Not just for Section 23: Economic analysis and the Budget

Tom McDonnell: There has been much commentary in the last week about the Government’s decision to roll back on its commitment to end the Section 23 property tax breaks. The Government has instead committed to an economic analysis of the impact of ending the tax breaks. Although TASC called for the abolition of these reliefs in its pre- Budget submission, economic analysis of budgetary measures is in many ways a welcome development.

The larger issue here is the continuing failure to undertake economic analyses of all budgetary measures. For example, an announcement pointing to a forthcoming econometric analysis of the impact of €6 billion in austerity measures is glaringly conspicuous by its absence. The absence of serious analysis was a causal factor in the economic crash, and it would be criminally negligent not to learn from past mistakes.

At least six months before each annual budget, the Government of the day should produce a long list of the measures it is considering for the forthcoming budget. Each of these measures should then be subjected to a full cost-benefit analysis by independent economists. Opposition parties should have their own opportunity to submit proposals for analysis. The cost-benefit analysis should seek to quantify the impact of the proposal across a variety of indicators. Sample indicators include (but are not limited to) the impact on:

• Economic growth (short and long-term)
• Employment
• The exchequer borrowing requirement
• Economic equality, for example which groups will gain and which groups will lose
• The at risk of poverty rate and other poverty related indicators
• Quality of life indicators, for example health outcomes
• Aggregate stock and composition of productive physical capacity
• Aggregate stock and composition of human capital
• The national innovative capacity
• The environment

The results of each of the cost-benefit analyses should then be independently peer-reviewed and submitted to the Government two months in advance of the budget. Existing policies, for example tax expenditures, should be subjected to regular ex post analysis. All policy measures should be reviewed twelve months after implementation, and then again every two or three years.

In the run-up to the budget the Government’s chosen set of budget proposals should be submitted to an independent Fiscal Council, set up for the express purpose of ensuring the parameters of the budget are counter-cyclical and consistent with the principle of macroeconomic sustainability.

The Government of the day should also seek to ensure that the principle of multi-annual budgeting becomes standard practice. The publication of multi-annual budgetary frameworks, of the type outlined in the National Recovery Plan, need to become semi-annual events.

None of this in any way precludes or infringes on political or economic debate. Political parties will have different positions on the relative importance of the various indicators and these differences will lead to divergent policy choices.
Impact analysis will improve accountability and transparency in budgetary decisions and will make it more difficult for interest groups to lobby Governments to sneak through legislation that benefits their narrow sectional interest at the expense of the wider society.

An indicative timetable might look like this:

January to March: Passing of Finance Bill through the Dáil
April: Publication of ‘Four Year Budgetary Framework’
June: Publication of Long list of budget proposals
June-October: Cost benefit analyses of the long list
October: Publication of ‘Updated Four year Budgetary Framework’
November: Parameters of the current year’s proposed budget audited by independent fiscal council and findings published
December: Budget

The fiscal council should be a purely advisory body, entirely independent from political parties and from powerful vested interests. For example, this would automatically exclude all economists working in the financial sector (or, indeed, for other sectional interests). Lobbying a member of the fiscal council should be made illegal. Ideally, the head of the fiscal council should be an economist of international renown.

The efficiency of “saving” vs “creating” jobs

Marie Sherlock: As the country goes to the polls tomorrow, Live register figures for the first five months of 2009 are due to be released. The question remains as to whether the stark downward trend in job losses and part time work is beginning to plateau out, whether this is the beginning of the end of the economic crisis or is the live register going to rumble on well past the half a million mark.

Redundancy figures released earlier this week showed that figures for the month of May breached the 8000 mark, yet little can be interpreted from this as qualification for redundancy payment is confined to those working two or more years in the company. Nonetheless, in the absence of up to date QNHS data on sectoral employment levels, the redundancy figures do highlight the concentration of lay offs in what is termed “other services”, running well ahead of redundancies in construction and manufacturing.

The local and European election campaigns have naturally been dominated by the issues of job losses and the economic crisis- ironically these are issues largely beyond the reach of both sets of institutions, but of course that hasn’t prevented the turning of Friday’s poll into a proxy general election. In that context, I thought it interesting to engage in a brief perusal of the various political parties’ employment policies and intend that this be akin to the throw in ball into the debate, as opposed to a detailed treatise on active labour market policies.

Needless to say, all parties are singing off the one hymn sheet on the need to upskill and retrain those who now find themselves jobless, but the devil is in the detail and Fine Gael’s approach of reallocating Fás resources towards the enterprise-led Skillnets, and the limiting of the upskilling of workers within the context of existing industry, departs sharply from Labour’s agenda for the broadening of access to upskilling, training and work experience for individual workers. This distinction in approach reflects a divergence in thinking regarding the possible sources of future economic recovery, and in ways goes to the heart of the question about the efforts that should be made to retain existing jobs and businesses and the separate question of promoting “job creation”.

The trade union movement have long argued for some type of short time working mechanism to support existing firms effected by the economic downturn, who in less volatile economic trading conditions would be operating profitably. The criteria for entitlement to the support remains a moot point, with Sinn Fein proposing a trouble shooting body to identify and advise troubled companies along with a specific job retention fund of €300m. Labour’s Earn and Learn scheme most closely resembles the pilot project announced in the April Budget, however the 277 places made available in the pilot project by the Government makes the scheme wholly inadequate and in danger of being far too little too late to rescue potentially sustainable jobs.

In contrast, Fine Gael overlook the idea of direct support to retain existing jobs and instead address the broader issue of operating costs in the country. Their preference to introduce direct wage subsidies to incentivise companies to recruit unemployed persons raises important questions as to the economic efficiency of such a measure vis a vis the retention of existing jobs. While sustaining those currently employed can arguably impose a deadweight cost by delaying the natural turnover of businesses and can displace funding to support future creation, these costs can arguably be minimised be imposing time limits to benefits and by imposing strict criteria for eligibility. In contrast, the economic efficiency of a wage subsidy to create jobs is much more in question. Relieving 31% of the cost of a minimum wage job is an attractive short term measure for those who wish to reduce unemployment figures overnight but serious questions remain as to the long term sustainability of these jobs after the two years, the deadweight cost to the Government of jobs that would have been created anyway and most importantly of all, the possible displacement of both the funding of and the take up of formal training and upskilling that is necessary for long term economic growth.
Marie Sherlock is an economist with SIPTU