves €56 at the end of the week. The other women were in similar situations. Another woman, for example, with two kids, had a weekly income of €405 (FAS and Social Welfare). Her basic expenditure was €385 including €60 a week on the crèche, €50 on rent, €30 on gas, €30 on ESB, €50 on travel, €150 on food shopping and €15 for mobile phone. Leaving her with a tiny sum of €20 euro to spare at the end of the week.
These people are finding it extremely difficult to survive at the moment on their low incomes. Just think about it. How do they afford additional costs of clothes, shoes, pharmacy medicines (not always covered under medical card), additional bus and rail travel, birthday parties, Christmas? Not to mind what many would consider basic things to do and have, such as going out for a meal or a trip to a leisureplex an odd time. They spoke similarly of the difficulty of paying for activities for their children - boxing clubs, dancing, football – which could cost anything from €40 to €50 a week. Even if these overall income and expenditure figures approximated to the truth, it demonstrates two things.
Firstly, further cuts in social welfare in the budget or increases in gas and ESB prices will have a terrible human impact. Those on such low incomes will ‘get by’ only with huge difficulty. As a result, and already we are witnessing as Christmas approaches, the use of money lenders is on the rise. Their grip of harassment and intimidation hanging over a family can be devastating.
Secondly, it provides strong supportive evidence to the argument that cutting welfare spending directly impacts on economic growth. Look at the areas of expenditure of these welfare recipients. It is on the local crèche, the local authority, Bord Gais, ESB, Dublin Bus, local and larger supermarkets, phone companies, local sports organisations etc. It is all being spent directly in the Irish economy. Indeed much is on the state and semi state sectors.
A notable double-edged sword for the Irish state is that the local authority rent is set according to the individual’s income so if their welfare payment is cut the local authority’s income will be reduced, requiring further subsidy from the state. The state thus cuts itself.
Another point that these figures raise is that the reduction in income will mean a reduced spend on the services being provided in the communities they live in – such as the crèche, local shops and sports organisations etc – so the retrenchment will hit the lower income sections of our society at two levels: as individuals experiencing a reduction in direct income and, as local areas, geographically. This is because lower income areas will have less spent in those areas after the budget as the individuals living in them experience income reductions. Thus the poor and vulnerable get disproportionally affected on multiple scales.
Interestingly it highlights also the important role of social housing. With significantly higher rents these people would simply not survive financially.
From a human perspective, how will children growing up in this household feel? The poverty causes depression. There is the stress of not being able to provide a ‘proper’ birthday party and presents or a ‘good’ Christmas. Where is the money to give to the teenagers for a new top or for the cinema? How stigmatised will those teenagers feel as a result? What social impacts will this have on mental health, on youth anti-social behaviour, crime, vandalism, education drop out? What wider costs will this have to Irish society and the economy?
The so called ‘double payment’ as part of FAS’ Community Employment scheme clearly plays a vital role in the lives of these individuals, and therefore, should not be cut in the budget. The schemes also provide much needed support in these communities in service provision providing employees for homework clubs, crèches, senior citizen support and others.
In an effort to highlight what are the potential real human and economic impacts of some of the proposed December budget cuts I asked a few young women on the FAS-funded Community Employment scheme in the area where I work if they would tell me their approximate weekly income and expenditure.
One woman, with three young children, explained that her total weekly income is €517. That included a ‘double payment’ of €305 a week from FAS and €212 from Social Welfare. Her total weekly basic expenditure, at the minimum, is €461. This included €90 a week on the crèche, €25 on bus fare, €38 on rent, €30 on ESB, €30 on Gas, €200 on food shopping, not including kids lunches, €20 on mobile phones, €28 a week on football and other kid’s training costs. That leaves €56 at the end of the week. The other women were in similar situations. Another woman, for example, with two kids, had a weekly income of €405 (FAS and Social Welfare). Her basic expenditure was €385 including €60 a week on the crèche, €50 on rent, €30 on gas, €30 on ESB, €50 on travel, €150 on food shopping and €15 for mobile phone. Leaving her with a tiny sum of €20 euro to spare at the end of the week.
These people are finding it extremely difficult to survive at the moment on their low incomes. Just think about it. How do they afford additional costs of clothes, shoes, pharmacy medicines (not always covered under medical card), additional bus and rail travel, birthday parties, Christmas? Not to mind what many would consider basic things to do and have, such as going out for a meal or a trip to a leisureplex an odd time. They spoke similarly of the difficulty of paying for activities for their children - boxing clubs, dancing, football – which could cost anything from €40 to €50 a week. Even if these overall income and expenditure figures approximated to the truth, it demonstrates two things.
Firstly, further cuts in social welfare in the budget or increases in gas and ESB prices will have a terrible human impact. Those on such low incomes will ‘get by’ only with huge difficulty. As a result, and already we are witnessing as Christmas approaches, the use of money lenders is on the rise. Their grip of harassment and intimidation hanging over a family can be devastating.
Secondly, it provides strong supportive evidence to the argument that cutting welfare spending directly impacts on economic growth. Look at the areas of expenditure of these welfare recipients. It is on the local crèche, the local authority, Bord Gais, ESB, Dublin Bus, local and larger supermarkets, phone companies, local sports organisations etc. It is all being spent directly in the Irish economy. Indeed much is on the state and semi state sectors.
A notable double-edged sword for the Irish state is that the local authority rent is set according to the individual’s income so if their welfare payment is cut the local authority’s income will be reduced, requiring further subsidy from the state. The state thus cuts itself.
Another point that these figures raise is that the reduction in income will mean a reduced spend on the services being provided in the communities they live in – such as the crèche, local shops and sports organisations etc – so the retrenchment will hit the lower income sections of our society at two levels: as individuals experiencing a reduction in direct income and, as local areas, geographically. This is because lower income areas will have less spent in those areas after the budget as the individuals living in them experience income reductions. Thus the poor and vulnerable get disproportionally affected on multiple scales.
Interestingly it highlights also the important role of social housing. With significantly higher rents these people would simply not survive financially.
From a human perspective, how will children growing up in this household feel? The poverty causes depression. There is the stress of not being able to provide a ‘proper’ birthday party and presents or a ‘good’ Christmas. Where is the money to give to the teenagers for a new top or for the cinema? How stigmatised will those teenagers feel as a result? What social impacts will this have on mental health, on youth anti-social behaviour, crime, vandalism, education drop out? What wider costs will this have to Irish society and the economy?
The so called ‘double payment’ as part of FAS’ Community Employment scheme clearly plays a vital role in the lives of these individuals, and therefore, should not be cut in the budget. The schemes also provide much needed support in these communities in service provision providing employees for homework clubs, crèches, senior citizen support and others.
Tuesday, 19 October 2010
Fine Gael's 3:1 Ratio
Nat O'Connor: Fine Gael has given some useful clarity on their fiscal policy position with the declaration that they would seek €1 billion in tax increases for every €3 billion in cuts (Irish Examiner). Across the period of the four-year plan, this suggests that they would seek to close the deficit while making Ireland an even lower tax economy than it was before the boom; which can only mean the wholesale removal or reduction of public services, and significant cuts to public pay and/or numbers.
The implications of the 3:1 ratio can be spelled out in more detail once we establish just how much needs to be cut in the four-year plan.
The Opposition finance spokespersons were given access to data by the Department of Finance today. Is it just political theatre, or did the spokepersons really not know that the adjustment needs to be more than €7.5 billion over the four-year plan?
Consider, we have known for some time that the deficit is c.€19 billion (not including the banks), although it now seems that it might come closer to €20 billion. In July, the IMF's most recent report on Ireland suggests that the structural deficit is eight and a half per cent of GDP (i.e. the bit that won't go away when the economy recovers, welfare payment decrease, tax increases, etc.); which is €13.6 billion (8.5% of 2010's estimated GDP of c.€160 billion). So, it should have been obvious to them for some time that the four-year plan will have to make adjustments of c. €12-14 billion to meet the target of 3 per cent of GDP by 2014.
Note, I'm assuming that the economy will not have moved to the height of another economic cycle, so we would need to clear the entire structural deficit by 2014, assuming that at least €5 billion of a cyclical deficit remains, which will diminish with further economic growth. (€5 billion in today's money is the 3 per cent of GDP requirement under the Eurozone SGP). Arguably, the target for cutting the structural deficit could be slightly less, if the economy recovers faster and helps closes the gap. Hence, my use of the range €12-14 billion.
If we seek a €12 billion adjustment, Fine Gael's 3:1 ratio equates to €3 billion in taxation and €9 billion in cuts; €14 billion would imply €3.5 billion in tax and €10.5 billion in cuts.
A more moderate approach would be a 1:1 ratio, with an equal balance of tax and spending reductions; for €6-7 billion of each.
Patrick Honahan, before he became Governor of the Central Bank, suggested that Ireland's tax take could increase by 3 per cent of GDP (i.e. €4.8 billion) (e.g. quoted here). And that level of tax increase is just to return us to the same type of low tax economy we had before the boom. Nonetheless, if €4.8 billion was taken as an ideal level of tax increases, that would imply €7.2 billion to €9.2 billion in cuts. That is a ratio of 2:3 or almost 1:2 (depending on whether we adjust by €12 or €14 billion). Hence, Fine Gael, with only €3 or €3.5 billion in taxes, would not even reach the €4.8 billion that Patrick Honahan suggests is a credible target.
And once we have established what levels of tax and spending cuts each party wants in the four-year plan, the next question is timing; that is, should we frontload the adjustment? Or keep a more even pace? Or should be push out the deadline for fiscal adjustment by a few years? Leo Varadker of Fine Gael is on record calling for more adjustment sooner. TASC argues for a slower pace (€3 billion adjustment in 2010) to avoid damaging the economy too much in one year.
Of course, we will have to deal with more than the structural part of the deficit if we don't foster recovery in the economy!
TASC's budget proposals argue that we need to foster economic growth through targetted investment to build up human capital and intellectual capital (education, training, R&D) as well as physical infrastructure (broadband, schools, renewable energy). Speaking at the Kenmare economics conference, Leo Varadker emphasised his disagreement with the TASC proposals and signaled Fine Gael's intention to focus all investment on infrastructure (including broadband and renewable energy, but also forestry and other areas).
It would be nice if every political party could state what ratio they would choose between tax and cuts, as it would be a useful rule-of-thumb for the broad implications of their fiscal policy. Likewise, we'd need to see their timescale and what they would do to foster economic recovery.
More importantly, from TASC's perspective, it will be essential to see how each party's four-year plan would change the distribution of income and level of economic equality in Ireland. Tax change and cuts to public services affect different segments of the society differently. Whatever package of fiscal policy decisions are taken in these four-year plans will shape our society, as well as the economy, for quite some time.
The implications of the 3:1 ratio can be spelled out in more detail once we establish just how much needs to be cut in the four-year plan.
The Opposition finance spokespersons were given access to data by the Department of Finance today. Is it just political theatre, or did the spokepersons really not know that the adjustment needs to be more than €7.5 billion over the four-year plan?
Consider, we have known for some time that the deficit is c.€19 billion (not including the banks), although it now seems that it might come closer to €20 billion. In July, the IMF's most recent report on Ireland suggests that the structural deficit is eight and a half per cent of GDP (i.e. the bit that won't go away when the economy recovers, welfare payment decrease, tax increases, etc.); which is €13.6 billion (8.5% of 2010's estimated GDP of c.€160 billion). So, it should have been obvious to them for some time that the four-year plan will have to make adjustments of c. €12-14 billion to meet the target of 3 per cent of GDP by 2014.
Note, I'm assuming that the economy will not have moved to the height of another economic cycle, so we would need to clear the entire structural deficit by 2014, assuming that at least €5 billion of a cyclical deficit remains, which will diminish with further economic growth. (€5 billion in today's money is the 3 per cent of GDP requirement under the Eurozone SGP). Arguably, the target for cutting the structural deficit could be slightly less, if the economy recovers faster and helps closes the gap. Hence, my use of the range €12-14 billion.
If we seek a €12 billion adjustment, Fine Gael's 3:1 ratio equates to €3 billion in taxation and €9 billion in cuts; €14 billion would imply €3.5 billion in tax and €10.5 billion in cuts.
A more moderate approach would be a 1:1 ratio, with an equal balance of tax and spending reductions; for €6-7 billion of each.
Patrick Honahan, before he became Governor of the Central Bank, suggested that Ireland's tax take could increase by 3 per cent of GDP (i.e. €4.8 billion) (e.g. quoted here). And that level of tax increase is just to return us to the same type of low tax economy we had before the boom. Nonetheless, if €4.8 billion was taken as an ideal level of tax increases, that would imply €7.2 billion to €9.2 billion in cuts. That is a ratio of 2:3 or almost 1:2 (depending on whether we adjust by €12 or €14 billion). Hence, Fine Gael, with only €3 or €3.5 billion in taxes, would not even reach the €4.8 billion that Patrick Honahan suggests is a credible target.
And once we have established what levels of tax and spending cuts each party wants in the four-year plan, the next question is timing; that is, should we frontload the adjustment? Or keep a more even pace? Or should be push out the deadline for fiscal adjustment by a few years? Leo Varadker of Fine Gael is on record calling for more adjustment sooner. TASC argues for a slower pace (€3 billion adjustment in 2010) to avoid damaging the economy too much in one year.
Of course, we will have to deal with more than the structural part of the deficit if we don't foster recovery in the economy!
TASC's budget proposals argue that we need to foster economic growth through targetted investment to build up human capital and intellectual capital (education, training, R&D) as well as physical infrastructure (broadband, schools, renewable energy). Speaking at the Kenmare economics conference, Leo Varadker emphasised his disagreement with the TASC proposals and signaled Fine Gael's intention to focus all investment on infrastructure (including broadband and renewable energy, but also forestry and other areas).
It would be nice if every political party could state what ratio they would choose between tax and cuts, as it would be a useful rule-of-thumb for the broad implications of their fiscal policy. Likewise, we'd need to see their timescale and what they would do to foster economic recovery.
More importantly, from TASC's perspective, it will be essential to see how each party's four-year plan would change the distribution of income and level of economic equality in Ireland. Tax change and cuts to public services affect different segments of the society differently. Whatever package of fiscal policy decisions are taken in these four-year plans will shape our society, as well as the economy, for quite some time.
Monday, 20 September 2010
Debating on the Titanic
Michael Taft: The confusion between fiscal contraction (i.e. public spending cuts) and reducing the fiscal deficit continues apace. On Morning Ireland, Caoimhghín Ó Caoláin, Sinn Féin’s Dáil leader was being interviewed on the budgetary options facing the Government. The very first question began like this:
RTE: ‘We know the Government is going to cut the deficit this year by around €3 billion ... some doubt about whether it will be a little more than that . . . ‘
This encapsulates all that is wrong with the debate over fiscal policy. For the Government is not seeking to reduce borrowing or the fiscal deficit by this amount or anything like it.
Leaving aside the impact of bank bail-outs – which should be treated as an ‘extra-ordinary’ (with special emphasis on ‘extra-ordinary’) – the Government estimates that net borrowing of central government will be:
2009: - €16,857 million
2010: - €17,346 million
2011: - €16,831 million
At best, if the Government hits its budgetary targets, central government borrowing will fall by €515 million – not €3 billion.
When we turn to the General Government Deficit (the instrument used to measure Maastricht compliance) we find the deficit falling from -€18,720 million to -€17,030. This is a fall of nearly €1.7 billion. Why the discrepancy then with the above figures? And doesn’t this show the Government is at least making some progress? Answer to the second question – no. Let’s answer the first.
The discrepancy is due to the treatment of the deficit in the Social Insurance Fund. In 2010, the Government expects the Fund to be in deficit by nearly €1.2 billion. This is factored into the General Government Deficit. In 2011, the Government expects the Fund to be in surplus again – largely because those on Jobseekers’ Benefit will have exhausted their benefit (they receive it for only nine months).
When we remove the Fund deficit, we find the difference to be approximately €500 million – the same as the Central Government borrowing.
Let’s cut to the chase: if cutting public spending resulted in an equivalent cut in the fiscal deficit we wouldn’t be having a public finance crisis. The Government has already cut nearly €9 billion from public spending. They intend to cut €2 billion plus in the next budget. If all these cuts equalled cuts in fiscal deficit, we wouldn’t be having these discussions about public finances – we’d be in clover.
The ESRI has already assessed the Government’s fiscal strategy and found it incapable of either repairing public finances (at least in this decade) or preventing the debt from spiralling out of control.
Debating a future of public spending cuts is like holding a debate on the decks of the Titanic. Equating public spending cuts with cuts in the fiscal deficit will do nothing to change the course of the ship or melt the iceberg waiting for us. There is only one option – change the captain and, for goodness sake, turn the wheel.
RTE: ‘We know the Government is going to cut the deficit this year by around €3 billion ... some doubt about whether it will be a little more than that . . . ‘
This encapsulates all that is wrong with the debate over fiscal policy. For the Government is not seeking to reduce borrowing or the fiscal deficit by this amount or anything like it.
Leaving aside the impact of bank bail-outs – which should be treated as an ‘extra-ordinary’ (with special emphasis on ‘extra-ordinary’) – the Government estimates that net borrowing of central government will be:
2009: - €16,857 million
2010: - €17,346 million
2011: - €16,831 million
At best, if the Government hits its budgetary targets, central government borrowing will fall by €515 million – not €3 billion.
When we turn to the General Government Deficit (the instrument used to measure Maastricht compliance) we find the deficit falling from -€18,720 million to -€17,030. This is a fall of nearly €1.7 billion. Why the discrepancy then with the above figures? And doesn’t this show the Government is at least making some progress? Answer to the second question – no. Let’s answer the first.
The discrepancy is due to the treatment of the deficit in the Social Insurance Fund. In 2010, the Government expects the Fund to be in deficit by nearly €1.2 billion. This is factored into the General Government Deficit. In 2011, the Government expects the Fund to be in surplus again – largely because those on Jobseekers’ Benefit will have exhausted their benefit (they receive it for only nine months).
When we remove the Fund deficit, we find the difference to be approximately €500 million – the same as the Central Government borrowing.
Let’s cut to the chase: if cutting public spending resulted in an equivalent cut in the fiscal deficit we wouldn’t be having a public finance crisis. The Government has already cut nearly €9 billion from public spending. They intend to cut €2 billion plus in the next budget. If all these cuts equalled cuts in fiscal deficit, we wouldn’t be having these discussions about public finances – we’d be in clover.
The ESRI has already assessed the Government’s fiscal strategy and found it incapable of either repairing public finances (at least in this decade) or preventing the debt from spiralling out of control.
Debating a future of public spending cuts is like holding a debate on the decks of the Titanic. Equating public spending cuts with cuts in the fiscal deficit will do nothing to change the course of the ship or melt the iceberg waiting for us. There is only one option – change the captain and, for goodness sake, turn the wheel.
Tuesday, 15 June 2010
Krugman & lying eyes
Michael Burke: Paul Krugman, writing in the New York Times, asks whether fiscal austerity measures actually reassure the financial markets. This question is of course extremely pertinent to this economy. Not only has the FF-led government led the way in slash&burn economics in Europe, but this has become a defining totem of its economic policy - that the cuts are necessary to reassure financial markets.
Government policy was recently commended by the Wall Street Journal, and duly got a widespread airing. Krugman's analysis is very different and by implication much more critical of policy. I'm guessing his piece will get much less of an airing on the radio shows and might not be reproduced by the Irish Times. Just a hunch.
But who is right, the WSJ, or the NYT's Nobel-winning economist? The only way to judge is in their treatment of facts. Specifically, both articles refer to the reaction in the bond market to Dublin's economic policy, and the contrast with that of Madrid. Krugman points out that Irish 10yr bond yields are higher than Spanish ones, despite the fact that the latter had to be recently strong-armed into fiscal austerity and there has been a public backlash against the measures. He also points that Irish Credit Default Swap rates are higher than Spanish ones. Although these are less reliable guides than bond yields, because they are smaller, more illiquid markets, they do indicate that more speculators are betting on an Irish default than on a Spanish one. Helpfully, Krugman provides links to Bloomberg charts, so the facts at least cannot be contested. In neither case can it be argued that the fiscal austerity here has provided greater reassurance to the markets.
But what of the Murdoch-owned WSJ? It certainly uses lots of facts to support its argument that policy here is correct, and should be emulated. But how it uses those facts is less than rigorous.
To take the key area of disputed ground, bond yields, this is what the WSJ says in its opening paragraph, "SPANISH TWO-year government bond yields climbed five basis points to 2.47 per cent on Monday morning, after Fitch last week cut Spain’s triple-A credit rating to double-A-plus. Ireland, on the other hand, has been making do with its diminished Fitch rating of double A-minus since November. And yet yesterday morning the yield on its two-year government bond was at 1.77 per cent, down seven basis points from the day before, though its 10-year yields remain elevated." The full piece can be read here.
It is perfectly true that Spanish 2-year government yields are higher than Irish ones. But the WSJ article glossed over the fact that Spanish 10-year yields are significantly lower as they have been throughout the crisis. This is shown in the chart below.
Yields
10-year yields are the accepted benchmark for government debt, as prudent government borrowers attempt to lengthen the maturity of its debt precisely to avoid being hurt by wild short-term swings in market sentiment. Less than 20% of government debt is held at short-term maturities like 2 years, the bulk held at much longer maturities. So, while the WSJ treated us to a daily commentary on Irish 2yr yield movements, it passed over a key fact; that Irish long-term yields are higher than Spain's where it counts, which is where most of the borrowing is done. The grudging admission was that Irish 10yr yields 'remain elevated'.
All the crisis-hit countries in Western Europe, Greece, Spain, Portugal and Italy are suffering a fate that has already befallen Eastern Europe. International bodies such as the ECB, European Commission, IMF, etc. insist on austerity policies to reassure financial markets. Sometimes local governments are happy to oblige, others need arm-twisting. But the austerity doesn't reassure financial markets, so more of the same is demanded, and yields rise because bond investors think that the risk of default is rising, as Krugman points out.
Within that general trend, there seem to be favoured countries and not so favoured ones. These are the ones under attack and whose 2year yields are pushed higher as governments find it hard to access short-term funds. But it seems to have little to do with deficits- Italy's deficit is expected to be 5.3% of GDP this year the same as Belgium's, compared to 8% for France and 11.7% for Ireland. And it seems to have precious little to do with debt levels either, with Spain's debt at 64.9% of GDP this year, compared to 77.3% for Ireland, 78.8% for Germany, 83.6% for France, and 99% for Belgium. It does have a lot to do with the scale and foreign assets of each country's banking system, but that's another story http://socialisteconomicbulletin.blogspot.com/2010/06/parasite-threatens-host-impact-of.html .
Irish 10yr yields were the highest in the EU for most of 2009, as austerity was being implemented, in contrast to the rest of the Euro Area, where various types of stimulus measures were attempted. The reassurance that bond investors need is that you can meet interest payments and repay debt as it falls due. For governments that can only come from tax revenues.
Krugman ends with a question, should you believe what everyone knows, or your own lying eyes?
Government policy was recently commended by the Wall Street Journal, and duly got a widespread airing. Krugman's analysis is very different and by implication much more critical of policy. I'm guessing his piece will get much less of an airing on the radio shows and might not be reproduced by the Irish Times. Just a hunch.
But who is right, the WSJ, or the NYT's Nobel-winning economist? The only way to judge is in their treatment of facts. Specifically, both articles refer to the reaction in the bond market to Dublin's economic policy, and the contrast with that of Madrid. Krugman points out that Irish 10yr bond yields are higher than Spanish ones, despite the fact that the latter had to be recently strong-armed into fiscal austerity and there has been a public backlash against the measures. He also points that Irish Credit Default Swap rates are higher than Spanish ones. Although these are less reliable guides than bond yields, because they are smaller, more illiquid markets, they do indicate that more speculators are betting on an Irish default than on a Spanish one. Helpfully, Krugman provides links to Bloomberg charts, so the facts at least cannot be contested. In neither case can it be argued that the fiscal austerity here has provided greater reassurance to the markets.
But what of the Murdoch-owned WSJ? It certainly uses lots of facts to support its argument that policy here is correct, and should be emulated. But how it uses those facts is less than rigorous.
To take the key area of disputed ground, bond yields, this is what the WSJ says in its opening paragraph, "SPANISH TWO-year government bond yields climbed five basis points to 2.47 per cent on Monday morning, after Fitch last week cut Spain’s triple-A credit rating to double-A-plus. Ireland, on the other hand, has been making do with its diminished Fitch rating of double A-minus since November. And yet yesterday morning the yield on its two-year government bond was at 1.77 per cent, down seven basis points from the day before, though its 10-year yields remain elevated." The full piece can be read here.
It is perfectly true that Spanish 2-year government yields are higher than Irish ones. But the WSJ article glossed over the fact that Spanish 10-year yields are significantly lower as they have been throughout the crisis. This is shown in the chart below.
Yields
10-year yields are the accepted benchmark for government debt, as prudent government borrowers attempt to lengthen the maturity of its debt precisely to avoid being hurt by wild short-term swings in market sentiment. Less than 20% of government debt is held at short-term maturities like 2 years, the bulk held at much longer maturities. So, while the WSJ treated us to a daily commentary on Irish 2yr yield movements, it passed over a key fact; that Irish long-term yields are higher than Spain's where it counts, which is where most of the borrowing is done. The grudging admission was that Irish 10yr yields 'remain elevated'.
All the crisis-hit countries in Western Europe, Greece, Spain, Portugal and Italy are suffering a fate that has already befallen Eastern Europe. International bodies such as the ECB, European Commission, IMF, etc. insist on austerity policies to reassure financial markets. Sometimes local governments are happy to oblige, others need arm-twisting. But the austerity doesn't reassure financial markets, so more of the same is demanded, and yields rise because bond investors think that the risk of default is rising, as Krugman points out.
Within that general trend, there seem to be favoured countries and not so favoured ones. These are the ones under attack and whose 2year yields are pushed higher as governments find it hard to access short-term funds. But it seems to have little to do with deficits- Italy's deficit is expected to be 5.3% of GDP this year the same as Belgium's, compared to 8% for France and 11.7% for Ireland. And it seems to have precious little to do with debt levels either, with Spain's debt at 64.9% of GDP this year, compared to 77.3% for Ireland, 78.8% for Germany, 83.6% for France, and 99% for Belgium. It does have a lot to do with the scale and foreign assets of each country's banking system, but that's another story http://socialisteconomicbulletin.blogspot.com/2010/06/parasite-threatens-host-impact-of.html .
Irish 10yr yields were the highest in the EU for most of 2009, as austerity was being implemented, in contrast to the rest of the Euro Area, where various types of stimulus measures were attempted. The reassurance that bond investors need is that you can meet interest payments and repay debt as it falls due. For governments that can only come from tax revenues.
Krugman ends with a question, should you believe what everyone knows, or your own lying eyes?
Wednesday, 19 May 2010
Pain, but no gain
Michael Burke: In a recent piece in The Guardian, Dean Baker argues that politicians are ignoring Keynes "at their peril".
Arguing that it would be reasonable if deficit-reduction easures produced positive results, but they do not, Baker says, this is a case of "pain, but no gain."
"Ostensibly, there will be a lower interest-rate burden in future years, but even this is questionable. First, the contractionary policy being pursued by the deficit hawks will slow growth and lead to lower inflation or possibly even deflation. It is entirely possible that the debt-to-GDP ratio may actually end up higher by following their policies than by pursuing more expansionary policy."
This is exactly what has happened. The Fianna Fail-led government has had a fiscal contraction totalling 8.9% of GDP (€14.6bn in fiscal tightening compared to 2009 GDP of €163.5bn).
This is the profile of Ireland's general government borrowing as a proportion of GDP, according to the EU Commission's data and forecasts (click to enlarge). Those for the Euro Area are shown alongside (Euro Area Report, Spring 2010, Table 37)
By contrast, the Euro Area had an average fiscal stimulus of 4.4% of GDP, according to the EU Commission, European Economic Forecast, Autumn 2009, although since that was written both Germany and France announced further significant stimulus at end-2009, pushing the average over 6%.
If we take 2009 as the major year of fiscal stimulus in the Euro Area and of fiscal contraction by the Dublin government, then we have a startling conclusion. It seems that the EU average GGB deficit is barely more than the fiscal stimulus itself, at approximately 6% of GDP. Yet at the same time government policy has saved Irish taxpayers from a far worse fate. If it hadn't been for 'tough decisisons to reassure the markets', by taking 8.9% out of the economy, the deficit would be 21% of GDP in 2011 (8.9% + 12.1%, not including Anglo).
Advocates of fiscal stimulus are accused of believing in the tooth fairy. But this is a tale out of the Brothers Grimm.
The advocates of slash&burn can neither explain the semi-magical way in which the Euro Area's deficit is no greater than the stimulus measures, and is now falling. And they invite us to believe in a horror story, where a gargantuan deficit, unique to Ireland has been averted, leaving just a monstrously-sized one in its stead, which is forecast to rise again in 2011.
But there is another explanation, one which would incorporate the hugely divergent trends in Euro Area government finances. It can be summarised as follows: Stimulus works. Slash-and-burn doesn't.
Arguing that it would be reasonable if deficit-reduction easures produced positive results, but they do not, Baker says, this is a case of "pain, but no gain."
"Ostensibly, there will be a lower interest-rate burden in future years, but even this is questionable. First, the contractionary policy being pursued by the deficit hawks will slow growth and lead to lower inflation or possibly even deflation. It is entirely possible that the debt-to-GDP ratio may actually end up higher by following their policies than by pursuing more expansionary policy."
This is exactly what has happened. The Fianna Fail-led government has had a fiscal contraction totalling 8.9% of GDP (€14.6bn in fiscal tightening compared to 2009 GDP of €163.5bn).
This is the profile of Ireland's general government borrowing as a proportion of GDP, according to the EU Commission's data and forecasts (click to enlarge). Those for the Euro Area are shown alongside (Euro Area Report, Spring 2010, Table 37)
If we take 2009 as the major year of fiscal stimulus in the Euro Area and of fiscal contraction by the Dublin government, then we have a startling conclusion. It seems that the EU average GGB deficit is barely more than the fiscal stimulus itself, at approximately 6% of GDP. Yet at the same time government policy has saved Irish taxpayers from a far worse fate. If it hadn't been for 'tough decisisons to reassure the markets', by taking 8.9% out of the economy, the deficit would be 21% of GDP in 2011 (8.9% + 12.1%, not including Anglo).
Advocates of fiscal stimulus are accused of believing in the tooth fairy. But this is a tale out of the Brothers Grimm.
The advocates of slash&burn can neither explain the semi-magical way in which the Euro Area's deficit is no greater than the stimulus measures, and is now falling. And they invite us to believe in a horror story, where a gargantuan deficit, unique to Ireland has been averted, leaving just a monstrously-sized one in its stead, which is forecast to rise again in 2011.
But there is another explanation, one which would incorporate the hugely divergent trends in Euro Area government finances. It can be summarised as follows: Stimulus works. Slash-and-burn doesn't.
Friday, 14 May 2010
Do cuts work?
Michael Burke: The Irish economy is in a Depression. Real GDP has fallen by 9.9% from its peak and real GNP by 13.8%. Even these terrifying data are flattered by the onset of deflation. Nominal GDP has fallen by 13.8% and nominal GNP by 18.5%.
The Government’s stated aim is to repair the public finances. Yet the crisis in government finances is a symptom of that economic slump, not its cause. The Government and its supporters argue that their actions have forestalled an even greater crisis- that revenues would have fallen further without tax increases and that expenditures would have climbed even higher without spending cuts. The argument for fiscal austerity stands or falls on this proposition.
This argument has been forcefully deployed. But it is false.
This can be shown by comparing the fiscal measures with the outturn in both government finances and the economy. Table 1. below sets out measures taken by the government in the name of restoring government finances and reassuring the financial markets. The December 2009 Budget measures, which will impact in 2010 and beyond, are not included. Those amounted to another €4bn in expenditure cuts.
Table 1. Budget Measures, 2008-2009
The total tax increase amounted to €5.944bn and the total cuts in expenditure amounted to €4.614bn, for a total of €10.558bn, equivalent then to 6.44% of GDP. It is argued that these measures prevented a further deterioration in government finances.
But this assertion has no merit. If it were true, then without the fiscal measures taxes would now be €5.944bn lower than currently and spending €4.614bn higher. Table 2. below sets out the actual change in both tax revenues and votes spending and adds these to Budgetary contraction measures, both spending and taxation, ie takes the government assertion at face value.
Note: all in nominal terms, for consistency with both the reality and accounting of government finances.
Table 2. Wishful Thinking on Slash&Burn- The Government Case for Cuts
Source: calculated from DoF, CSO data
We therefore arrive at the ludicrous situation where the Government and its supporters argue that they have saved Government finances from a far worse fate- one in which Government activity accounts for 107% of GDP. Even if the supposed effectiveness of fiscal austerity fell by 18%, it would still leave the State finances accounting for 100% of the change in GDP during the recession. Or if we apply the government’s preferred measure of GNP, the State finances are still equivalent to 94% of the change in GNP. This is not a serious proposition. It is a level of State dominance of the economy not reached even in the Democratic People’s Republic of Korea.
Instead, in national accounts government expenditure is a component of GDP and a part of investment (Gross Fixed Capital Formation). Cutting either depresses economic activity both directly and indirectly, as other sectors adjust to the lower level of final demand.
The alternative view, that government spending cuts can ‘crowd in’ private sector expenditure to replace it, has demonstrably failed to materialise. Since fiscal tightening began in late 2008 every component of GDP has declined, household consumption, government spending, exports and inventories have declined by. Declining investment remains the driving force behind the recession, with gross fixed capital formation falling by a further €10.4bn over that period. All sectors of private activity have fallen at much faster rate than the decline in public spending. They have not been ‘crowded in’.
Government finances are in crisis because of the collapse in tax revenues, based on the slump in private sector activity. Only the restoration of growth will restore those taxes, along with a balanced tax regime. Current policy is not working.
The Government’s stated aim is to repair the public finances. Yet the crisis in government finances is a symptom of that economic slump, not its cause. The Government and its supporters argue that their actions have forestalled an even greater crisis- that revenues would have fallen further without tax increases and that expenditures would have climbed even higher without spending cuts. The argument for fiscal austerity stands or falls on this proposition.
This argument has been forcefully deployed. But it is false.
This can be shown by comparing the fiscal measures with the outturn in both government finances and the economy. Table 1. below sets out measures taken by the government in the name of restoring government finances and reassuring the financial markets. The December 2009 Budget measures, which will impact in 2010 and beyond, are not included. Those amounted to another €4bn in expenditure cuts.
Table 1. Budget Measures, 2008-2009
The total tax increase amounted to €5.944bn and the total cuts in expenditure amounted to €4.614bn, for a total of €10.558bn, equivalent then to 6.44% of GDP. It is argued that these measures prevented a further deterioration in government finances.
But this assertion has no merit. If it were true, then without the fiscal measures taxes would now be €5.944bn lower than currently and spending €4.614bn higher. Table 2. below sets out the actual change in both tax revenues and votes spending and adds these to Budgetary contraction measures, both spending and taxation, ie takes the government assertion at face value.
Note: all in nominal terms, for consistency with both the reality and accounting of government finances.
Table 2. Wishful Thinking on Slash&Burn- The Government Case for Cuts
Source: calculated from DoF, CSO data
We therefore arrive at the ludicrous situation where the Government and its supporters argue that they have saved Government finances from a far worse fate- one in which Government activity accounts for 107% of GDP. Even if the supposed effectiveness of fiscal austerity fell by 18%, it would still leave the State finances accounting for 100% of the change in GDP during the recession. Or if we apply the government’s preferred measure of GNP, the State finances are still equivalent to 94% of the change in GNP. This is not a serious proposition. It is a level of State dominance of the economy not reached even in the Democratic People’s Republic of Korea.
Instead, in national accounts government expenditure is a component of GDP and a part of investment (Gross Fixed Capital Formation). Cutting either depresses economic activity both directly and indirectly, as other sectors adjust to the lower level of final demand.
The alternative view, that government spending cuts can ‘crowd in’ private sector expenditure to replace it, has demonstrably failed to materialise. Since fiscal tightening began in late 2008 every component of GDP has declined, household consumption, government spending, exports and inventories have declined by. Declining investment remains the driving force behind the recession, with gross fixed capital formation falling by a further €10.4bn over that period. All sectors of private activity have fallen at much faster rate than the decline in public spending. They have not been ‘crowded in’.
Government finances are in crisis because of the collapse in tax revenues, based on the slump in private sector activity. Only the restoration of growth will restore those taxes, along with a balanced tax regime. Current policy is not working.
Tuesday, 9 February 2010
A disastrous approach to disaster capitalism
Colm O'Doherty: The captivation of our Fianna Fail-led government by the Milton Friedman /Chicago School policy trinity of privatization, government deregulation and reduced social spending is critically harming our well-being. Our economic crisis has allowed free marketeers to instigate orchestrated raids on the public sphere. The crisis opportunism of disaster capitalism is activated through networks of rule which underpin the governance strategies facilitating our so- called recovery. Economic ideology masquerading as technical and uncontentious adjustments has been engaged to finesse this asymmetrical relationship between power and rationality - power produces rationality and rationality produces power, but power has the upper hand in the dynamic and overlapping relationship between the two.
The hallmark of disaster capitalism - economic shock treatment - is manifested through coercive policies which decouple individual well-being from social well-being, and privilege private gain over common good. The atmosphere of crisis generated by the failed policies of successive Fianna Fail-led administrations has paved the way for an economic settlement which overrules the expressed wishes of citizens and has handed the country over to economic technocrats. As Naomi Klein puts it in the Shock Doctrine (2007,140,) “If an economic crisis hits and is severe enough – a currency meltdown , a market crash, a major recession –it blows everything else out of the water , and leaders are liberated to do whatever is necessary (or said to be necessary) in the name of responding to a national emergency”.
Thus, our recession has provided those economic zealots in thrall to the fundamentalist doctrine (Capitalism and Freedom ,1962) of Milton Friedman with an opportunity to reduce all regulatory obstacles to profitmaking , sell off all public assets , cut back funding of social programmes and keep taxes low. The dominance of this ideological vision is strongly reflected in the competiveness, securitisation and flexibility discourses filling the airwaves.
Fianna Fail and their coalition partners have articulated these political rationalities in a populist idiom - the idiom of frontier politics. Here, politics finds expression through economic sequestration of social citizenship. Abolition of social rights is viewed as a pragmatic “structural adjustment”, and the task of politicians is to follow the money from crisis to crisis. Opposition to frontier politics within the political system is finite, as Fine Gael is also in thrall to economic fundamentalism and Labour lack political muscle. Civil society is the only real opposition, and civil society in Ireland has been shaped and nurtured by the very politicians it now has to challenge and oppose. The capacity of civil society to act as a counterweight to the economic shock therapy now being administered has been undermined by the cut backs and closures imposed on community development/family support projects, and by the tightening of revenue streams for voluntary service providers.
The trade unions are the only remaining force in civil society capable of challenging the Government’s disaster capitalism doctrine, as the Catholic Church’s power has been compromised. However, the trade unions are now engaged in a form of action which is focused on some of the symptoms of our political malaise rather than its root cause. Industrial action which, in the main, impacts on fellow citizens will further weaken civil society and plays into the hands of the Government. What is needed here is a co-ordinated, strategic political campaign organized and directed by the trade union movement targeting Fianna Fail and their coalition partners. Solving our political crisis by confronting a Government who are bent on protecting the wealthy by impoverishing large sections of the population should, logically, be the first step in reforming our ailing economy.
The hallmark of disaster capitalism - economic shock treatment - is manifested through coercive policies which decouple individual well-being from social well-being, and privilege private gain over common good. The atmosphere of crisis generated by the failed policies of successive Fianna Fail-led administrations has paved the way for an economic settlement which overrules the expressed wishes of citizens and has handed the country over to economic technocrats. As Naomi Klein puts it in the Shock Doctrine (2007,140,) “If an economic crisis hits and is severe enough – a currency meltdown , a market crash, a major recession –it blows everything else out of the water , and leaders are liberated to do whatever is necessary (or said to be necessary) in the name of responding to a national emergency”.
Thus, our recession has provided those economic zealots in thrall to the fundamentalist doctrine (Capitalism and Freedom ,1962) of Milton Friedman with an opportunity to reduce all regulatory obstacles to profitmaking , sell off all public assets , cut back funding of social programmes and keep taxes low. The dominance of this ideological vision is strongly reflected in the competiveness, securitisation and flexibility discourses filling the airwaves.
Fianna Fail and their coalition partners have articulated these political rationalities in a populist idiom - the idiom of frontier politics. Here, politics finds expression through economic sequestration of social citizenship. Abolition of social rights is viewed as a pragmatic “structural adjustment”, and the task of politicians is to follow the money from crisis to crisis. Opposition to frontier politics within the political system is finite, as Fine Gael is also in thrall to economic fundamentalism and Labour lack political muscle. Civil society is the only real opposition, and civil society in Ireland has been shaped and nurtured by the very politicians it now has to challenge and oppose. The capacity of civil society to act as a counterweight to the economic shock therapy now being administered has been undermined by the cut backs and closures imposed on community development/family support projects, and by the tightening of revenue streams for voluntary service providers.
The trade unions are the only remaining force in civil society capable of challenging the Government’s disaster capitalism doctrine, as the Catholic Church’s power has been compromised. However, the trade unions are now engaged in a form of action which is focused on some of the symptoms of our political malaise rather than its root cause. Industrial action which, in the main, impacts on fellow citizens will further weaken civil society and plays into the hands of the Government. What is needed here is a co-ordinated, strategic political campaign organized and directed by the trade union movement targeting Fianna Fail and their coalition partners. Solving our political crisis by confronting a Government who are bent on protecting the wealthy by impoverishing large sections of the population should, logically, be the first step in reforming our ailing economy.
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.
Monday, 5 October 2009
Investing in drug services may save the state more in the long-term
Nat O'Connor: Merchants Quay Ireland have highlighted a growing trend of heroin use across Ireland. If this is true, it is something to be taken seriously. An increase in drug misuse is one of the predictable, ugly sides of economic recession and, besides the incalculable human cost, there is a risk here of a downward spiral of long-term costs to the exchequer if this is not handled well by the state.
In the context of public sector cuts, it is likely that drug treatment services (like everything else) will be cut. And no, this is not just another argument to 'protect' a sector from cuts; it simply means that there is a need for the relevant Departments to be very strategic about what they cut and what services they bolster.
For example, at present, many people have to travel to Dublin to avail of drug treatment services. Travel and accommodation increase the cost of the providing these services. Some localisation of services might actually save money. Also, people have a better chance of responding well to treatment where they have a network of social supports. Likewise, early access to detox, rehab and step-down facilities can help tackle addiction at the outset.
British research, cited by MQI, shows that for every £1 spent on drug treatment, at least £3 is saved in terms of social, health and criminal justice related costs. So, there is value for money in continuing to target public spending on drug treatment services, as the state has little control over expenses if someone goes to court or to hospital. (Conversely, 'savings' from cuts may be a false economy, if they result in higher costs in later years).
In the budgetary context, this is an example where one department can save (or cost) another department money. It would be worth the Department of Finance taking more of a holistic approach, and perhaps considering more flexibility about transfers from one Budget Vote to another in order to target resources where they will provide the best impact. In this particular case, if it will save money, funds could be moved from health and justice to pay for drug treatment (and we are talking about expenditure on the same cohort of people). We hear a lot of talk about public service reform. A mechanism for this kind of holistic view, with more flexibility about vote transfers, would be a concrete way of generating efficiencies.
Even when the economy recovers, we may have years of 'jobless growth'. That means years of high unemployment - which is correlated with a higher number of people falling into drug misuse. We already have a problem of over-crowded prisons and waiting lists for hospital beds. Failing to address growing drug misuse now will only result in further pressure in other areas of public spending for years to come.
In the context of public sector cuts, it is likely that drug treatment services (like everything else) will be cut. And no, this is not just another argument to 'protect' a sector from cuts; it simply means that there is a need for the relevant Departments to be very strategic about what they cut and what services they bolster.
For example, at present, many people have to travel to Dublin to avail of drug treatment services. Travel and accommodation increase the cost of the providing these services. Some localisation of services might actually save money. Also, people have a better chance of responding well to treatment where they have a network of social supports. Likewise, early access to detox, rehab and step-down facilities can help tackle addiction at the outset.
British research, cited by MQI, shows that for every £1 spent on drug treatment, at least £3 is saved in terms of social, health and criminal justice related costs. So, there is value for money in continuing to target public spending on drug treatment services, as the state has little control over expenses if someone goes to court or to hospital. (Conversely, 'savings' from cuts may be a false economy, if they result in higher costs in later years).
In the budgetary context, this is an example where one department can save (or cost) another department money. It would be worth the Department of Finance taking more of a holistic approach, and perhaps considering more flexibility about transfers from one Budget Vote to another in order to target resources where they will provide the best impact. In this particular case, if it will save money, funds could be moved from health and justice to pay for drug treatment (and we are talking about expenditure on the same cohort of people). We hear a lot of talk about public service reform. A mechanism for this kind of holistic view, with more flexibility about vote transfers, would be a concrete way of generating efficiencies.
Even when the economy recovers, we may have years of 'jobless growth'. That means years of high unemployment - which is correlated with a higher number of people falling into drug misuse. We already have a problem of over-crowded prisons and waiting lists for hospital beds. Failing to address growing drug misuse now will only result in further pressure in other areas of public spending for years to come.
Thursday, 1 October 2009
Marching for the economy
Michael Taft: Imagine you’re walking a high-wire. You’re nearly at the end of line. You’re doing everything possible not to fall – balancing with your arms, moving snail-like, praying; the last thing you need is for some messer to start shaking the wire.
That’s exactly what the Government is preparing to do as it mulls over its €4 billion worth of cuts in the upcoming budget - shaking the wire.
With ICTU’s launch of a campaign to stop the cuts, commentators will be queuing up to have a go at trade unionists – particularly public sector workers. You can write the script now – ‘privileged’, ‘sheltered’, ‘bloated’, ‘over-paid’, etc. That workers are engaging in action to protect the quality of public services and the living standards of the poorest is no matter; they are ‘not in touch with reality’ as Colm McCarthy might say (actually, he did).
Yes, there is the issue of protecting public services – which rank well below the EU-15 norm; and there’s the issue of protecting living standards – another vital issue given that the McCarthy Report wants to cut nearly €2 billion in transfers to low and average income earners. And, yes, many public sector workers will protest over wage cuts – but after social welfare cuts, levy increases, and the pension levy, this is reasonable.
But there’s another reason why trade unionists should be marching – to prevent the Government from shaking the economic wire and causing more people to fall off.
It appears that the recession will end (at least in a statistical sense on a quarterly basis) anytime between the 1st and 3rd quarter of next year. If these cuts are implemented, the end of the recession will be postponed, national output will fall further than it would have otherwise, more people will be on the dole, more enterprises will go the wall – with only a minimal benefit in the fiscal deficit.
If the trade unions really engage the fight, they will be doing so, not on behalf of a sectional interest, but on behalf of the nation’s economic interest.
Let’s turn to the ESRI’s multiplier simulations. They modelled three public expenditure measures – cutting public sector wages, cutting 17,000 public sector jobs and cutting public investment. Each of these would reduce current expenditure by €1 billion each, or €3 billion combined. What would be the effect?
• GDP would fall by a further 1.2 percent, or €2 billion
• Unemployment would rise by nearly 29,000 – just as the recent Live Register figures showed almost no growth in seasonal terms.
And the reduction in the borrowing requirement? Less than €1.9 billion. Not €3 billion – that’s only the reduction in Government expenditure. When account is taken of the impact those cuts will have (on output, consumption, employment, etc.), the net gain is seriously eroded. At the end of the day, the annual deficit would fall by 0.9 percentage points. So, we have
• Knocked off another €2 billion of our GDP, thus postponing the end of the recession and making it harder to generate the growth needed to absorb high borrowing costs in the future
• Thrown nearly 29,000 on to the dole queues, ensuring higher social welfare expenditure going forward
• Degraded public services further just at the point demand is growing
• Cut people’s living standards and consumer spending
• Reduced investment in an infrastructure that is one of the worst in the industrialised world (the Global Competitiveness Index ranks Irish infrastructure 65th out of 133 countries)
All this, to reduce borrowing by less than 1 percent of GDP? If that sounds irrational it’s because it is. And that’s why hardly any other government in the industrialised world is pursing this absurd course.
There are alternatives. For instance, using the ESRI’s simulations we find that €3 billion in tax increases (increasing income tax along with introducing a property and carbon tax) would:
• Reduce borrowing by €2.5 billion (or €600 million more than public expenditure cuts)
• Reduce the GDP by €800 million (compared to €2 billion under spending cuts)
• Increase unemployment by 6,600 (22,000 less than under a cuts strategy)
The annual deficit would fall further if a tax strategy were used. The end of the recession would not be postponed and everyone would be better off. That is not to endorse the particular tax proposals used by the ESRI. It merely serves as an indicator.
Of course, we could get really creative – less deflationary tax increases on high incomes and wealth, public enterprise infrastructural investment (off the books), necessary social investment with high economic returns (early childhood education), front-loading the drawdown of the €20 billion in the NTMA’s coffers; a whole range of measures to stimulate the economy while at the same time setting the foundations for a fiscal consolidation that can only be effective once the economy has returned to growth.
But, really, the idea that this government, which has pursued deflationary policies from day one, is somehow going to change direction at this stage is pure fantasy. Inertia, not rational economic thinking, is propelling Fianna Fail. We can’t expect them to make things better, but we can try and prevent them from making things worse.
That’s where the trade union campaign enters. It is imperative that it succeeds – that it derails the Government from its determination to push through €4 billion in cuts. It is both an economic and social imperative. And if, in the meantime, the action derails the Government itself – who will complain?
If the trade union movement, in alliance with community and social organisations, and progressive political parties can prevent the Government from prolonging the recession and increasing unemployment– then they will have done the economy enormous benefit.
If the trade union movement and their allies fight – and I mean really fight – then they will be right. And all of us will reap the benefit.
That’s exactly what the Government is preparing to do as it mulls over its €4 billion worth of cuts in the upcoming budget - shaking the wire.
With ICTU’s launch of a campaign to stop the cuts, commentators will be queuing up to have a go at trade unionists – particularly public sector workers. You can write the script now – ‘privileged’, ‘sheltered’, ‘bloated’, ‘over-paid’, etc. That workers are engaging in action to protect the quality of public services and the living standards of the poorest is no matter; they are ‘not in touch with reality’ as Colm McCarthy might say (actually, he did).
Yes, there is the issue of protecting public services – which rank well below the EU-15 norm; and there’s the issue of protecting living standards – another vital issue given that the McCarthy Report wants to cut nearly €2 billion in transfers to low and average income earners. And, yes, many public sector workers will protest over wage cuts – but after social welfare cuts, levy increases, and the pension levy, this is reasonable.
But there’s another reason why trade unionists should be marching – to prevent the Government from shaking the economic wire and causing more people to fall off.
It appears that the recession will end (at least in a statistical sense on a quarterly basis) anytime between the 1st and 3rd quarter of next year. If these cuts are implemented, the end of the recession will be postponed, national output will fall further than it would have otherwise, more people will be on the dole, more enterprises will go the wall – with only a minimal benefit in the fiscal deficit.
If the trade unions really engage the fight, they will be doing so, not on behalf of a sectional interest, but on behalf of the nation’s economic interest.
Let’s turn to the ESRI’s multiplier simulations. They modelled three public expenditure measures – cutting public sector wages, cutting 17,000 public sector jobs and cutting public investment. Each of these would reduce current expenditure by €1 billion each, or €3 billion combined. What would be the effect?
• GDP would fall by a further 1.2 percent, or €2 billion
• Unemployment would rise by nearly 29,000 – just as the recent Live Register figures showed almost no growth in seasonal terms.
And the reduction in the borrowing requirement? Less than €1.9 billion. Not €3 billion – that’s only the reduction in Government expenditure. When account is taken of the impact those cuts will have (on output, consumption, employment, etc.), the net gain is seriously eroded. At the end of the day, the annual deficit would fall by 0.9 percentage points. So, we have
• Knocked off another €2 billion of our GDP, thus postponing the end of the recession and making it harder to generate the growth needed to absorb high borrowing costs in the future
• Thrown nearly 29,000 on to the dole queues, ensuring higher social welfare expenditure going forward
• Degraded public services further just at the point demand is growing
• Cut people’s living standards and consumer spending
• Reduced investment in an infrastructure that is one of the worst in the industrialised world (the Global Competitiveness Index ranks Irish infrastructure 65th out of 133 countries)
All this, to reduce borrowing by less than 1 percent of GDP? If that sounds irrational it’s because it is. And that’s why hardly any other government in the industrialised world is pursing this absurd course.
There are alternatives. For instance, using the ESRI’s simulations we find that €3 billion in tax increases (increasing income tax along with introducing a property and carbon tax) would:
• Reduce borrowing by €2.5 billion (or €600 million more than public expenditure cuts)
• Reduce the GDP by €800 million (compared to €2 billion under spending cuts)
• Increase unemployment by 6,600 (22,000 less than under a cuts strategy)
The annual deficit would fall further if a tax strategy were used. The end of the recession would not be postponed and everyone would be better off. That is not to endorse the particular tax proposals used by the ESRI. It merely serves as an indicator.
Of course, we could get really creative – less deflationary tax increases on high incomes and wealth, public enterprise infrastructural investment (off the books), necessary social investment with high economic returns (early childhood education), front-loading the drawdown of the €20 billion in the NTMA’s coffers; a whole range of measures to stimulate the economy while at the same time setting the foundations for a fiscal consolidation that can only be effective once the economy has returned to growth.
But, really, the idea that this government, which has pursued deflationary policies from day one, is somehow going to change direction at this stage is pure fantasy. Inertia, not rational economic thinking, is propelling Fianna Fail. We can’t expect them to make things better, but we can try and prevent them from making things worse.
That’s where the trade union campaign enters. It is imperative that it succeeds – that it derails the Government from its determination to push through €4 billion in cuts. It is both an economic and social imperative. And if, in the meantime, the action derails the Government itself – who will complain?
If the trade union movement, in alliance with community and social organisations, and progressive political parties can prevent the Government from prolonging the recession and increasing unemployment– then they will have done the economy enormous benefit.
If the trade union movement and their allies fight – and I mean really fight – then they will be right. And all of us will reap the benefit.
Friday, 11 September 2009
'Principle of revenue neutrality' proves Government's lack of vision
Mary Murphy: The average percentage of GDP spent on social protection in the EU-15 is 27.5% (Eurostat, 2007) . The Irish rate of 18.2% compares badly with high spenders France (31.1%) and Sweden (30.7%), with our nearest neighbour the UK at 26.4% but also with countries like Greece (24.2%) and Portugal (25.4%). Ireland, to make any meaningful social or economic progress, should be moving toward a higher percentage of GDP on social protection.
However, the objective of a low tax economy and the principle of revenue neutrality that lie at the heart of the Commission on Taxation can only lead to one place: a low level of social expenditure that limits Irish social development and cohesion. Further, given that revenue has dropped substantially (by over 6 billion euro since 2007) a revenue neutral scenario locks Irish social expenditure into even lower levels than the relatively poor levels of 2007. This post argues that, despite the fact that there are revenue policy choices available to the government that could increase overall revenue for social expenditure, Government has made an explicit policy choice not to avail of these policy options but to instead let those on the lowest incomes bear the brunt of our crisis. This policy choice exposes the vision of this government. Quite simply, there is no social vision.
We grew accustomed to the government mantra that Government policy is to protect the most vulnerable. However, the new mantra is that because social welfare accounts for a third of social expenditure it must contribute one third of savings in public expenditure required in this forthcoming budget (1 billion euro in expenditure cuts). To justify this failure to ‘protect the vulnerable’,the government is selling two myths to the Irish public. The first myth; that the level of Irish welfare is problematic, the second; that cuts are inevitable.
First, the reality of poverty has been obscured by a deluge of myths: welfare is the most generous in Europe; it does not pay to work; the cost of living has fallen, welfare soared in recent years. Every one of these myths has been endlessly exposed. OECD figures show payments to single claimants in Ireland are the third lowest in the EU15, while a family with two children gets just above the EU15 average. Welfare is not ‘high’ or ‘generous’, and if you are living on it you are below the Government’s own ‘at risk of poverty threshold’. You are not better off on the dole – not only single people, but also those with large families, get higher incomes from working (through Family Income Supplement). This is true whether they are on the minimum wage or the average wage. While the overall cost of living is falling, the things that low income families buy more of (solid fuel, public transport, childcare) are rising. If you are interested in facts there are more on The Poor Can’t Pay website.
The second myth involves convincing the public that there is no alternative to cutting welfare payments. This is not true. The most plausible and realistic policy alternative to welfare cuts is to raise the 1 billion euro through taxation. However, from the very start the Commission on Taxation was asked to be ‘revenue neutral’ and McCarthy was told not to look at taxes - or pay. Ironically, the Commission on Taxation draws our attention to the multiple instruments government has available to increase government revenue - instruments with capacity to generate as much revenue as welfare cuts would save. These include a property tax, an increase in the top tax rate for high earners, the abolition of remaining discretionary tax allowances, a policy of standard-rating pension reliefs, increases in corporate taxes and the introduction of carbon taxes. However, in the context of a principle of ‘revenue neutrality’ none of these become viable policy alternatives to stave off cuts in welfare.
A leaked comment from April shows that the Cabinet believes that the €1 billion it could raise from property tax is ‘probably not worth the bother’ (Irish Times, April 19th). It is true that such tax reform would not be popular and those on middle and higher incomes would find life more difficult. Clearly, taking 1 billion euro from welfare recipients is an easier political option, and so worth the bother.
Minister Lenihan justifies his revenue neutral principle with the assumption that the ‘burden of taxation in this economy is high enough’ and assumes Irish people are unwilling to pay more taxes to tackle inequality and poverty. This is simply not true. A 2009 Behaviour and Attitudes poll commissioned by TASC shows 72% of adults are concerned at the level of wealth inequality in Ireland and that 85% of adults (60% strongly) agree to government taking steps to reduce income inequality.
Irish people care more then their ministers about the ‘burden of poverty’. Let us be clear: This Government is making a conscious choice. It is declining an opportunity to raise upwards of €1 billion in revenue. If this government cuts social welfare it is because it has chosen to do so, and because it has chosen not to develop alternative revenue raising tools. The Minister should think again.
Crude welfare cuts do not make social, practical or moral sense. There are significant economic benefits from social welfare expenditure. In the short term every penny of social welfare expenditure is spent in the economy and stimulates demand. Cutting such expenditure is deflationary. In the longer term, social welfare expenditure and broader social inclusion policies are a vital part of every successful modern economy. Decent welfare enables workers be more flexible and adaptable in the face of global economic change. A cut in social welfare cuts competitiveness, reduces social cohesion and reduces our collective capacity to fight this recession. Restoring our competitiveness, saving jobs and closing the fiscal deficit can be achieved in ways other than forcing society’s poorest families into deeper levels of poverty. This is about choices. Nothing is inevitable.
Dr. Mary Murphy is a member of the Steering Group of The Poor Can't Pay. She lectures in Irish Politics and Society in the Department of Sociology, NUIM.
However, the objective of a low tax economy and the principle of revenue neutrality that lie at the heart of the Commission on Taxation can only lead to one place: a low level of social expenditure that limits Irish social development and cohesion. Further, given that revenue has dropped substantially (by over 6 billion euro since 2007) a revenue neutral scenario locks Irish social expenditure into even lower levels than the relatively poor levels of 2007. This post argues that, despite the fact that there are revenue policy choices available to the government that could increase overall revenue for social expenditure, Government has made an explicit policy choice not to avail of these policy options but to instead let those on the lowest incomes bear the brunt of our crisis. This policy choice exposes the vision of this government. Quite simply, there is no social vision.
We grew accustomed to the government mantra that Government policy is to protect the most vulnerable. However, the new mantra is that because social welfare accounts for a third of social expenditure it must contribute one third of savings in public expenditure required in this forthcoming budget (1 billion euro in expenditure cuts). To justify this failure to ‘protect the vulnerable’,the government is selling two myths to the Irish public. The first myth; that the level of Irish welfare is problematic, the second; that cuts are inevitable.
First, the reality of poverty has been obscured by a deluge of myths: welfare is the most generous in Europe; it does not pay to work; the cost of living has fallen, welfare soared in recent years. Every one of these myths has been endlessly exposed. OECD figures show payments to single claimants in Ireland are the third lowest in the EU15, while a family with two children gets just above the EU15 average. Welfare is not ‘high’ or ‘generous’, and if you are living on it you are below the Government’s own ‘at risk of poverty threshold’. You are not better off on the dole – not only single people, but also those with large families, get higher incomes from working (through Family Income Supplement). This is true whether they are on the minimum wage or the average wage. While the overall cost of living is falling, the things that low income families buy more of (solid fuel, public transport, childcare) are rising. If you are interested in facts there are more on The Poor Can’t Pay website.
The second myth involves convincing the public that there is no alternative to cutting welfare payments. This is not true. The most plausible and realistic policy alternative to welfare cuts is to raise the 1 billion euro through taxation. However, from the very start the Commission on Taxation was asked to be ‘revenue neutral’ and McCarthy was told not to look at taxes - or pay. Ironically, the Commission on Taxation draws our attention to the multiple instruments government has available to increase government revenue - instruments with capacity to generate as much revenue as welfare cuts would save. These include a property tax, an increase in the top tax rate for high earners, the abolition of remaining discretionary tax allowances, a policy of standard-rating pension reliefs, increases in corporate taxes and the introduction of carbon taxes. However, in the context of a principle of ‘revenue neutrality’ none of these become viable policy alternatives to stave off cuts in welfare.
A leaked comment from April shows that the Cabinet believes that the €1 billion it could raise from property tax is ‘probably not worth the bother’ (Irish Times, April 19th). It is true that such tax reform would not be popular and those on middle and higher incomes would find life more difficult. Clearly, taking 1 billion euro from welfare recipients is an easier political option, and so worth the bother.
Minister Lenihan justifies his revenue neutral principle with the assumption that the ‘burden of taxation in this economy is high enough’ and assumes Irish people are unwilling to pay more taxes to tackle inequality and poverty. This is simply not true. A 2009 Behaviour and Attitudes poll commissioned by TASC shows 72% of adults are concerned at the level of wealth inequality in Ireland and that 85% of adults (60% strongly) agree to government taking steps to reduce income inequality.
Irish people care more then their ministers about the ‘burden of poverty’. Let us be clear: This Government is making a conscious choice. It is declining an opportunity to raise upwards of €1 billion in revenue. If this government cuts social welfare it is because it has chosen to do so, and because it has chosen not to develop alternative revenue raising tools. The Minister should think again.
Crude welfare cuts do not make social, practical or moral sense. There are significant economic benefits from social welfare expenditure. In the short term every penny of social welfare expenditure is spent in the economy and stimulates demand. Cutting such expenditure is deflationary. In the longer term, social welfare expenditure and broader social inclusion policies are a vital part of every successful modern economy. Decent welfare enables workers be more flexible and adaptable in the face of global economic change. A cut in social welfare cuts competitiveness, reduces social cohesion and reduces our collective capacity to fight this recession. Restoring our competitiveness, saving jobs and closing the fiscal deficit can be achieved in ways other than forcing society’s poorest families into deeper levels of poverty. This is about choices. Nothing is inevitable.
Dr. Mary Murphy is a member of the Steering Group of The Poor Can't Pay. She lectures in Irish Politics and Society in the Department of Sociology, NUIM.
Friday, 28 August 2009
A Smart Approach
Nat O'Connor: I agree with some of what Philip R Lane wrote today about taking a smart approach to balancing the public finances.
I agree when he says that “a smart approach to expenditure cuts would avoid crude, across-the- board solutions in favour of a clear ranking of projects and programmes, by which those expenditure lines that offer the highest economic and social benefits suffer the least.”
He argues that due to a lack of cost-benefit analysis “it seems clear that the pre-crisis levels of public spending in many areas were not set at the socially optimal level.” I’m not so sure about “many”, or the infallibility of CBA, but I agree that some programmes probably need to be seriously revised. In fact, I believe that the Government should take a hard look at every year’s Budget and cut out poorly performing programmes of expenditure, but I might disagree about the criteria for measuring success and hence which ones are poorly performing. I would question the value for money of many tax incentives for example.
Professor Lane argues that “The long-term level of public spending must be closely matched by the sustainable level of government revenues” and I agree with that, although logically there are always two ways to achieve this: cut spending or raise revenue. And raising revenue doesn't have to mean an increased tax burden, as it can also result from additional economic activity.
But then I disagree. Professor Lane argues that as “A richer population will typically desire better-quality public services” and Ireland’s income per capita looks likely to decrease, so “the economic forces driving demand for higher public spending in many areas will be quelled.” I would argue instead that a better educated population, and one in which more people have travelled or worked abroad, will be more critical of public services here. And once the population has tasted the fruits of better services, it is not going to cease wanting them during a recession. So I think demand for public spending will remain high.
I don’t disagree that some public expenditure can be cut, if we can agree on the evidence of inefficiency. But I also think that there is plenty of scope for continued public spending, funded by borrowing (within limits) especially if it lays the foundations for sustainable economic development in the future. There is a pressing need to generate new areas of economic activity as part of the solution to the crisis, from which higher revenue can be raised and better public services can be funded.
Finally, I have a problem with the suggestion that “Once the crisis phase is over, a new fiscal debate will be required concerning the optimal level of long-term public spending in the economy.” That debate is needed now, and is happening now, as the role of the state in the economy, including the level of public services that people desire, is a major part of what path we take out of the current crisis.
I agree when he says that “a smart approach to expenditure cuts would avoid crude, across-the- board solutions in favour of a clear ranking of projects and programmes, by which those expenditure lines that offer the highest economic and social benefits suffer the least.”
He argues that due to a lack of cost-benefit analysis “it seems clear that the pre-crisis levels of public spending in many areas were not set at the socially optimal level.” I’m not so sure about “many”, or the infallibility of CBA, but I agree that some programmes probably need to be seriously revised. In fact, I believe that the Government should take a hard look at every year’s Budget and cut out poorly performing programmes of expenditure, but I might disagree about the criteria for measuring success and hence which ones are poorly performing. I would question the value for money of many tax incentives for example.
Professor Lane argues that “The long-term level of public spending must be closely matched by the sustainable level of government revenues” and I agree with that, although logically there are always two ways to achieve this: cut spending or raise revenue. And raising revenue doesn't have to mean an increased tax burden, as it can also result from additional economic activity.
But then I disagree. Professor Lane argues that as “A richer population will typically desire better-quality public services” and Ireland’s income per capita looks likely to decrease, so “the economic forces driving demand for higher public spending in many areas will be quelled.” I would argue instead that a better educated population, and one in which more people have travelled or worked abroad, will be more critical of public services here. And once the population has tasted the fruits of better services, it is not going to cease wanting them during a recession. So I think demand for public spending will remain high.
I don’t disagree that some public expenditure can be cut, if we can agree on the evidence of inefficiency. But I also think that there is plenty of scope for continued public spending, funded by borrowing (within limits) especially if it lays the foundations for sustainable economic development in the future. There is a pressing need to generate new areas of economic activity as part of the solution to the crisis, from which higher revenue can be raised and better public services can be funded.
Finally, I have a problem with the suggestion that “Once the crisis phase is over, a new fiscal debate will be required concerning the optimal level of long-term public spending in the economy.” That debate is needed now, and is happening now, as the role of the state in the economy, including the level of public services that people desire, is a major part of what path we take out of the current crisis.
Thursday, 20 August 2009
Social welfare debate: What it really boils down to
Michael Taft: Having previously shown that the claims that we have a comparatively ‘lavish’ social welfare system’ are clearly false and not backed up by the data in the hotly debated OECD report, let’s address another issue this debate has raised (or should raise). That is, how low social welfare payments are in the Irish context.
There is a crude and, at times, vicious populist attack on the living standards of social welfare recipients. The OECD report showed that the overwhelming number of unemployed and lone parents survive on net replacement ratios well below the EU-15 average. But let’s use some numbers close to home – and use the 2007 figures on which there is considerable data (later years would require extrapolating and estimating) – to give a full picture of poverty and low incomes in this country.
The CSO – in line with international practice – uses the relative poverty line (60 percent of median income) as a measurement of how many people are ‘at-risk’ of poverty. There is some controversy over how valid this measurement. But all it tells us (and all it seeks to tell us) is how many are ‘at-risk’. It provides a starting point, a set of parameters. For instance:
• In households where the head is unemployed, 58 percent are at-risk
• In lone parent households, 36 percent are at-risk
• In households headed by someone ill or disabled, 49 percent are at-risk
Indeed, it is disconcerting to realise that of all households in the state, nearly one-in-five are at-risk of poverty. There’s a lot of risk out there and when one examine the level of social welfare payments, one begins to understand why.
The figures below show how much weekly welfare rates in 2007 would have had to increase to bring, in cash terms, the different categories up to the at-risk poverty line (for those with children, it includes Child Benefit). These are the categories which the OECD report dealt with:
Single Unemployed: €42.06
Lone Parent – 1 Child: €59.08
Lone Parent – 2 Children: €76.11
Unemployed Couple: €70.67
Unemployed Couple – 1 Child: €87.70
Unemployed Couple – 2 Children: 104.72
No payment in these categories exceed the 50 percent threshold of median income (remember that the poverty line is 60 percent).
Of course, this is not all there is to social transfers – whether cash or in kind. There will be (or was) the Christmas bonus. Households with children may receive school and clothing allowance. Social welfare recipients are eligible for the medical card (but short-term unemployed, especially younger people with little demand on medical services, are not as likely to hold one). But, as can be seen, these transfers are necessary if people are to have any chance of reaching the poverty line.
One of the bigger additional payments is rent supplement (or Housing Benefit in the OECD). This is an example of a well-targeted payment. Some recipients will need it; others won’t (those living in local authority housing, owner-occupiers, young people living at home, etc.). In 2007, the average weekly rent supplement (and this is an annualised figure) was €126 per week, or €546 per month.
As pointed out previously, only a small minority of unemployed and lone parents receive this benefit – less than 14 percent. If that payment was abolished and the expenditure distributed through the basic social welfare payment, it would increase the social welfare rate by €17.37. This would still leave all categories well short of the poverty line (especially in households with children) and would be insufficient to assist those who face high rents in the private sector.
Rent Supplement is a curious thing. It puts money in the hands of the recipient in order to purchase shelter in the open market. Therefore, the level of Rent Supplement is inextricably tied to both market rates and the recipients’ need of it. For instance, as Nat O’Connor points out, Rent Supplement varies geographically. Recipients in Dublin will get a higher rate than those in Waterford. Does this mean that Dubliners have a resulting higher standard of living? No, just the opposite – since rent is much higher than in Waterford. They will get a higher social transfer but potentially live in worse conditions - all by accident of location.
There is considerable debate over the cost of Rent Supplement and, given the fall in rents, whether it should be cut pro-rata. Again, as Nat points out, this misses the point of both the continuing high need (getting higher in these recessionary times) and the continuing high market price vis-à-vis welfare recipients’ living standards. Of course, there are other solutions rarely canvassed by those demanding social welfare cuts (more public housing, direct state provision in the private rented sector based on the model proposed by Threshold, rent control, etc.).
All this goes to show that, whether one examines the OECD report or the current economic conditions in Ireland – we can only conclude that social welfare payments are too low, much too low.
But we tend to get lost in all these arguments and ratios and percentages. So let’s use two figures to put this debate into context as it inextricably moves its way towards the next budget and the strong possibility that social welfare rates will be cut. In the social welfare system there are:
Over 500,000 the age of 60 years
Nearly 450,000 are children
Elderly and children - nearly a million. Whether intentional or not, they are the true target of those who want to cut social welfare rates.
Is this how far we have come?
There is a crude and, at times, vicious populist attack on the living standards of social welfare recipients. The OECD report showed that the overwhelming number of unemployed and lone parents survive on net replacement ratios well below the EU-15 average. But let’s use some numbers close to home – and use the 2007 figures on which there is considerable data (later years would require extrapolating and estimating) – to give a full picture of poverty and low incomes in this country.
The CSO – in line with international practice – uses the relative poverty line (60 percent of median income) as a measurement of how many people are ‘at-risk’ of poverty. There is some controversy over how valid this measurement. But all it tells us (and all it seeks to tell us) is how many are ‘at-risk’. It provides a starting point, a set of parameters. For instance:
• In households where the head is unemployed, 58 percent are at-risk
• In lone parent households, 36 percent are at-risk
• In households headed by someone ill or disabled, 49 percent are at-risk
Indeed, it is disconcerting to realise that of all households in the state, nearly one-in-five are at-risk of poverty. There’s a lot of risk out there and when one examine the level of social welfare payments, one begins to understand why.
The figures below show how much weekly welfare rates in 2007 would have had to increase to bring, in cash terms, the different categories up to the at-risk poverty line (for those with children, it includes Child Benefit). These are the categories which the OECD report dealt with:
Single Unemployed: €42.06
Lone Parent – 1 Child: €59.08
Lone Parent – 2 Children: €76.11
Unemployed Couple: €70.67
Unemployed Couple – 1 Child: €87.70
Unemployed Couple – 2 Children: 104.72
No payment in these categories exceed the 50 percent threshold of median income (remember that the poverty line is 60 percent).
Of course, this is not all there is to social transfers – whether cash or in kind. There will be (or was) the Christmas bonus. Households with children may receive school and clothing allowance. Social welfare recipients are eligible for the medical card (but short-term unemployed, especially younger people with little demand on medical services, are not as likely to hold one). But, as can be seen, these transfers are necessary if people are to have any chance of reaching the poverty line.
One of the bigger additional payments is rent supplement (or Housing Benefit in the OECD). This is an example of a well-targeted payment. Some recipients will need it; others won’t (those living in local authority housing, owner-occupiers, young people living at home, etc.). In 2007, the average weekly rent supplement (and this is an annualised figure) was €126 per week, or €546 per month.
As pointed out previously, only a small minority of unemployed and lone parents receive this benefit – less than 14 percent. If that payment was abolished and the expenditure distributed through the basic social welfare payment, it would increase the social welfare rate by €17.37. This would still leave all categories well short of the poverty line (especially in households with children) and would be insufficient to assist those who face high rents in the private sector.
Rent Supplement is a curious thing. It puts money in the hands of the recipient in order to purchase shelter in the open market. Therefore, the level of Rent Supplement is inextricably tied to both market rates and the recipients’ need of it. For instance, as Nat O’Connor points out, Rent Supplement varies geographically. Recipients in Dublin will get a higher rate than those in Waterford. Does this mean that Dubliners have a resulting higher standard of living? No, just the opposite – since rent is much higher than in Waterford. They will get a higher social transfer but potentially live in worse conditions - all by accident of location.
There is considerable debate over the cost of Rent Supplement and, given the fall in rents, whether it should be cut pro-rata. Again, as Nat points out, this misses the point of both the continuing high need (getting higher in these recessionary times) and the continuing high market price vis-à-vis welfare recipients’ living standards. Of course, there are other solutions rarely canvassed by those demanding social welfare cuts (more public housing, direct state provision in the private rented sector based on the model proposed by Threshold, rent control, etc.).
All this goes to show that, whether one examines the OECD report or the current economic conditions in Ireland – we can only conclude that social welfare payments are too low, much too low.
But we tend to get lost in all these arguments and ratios and percentages. So let’s use two figures to put this debate into context as it inextricably moves its way towards the next budget and the strong possibility that social welfare rates will be cut. In the social welfare system there are:
Over 500,000 the age of 60 years
Nearly 450,000 are children
Elderly and children - nearly a million. Whether intentional or not, they are the true target of those who want to cut social welfare rates.
Is this how far we have come?
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