Rory O'Farrell: The idea of an investment stimulus got a boost this week. Though people may disagree over the extent to which this is 'new money', it shows that at the very least, the government want to be seen to be pro-investment stimulus.
Coincidentally, this week I presented a working paper which uses the HERMIN model (used by the EU to measure the effects of cohesion funding) to assess the effect of an investment stimulus.
Two interesting things stand out about the announced stimulus. First is the involvement of the European Investment Bank (EIB). Not only do they bring money to the table, but perhaps more importantly they bring their expertise in assessing projects and an independent pair of eyes. They won't be funding any vanity projects.
The second is the off-the books nature of the funding. With traditional financing, the net cost to Government of an investment is considerably less than the headline cost, about 57%. This is as multiplier effects lead to increased tax revenue. Then over the medium term, the supply side effects of higher GDP and tax revenue more than offset interest payments on a project. However, as the projects are 'off the books' and the tax revenue is 'on the books' there will be an immediate decrease in the reported Government deficit. Though this is playing with accounting rules, it means that the government will about €400 million more room to manoeuvre and staying within Troika limits.
Overall, we can expect 17,000 jobs to be created per €1bn invested in a year, and there is a multiplier of 1.6. When designing a stimulus, it is important to front load the investment, and then phase it out. This allows the export cavalry enough time to come over the hill and save us from long term unemployment and stagnation.
Showing posts with label jobs. Show all posts
Showing posts with label jobs. Show all posts
Friday, 20 July 2012
Tuesday, 22 May 2012
TASC submission on unemployment
Sinéad Pentony: In a submission to the Oireachtas Committee on Jobs, Social Protection and Education, TASC has looked at a number of key questions.
The submission provides an overview of unemployment, which clearly illustrates the scale of the crisis and who is being most affected. There are clear inequalities in the labour market within and between generations. Those previously unemployed in craft and related areas represent over one third of those who are on the live register and this group is more likely to have lower levels of education and skills. Almost one third of young people are unemployed. The reasons for this include a lack of jobs, low levels of education and training coupled with limited work experience and the fact that young people are more likely to lose their jobs in economic downturns.
The submission also considers the measures that Government is taking to address the problem, which includes reform of labour market activation policy – Pathways to Work, and the Government’s Action Plan for Jobs. These measures include some long over-due reforms, but they will not address the unemployment crisis, as it is primarily a demand-side problem – the demand for labour is less than the available supply of labour and addressing this issue requires a targeted programme of investment and economic growth.
Finally, the submission considers the issue of youth unemployment and puts forward a number of recommendations that include improving the quality of existing policies aimed at providing young people with valuable work experience and training; assessing the feasibility of providing a ‘Youth Job Guarantee’; assisting young people to become entrepreneurs; and targeted education and training initiatives aimed at young people with no formal qualifications.
The submission provides an overview of unemployment, which clearly illustrates the scale of the crisis and who is being most affected. There are clear inequalities in the labour market within and between generations. Those previously unemployed in craft and related areas represent over one third of those who are on the live register and this group is more likely to have lower levels of education and skills. Almost one third of young people are unemployed. The reasons for this include a lack of jobs, low levels of education and training coupled with limited work experience and the fact that young people are more likely to lose their jobs in economic downturns.
The submission also considers the measures that Government is taking to address the problem, which includes reform of labour market activation policy – Pathways to Work, and the Government’s Action Plan for Jobs. These measures include some long over-due reforms, but they will not address the unemployment crisis, as it is primarily a demand-side problem – the demand for labour is less than the available supply of labour and addressing this issue requires a targeted programme of investment and economic growth.
Finally, the submission considers the issue of youth unemployment and puts forward a number of recommendations that include improving the quality of existing policies aimed at providing young people with valuable work experience and training; assessing the feasibility of providing a ‘Youth Job Guarantee’; assisting young people to become entrepreneurs; and targeted education and training initiatives aimed at young people with no formal qualifications.
Friday, 2 March 2012
Pathways to Work - can it deliver?
Sinéad Pentony: Pathways to Work was launched last week and it sets out to achieve some much needed reform in relation to labour market activation measures. The ambition “is to develop a new approach to engagement with people who are unemployed which meets international best practice”. Plans to increase the level of engagement with people who are unemployed and greater targeting of activation places are essential ingredients of an effective active labour market policy. Pathways also includes measures aimed at ‘incentivising’ unemployed people to take up employment opportunities and incentives for employers to take on unemployed people. The final element focuses on reforming institutions to deliver services to people who are unemployed. But can it deliver?
Pathways to Work rightly draws on international best practice which has increased levels of engagement with unemployed people as a central plank in its active labour market measures and this measure will be rolled out through the National Employment and Entitlement Service (NEES). This will take time, resources and institutional reform if it is going to achieve the objective of a work-focused welfare payment and effective and targeted service delivery.
Unfortunately, it appears that increased levels of engagement will only target those who are newly unemployed and in a number of pilot areas, in the first instance. This means that the vast majority of people currently on the live register will not benefit from an improved service. There are also plans to target activation measures at approximately 15,000-20,000 people who are long term unemployed per year, up until 2015. Again, the scale of the interventions planned for the long-term unemployed is not sufficient to deal with the scale of the problem, with over 180,000 classed as being on the Live Register for more than one year.
To get an idea of the scale of investment as a percentage of GDP by countries which have highly developed active labour market measures - in Ireland (2009) we spent 0.87 per cent of GDP on active labour market measures, while countries such as Denmark and Sweden spent 1.62 per cent and 1.13 per cent, respectively. This spending also needs to be put in the context of the fact we have many more people unemployed and long-term unemployed than these countries.
International best practice is drawn from countries that have highly developed activation measures. Nordic labour policy fosters the human capital of the population, while at the same time deploying activation mechanisms which also include an obligation to work. The services provided place a strong emphasis on quality – and the occupational and skill requirements with regard to the staff are high. Regular evaluations and examinations of their knowledge are the norm.
The institutional reform required in Ireland cannot be underestimated. If Pathways to Work is going to achieve best practice, this will require a different set of skills and capacities within the NEES, which may not currently exist. The ESRI report on Activation in Ireland shows how far we need to go in providing the types of training that are needed to improve people’s prospects of re-entering the labour market. The report highlights the pre-dominance of general and low skill training activity, which is unlikely to have strong positive impacts on employment prospects. The research also found that training provision is out of sync with the educational profile of unemployed people and that it does not address the structural employment among former construction workers. Finally, the report calls for a radical restructuring of training provision.
If the NEES is focused on providing a quality service where people are supported through individual progression plans, there should be very little need for ‘sanctions’ to be applied because the vast majority of people are desperate to find a job. However, there is a danger that rolling out such a service in the absence of building the institutional capacity and the capacity of those delivering the service may result in the over-use of ‘sanctions’ on those who are considered to be ‘not engaging’ with the service because there is little/no emphasis put on finding out why a person may not be engaging with the service or if there are aspects of the service that are not meeting the needs of the service user.
Another element of Pathways to Work is ‘incentivisation’ – of those who are unemployed to take up jobs, along with incentives for employers to take on unemployed workers. In the case of employers there are a range of measures that reduce the cost of employing people, which make sense in times of recession and high unemployment.
In the case of ‘incentivising’ unemployed people, a number of reforms are planned to streamline working age payments, child income support and disability allowances. These reforms include moving lone parents onto working age payments over time. However, the main barrier preventing lone parents from accessing education and training opportunities and/or employment opportunities is the provision of affordable childcare and afterschool care, and the absence of jobs with flexible arrangements. So, what will happen to lone parents who are expected to be ‘available for work’ but are unable to take up education/training opportunities or employment because of the absence of flexible arrangements and affordable child/afterschool care? Will they be sanctioned?
Other changes include increasing the USC threshold to €10,036, which is welcomed but the benefits of this are likely to be offset by reducing the social welfare week from 6 to 5 days. In general, the last number of years have seen cuts in direct and indirect social welfare payments, which is having a devastating impact on low income households. This is reflected in growing numbers of families at risk of poverty and experiencing poverty along with growing income inequality as evidenced by the latest SILC statistics. The recently published report on A Minimum Income Standard for Ireland also clearly demonstrates that many households in situations of reliance on social welfare or the national minimum wage live on an insufficient income. It is essential that reform of tax and welfare measures should not be equated with cuts, but that reform results in the better targeting of resources and supports at those who need them the most. Only then will we see a reversal of the current poverty and inequality trends.
The final element of Pathways to Work is institutional reform, which has been mentioned above. This includes plans to introduce ‘payment by results’, whereby the private sector is contracted to provide activation services for long-term unemployed. The report cites experience in the UK and Australia, asserting that it has “proven effective in supporting the unemployed to secure employment”. This system is operating less than a year in the UK and there are no independent evaluations available at this point in time.
However, the UK National Audit Office recently published a report on the introduction of the Work Programme in the UK, which examines ‘payment by results’. Some of the findings include “a significant risk that ministers’ assumptions about the numbers who can be found jobs may be over-optimistic”. The contractual arrangements with private providers are also questioned because of the programme’s demanding targets which “may encourage providers to target easier-to-help claimants while not helping others... and reduce the level of service provided in order to reduce costs...” There are also issues identified in relation to private providers operating in areas of high unemployment and how “they may struggle to meet nationally set targets”. The Report clearly articulates a whole host of other ‘risks’ associated with the Programme, which highlight the complexities behind what can often appear straightforward ‘payment by results measures’, which can actually result in diminished services and 'cherry picking' people who are easier to place in employment.
The Report also identifies the future state of the economy as a key indicator of success and this means the availability of jobs. While Pathways to Work will hopefully deliver some much needed reform, its success will depend on whether or not the economy is growing and creating jobs. Unemployment is primarily a ‘demand-side’ problem which needs demand-side solutions, and central to this is investment, along with measures that protect low incomes, which maintain aggregate demand in the domestic economy.
Pathways to Work rightly draws on international best practice which has increased levels of engagement with unemployed people as a central plank in its active labour market measures and this measure will be rolled out through the National Employment and Entitlement Service (NEES). This will take time, resources and institutional reform if it is going to achieve the objective of a work-focused welfare payment and effective and targeted service delivery.
Unfortunately, it appears that increased levels of engagement will only target those who are newly unemployed and in a number of pilot areas, in the first instance. This means that the vast majority of people currently on the live register will not benefit from an improved service. There are also plans to target activation measures at approximately 15,000-20,000 people who are long term unemployed per year, up until 2015. Again, the scale of the interventions planned for the long-term unemployed is not sufficient to deal with the scale of the problem, with over 180,000 classed as being on the Live Register for more than one year.
To get an idea of the scale of investment as a percentage of GDP by countries which have highly developed active labour market measures - in Ireland (2009) we spent 0.87 per cent of GDP on active labour market measures, while countries such as Denmark and Sweden spent 1.62 per cent and 1.13 per cent, respectively. This spending also needs to be put in the context of the fact we have many more people unemployed and long-term unemployed than these countries.
International best practice is drawn from countries that have highly developed activation measures. Nordic labour policy fosters the human capital of the population, while at the same time deploying activation mechanisms which also include an obligation to work. The services provided place a strong emphasis on quality – and the occupational and skill requirements with regard to the staff are high. Regular evaluations and examinations of their knowledge are the norm.
The institutional reform required in Ireland cannot be underestimated. If Pathways to Work is going to achieve best practice, this will require a different set of skills and capacities within the NEES, which may not currently exist. The ESRI report on Activation in Ireland shows how far we need to go in providing the types of training that are needed to improve people’s prospects of re-entering the labour market. The report highlights the pre-dominance of general and low skill training activity, which is unlikely to have strong positive impacts on employment prospects. The research also found that training provision is out of sync with the educational profile of unemployed people and that it does not address the structural employment among former construction workers. Finally, the report calls for a radical restructuring of training provision.
If the NEES is focused on providing a quality service where people are supported through individual progression plans, there should be very little need for ‘sanctions’ to be applied because the vast majority of people are desperate to find a job. However, there is a danger that rolling out such a service in the absence of building the institutional capacity and the capacity of those delivering the service may result in the over-use of ‘sanctions’ on those who are considered to be ‘not engaging’ with the service because there is little/no emphasis put on finding out why a person may not be engaging with the service or if there are aspects of the service that are not meeting the needs of the service user.
Another element of Pathways to Work is ‘incentivisation’ – of those who are unemployed to take up jobs, along with incentives for employers to take on unemployed workers. In the case of employers there are a range of measures that reduce the cost of employing people, which make sense in times of recession and high unemployment.
In the case of ‘incentivising’ unemployed people, a number of reforms are planned to streamline working age payments, child income support and disability allowances. These reforms include moving lone parents onto working age payments over time. However, the main barrier preventing lone parents from accessing education and training opportunities and/or employment opportunities is the provision of affordable childcare and afterschool care, and the absence of jobs with flexible arrangements. So, what will happen to lone parents who are expected to be ‘available for work’ but are unable to take up education/training opportunities or employment because of the absence of flexible arrangements and affordable child/afterschool care? Will they be sanctioned?
Other changes include increasing the USC threshold to €10,036, which is welcomed but the benefits of this are likely to be offset by reducing the social welfare week from 6 to 5 days. In general, the last number of years have seen cuts in direct and indirect social welfare payments, which is having a devastating impact on low income households. This is reflected in growing numbers of families at risk of poverty and experiencing poverty along with growing income inequality as evidenced by the latest SILC statistics. The recently published report on A Minimum Income Standard for Ireland also clearly demonstrates that many households in situations of reliance on social welfare or the national minimum wage live on an insufficient income. It is essential that reform of tax and welfare measures should not be equated with cuts, but that reform results in the better targeting of resources and supports at those who need them the most. Only then will we see a reversal of the current poverty and inequality trends.
The final element of Pathways to Work is institutional reform, which has been mentioned above. This includes plans to introduce ‘payment by results’, whereby the private sector is contracted to provide activation services for long-term unemployed. The report cites experience in the UK and Australia, asserting that it has “proven effective in supporting the unemployed to secure employment”. This system is operating less than a year in the UK and there are no independent evaluations available at this point in time.
However, the UK National Audit Office recently published a report on the introduction of the Work Programme in the UK, which examines ‘payment by results’. Some of the findings include “a significant risk that ministers’ assumptions about the numbers who can be found jobs may be over-optimistic”. The contractual arrangements with private providers are also questioned because of the programme’s demanding targets which “may encourage providers to target easier-to-help claimants while not helping others... and reduce the level of service provided in order to reduce costs...” There are also issues identified in relation to private providers operating in areas of high unemployment and how “they may struggle to meet nationally set targets”. The Report clearly articulates a whole host of other ‘risks’ associated with the Programme, which highlight the complexities behind what can often appear straightforward ‘payment by results measures’, which can actually result in diminished services and 'cherry picking' people who are easier to place in employment.
The Report also identifies the future state of the economy as a key indicator of success and this means the availability of jobs. While Pathways to Work will hopefully deliver some much needed reform, its success will depend on whether or not the economy is growing and creating jobs. Unemployment is primarily a ‘demand-side’ problem which needs demand-side solutions, and central to this is investment, along with measures that protect low incomes, which maintain aggregate demand in the domestic economy.
Wednesday, 25 January 2012
The Debt Trap
Sinéad Pentony: The dust has hardly settled from the Troika’s departure when we are facing the repayment of €1.25 billion in unsecured bonds that are not covered by the bank guarantee to Anglo bondholders today.
Last week the Troika asserted that the “front loaded fiscal consolidation is on track, with the 2011 deficit significantly below the programme target”. Recent growth has been on the back of a strong performing export sector, but as forecasts for global growth are reduced, this channel for growth will diminish and it is going to become increasingly difficult to achieve the deficit reduction targets set out in the EU/IMF Programme of Financial Support for Ireland.
The deficit stood at 10.1 per cent (€16 billion) in 2011 and Budget 2012 is intended to reduce this to 8.6 per cent (€13.5 billion). In an attempt to reduce the deficit by €2.5 billion, cuts of €3.8 billion are being imposed. In the absence of strong growth domestically and globally, the government will have to face the prospect of having to cut more to achieve a smaller reduction in the deficit.
This is before we factor in the servicing/repayments of (sovereign and banking) debts, which includes today’s repayment of €1.25 billion in unsecured bonds and a further €3.1 billion in Anglo promissory notes at the end of March. Given the current state of our finances, these repayments will have to be financed through borrowing, which adds a further cost – interest.
The Anglo–Not Our Debt campaign which TASC is supporting has been raising awareness and generating much-needed debate on the issue. These debts are strangling our economy and we cannot begin the process of recovery until they are re-negotiated and re-structured.
We are borrowing to pay/service debts and we are borrowing to run the country, but repayments all come from the same source – government revenue (mostly taxes and charges). If we continue down this road we will see an ever-increasing proportion of taxation revenue being diverted to service/repay debt. This will result in further reductions in the revenue used to maintain and upgrade our infrastructure, finance health services and provide schools and housing – unless of course taxes and charges are increased.
Increasing tax revenue can only be achieved if the economy is growing and more people are working, but we are missing one essential ingredient - investment. The Troika identified “subdued” domestic demand and lower GDP growth projections of 0.5 per cent as the major challenges facing Ireland in 2012, both of which can be solved through significant investment in physical infrastructure and human capital. The question that is always asked is ‘where will the money come from?’.
There have been lots of creative proposals and suggestions put forward on where finance could be found. A quick look at the 2010 European Investment Bank (EIB) Activity and Financial Reports show that EIB lending reached €72 billion in 2010 and it made a net profit of over €2 billion in 2010. The EIB is a triple A-rated bank and can therefore borrow at very low rates of interest.
Member states are required to provide matching funding averaging 50 per cent. But given the scale of the crisis, it would make sense to reduce the level of matching funds required. This would facilitate increased lending and much great leveraging of EU resources, particularly by the countries utilising the EFSF (Ireland, Greece and Portugal): while our scope for investment is much more limited, such investment is essential for recovery. However, this will require the agreement of member states.
The latest report from the International Labour Organisation (ILO) on Global Employment Trends 2012 should provide all political leaders with much needed motivation to start coming up with policy responses that will put struggling economies on a sustainable path to recovery.
The ILO report is called “Preventing a Deeper Jobs Crisis” and it states that the world faces the “urgent challenge of creating 600 million productive jobs over the next decade in order to generate sustainable growth and maintain social cohesion.”
The report also calls for fiscal consolidation efforts to be carried out in a socially responsible manner, with growth and employment prospects as guiding principles. Budget 2012 and the decision to repay unsecured bondholders today, provide ample evidence that these guiding principles are not being applied in Ireland.
Last week the Troika asserted that the “front loaded fiscal consolidation is on track, with the 2011 deficit significantly below the programme target”. Recent growth has been on the back of a strong performing export sector, but as forecasts for global growth are reduced, this channel for growth will diminish and it is going to become increasingly difficult to achieve the deficit reduction targets set out in the EU/IMF Programme of Financial Support for Ireland.
The deficit stood at 10.1 per cent (€16 billion) in 2011 and Budget 2012 is intended to reduce this to 8.6 per cent (€13.5 billion). In an attempt to reduce the deficit by €2.5 billion, cuts of €3.8 billion are being imposed. In the absence of strong growth domestically and globally, the government will have to face the prospect of having to cut more to achieve a smaller reduction in the deficit.
This is before we factor in the servicing/repayments of (sovereign and banking) debts, which includes today’s repayment of €1.25 billion in unsecured bonds and a further €3.1 billion in Anglo promissory notes at the end of March. Given the current state of our finances, these repayments will have to be financed through borrowing, which adds a further cost – interest.
The Anglo–Not Our Debt campaign which TASC is supporting has been raising awareness and generating much-needed debate on the issue. These debts are strangling our economy and we cannot begin the process of recovery until they are re-negotiated and re-structured.
We are borrowing to pay/service debts and we are borrowing to run the country, but repayments all come from the same source – government revenue (mostly taxes and charges). If we continue down this road we will see an ever-increasing proportion of taxation revenue being diverted to service/repay debt. This will result in further reductions in the revenue used to maintain and upgrade our infrastructure, finance health services and provide schools and housing – unless of course taxes and charges are increased.
Increasing tax revenue can only be achieved if the economy is growing and more people are working, but we are missing one essential ingredient - investment. The Troika identified “subdued” domestic demand and lower GDP growth projections of 0.5 per cent as the major challenges facing Ireland in 2012, both of which can be solved through significant investment in physical infrastructure and human capital. The question that is always asked is ‘where will the money come from?’.
There have been lots of creative proposals and suggestions put forward on where finance could be found. A quick look at the 2010 European Investment Bank (EIB) Activity and Financial Reports show that EIB lending reached €72 billion in 2010 and it made a net profit of over €2 billion in 2010. The EIB is a triple A-rated bank and can therefore borrow at very low rates of interest.
Member states are required to provide matching funding averaging 50 per cent. But given the scale of the crisis, it would make sense to reduce the level of matching funds required. This would facilitate increased lending and much great leveraging of EU resources, particularly by the countries utilising the EFSF (Ireland, Greece and Portugal): while our scope for investment is much more limited, such investment is essential for recovery. However, this will require the agreement of member states.
The latest report from the International Labour Organisation (ILO) on Global Employment Trends 2012 should provide all political leaders with much needed motivation to start coming up with policy responses that will put struggling economies on a sustainable path to recovery.
The ILO report is called “Preventing a Deeper Jobs Crisis” and it states that the world faces the “urgent challenge of creating 600 million productive jobs over the next decade in order to generate sustainable growth and maintain social cohesion.”
The report also calls for fiscal consolidation efforts to be carried out in a socially responsible manner, with growth and employment prospects as guiding principles. Budget 2012 and the decision to repay unsecured bondholders today, provide ample evidence that these guiding principles are not being applied in Ireland.
Friday, 27 May 2011
The Gloves are Off!
Sinead Pentony: When the Report of the Independent Review of EROs and REA Wage Setting Mechanisms was published on Wednesday, there was a general view that it’s a well researched report that puts forward a set of evidence-based recommendations that aim to “....create a framework within which greater efficiencies and necessary adjustments in payroll costs can be achieved in the affected sectors”. While I may not agree with all of the recommendations, there are certainly plenty of sensible proposals that will lead to benefits for all stakeholder groups. However, IBEC were obviously disappointed that it did not call for the abolition of the JLC system and said that the Review “...was totally out of touch with the need to create and sustain jobs.”
The following day (Thursday), the Minister for Enterprise, Jobs and Innovation published his own set of proposals that aim to pursue the agenda for “radical overhaul”; many of which are at odds with the carefully researched recommendations in the Report. Again, the message was about creating and sustaining jobs. However, the Report makes clear the finding that the balance of evidence does not support the assertion that lowering pay will lead to the creation of more jobs. The problem in the domestic economy is lack of demand - not competitiveness - and the wage cutting agenda will only exacerbate the problems in the domestic economy further. The Global Competitiveness Report 2010-2011 identified our small market size; poor infrastructure; macroeconomic instability and dysfunctional financial markets as factors inhibiting competitiveness.
In the absence of any serious efforts to address the full range of costs of doing business in the domestic economy – commercial rents, waste charges, professional fees, energy costs and the price of food - the focus is firmly on the easy target – low paid workers. The only protection many of these workers have, is the JLC system, but even within this system there is widespread abuse and derogation of responsibilities on the part of the employers. The NERA report shows that only about 20 per cent of investigated firms were compliant with the rules.
In TASC’s Submission to the Independent Review we identified the need to monitor, evaluate and review low paying sectors on a regular basis, which should be used to identify the labour market and competitive impacts of the various wage floors and the equality and poverty impacts of these wage floors. This is how evidence-based policy making works.
In Budget 2011, the budgetary measures included a cut in the minimum wage and the abolition of Section 23 tax reliefs for those renting private accommodation. The former is due to be reversed in the coming weeks. However, the implementation of the latter was postponed, following concerns about the impact of ending the reliefs and that an impact assessment was needed to ascertain the effect of phasing out such reliefs. The Programme for Government (p.23) is also committed to publishing cost-benefit analyses for major infrastructure proposals and “tax expenditure”. All of this points us in the direction of evidence-based policy analysis and formulation, albeit belatedly.
The labour market is central to the economy and any changes therein must be carefully considered. The government now has a well-researched 117 page report on the various wage setting mechanisms. Why would it not apply the same level of rigour to this aspect of the economy that is being applied to other parts of the economy? And why would it ignore the findings in this report in favour of anecdotal assertions that are being portrayed as fact? We must do our best to ensure that the facts win out over fiction, in the interests of evidence-based approaches to policy making and in the battle to protect the incomes of low paid workers
The following day (Thursday), the Minister for Enterprise, Jobs and Innovation published his own set of proposals that aim to pursue the agenda for “radical overhaul”; many of which are at odds with the carefully researched recommendations in the Report. Again, the message was about creating and sustaining jobs. However, the Report makes clear the finding that the balance of evidence does not support the assertion that lowering pay will lead to the creation of more jobs. The problem in the domestic economy is lack of demand - not competitiveness - and the wage cutting agenda will only exacerbate the problems in the domestic economy further. The Global Competitiveness Report 2010-2011 identified our small market size; poor infrastructure; macroeconomic instability and dysfunctional financial markets as factors inhibiting competitiveness.
In the absence of any serious efforts to address the full range of costs of doing business in the domestic economy – commercial rents, waste charges, professional fees, energy costs and the price of food - the focus is firmly on the easy target – low paid workers. The only protection many of these workers have, is the JLC system, but even within this system there is widespread abuse and derogation of responsibilities on the part of the employers. The NERA report shows that only about 20 per cent of investigated firms were compliant with the rules.
In TASC’s Submission to the Independent Review we identified the need to monitor, evaluate and review low paying sectors on a regular basis, which should be used to identify the labour market and competitive impacts of the various wage floors and the equality and poverty impacts of these wage floors. This is how evidence-based policy making works.
In Budget 2011, the budgetary measures included a cut in the minimum wage and the abolition of Section 23 tax reliefs for those renting private accommodation. The former is due to be reversed in the coming weeks. However, the implementation of the latter was postponed, following concerns about the impact of ending the reliefs and that an impact assessment was needed to ascertain the effect of phasing out such reliefs. The Programme for Government (p.23) is also committed to publishing cost-benefit analyses for major infrastructure proposals and “tax expenditure”. All of this points us in the direction of evidence-based policy analysis and formulation, albeit belatedly.
The labour market is central to the economy and any changes therein must be carefully considered. The government now has a well-researched 117 page report on the various wage setting mechanisms. Why would it not apply the same level of rigour to this aspect of the economy that is being applied to other parts of the economy? And why would it ignore the findings in this report in favour of anecdotal assertions that are being portrayed as fact? We must do our best to ensure that the facts win out over fiction, in the interests of evidence-based approaches to policy making and in the battle to protect the incomes of low paid workers
Friday, 6 May 2011
Full steam nowhere?
Michael Taft: Sometimes we get a set of numbers which leaves us guessing. In some cases, we have someone who can give some insight. On the face of it, it looked like there was a positive turnaround in income tax revenue. Until we discover that a sizeable proportion of that was actually DIRT revenue. And until An Saoi tells us that the ‘boost’ may be explained by the fact that April contained five pay weeks and three pay fortnights. This puts a different perspective on the returns – one not mentioned by other commentaries.
With Live Register figures we are likewise left guessing at what it could mean – if we even venture to put any stock in one month’s return. A marginal fall of 1,600 signing-on – or a drop of 0.1 percent – tells us very little. But there are other numbers that might tell us something more.
The CSO provides data for inflows (signing-on) and outflows (signing-off).
In April, there was a sizeable increase in the numbers signing-on – both Benefit and Assistance. In March, there were 33,100 new signing-ons. In April this increased to 40,200. There was also a marked increase in those signing off.
Without further information it is difficult to say what this means. New registrations are fairly straight-forward (though new registrations for Assistance could include a transition from Benefit, meaning no net increase; as well as part-time, seasonal and casual workers).
The reasons underlying the outflows are more difficult to assess. Some of this will represent job-finders. But it will also represent those whose Benefit has been exhausted but denied Assistance (such as those with a spouse/partner who is still in work); or those going on training schemes or returning to education; or those emigrating.
So are we seeing an increase in jobs? An increase in emigration? People who are removed for removed administrative reasons but are still unemployed? An increase in part-time and/or casual work but reduced full-time employment?
All we know was that there was a big spike in new registrations. And in the recent Stability Programme Update, the Government projects there will be nearly 30,000 fewer people at work this year.
So, between extra pay weeks and higher registrations for the Live Register – it appears that we are still heading full-steam nowhere.
With Live Register figures we are likewise left guessing at what it could mean – if we even venture to put any stock in one month’s return. A marginal fall of 1,600 signing-on – or a drop of 0.1 percent – tells us very little. But there are other numbers that might tell us something more.
The CSO provides data for inflows (signing-on) and outflows (signing-off).
In April, there was a sizeable increase in the numbers signing-on – both Benefit and Assistance. In March, there were 33,100 new signing-ons. In April this increased to 40,200. There was also a marked increase in those signing off.
Without further information it is difficult to say what this means. New registrations are fairly straight-forward (though new registrations for Assistance could include a transition from Benefit, meaning no net increase; as well as part-time, seasonal and casual workers).
The reasons underlying the outflows are more difficult to assess. Some of this will represent job-finders. But it will also represent those whose Benefit has been exhausted but denied Assistance (such as those with a spouse/partner who is still in work); or those going on training schemes or returning to education; or those emigrating.
So are we seeing an increase in jobs? An increase in emigration? People who are removed for removed administrative reasons but are still unemployed? An increase in part-time and/or casual work but reduced full-time employment?
All we know was that there was a big spike in new registrations. And in the recent Stability Programme Update, the Government projects there will be nearly 30,000 fewer people at work this year.
So, between extra pay weeks and higher registrations for the Live Register – it appears that we are still heading full-steam nowhere.
Thursday, 5 May 2011
April tax figures - not as good as they look
An Saoi: At an initial examination the April figures appear to be very good. However, at closer examination I think that there are a number of specific reasons - administrative and technical - explaining why the underlying figures tell another story.
The Income Tax figure looks excellent at first view. However, the estimate for April appears to have been far below the underlying liability. March involved five pay weeks for those paid weekly, and three pay fortnights. The estimate was just €1,080M - just €100M over the previous month, while €1,271M was actually paid. The profiler clearly did not get out his diary and calculate the full effect of the additional pay weeks.
Bi-monthly VAT returns are not due in April and the net VAT paid for April was €287M well in excess of €205M profiled. This is probably a reflection of delays in VAT repayment claims due to staff shortages, rather than additional taxes paid. The Revenue does not publish any details of repayment claims on hands at the end of the month therefore we can only guess what the actually position is. There have been strong rumours that the Revenue has been staggering large repayments over a longer period because of staffing and cashflow problems. The real test will occur with next month’s figures, which will include the March/April VAT returns. March spending on credit cards published by the Central Bank last week reflected very poor consumer activity in the month, and suggests that the VAT returns will be poor. Add to this the processing of the balance of the repayment claims arising from earlier periods and
Corporation Tax for the month was on target and remains ahead of target. May is a crucial month for Corporation Tax. Companies with account years ending 30th November & 30th June must make payments. In Ireland this includes Microsoft, Pfizer, Oracle & Diageo (Guinness). Last month I commented as follows on Corporation Tax,
“Little or no Corporation Tax is now paid by Irish owned businesses, while a very small proportion of the net yield is accounted for by those multi nationals actually trading in the Irish economy, e.g. Vodafone & O2. The increase in yield from Corporation Tax reflects the activities of multinationals in Ireland, using Ireland as their point of sale for goods and services. The annual target for Corporation Tax of €4,020M is likely to be comfortably exceeded. The net target for March was just €10M compared to €111M actually received. Such a monthly discrepancy needs some explanation, which was not forthcoming from Dept. of Finance.”
Corporation Tax bears no relation to actually Irish economic activity rather it is paid by multi-nationals for Ireland facilitating their activities.
Excise, which includes VRT is slightly below target in April (€406M versus profile €420M), however remains slightly ahead of target. Ongoing car sales are helping to keep figures up. The real test will occur after 30th June and the scrappage scheme ends. The continuing collapse of major garages such as Maxwell Motors would suggest that without this crutch, trade will collapse in the second half of the year.
Customs Duties are collected by the Irish Revenue on behalf of the European Union. The increase in yield is down to large multi-nationals using Ireland as their point of entry on imports from outside of the European Union and is irrelevant to the Irish Exchequer.
I made a technical error last month in relation to CAT which of course was brought into the pay and file system in Finance Act 2010. We will therefore have to wait until later in the year before we can make any real comparison. Stamp Duty & CGT are both running marginally below their very low targets.
However, I would hold with my tentative projection of March, which you can access here. Real cutbacks have not yet been felt, despite what people may think. Substantial losses of jobs will continue in the Public Sector and in Construction. The May figures should enable us to make more confident predictions for the final outcome.
The Income Tax figure looks excellent at first view. However, the estimate for April appears to have been far below the underlying liability. March involved five pay weeks for those paid weekly, and three pay fortnights. The estimate was just €1,080M - just €100M over the previous month, while €1,271M was actually paid. The profiler clearly did not get out his diary and calculate the full effect of the additional pay weeks.
Bi-monthly VAT returns are not due in April and the net VAT paid for April was €287M well in excess of €205M profiled. This is probably a reflection of delays in VAT repayment claims due to staff shortages, rather than additional taxes paid. The Revenue does not publish any details of repayment claims on hands at the end of the month therefore we can only guess what the actually position is. There have been strong rumours that the Revenue has been staggering large repayments over a longer period because of staffing and cashflow problems. The real test will occur with next month’s figures, which will include the March/April VAT returns. March spending on credit cards published by the Central Bank last week reflected very poor consumer activity in the month, and suggests that the VAT returns will be poor. Add to this the processing of the balance of the repayment claims arising from earlier periods and
Corporation Tax for the month was on target and remains ahead of target. May is a crucial month for Corporation Tax. Companies with account years ending 30th November & 30th June must make payments. In Ireland this includes Microsoft, Pfizer, Oracle & Diageo (Guinness). Last month I commented as follows on Corporation Tax,
“Little or no Corporation Tax is now paid by Irish owned businesses, while a very small proportion of the net yield is accounted for by those multi nationals actually trading in the Irish economy, e.g. Vodafone & O2. The increase in yield from Corporation Tax reflects the activities of multinationals in Ireland, using Ireland as their point of sale for goods and services. The annual target for Corporation Tax of €4,020M is likely to be comfortably exceeded. The net target for March was just €10M compared to €111M actually received. Such a monthly discrepancy needs some explanation, which was not forthcoming from Dept. of Finance.”
Corporation Tax bears no relation to actually Irish economic activity rather it is paid by multi-nationals for Ireland facilitating their activities.
Excise, which includes VRT is slightly below target in April (€406M versus profile €420M), however remains slightly ahead of target. Ongoing car sales are helping to keep figures up. The real test will occur after 30th June and the scrappage scheme ends. The continuing collapse of major garages such as Maxwell Motors would suggest that without this crutch, trade will collapse in the second half of the year.
Customs Duties are collected by the Irish Revenue on behalf of the European Union. The increase in yield is down to large multi-nationals using Ireland as their point of entry on imports from outside of the European Union and is irrelevant to the Irish Exchequer.
I made a technical error last month in relation to CAT which of course was brought into the pay and file system in Finance Act 2010. We will therefore have to wait until later in the year before we can make any real comparison. Stamp Duty & CGT are both running marginally below their very low targets.
However, I would hold with my tentative projection of March, which you can access here. Real cutbacks have not yet been felt, despite what people may think. Substantial losses of jobs will continue in the Public Sector and in Construction. The May figures should enable us to make more confident predictions for the final outcome.
Tuesday, 12 April 2011
Facing Up to Reality II: The Methodological Flaw in An Bord Snip Nua
This post follows on from a previous contribution.
Michael Taft: In the previous post, we saw how billions of fiscal contraction has led to little deficit reduction. After that post was written the IMF published their latest projections. They estimate the deficit this year to be -10.8 percent this year. Between 2009 and 2011, we have experienced a fiscal contraction of €10 billion - or over 6 percent of GDP. Nominal GDP will fall by €4 billion. The deficit is expected to fall by less than 1 percent. Does the Government get this connection?
In this post we will examine why the notion that cuts equals savings is one of the more pernicious that has come to dominate the debate; why there is a fundamental flaw at the heart of the methodology employed by the Special Group report. With Government ministers threatening more cuts, this is certainly topical.
The Special Group Report used the word ‘saving’ or ‘savings’ 1,096 times. It neatly equated ‘savings’ and ‘spending cuts’ when no such relationship necessarily exists. Fortunately, we have a simulation of the effects of one of the ‘savings’ that the Special Group highlighted: cutting public sector employment.
Flawed Methodology: The ESRI Stress Test
The Special Group recommended that public sector employment be cut by 17,000. According the ESRI model, reducing public sector employment by 17,000 would mean a reduction of €1 billion in public spending – or 0.6 percent of GDP. What would happen?
• GDP would fall by 0.8 percent. So, for every €1 billion cut, the GDP falls by nearly €1.3 billion.
• More worryingly, GNP would fall by 1 percent. That represents an even more deflationary impact.
• Consumer demand would fall 0.5 percent in the first year, rising to 1 percent in the second year. That’s nearly €1 billion cut from consumer spending – putting considerable pressure on domestic businesses.
• Employment would fall by 1.1 percent. In 2009, that would mean a loss of over 20,000 jobs. Unemployment would rise by almost the same amount.
These are all the factors that must be included before we can assess the ‘savings’ to the Exchequer. So what did the ESRI conclude?
• The deficit would fall by 0.2 percent in the first year and 0.1 percent in the second year.
According to the ESRI, the ‘net saving’ to the Exchequer would be 25 percent of the cut, falling to less than 15 percent in the second year. This is because when you factor in the:
• Loss of tax revenue from reduced spending
• Increase in public sector spending arising from unemployment costs
• Decline in GDP/GNP
The gain to the Exchequer diminishes greatly. This simulation – along with measurements for other spending cuts and tax increases – was available to the Special Group report. It was, and remains, the best estimate of the impact of cutting public sector employment. They didn’t utilise it or even refer to it.
The Special Group could have commissioned, through the Department of Finance, other stress-tests regarding social transfers (nearly 40 percent of the ‘savings’ in the Report was due cuts in direct and in-kind social transfers) and Government purchases of private goods and services, which make up approximately a third of spending on public services They didn’t. They have yet to explain why. But that it would have undermined their basic premise – that cuts equals savings – is fairly certain. For its methodology adopted a crude ‘arithmetic’ approach to spending cuts, not an economic one.
When Government ministers proclaim progress on public sector employment reduction, they are, without realising, actually proclaiming very little progress on deficit reduction but significant progress on deflating the economy, driving up unemployment and cutting domestic demand.
But when this realisation hits home – falling growth, continued high deficits – these same Ministers demand more of the same, again not realising that more of the same is likely to produce the same results which produces more demands for cuts until the economy gives out.
It is a vicious circle, legitimated by the false methodology at the heart of the Special Group report. Cuts do not equal savings. But common sense should tell us this – without resort to models and projections. During a jobs crisis, does it make sense to cut employment levels from the largest employer? Why should we be surprised when the result is so dismal?
****
We are facing into another round of cuts. Employees are now being threatened - with job losses and pay cuts; in the public and private sector. Why? Because past Government ministers either could not or would not subject their policies to economic stress-tests (any comparison with the banking crisis is not co-incidental). They assumed propositions that had little empirical justification. They suffered from ‘escalation of commitment’ – having committed to a particular strategy, they could not extricate themselves when it became clear the strategy was failing.
It is still not too late for this Government to take a step back from the brink. There is still good will towards it. They could adopt a set of transparent and public measurements whereby fiscal options are assessed on the best data available. And on the basis of such informed analysis, adopt the policies that flow from that.
The last thing the Government should do is merely continue failed Fianna Fail policies with only the most cursory of makeovers. If they do, then people will have the right to ask – what was the election for?
Friday, 1 April 2011
Tell me: Are we out of recession yet and what can be done?
Tom O'Connor: The banking crisis is topical. Unemployment isn't and hasn't been in the last three years. This blindness towards unemployment and monopolisation of everybody's efforts solely on the banks, needs to stop. Human misery, suicide, emigration and economic recession should not be displaced from the top of the agenda by anything. Unemployment should and can be dealt with in advance of a banking solution. Last week's Quarterly National Income figures demonstrate that Unemployment cannot wait. It has been waiting since 2008 until the banking mess has resolved.
A plan and a concrete investment strategy funded from our own unborrowed resources within the NPRF and NTMA needs to happen mow. What is happening now and in the last two years is that governments, most economists and the media have all but ignored unemployment, given the urgent necessity to fix the banks. Can I suggest that unemployment is even more urgent? It should have been, and should now be, dealt with, even before this banking crisis is resolved.
Most people will not read last week's CSO figures on economic growth which are designed to tell us whether or not we are still in recession. However, people in pubs, shops, clubs and workplaces really do want to know whether we are or not. They are hanging on for dear life and their children are emigrating. Will there be an improvement? If not, they want to know why not, and what is the Government going to do about it?
Let’s look at the figures: Based on the whole of 2010, they tell us we are still in recession because both measures of economic growth fell. GDP fell by 1% and GNP by 2%. This is bad news. But, policy makers will say that we are either out of recession or coming out of recession. Why? Because they will say that GNP grew by somewhere between 0 and 2% in each of the last three quarters of 2010.
People will say, however, that they can still really feel the recession and it’s not getting any better. The truth is that we are not out of recession! This indeed is also borne out by the figures for GDP, which fell by 1.6% in the last quarter of 2010. Ah, but policy makers will say that GNP is a better measure for Ireland, so that doesn’t matter!
They would be very wrong. During this recession, the GDP figures are a far better indication of whether or not the economy is out of recession. It is a better indicator of how many jobs are being lost and created. It is a better indicator of how much money people have in their pockets and also how many people will emigrate.
The figures tell us why: firstly, the fact that GDP has fallen by 1.6% in the last quarter of 2010, and GNP rose by 2%, is explained mainly by the profit repatriation practices of multinational companies. Essentially, some of the 2% growth in GNP in the last quarter of 2010 is a statistical aberration, and happened mainly because multinationals didn’t repatriate as many profits as normal in that quarter!
Nonetheless, much of the GNP increase has been fuelled by real exports which in gross terms rose by 13.6 billion from 2009-2010 and when imports are subtracted grew by 5.7 billion. This growth arose from the multinational sector in the main, which accounts for up to 90% of Irish exports. However, the jobs dividend from this growth will be very little. Why?
Much of the work on these exports has already been done in Bermuda or elsewhere and is only registered as an Irish export to take advantage of the low 12.5% corporation tax. Multinationals' employment levels have been relatively stable over that last number of years, fixed at around 100 to 120,000 workers. The new technology which continues to revolutionise these companies also reduces the numbers employed.
But hold on, there are 2 million people needing jobs! There are 444,000 people on the live register of unemployment. The figures tell us the continuingly depressing story of the demise of these people. We knew already that 150,000 have lost their jobs in construction or construction-related work.
The big drivers in creating Irish jobs have always been based on what people produce domestically. However, the figures tell us that all domestic output fell, apart from business output which rose, and which is strongly influenced by multinationals. For example: the value of building and construction to the Irish economy fell from 8.4 billion to 5.7 billion from 2009 to 2010; the value of agriculture and fishing has fallen by 227 million; the distribution, transport and communication sectors fell by 336 million; the value of other services fell by 2 billion. Incidentally, in 2007 the value of construction output stood at 13.6 billion compared to 5.7 billion at the end of 2010.
Taking all the above into consideration, the clear message is that the loss in jobs in the Irish economy, which is reflected in the fall of GDP in 2010 and particularly in the fourth quarter of 2010, is indicative of a deep recession. Apart from multinationals, Ireland is haemorrhaging jobs out of its economy and driving up emigration.
Examining the expenditure economic growth figures, the overall demand in the economy has fallen by 7.9 billion. The fact that multinational net exports grew by 5.7 billion makes little difference as it produces few extra jobs. It does nothing to improve the catastrophic effects of the loss of jobs in the sectors of the Irish economy mentioned above which actually do provide jobs, and which have all fallen.
The current GNP figures only statistically mask this huge problem which is obvious from the fall in GDP of almost one billion in the last quarter of 2010 alone. The masking of this by a statistical increase of over 2 billion in GNP terms, based on lower repatriation of multinational profits, shows that the GDP figures are giving the correct picture.
Last year I warned against trusting the predictions of a strong economic recovery at the end of last year and the dangers of growing unemployment and emigration. Unemployment has increased to 444,000 at present, and emigration is running at 80,000 a year. The reasons are obvious from the above. Unemployment and recession will not be solved by any government which lies to the population by quoting GNP figures. They mislead the people by promising that the economy is out of recession; that it has ‘turned the corner’; or that unemployment will drop significantly going forward.
As I have stated since June 2008, the government needs a sustained set of stimulus packages to provide job beneficial growth. It needs three stimulus packages worth 8 billion over two years and includes: A state development bank to lend money to viable businesses coming from the un-borrowed cash reserves of the government at the National Treasury Management Agency and at the National Pension Reserve Fund. This is crying out to happen as money invested by businesses fell by a staggering 27% in 2010 according to the current figures. This needs to prioritise indigenous business by investing 3 billion in social partner-vetted business growth and new ventures.
A further 2 billion needs to be invested in hundreds of new schools, primary care health centres and mental health facilities; finally, 100,000 houses need to be bought by the state at never-to-be-repeated bargain basement prices which would cost 3 billion in net terms. Through low cost affordable housing and social housing with reasonable rents, thousands can be taken out of unemployment traps and the black economy, and with economic stimulation, be brought in to taxpaying real jobs, also taking them off social welfare.
This piece is written from an ideological position that the economic consensus that operating up to now, called variously by terms such as total free market philosophy, has failed. In the words of a book by Paul Krugman, Nobel Prize Winner for Economics in 2008, “A Country is not a Company”. Each business leads its own business only; the government needs to lead overall. The current debacle will continue to fail as long as there is a failure by the state to lead economic development. The direction of change at this point should be firmly rooted in a new and lean Keynesian economic model.
A plan and a concrete investment strategy funded from our own unborrowed resources within the NPRF and NTMA needs to happen mow. What is happening now and in the last two years is that governments, most economists and the media have all but ignored unemployment, given the urgent necessity to fix the banks. Can I suggest that unemployment is even more urgent? It should have been, and should now be, dealt with, even before this banking crisis is resolved.
Most people will not read last week's CSO figures on economic growth which are designed to tell us whether or not we are still in recession. However, people in pubs, shops, clubs and workplaces really do want to know whether we are or not. They are hanging on for dear life and their children are emigrating. Will there be an improvement? If not, they want to know why not, and what is the Government going to do about it?
Let’s look at the figures: Based on the whole of 2010, they tell us we are still in recession because both measures of economic growth fell. GDP fell by 1% and GNP by 2%. This is bad news. But, policy makers will say that we are either out of recession or coming out of recession. Why? Because they will say that GNP grew by somewhere between 0 and 2% in each of the last three quarters of 2010.
People will say, however, that they can still really feel the recession and it’s not getting any better. The truth is that we are not out of recession! This indeed is also borne out by the figures for GDP, which fell by 1.6% in the last quarter of 2010. Ah, but policy makers will say that GNP is a better measure for Ireland, so that doesn’t matter!
They would be very wrong. During this recession, the GDP figures are a far better indication of whether or not the economy is out of recession. It is a better indicator of how many jobs are being lost and created. It is a better indicator of how much money people have in their pockets and also how many people will emigrate.
The figures tell us why: firstly, the fact that GDP has fallen by 1.6% in the last quarter of 2010, and GNP rose by 2%, is explained mainly by the profit repatriation practices of multinational companies. Essentially, some of the 2% growth in GNP in the last quarter of 2010 is a statistical aberration, and happened mainly because multinationals didn’t repatriate as many profits as normal in that quarter!
Nonetheless, much of the GNP increase has been fuelled by real exports which in gross terms rose by 13.6 billion from 2009-2010 and when imports are subtracted grew by 5.7 billion. This growth arose from the multinational sector in the main, which accounts for up to 90% of Irish exports. However, the jobs dividend from this growth will be very little. Why?
Much of the work on these exports has already been done in Bermuda or elsewhere and is only registered as an Irish export to take advantage of the low 12.5% corporation tax. Multinationals' employment levels have been relatively stable over that last number of years, fixed at around 100 to 120,000 workers. The new technology which continues to revolutionise these companies also reduces the numbers employed.
But hold on, there are 2 million people needing jobs! There are 444,000 people on the live register of unemployment. The figures tell us the continuingly depressing story of the demise of these people. We knew already that 150,000 have lost their jobs in construction or construction-related work.
The big drivers in creating Irish jobs have always been based on what people produce domestically. However, the figures tell us that all domestic output fell, apart from business output which rose, and which is strongly influenced by multinationals. For example: the value of building and construction to the Irish economy fell from 8.4 billion to 5.7 billion from 2009 to 2010; the value of agriculture and fishing has fallen by 227 million; the distribution, transport and communication sectors fell by 336 million; the value of other services fell by 2 billion. Incidentally, in 2007 the value of construction output stood at 13.6 billion compared to 5.7 billion at the end of 2010.
Taking all the above into consideration, the clear message is that the loss in jobs in the Irish economy, which is reflected in the fall of GDP in 2010 and particularly in the fourth quarter of 2010, is indicative of a deep recession. Apart from multinationals, Ireland is haemorrhaging jobs out of its economy and driving up emigration.
Examining the expenditure economic growth figures, the overall demand in the economy has fallen by 7.9 billion. The fact that multinational net exports grew by 5.7 billion makes little difference as it produces few extra jobs. It does nothing to improve the catastrophic effects of the loss of jobs in the sectors of the Irish economy mentioned above which actually do provide jobs, and which have all fallen.
The current GNP figures only statistically mask this huge problem which is obvious from the fall in GDP of almost one billion in the last quarter of 2010 alone. The masking of this by a statistical increase of over 2 billion in GNP terms, based on lower repatriation of multinational profits, shows that the GDP figures are giving the correct picture.
Last year I warned against trusting the predictions of a strong economic recovery at the end of last year and the dangers of growing unemployment and emigration. Unemployment has increased to 444,000 at present, and emigration is running at 80,000 a year. The reasons are obvious from the above. Unemployment and recession will not be solved by any government which lies to the population by quoting GNP figures. They mislead the people by promising that the economy is out of recession; that it has ‘turned the corner’; or that unemployment will drop significantly going forward.
As I have stated since June 2008, the government needs a sustained set of stimulus packages to provide job beneficial growth. It needs three stimulus packages worth 8 billion over two years and includes: A state development bank to lend money to viable businesses coming from the un-borrowed cash reserves of the government at the National Treasury Management Agency and at the National Pension Reserve Fund. This is crying out to happen as money invested by businesses fell by a staggering 27% in 2010 according to the current figures. This needs to prioritise indigenous business by investing 3 billion in social partner-vetted business growth and new ventures.
A further 2 billion needs to be invested in hundreds of new schools, primary care health centres and mental health facilities; finally, 100,000 houses need to be bought by the state at never-to-be-repeated bargain basement prices which would cost 3 billion in net terms. Through low cost affordable housing and social housing with reasonable rents, thousands can be taken out of unemployment traps and the black economy, and with economic stimulation, be brought in to taxpaying real jobs, also taking them off social welfare.
This piece is written from an ideological position that the economic consensus that operating up to now, called variously by terms such as total free market philosophy, has failed. In the words of a book by Paul Krugman, Nobel Prize Winner for Economics in 2008, “A Country is not a Company”. Each business leads its own business only; the government needs to lead overall. The current debacle will continue to fail as long as there is a failure by the state to lead economic development. The direction of change at this point should be firmly rooted in a new and lean Keynesian economic model.
Tuesday, 15 February 2011
'Job Pact', not 'Competitiveness Pact'
Tom McDonnell: Useful post (here) from Andrew Watt. He looks at the latest uninspiring growth figures in Europe (0.3% quarter-on-quarter in the euro area and just 0.2% in the wider EU27). We cannot assume such anaemic growth will be improved upon as austerity bites down in 2011. Weak employment growth will be the upshot.
One interesting point relates to the newly fashionable idea that increased ‘competitiveness’ is the solution to the jobs crisis. Andrew notes that the Euro area has actually maintained a balanced trade account virtually throughout its existence and achieved a trade surplus in 2010. If the Euro area had a severe competitiveness problem it would surely be reflected in the trade statistics.
Ireland of course has the second highest (http://www.finfacts.ie/irishfinancenews/article_1021642.shtml) trade surplus in the whole of the EU. Ireland has many problems but competitiveness does not appear to be at the top of the list. Worth bearing in mind as the attacks on the minimum wage and other wage floors continue...
One interesting point relates to the newly fashionable idea that increased ‘competitiveness’ is the solution to the jobs crisis. Andrew notes that the Euro area has actually maintained a balanced trade account virtually throughout its existence and achieved a trade surplus in 2010. If the Euro area had a severe competitiveness problem it would surely be reflected in the trade statistics.
Ireland of course has the second highest (http://www.finfacts.ie/irishfinancenews/article_1021642.shtml) trade surplus in the whole of the EU. Ireland has many problems but competitiveness does not appear to be at the top of the list. Worth bearing in mind as the attacks on the minimum wage and other wage floors continue...
Thursday, 20 January 2011
Recovery? What recovery?
Michael Taft: The ESRI’s new quarterly analysis is out (though not available on-line for 30 days). Though its forecasts are more pessimistic than the Government’s projections, they state:
‘ . . . we would not place too great an emphasis on the difference. Instead, we take it as being an on-going indicator of the challenges which are faced in restoring the public finances to a sustainable path.’
Maybe so, but the challenges, then, are getting even challengier. Let’s summarise.
Economic Growth
The ESRI is projecting sluggish growth coming off the recession. Whereas the Government is hoping for 4.9 percent GDP growth over the next two years, the ESRI suggests it will be only 3.7 percent.
The gap between the two is even larger with GNP – 3.6 percent compared to 1.7 percent. The domestic economy, according to the ESRI, will grow by less than half the rate the Government projects.
That considerable gap is more understandable when we see that the ESRI projects that the economy will still be in a domestic-demand recession by 2012 – the fifth year running.
Employment
The Government is hoping that net job creation over the two years will be positive – 21,000. The ESRI, reflecting their pessimism on the domestic economy, sees employment falling – by 20,000. Industry will continue to slide despite the increase in merchandise exports, falling by over 4 percent, with the service sector registering a smaller percentage fall.
Emigration, which is rightfully getting big headlines, is projected to be 100,000 over the next two years. The Government projected emigration to be 100,000 as well – but over the four year period up to 2014. Even with this higher emigration, the ESRI projects that the unemployment rate will still be higher than the Government’s estimates by 2012: 13 percent compared to 12 percent.
Investment
The fall in investment has been the driver in the Irish recession. According to the ESRI it will be some time before it is a driver in the recovery (at least under current policy). Investment is expected to fall, in nominal terms, from €18 billion to €17.6 billion by 2012.
Let’s put that in some perspective. In 2007, capital formation stood at €46 billion. Of course, much of this was part of the boom which was always going to melt away. But the Government hasn’t helped – cutting public investment by half since 2008, from €9 billion to €4.7 billion this year (and €3.5 billion by 2014). The even greater reliance on private sector investment will mean minimal growth over the years ahead.
Exports
This is the one category going from strength to strength. The ESRI is even more optimistic than the Government, projecting exports to grow by 11 percent over the next two years, after a strong performance last year (estimated at over 8 percent). But while the ESRI predicts growth in all sectors (goods, services, tourism), they are most bullish on what is essentially the modern sectors which are dominated by multi-nationals. As pointed out here, growth in the multi-national sectors will have a far less impact on the domestic economy than growth in indigenous exports. So the headline rate looks positive, but we will need more details on the composition of exports (which the ESRI doesn’t have) to assess its final impact on economic growth.
Consumer Spending
Another category of negative growth. The Government is hoping that consumer spending will grow, though only marginally (0.9 percent over the next two years); the ESRI is projecting a further fall of – 1.5 percent. This is due to income tax increases, cuts in social transfers, falling employment and emigration, etc. We can also throw in rising interest rates – the ESRI projects that the ECB main rate will rise from 1.0 to 2.5 by 2012. Higher payments on mortgages and other debt, means less spending on goods and services. All in all, consumer sentiment is expected to be cautious with the savings ratio remaining high.
Public Finances
Domestic demand, investment, consumer spending, employment – all down from Government projections. Yet, the ESRI is still hopeful that Government deficit targets can be met. In 2012, they are projecting a deficit of -7.7 percent, only fractionally worse than the Government’s own -7.4 percent projection. They explain it this way.
On the revenue side, the ESRI estimates that tax revenue will be €1.6 billion lower than Government estimates by 2012 – reflecting low economic and employment growth.
On the expenditure side, the ESRI estimates that net current spending will be €900 million less. This is made up mostly of declining interest payments (€800 million) arising from the reduction of the Exchequer cash balances as part of the IMF/EU bail-out.
If interest payments fall at the rate ESRI projects, the Government might hope to reach their target. But with revenue slipping and more demand on expenditure arising from higher unemployment and low incomes, the ESRI may be too optimistic on this score.
‘ . . . we would not place too great an emphasis on the difference. Instead, we take it as being an on-going indicator of the challenges which are faced in restoring the public finances to a sustainable path.’
Maybe so, but the challenges, then, are getting even challengier. Let’s summarise.
Economic Growth
The ESRI is projecting sluggish growth coming off the recession. Whereas the Government is hoping for 4.9 percent GDP growth over the next two years, the ESRI suggests it will be only 3.7 percent.
The gap between the two is even larger with GNP – 3.6 percent compared to 1.7 percent. The domestic economy, according to the ESRI, will grow by less than half the rate the Government projects.
That considerable gap is more understandable when we see that the ESRI projects that the economy will still be in a domestic-demand recession by 2012 – the fifth year running.
Employment
The Government is hoping that net job creation over the two years will be positive – 21,000. The ESRI, reflecting their pessimism on the domestic economy, sees employment falling – by 20,000. Industry will continue to slide despite the increase in merchandise exports, falling by over 4 percent, with the service sector registering a smaller percentage fall.
Emigration, which is rightfully getting big headlines, is projected to be 100,000 over the next two years. The Government projected emigration to be 100,000 as well – but over the four year period up to 2014. Even with this higher emigration, the ESRI projects that the unemployment rate will still be higher than the Government’s estimates by 2012: 13 percent compared to 12 percent.
Investment
The fall in investment has been the driver in the Irish recession. According to the ESRI it will be some time before it is a driver in the recovery (at least under current policy). Investment is expected to fall, in nominal terms, from €18 billion to €17.6 billion by 2012.
Let’s put that in some perspective. In 2007, capital formation stood at €46 billion. Of course, much of this was part of the boom which was always going to melt away. But the Government hasn’t helped – cutting public investment by half since 2008, from €9 billion to €4.7 billion this year (and €3.5 billion by 2014). The even greater reliance on private sector investment will mean minimal growth over the years ahead.
Exports
This is the one category going from strength to strength. The ESRI is even more optimistic than the Government, projecting exports to grow by 11 percent over the next two years, after a strong performance last year (estimated at over 8 percent). But while the ESRI predicts growth in all sectors (goods, services, tourism), they are most bullish on what is essentially the modern sectors which are dominated by multi-nationals. As pointed out here, growth in the multi-national sectors will have a far less impact on the domestic economy than growth in indigenous exports. So the headline rate looks positive, but we will need more details on the composition of exports (which the ESRI doesn’t have) to assess its final impact on economic growth.
Consumer Spending
Another category of negative growth. The Government is hoping that consumer spending will grow, though only marginally (0.9 percent over the next two years); the ESRI is projecting a further fall of – 1.5 percent. This is due to income tax increases, cuts in social transfers, falling employment and emigration, etc. We can also throw in rising interest rates – the ESRI projects that the ECB main rate will rise from 1.0 to 2.5 by 2012. Higher payments on mortgages and other debt, means less spending on goods and services. All in all, consumer sentiment is expected to be cautious with the savings ratio remaining high.
Public Finances
Domestic demand, investment, consumer spending, employment – all down from Government projections. Yet, the ESRI is still hopeful that Government deficit targets can be met. In 2012, they are projecting a deficit of -7.7 percent, only fractionally worse than the Government’s own -7.4 percent projection. They explain it this way.
On the revenue side, the ESRI estimates that tax revenue will be €1.6 billion lower than Government estimates by 2012 – reflecting low economic and employment growth.
On the expenditure side, the ESRI estimates that net current spending will be €900 million less. This is made up mostly of declining interest payments (€800 million) arising from the reduction of the Exchequer cash balances as part of the IMF/EU bail-out.
If interest payments fall at the rate ESRI projects, the Government might hope to reach their target. But with revenue slipping and more demand on expenditure arising from higher unemployment and low incomes, the ESRI may be too optimistic on this score.
Thursday, 4 November 2010
Has Unemployment Stabilised?
Nat O'Connor: Unemployed decreased by 6,600 (seasonally adjusted) if you compare October 2010 figures with those of September 2010. Yet, October’s figures are an increase of 17,400 (also seasonally adjusted) from 2009. (CSO source here). Stablising or not, it clearly remains essential to bring as many ideas as possible on the table to maximise job creation.
The Government has welcomed the fall in unemployment, calling it signs of a “stabilising economy”, however they recognise the ongoing jobs challenge.
“Minister Ó Cuív referred to number of key strategic initiatives to create new jobs and to get people back to work; the five-year integrated plan for trade, tourism and investment, aimed at generating 300,000 jobs and boosting exports by one third, and the €500 million Innovation Fund-Ireland which aims to draw top venture capitalists to Ireland.”
The Government is also welcoming a decline in redundancies.
Labour spokesperson on Enterprise, Trade and Employment Willie Penrose has provided a longer list of measures to “generate the conditions where job creation can flourish”.
These include:
- Using €2 billion from the pension reserve fund to establish a strategic investment bank to get credit to the SME sector and to invest in infrastructure;
- Targetting clean technology, food, tourism, cultural and creative industries for job creation;
- Banning of upward only rent reviews;
- Reforming the PRSI exemption scheme to incentivise employers to take on extra staff;
- Creating 20,000 places on a six-month placement scheme in both the public and private sector;
- Reducing the qualifying period for Back to Education and Back to Work Enterprise Allowance to three months, and allow far greater access to post-graduate courses;
- Increasing the Back to Education Initiative by 6,000 places;
- Lifting the cap on VEC further education places and create an additional 10,000 places;
- Expanding VTOS by 20%. Create one thousand extra places for young jobseekers;
- Creating a skills exchange in VECs, FAS training Colleges, and Institutes of Technology;
- Providing more support services for jobseekers through the amalgamation of FAS employment services with the Department of Social Protection, and through integration with other key training and education agencies.
Labour's proposals point towards expanding or reforming existing schemes. These are policies that can be rolled out quickly, which is vital. The question of eliminating all remaining 'upward only' rent contracts is also worth serious consideration.
Meanwhile, Fine Gael have proposals under the heading of Getting Ireland Working Again.
They would:
- Immediately cut taxes on jobs and struggling sectors of the economy;
- Start a new National Recovery Bank to ease credit conditions for families and small businesses;
- Create 105,000 jobs through an €18 billion upgrading of water, broadband and energy, paid for in part by selling assets that the State no longer needs (i.e. their NewERA plan);
- Use the social welfare budget to expand second chance education, training and internship opportunities;
- Help small businesses, exporters and inward investors by forcing down high prices for rent, electricity, transport and professional services.
Fine Gael add one specific policy to the jobs debate: doubling Ireland’s sector that provides education to international students. This is perhaps a useful reminder that job creation requires a focus on the ‘micro’ economy; industry-by-industry, sub-sector-by-sub-sector.
It is important to note deep differences underlying the Labour and Fine Gael approaches. Labour want to use the NPRF to get credit to SMEs. They also call for higher taxes. And they focus on reforming the links between the welfare system and employment support services. Whereas Fine Gael are talking about tax cuts, and their policy on social welfare is more menacing, where they state: "instead of encouraging idleness, dependency and poverty for younger unemployed people, we would use the social welfare budget to expand second chance education, training and internship opportunities." This suggests cutting welfare rates to 'incentivise' employment - regardless of the hardship or the deflationary decrease in aggregate demand in the economy it would cause.
The Government has welcomed the fall in unemployment, calling it signs of a “stabilising economy”, however they recognise the ongoing jobs challenge.
“Minister Ó Cuív referred to number of key strategic initiatives to create new jobs and to get people back to work; the five-year integrated plan for trade, tourism and investment, aimed at generating 300,000 jobs and boosting exports by one third, and the €500 million Innovation Fund-Ireland which aims to draw top venture capitalists to Ireland.”
The Government is also welcoming a decline in redundancies.
Labour spokesperson on Enterprise, Trade and Employment Willie Penrose has provided a longer list of measures to “generate the conditions where job creation can flourish”.
These include:
- Using €2 billion from the pension reserve fund to establish a strategic investment bank to get credit to the SME sector and to invest in infrastructure;
- Targetting clean technology, food, tourism, cultural and creative industries for job creation;
- Banning of upward only rent reviews;
- Reforming the PRSI exemption scheme to incentivise employers to take on extra staff;
- Creating 20,000 places on a six-month placement scheme in both the public and private sector;
- Reducing the qualifying period for Back to Education and Back to Work Enterprise Allowance to three months, and allow far greater access to post-graduate courses;
- Increasing the Back to Education Initiative by 6,000 places;
- Lifting the cap on VEC further education places and create an additional 10,000 places;
- Expanding VTOS by 20%. Create one thousand extra places for young jobseekers;
- Creating a skills exchange in VECs, FAS training Colleges, and Institutes of Technology;
- Providing more support services for jobseekers through the amalgamation of FAS employment services with the Department of Social Protection, and through integration with other key training and education agencies.
Labour's proposals point towards expanding or reforming existing schemes. These are policies that can be rolled out quickly, which is vital. The question of eliminating all remaining 'upward only' rent contracts is also worth serious consideration.
Meanwhile, Fine Gael have proposals under the heading of Getting Ireland Working Again.
They would:
- Immediately cut taxes on jobs and struggling sectors of the economy;
- Start a new National Recovery Bank to ease credit conditions for families and small businesses;
- Create 105,000 jobs through an €18 billion upgrading of water, broadband and energy, paid for in part by selling assets that the State no longer needs (i.e. their NewERA plan);
- Use the social welfare budget to expand second chance education, training and internship opportunities;
- Help small businesses, exporters and inward investors by forcing down high prices for rent, electricity, transport and professional services.
Fine Gael add one specific policy to the jobs debate: doubling Ireland’s sector that provides education to international students. This is perhaps a useful reminder that job creation requires a focus on the ‘micro’ economy; industry-by-industry, sub-sector-by-sub-sector.
It is important to note deep differences underlying the Labour and Fine Gael approaches. Labour want to use the NPRF to get credit to SMEs. They also call for higher taxes. And they focus on reforming the links between the welfare system and employment support services. Whereas Fine Gael are talking about tax cuts, and their policy on social welfare is more menacing, where they state: "instead of encouraging idleness, dependency and poverty for younger unemployed people, we would use the social welfare budget to expand second chance education, training and internship opportunities." This suggests cutting welfare rates to 'incentivise' employment - regardless of the hardship or the deflationary decrease in aggregate demand in the economy it would cause.
Wednesday, 14 July 2010
One step forward, one step backward, one step sideways
Michael Taft: The ESRI’s Summer Quarterly Economic Quarterly is full of data for just about every perspective on the economy – from the optimist to the pessimistic and all attitudes in between:
While data on retail sales, consumer confidence and exports all point to signs that a recovery is already underway, the numbers from the Live Register, income tax returns and the most recent estimates of quarterly GNP would suggest that the economy is still contracting.
Here’s the statistic that screams out to me: the ESRI has revised downwards their GNP growth projections (i.e. the domestic economy) for both this year and next year. Three months ago, the ESRI projected GNP growth this year to be 0 percent; now they’re saying it will decline by -0.5 percent; three months ago they projected GNP to grow in 2011 by 2.7 percent; now it’s 2.2 percent.
This is what other forecasters have been doing – revising downwards our domestic economy even as our export-driven GDP is growing. Three months ago, the ESRI was estimating that GNP growth would outstrip GDP growth over the next two years: 2.7 compared 2 percent.
Now the situation is completely reversed. While they have revised upwards GDP growth upwards by half over this year and next, they have cut GNP growth by nearly half. From outstripping GDP growth, the domestic economy is now lagging considerably.
But even these downward revisions may prove to be optimistic:
‘ . . . the short-term prospects for the Irish economy continue to be precarious . . . the forecasts . . . are critically based on the assumption that difficulties in international financial markets will be resolved swiftly.’
Those are heavy dice to roll – banking on a swift resolution.
While the ESRI report will produce a considerable debate over the next few days, let’s canvas a few issues here:
Employment: No good news here. If anything, the ESRI are marginally more pessimistic revising downwards employment levels in 2011. In short, there will be no jobs growth next year – compared to the Government’s target of 20,000 new jobs. This will result in an unemployment rate of 13 percent next year; again, slightly up on Government projections. Thanks goodness for all that emigration – which is now estimated to rise to 120,000 over this year and next. If it weren’t for emigration, the unemployment rate would be close to 17 percent.
Deficit: a lot of the attention will be paid to the ESRI’s decision to include the bank bail-out money in the annual deficit. In truth, given the EU’s ruling on the Anglo-Irish bail-out, they had no choice. As a result, the deficit will balloon this year to nearly -20 percent. The Government will, with some justification, point to the underlying deficit; that is, the deficit minus the bail-out money.
On this reading, the deficit is projected to come it at -11.6 percent, which is consistent with Government forecasts. However, there is one difference. The ESRI is anticipating a considerable increase in tax revenue compared to what the Government estimates. The tax revenue projections for 2010 are:
• Government: €31.1 billion
• ESRI: €32.6 billion
The ESRI is expecting tax revenue to exceed Government estimates by over 4 percent. The problem is that the half-yearly Exchequer returns show tax revenue to be -1.6 percent below Government targets. The ESRI is hoping for a big turnaround in the second half of this year, through marginally higher consumer spending and GDP growth. However, with job numbers and aggregate wages in decline, with the revision downwards in GNP growth, this remains to be seen.
If tax revenue figures end up closer to the Government’s estimates, then the deficit will easily exceed -12 percent. This is not what was supposed to happen.
Investment: The ESRI makes a curious and unexplained assertion.
‘We argue that public funds would be better used in re-skilling and up-skilling people who are unemployed as opposed to using spending on infrastructure as a form of employment creation. It appears to us that public funds would be better used in re-skilling and up-skilling people . . . As argued by Morgenroth, public capital projects should be undertaken on the basis that they have a long-run return to the whole economy and not because they create short-term employment. This is because of a relatively high cost per job created via public investment.’
This is an incredible statement by any measurement. ‘We argue’: no, they don’t. They assert because ‘it appears’. The ESRI puts investment and retraining in opposition when, in fact, they are complementary. Morgenroth’s argument cannot be taken as an argument against investment; in fact, it is a cogent argument for well-thought out initiatives that will deliver increased productivity, higher economic activity and, as it happens, more jobs.
Take IBEC’s proposal for a Next Generation broadband network capable of 90 percent coverage in the country: does anyone doubt the long-term boost to the economy. This would have enormous supply-side benefits which will continue to contribute to growth, employment and higher incomes in the long-term. And in the short-term, it would increase employment and growth as well – IBEC estimates that two-thirds of the €2.2 billion cost of this project would be spent on civil engineering works. Good for the short-term, good for the long-term. This is an investment stimulus strategy that focuses on those projects we would need to complete in any event, regardless of the recession.
The ESRI’s ‘argument’ against infrastructural investment amounts to a 76 word assertion. No data, no model, no facts. I could say this is not good enough; but, in truth, this is the way the debate has been conducted.
* * *
The ESRI report points to a two-tier economy a modern, multi-national sector which is neither tax-rich, because we don’t tax them, nor job-rich since it is capital intensive; a low-growth, high debt (debt is hurtling towards a worrying 100 percent of GDP), high unemployment medium-term.
Some will call this a recovery. There are better words.
While data on retail sales, consumer confidence and exports all point to signs that a recovery is already underway, the numbers from the Live Register, income tax returns and the most recent estimates of quarterly GNP would suggest that the economy is still contracting.
Here’s the statistic that screams out to me: the ESRI has revised downwards their GNP growth projections (i.e. the domestic economy) for both this year and next year. Three months ago, the ESRI projected GNP growth this year to be 0 percent; now they’re saying it will decline by -0.5 percent; three months ago they projected GNP to grow in 2011 by 2.7 percent; now it’s 2.2 percent.
This is what other forecasters have been doing – revising downwards our domestic economy even as our export-driven GDP is growing. Three months ago, the ESRI was estimating that GNP growth would outstrip GDP growth over the next two years: 2.7 compared 2 percent.
Now the situation is completely reversed. While they have revised upwards GDP growth upwards by half over this year and next, they have cut GNP growth by nearly half. From outstripping GDP growth, the domestic economy is now lagging considerably.
But even these downward revisions may prove to be optimistic:
‘ . . . the short-term prospects for the Irish economy continue to be precarious . . . the forecasts . . . are critically based on the assumption that difficulties in international financial markets will be resolved swiftly.’
Those are heavy dice to roll – banking on a swift resolution.
While the ESRI report will produce a considerable debate over the next few days, let’s canvas a few issues here:
Employment: No good news here. If anything, the ESRI are marginally more pessimistic revising downwards employment levels in 2011. In short, there will be no jobs growth next year – compared to the Government’s target of 20,000 new jobs. This will result in an unemployment rate of 13 percent next year; again, slightly up on Government projections. Thanks goodness for all that emigration – which is now estimated to rise to 120,000 over this year and next. If it weren’t for emigration, the unemployment rate would be close to 17 percent.
Deficit: a lot of the attention will be paid to the ESRI’s decision to include the bank bail-out money in the annual deficit. In truth, given the EU’s ruling on the Anglo-Irish bail-out, they had no choice. As a result, the deficit will balloon this year to nearly -20 percent. The Government will, with some justification, point to the underlying deficit; that is, the deficit minus the bail-out money.
On this reading, the deficit is projected to come it at -11.6 percent, which is consistent with Government forecasts. However, there is one difference. The ESRI is anticipating a considerable increase in tax revenue compared to what the Government estimates. The tax revenue projections for 2010 are:
• Government: €31.1 billion
• ESRI: €32.6 billion
The ESRI is expecting tax revenue to exceed Government estimates by over 4 percent. The problem is that the half-yearly Exchequer returns show tax revenue to be -1.6 percent below Government targets. The ESRI is hoping for a big turnaround in the second half of this year, through marginally higher consumer spending and GDP growth. However, with job numbers and aggregate wages in decline, with the revision downwards in GNP growth, this remains to be seen.
If tax revenue figures end up closer to the Government’s estimates, then the deficit will easily exceed -12 percent. This is not what was supposed to happen.
Investment: The ESRI makes a curious and unexplained assertion.
‘We argue that public funds would be better used in re-skilling and up-skilling people who are unemployed as opposed to using spending on infrastructure as a form of employment creation. It appears to us that public funds would be better used in re-skilling and up-skilling people . . . As argued by Morgenroth, public capital projects should be undertaken on the basis that they have a long-run return to the whole economy and not because they create short-term employment. This is because of a relatively high cost per job created via public investment.’
This is an incredible statement by any measurement. ‘We argue’: no, they don’t. They assert because ‘it appears’. The ESRI puts investment and retraining in opposition when, in fact, they are complementary. Morgenroth’s argument cannot be taken as an argument against investment; in fact, it is a cogent argument for well-thought out initiatives that will deliver increased productivity, higher economic activity and, as it happens, more jobs.
Take IBEC’s proposal for a Next Generation broadband network capable of 90 percent coverage in the country: does anyone doubt the long-term boost to the economy. This would have enormous supply-side benefits which will continue to contribute to growth, employment and higher incomes in the long-term. And in the short-term, it would increase employment and growth as well – IBEC estimates that two-thirds of the €2.2 billion cost of this project would be spent on civil engineering works. Good for the short-term, good for the long-term. This is an investment stimulus strategy that focuses on those projects we would need to complete in any event, regardless of the recession.
The ESRI’s ‘argument’ against infrastructural investment amounts to a 76 word assertion. No data, no model, no facts. I could say this is not good enough; but, in truth, this is the way the debate has been conducted.
* * *
The ESRI report points to a two-tier economy a modern, multi-national sector which is neither tax-rich, because we don’t tax them, nor job-rich since it is capital intensive; a low-growth, high debt (debt is hurtling towards a worrying 100 percent of GDP), high unemployment medium-term.
Some will call this a recovery. There are better words.
Wednesday, 2 June 2010
The inter-relationship of it all
Michael Taft: From Ernst & Young’s Economic Eye Summer 2010 forecast, two projections scream out from the report:
First, employment levels won’t return to their pre-recession level until 2022. Yes, 2022. That’s 15 years of a jobs-recession – a decade and a half. That led the report to refer to a ‘ . . . sluggish and largely ‘jobless’ recovery’. The word ‘largely’ is an understatement.
Second, is their projection on the annual deficit. This is equally depressing but, given their employment projections, not surprising. Ernst & Young project that the Government will not only fail to reach the Maastricht deficit target of -3 percent by 2014 – they won’t reach it until 2018 or 2019.
What’s noteworthy about this deficit projection is that it is done against the background of a reasonably optimistic growth rate of 3.5 percent throughout the next decade. However, the E&Y report poses a number of caveats, especially as this growth rate rests largely on the export sector. They raise the real danger of a two-tier economy, with the domestic economy lagging even further behind. If this occurs, we might find that the deficit might (might) eventually come right statistically, but remain an unsustainably high burden for years and years to come.
Of course, this will no doubt give new impetus to the cuts brigade – those who believe you get out of a hole by digging even more. They should be aware of the following. Just after the April 2009 budget, E&Y projected that Ireland would reach the Maastricht deficit target by 2015. Now, after the December budget, they have pushed that back by three to four years. Another round of cuts could see that target pushed back even further.
The key inter-relationship is employment and the deficit. A jobless recovery will continue to impair the public finances. Responding to public finances by more spending cuts will exacerbate employment. And this, in turn, will continue to impair public finances.
Some Governments get it. This one doesn’t.
First, employment levels won’t return to their pre-recession level until 2022. Yes, 2022. That’s 15 years of a jobs-recession – a decade and a half. That led the report to refer to a ‘ . . . sluggish and largely ‘jobless’ recovery’. The word ‘largely’ is an understatement.
Second, is their projection on the annual deficit. This is equally depressing but, given their employment projections, not surprising. Ernst & Young project that the Government will not only fail to reach the Maastricht deficit target of -3 percent by 2014 – they won’t reach it until 2018 or 2019.
What’s noteworthy about this deficit projection is that it is done against the background of a reasonably optimistic growth rate of 3.5 percent throughout the next decade. However, the E&Y report poses a number of caveats, especially as this growth rate rests largely on the export sector. They raise the real danger of a two-tier economy, with the domestic economy lagging even further behind. If this occurs, we might find that the deficit might (might) eventually come right statistically, but remain an unsustainably high burden for years and years to come.
Of course, this will no doubt give new impetus to the cuts brigade – those who believe you get out of a hole by digging even more. They should be aware of the following. Just after the April 2009 budget, E&Y projected that Ireland would reach the Maastricht deficit target by 2015. Now, after the December budget, they have pushed that back by three to four years. Another round of cuts could see that target pushed back even further.
The key inter-relationship is employment and the deficit. A jobless recovery will continue to impair the public finances. Responding to public finances by more spending cuts will exacerbate employment. And this, in turn, will continue to impair public finances.
Some Governments get it. This one doesn’t.
Monday, 22 March 2010
Fiscal recklessness and the TINA mantra
Tom McDonnell: The startling change in mood that has come upon the Irish people in this post Tiger era is reminiscent of a hangover after the ball. Indeed the drunken sense of hubris during the boom was such that our leaders seemed to have genuinely felt we had moved beyond such trivialities as economic cycles. The Government had reached such arrogant heights that Bertie Ahern even saw fit to recommend suicide to those few with the clarity of vision and understanding to warn of the impending collapse. Questioning the narrative was forbidden. Just as questioning the narrative that ‘there is no alternative’ (the TINA mantra) is now forbidden.
The Government was asleep at the wheel. Budgeting and economic planning had become so dysfunctional under Brian Cowen and Charlie McCreevy that the country’s public finances had become reliant on a single commodity rising in price year-on-year. A decade of giveaways had opened up a huge structural fiscal deficit which could remain hidden provided that the value of this one asset kept on surging. But asset prices move in cycles, and when the property crash inevitably took place (and it was inevitable) it was suddenly revealed to all that Ireland had a gaping hole in its public finances. It’s important to understand that this gaping hole already existed at the time the crisis struck. The crisis merely removed the illusion. During a time of unprecedented boom the Government had done all of the wrong things. They pursued pro-cyclical policies to remain in power, and now the taxpayer is left with the bill. The result of these policies is that at a time of severe economic crisis we have no nest egg available to provide any sort of stimulus. We are told that there is no alternative to the strategy of slash and burn.
But what is done is done, and the important question now is what can be learned from this folly. How can we ensure that our public finances are never mismanaged so badly in the future? Part of the difficulty with Keynesian demand management is that during those times of economic boom a purely self-interested political party will run pro-cyclical policies. Irish economic history is littered with such examples. Instead of seeking to manage the economy with the long term interests of the country at heart the party in power is concerned with maximising the number of jobs and maximising growth levels at precisely the time of the next election regardless of the consequences. The long term health and sustainability of the economy is therefore sacrificed to ensure present day electoral success. As Irish economic history has shown, the party in power cannot be trusted not to abuse long term sustainability in this way.
To prevent history repeating itself, there is an argument for governments being deprived of the power to buy elections at the expense of the long term. One option for achieving this aim would be a Constitutional amendment.
The details of such a Constitutional amendment would be up for debate but one possibility would be to require the Government to run a minimum budget surplus equal to half the previous year’s rate of GNP growth. To ensure long term planning, the government would also be required to set out indicative budgets for the next three to five years. Finally, the Constitutional amendment would set up an independent group of experts with the power to veto the budget if the Government’s estimates of both revenue and expenditure are unrealistic or are heavily reliant on temporary phenomena such as asset price swings. Politicians would, of course, still have power to decide levels and composition of tax/expenditure.
These changes should ensure more long term economic planning and would guarantee that the option exists during times of recession to engage in demand management through massive capital expenditure increases. We would not be in the perverse position of needing to slash and burn at exactly the time when capital projects are likely to have their greatest economic net benefit. Instead of the current ‘There is No Alternative’ (TINA) strategy there could have been a strategy focused on job creation.
No one disputes that the budget does have to be balanced in the long term, but to ignore the jobs crisis will devastate a generation and compromise Ireland’s economic future by running down the national store of human capital. Addressing the jobs crisis will involve the up skilling of a whole generation of former construction workers. This will be expensive but it has to be done. The old jobs aren’t coming back and the alternative to up skilling is to condemn these cohorts to long term unemployment or emigration.
So where is future economic growth to come from? The Government’s strategy is evidently to place all of its hopes on export led growth. They hope that Ireland will grab a larger slice of the international market through improving competitiveness and that this improved competitiveness will be achieved primarily through downwards pressure on wages. One side effect of this downwards pressure will be to reduce consumption in the short term but the Government is hoping that the increase in net exports will outweigh this drop in consumption. Brian Lenihan has already signalled that we can expect a further €3billion in cuts this year in the form of a drop of 1€billion in capital investment and a drop of €2billion in current expenditure. So the vicious circle of economic contraction seems set to continue. Of course Brian Cowen is still claiming that the NAMA exercise will increase the flows of private credit in the economy. However the sad reality is that the International Monetary Fund is telling the Government that NAMA will not lead to a significant increase in lending by the banks. NAMA and underlying issues may end up impairing the economy for years to come.
So what is to be done? In an ideal world we would be in a position to engage in a stimulus to deal with the jobs crisis. The ESRI’s fiscal multipliers from last April and the Benetrix/Lane historical multipliers both show that investment can be effective in generating jobs and growth despite Ireland’s status as a small open economy. However the sheer seriousness of the fiscal position will make demand stimulation extraordinarily difficult to fund through borrowing. But the jobs crisis must now be given equal precedence with the fiscal crisis. The real question then becomes one of whether the potential damage to the fiscal position is outweighed by the benefits of a stimulus.
Targeted investment chosen on the basis of strict cost benefit criteria must now be pursued. Investment projects with long term productivity enhancing benefits can, by increasing growth and creating jobs, actually improve the public finances. With levels of private investment so low at the moment, the likelihood of crowding out is minimal. Also, as actual output in the economy is lower than potential output the likelihood of capital projects successfully increasing growth is higher than usual. The Government can begin to move in this direction by reversing its planned cut of 1€billion in the capital budget. However alternative sources of funding for job creation projects must also be pursued and dipping into the National Pension Reserve Fund must now seriously be considered as a source of funding for as long as the crisis continues. At the same time a commitment should be made to start repaying the money to the NPRF once the crisis has passed.
Finally there must be recognition that the goal of economic policy is not economic growth per se but sustainable improvements in the quality of life of citizens. With this understanding in mind, it becomes clear that a more holistic approach to budgeting is appropriate. Economic growth is one indicator of progress, but so too are equality, long term environmental sustainability, job creation, health, education and other life outcomes. In the long term the budget must be designed with a mind to the impact on these areas, and the budget must be designed within the constraints of prudent fiscal policy.
Tom McDonnell is Policy Analyst with TASC
The Government was asleep at the wheel. Budgeting and economic planning had become so dysfunctional under Brian Cowen and Charlie McCreevy that the country’s public finances had become reliant on a single commodity rising in price year-on-year. A decade of giveaways had opened up a huge structural fiscal deficit which could remain hidden provided that the value of this one asset kept on surging. But asset prices move in cycles, and when the property crash inevitably took place (and it was inevitable) it was suddenly revealed to all that Ireland had a gaping hole in its public finances. It’s important to understand that this gaping hole already existed at the time the crisis struck. The crisis merely removed the illusion. During a time of unprecedented boom the Government had done all of the wrong things. They pursued pro-cyclical policies to remain in power, and now the taxpayer is left with the bill. The result of these policies is that at a time of severe economic crisis we have no nest egg available to provide any sort of stimulus. We are told that there is no alternative to the strategy of slash and burn.
But what is done is done, and the important question now is what can be learned from this folly. How can we ensure that our public finances are never mismanaged so badly in the future? Part of the difficulty with Keynesian demand management is that during those times of economic boom a purely self-interested political party will run pro-cyclical policies. Irish economic history is littered with such examples. Instead of seeking to manage the economy with the long term interests of the country at heart the party in power is concerned with maximising the number of jobs and maximising growth levels at precisely the time of the next election regardless of the consequences. The long term health and sustainability of the economy is therefore sacrificed to ensure present day electoral success. As Irish economic history has shown, the party in power cannot be trusted not to abuse long term sustainability in this way.
To prevent history repeating itself, there is an argument for governments being deprived of the power to buy elections at the expense of the long term. One option for achieving this aim would be a Constitutional amendment.
The details of such a Constitutional amendment would be up for debate but one possibility would be to require the Government to run a minimum budget surplus equal to half the previous year’s rate of GNP growth. To ensure long term planning, the government would also be required to set out indicative budgets for the next three to five years. Finally, the Constitutional amendment would set up an independent group of experts with the power to veto the budget if the Government’s estimates of both revenue and expenditure are unrealistic or are heavily reliant on temporary phenomena such as asset price swings. Politicians would, of course, still have power to decide levels and composition of tax/expenditure.
These changes should ensure more long term economic planning and would guarantee that the option exists during times of recession to engage in demand management through massive capital expenditure increases. We would not be in the perverse position of needing to slash and burn at exactly the time when capital projects are likely to have their greatest economic net benefit. Instead of the current ‘There is No Alternative’ (TINA) strategy there could have been a strategy focused on job creation.
No one disputes that the budget does have to be balanced in the long term, but to ignore the jobs crisis will devastate a generation and compromise Ireland’s economic future by running down the national store of human capital. Addressing the jobs crisis will involve the up skilling of a whole generation of former construction workers. This will be expensive but it has to be done. The old jobs aren’t coming back and the alternative to up skilling is to condemn these cohorts to long term unemployment or emigration.
So where is future economic growth to come from? The Government’s strategy is evidently to place all of its hopes on export led growth. They hope that Ireland will grab a larger slice of the international market through improving competitiveness and that this improved competitiveness will be achieved primarily through downwards pressure on wages. One side effect of this downwards pressure will be to reduce consumption in the short term but the Government is hoping that the increase in net exports will outweigh this drop in consumption. Brian Lenihan has already signalled that we can expect a further €3billion in cuts this year in the form of a drop of 1€billion in capital investment and a drop of €2billion in current expenditure. So the vicious circle of economic contraction seems set to continue. Of course Brian Cowen is still claiming that the NAMA exercise will increase the flows of private credit in the economy. However the sad reality is that the International Monetary Fund is telling the Government that NAMA will not lead to a significant increase in lending by the banks. NAMA and underlying issues may end up impairing the economy for years to come.
So what is to be done? In an ideal world we would be in a position to engage in a stimulus to deal with the jobs crisis. The ESRI’s fiscal multipliers from last April and the Benetrix/Lane historical multipliers both show that investment can be effective in generating jobs and growth despite Ireland’s status as a small open economy. However the sheer seriousness of the fiscal position will make demand stimulation extraordinarily difficult to fund through borrowing. But the jobs crisis must now be given equal precedence with the fiscal crisis. The real question then becomes one of whether the potential damage to the fiscal position is outweighed by the benefits of a stimulus.
Targeted investment chosen on the basis of strict cost benefit criteria must now be pursued. Investment projects with long term productivity enhancing benefits can, by increasing growth and creating jobs, actually improve the public finances. With levels of private investment so low at the moment, the likelihood of crowding out is minimal. Also, as actual output in the economy is lower than potential output the likelihood of capital projects successfully increasing growth is higher than usual. The Government can begin to move in this direction by reversing its planned cut of 1€billion in the capital budget. However alternative sources of funding for job creation projects must also be pursued and dipping into the National Pension Reserve Fund must now seriously be considered as a source of funding for as long as the crisis continues. At the same time a commitment should be made to start repaying the money to the NPRF once the crisis has passed.
Finally there must be recognition that the goal of economic policy is not economic growth per se but sustainable improvements in the quality of life of citizens. With this understanding in mind, it becomes clear that a more holistic approach to budgeting is appropriate. Economic growth is one indicator of progress, but so too are equality, long term environmental sustainability, job creation, health, education and other life outcomes. In the long term the budget must be designed with a mind to the impact on these areas, and the budget must be designed within the constraints of prudent fiscal policy.
Tom McDonnell is Policy Analyst with TASC
Friday, 19 March 2010
Jobs and recovery
Tom O'Connor: The Labour Party are holding a public seminar in Cork tomorrow on solutions to Ireland's economic crisis. The speakers including myself will look at the causes of Ireland’s economic crisis and solutions to it with a particular emphasis on job creation and national recovery.
I will be focusing on jobs and national recovery. My starting position is that to tolerate 430,000 unemployed on the live register is economically disastrous for the economy. Just as importantly, it is morally and socially unacceptable.
Two years ago this June I predicted in the national media that unless the economy received a significant short term stimulation, that it would spiral downwards in to recession.
I said (Summer 2008) on national radio that this would be accompanied by constant increases in unemployment and a resultant falling tax take and widening hole in the public finances. It was obvious two years ago that this perilous situation, in the absence of economic stimulation, would necessitate further cuts, more economic depression, more unemployment, more falls in tax takes, increased deficits and then more cuts......in a spiral downwards.
In the summer of 2008 a huge hole was opening in the government finances: reports at that time were that it was running a deficit of 4 billion. By the start of December, the government stated that it’s deficit for the first 11 months of 2008 was 8 billion. In fact, its end of year deficit for 2008 was 12.7 billion.
The government announced in its October 2008 budget that it expected the end of year deficit for 2009 to be 13.4 billion. In the extra budget in April, the government forecasted and far bigger end of 2009 deficit of 20.35 billion. On the sixth of January 2010, the government announced that the final end of year deficit for 2009 was 24.6 billion.
In May 2008 as the government’s finances started to deteriorate, live register unemployment stood at 201,800 (deficit 4 billion). In February 2009 live register unemployment was 352,453 (deficit of 12.7 billion). In January 2010, this figure was 436,936 (deficit of 24.6 billion) and in February it was 436,956.
That amounts to clear evidence for the cuts- economic depression- unemployment- falling tax takes- ballooning budget deficit prediction. The overall government tax take at end of 2007 amounted to around 47.8 billion (unemployment 198,000 Feb 08). At the end of 2008, with the recession after starting in June, this figure was 41.6 billion (Feb 09 352,000 unemployed). By the end of 2009, the tax take came in at 33 billion (unemployment 437,000 Jan 2010).
So, the government tax take fell by 15 billion over the 24 months in 2008 and 2009 accompanied by a rise in unemployment of 240,000 over the period. Over that period, the budget deficit rose from 1.6 billion to 24.6 billion. In 2009, the government also spend 4 billion out of exchequer funds to recapitalise Anglo Irish Bank. Consequently, 19 billon of the total accumulated deficit from the end of 2007 to 2009 can be accounted for by a huge tax fall, due to untreated unemployment and 4 billion spent on Anglo Irish Bank.
This is a critical observation: it shows that the government’s finances are mostly caused by a fall in aggregate demand due to the recession. Were it not for unemployment and Anglo Irish Bank, our government deficit would have accumulated only to 6 billion over 2 years, which does mean that some tightening is needed, but this is not the main problem. The main problem is unemployment.
The government should have tackled this head on. It still needs to. All the opposition parties and social partners in the past two years have called for the government to stimulate the economy: Fine Gael and Labour proposed stimulus packages in last summer’s local elections worth around 13 and 5 billion respectively. The Greens called for a 2 billion sustainable energy stimulus package last autumn. The Irish Congress of Trades Unions, the Construction Industry Federation and the Irish Small and Medium sized Enterprise associations have all called for similar interventions.
But the Irish government will is ignoring these and the experience of other countries such as the USA, the UK and Australia. It is doing this principally because it wants to ‘correct ‘what it and others perceive as a structural weakness in the economy, living wages. Its solution is to leave unemployment high and with no or negative inflation alongside cuts in social welfare, people will work for a lower minimum wage and wage cuts will become widespread. This will not succeed as countries in Eastern Europe, China and elsewhere will always work for a fraction of even these lower wages.
The solution is not to have very high wages either but living wages. These wages can be maintained by securing a competitive advantage and technological advantage over other countries engaged in lower knowledge work. Productivity and profits for business can be kept up in this way. Significant government investment is needed in high knowledge areas coupled with synchronised up skilling. This is one part of the stimulus package which will be sustainable. The other is the investment in key infrastructural areas which are badly needed: mental health services with the implementation of Vision for Change (700 million); schools building programmes and others.
This can work as follows: There are about 350 incubated companies mainly in the high knowledge area at the moment and the government has been and continues to pour 1 billion a year in to them from exchequer funding. There are over 10,000 researchers, including PhDs working here. The areas which a high proportion of these are researching are new areas for global demand for the next 12 years according to the government’s Expert Strategy Group Report: Ahead of the Curve. Some of the areas identified are:
• Sustainable energy (govt cut SEI budget in April!!)
• Telematics
• Biomedical devices
• Biopharma (govt cut funding for courses!!)
• High quality food exports
• Health and education services for export
Research clusters here need to be mainstreamed or ‘spun out’ in to the Irish economy. Other business ideas should also be considered. There were 13 companies ‘spun out’ as fully fledged trading companies. However, once they are spun out, they are at the mercy of venture capitalists to secure capital. This restricts their growth to employing only about 8 people per company, as they need to grow slowly, resulting from venture and other capital investment in them as businesses, which is far too low. Indigenous small high knowledge companies of this type are kept small or else bought up by huge global companies who can then make handsome gains on the research and development that was paid for by the Irish state.
This then further weakens our indigenous company base and makes us more and more susceptible to global economic shocks where global companies shut down and set up elsewhere. It also involves a knowledge stripping of Irish companies which the Irish taxpayer has paid for which delivers the innovation profits to companies based in New York or elsewhere. This may make a handful of Irish entrepreneurs immensely wealth overnight after the takeover of one of these Irish companies but this delivers poor returns to the country.
Paradoxically, given the recession, we have an opportunity to try to redress this problem to some extent. If the Irish government were to use some or all of the 5 billion left in the National Pension Reserve Fund to spin hundreds of high knowledge companies on the market with sufficient capital to allow them to become large players rather than fledgling ones employing less than 10 people, a significant opportunity for long-term sustainability of Irish owned high knowledge companies could for the first time be created.
Fledgling companies are currently bought out by huge global companies because they are too small to survive despite their excellent business ideas. They do not have the economies of scale to compete seriously. The government now has an opportunity to spin out large companies with a large capital and asset base to allow them to compete on their own on International markets.
These in turn, within a reasonably short period of time, can employ hundreds of workers each at the very least and become internationally sustainable. In turn, his would contribute to an improvement in our balance of payments as these Irish companies would not engage in either transfer pricing or profit repatriation, which most of the large global Trans National Corporations do.
The chain of events needed might look like the following:
• Government needs 5 billion at least stimulus 2010 + 2011
• Companies should be vetted and viable one’s aided within 3 months
• Government should give 50% grants in return for shares to be redeemed over 10 years and 50% in loans
• High quality retraining should happen in parallel through state training agencies to match the skills needs necessary
• Re-training allowance of 330 euros
• Priority should be given to indigenous
• Viable and strong State Owned Enterprises which would pay dividends to state and should be part of this
• A state Development Bank should be set and work alongside higher budgets for Enterprise Ireland.
The alternative of not investing significant resources from the NPRF and significant employment creation is: most of the 10,000 researchers including PhDs will continue to do more post docs as they do now or emigrate; there will still be only a trickle of a dozen or less than 20 most which will be spun out in to the market and because of their small venture capital funding and small size they will employ less than 10 people and then get taken over by TNCS who will reap the benefits of years of Research and Development which will have cost the state up to 3 billion Euros and where the Irish state acts as a nursery for global capital. Once knowledge has been harvested, these companies may then site elsewhere.
A plan of this nature could create thousands of jobs. It would create sustainable employment and start the process of making Ireland a leader and not a follower. It would be attractive to all social partners, benefitting workers and entrepreneurs. It would also give to country an opportunity to start breaking the high risk twin dependence on both construction and global capital
Global companies will always play a huge part in Irish economic development, but we need to start the process of taking control of our own economic affairs and through large Irish companies, in high knowledge areas going forward, such as sustainable energy, biomedical, telematics and food, we can start to insulate the country from the economic shocks which cause recessions. In this way, the current recession can be used as an economic opportunity.
I will be focusing on jobs and national recovery. My starting position is that to tolerate 430,000 unemployed on the live register is economically disastrous for the economy. Just as importantly, it is morally and socially unacceptable.
Two years ago this June I predicted in the national media that unless the economy received a significant short term stimulation, that it would spiral downwards in to recession.
I said (Summer 2008) on national radio that this would be accompanied by constant increases in unemployment and a resultant falling tax take and widening hole in the public finances. It was obvious two years ago that this perilous situation, in the absence of economic stimulation, would necessitate further cuts, more economic depression, more unemployment, more falls in tax takes, increased deficits and then more cuts......in a spiral downwards.
In the summer of 2008 a huge hole was opening in the government finances: reports at that time were that it was running a deficit of 4 billion. By the start of December, the government stated that it’s deficit for the first 11 months of 2008 was 8 billion. In fact, its end of year deficit for 2008 was 12.7 billion.
The government announced in its October 2008 budget that it expected the end of year deficit for 2009 to be 13.4 billion. In the extra budget in April, the government forecasted and far bigger end of 2009 deficit of 20.35 billion. On the sixth of January 2010, the government announced that the final end of year deficit for 2009 was 24.6 billion.
In May 2008 as the government’s finances started to deteriorate, live register unemployment stood at 201,800 (deficit 4 billion). In February 2009 live register unemployment was 352,453 (deficit of 12.7 billion). In January 2010, this figure was 436,936 (deficit of 24.6 billion) and in February it was 436,956.
That amounts to clear evidence for the cuts- economic depression- unemployment- falling tax takes- ballooning budget deficit prediction. The overall government tax take at end of 2007 amounted to around 47.8 billion (unemployment 198,000 Feb 08). At the end of 2008, with the recession after starting in June, this figure was 41.6 billion (Feb 09 352,000 unemployed). By the end of 2009, the tax take came in at 33 billion (unemployment 437,000 Jan 2010).
So, the government tax take fell by 15 billion over the 24 months in 2008 and 2009 accompanied by a rise in unemployment of 240,000 over the period. Over that period, the budget deficit rose from 1.6 billion to 24.6 billion. In 2009, the government also spend 4 billion out of exchequer funds to recapitalise Anglo Irish Bank. Consequently, 19 billon of the total accumulated deficit from the end of 2007 to 2009 can be accounted for by a huge tax fall, due to untreated unemployment and 4 billion spent on Anglo Irish Bank.
This is a critical observation: it shows that the government’s finances are mostly caused by a fall in aggregate demand due to the recession. Were it not for unemployment and Anglo Irish Bank, our government deficit would have accumulated only to 6 billion over 2 years, which does mean that some tightening is needed, but this is not the main problem. The main problem is unemployment.
The government should have tackled this head on. It still needs to. All the opposition parties and social partners in the past two years have called for the government to stimulate the economy: Fine Gael and Labour proposed stimulus packages in last summer’s local elections worth around 13 and 5 billion respectively. The Greens called for a 2 billion sustainable energy stimulus package last autumn. The Irish Congress of Trades Unions, the Construction Industry Federation and the Irish Small and Medium sized Enterprise associations have all called for similar interventions.
But the Irish government will is ignoring these and the experience of other countries such as the USA, the UK and Australia. It is doing this principally because it wants to ‘correct ‘what it and others perceive as a structural weakness in the economy, living wages. Its solution is to leave unemployment high and with no or negative inflation alongside cuts in social welfare, people will work for a lower minimum wage and wage cuts will become widespread. This will not succeed as countries in Eastern Europe, China and elsewhere will always work for a fraction of even these lower wages.
The solution is not to have very high wages either but living wages. These wages can be maintained by securing a competitive advantage and technological advantage over other countries engaged in lower knowledge work. Productivity and profits for business can be kept up in this way. Significant government investment is needed in high knowledge areas coupled with synchronised up skilling. This is one part of the stimulus package which will be sustainable. The other is the investment in key infrastructural areas which are badly needed: mental health services with the implementation of Vision for Change (700 million); schools building programmes and others.
This can work as follows: There are about 350 incubated companies mainly in the high knowledge area at the moment and the government has been and continues to pour 1 billion a year in to them from exchequer funding. There are over 10,000 researchers, including PhDs working here. The areas which a high proportion of these are researching are new areas for global demand for the next 12 years according to the government’s Expert Strategy Group Report: Ahead of the Curve. Some of the areas identified are:
• Sustainable energy (govt cut SEI budget in April!!)
• Telematics
• Biomedical devices
• Biopharma (govt cut funding for courses!!)
• High quality food exports
• Health and education services for export
Research clusters here need to be mainstreamed or ‘spun out’ in to the Irish economy. Other business ideas should also be considered. There were 13 companies ‘spun out’ as fully fledged trading companies. However, once they are spun out, they are at the mercy of venture capitalists to secure capital. This restricts their growth to employing only about 8 people per company, as they need to grow slowly, resulting from venture and other capital investment in them as businesses, which is far too low. Indigenous small high knowledge companies of this type are kept small or else bought up by huge global companies who can then make handsome gains on the research and development that was paid for by the Irish state.
This then further weakens our indigenous company base and makes us more and more susceptible to global economic shocks where global companies shut down and set up elsewhere. It also involves a knowledge stripping of Irish companies which the Irish taxpayer has paid for which delivers the innovation profits to companies based in New York or elsewhere. This may make a handful of Irish entrepreneurs immensely wealth overnight after the takeover of one of these Irish companies but this delivers poor returns to the country.
Paradoxically, given the recession, we have an opportunity to try to redress this problem to some extent. If the Irish government were to use some or all of the 5 billion left in the National Pension Reserve Fund to spin hundreds of high knowledge companies on the market with sufficient capital to allow them to become large players rather than fledgling ones employing less than 10 people, a significant opportunity for long-term sustainability of Irish owned high knowledge companies could for the first time be created.
Fledgling companies are currently bought out by huge global companies because they are too small to survive despite their excellent business ideas. They do not have the economies of scale to compete seriously. The government now has an opportunity to spin out large companies with a large capital and asset base to allow them to compete on their own on International markets.
These in turn, within a reasonably short period of time, can employ hundreds of workers each at the very least and become internationally sustainable. In turn, his would contribute to an improvement in our balance of payments as these Irish companies would not engage in either transfer pricing or profit repatriation, which most of the large global Trans National Corporations do.
The chain of events needed might look like the following:
• Government needs 5 billion at least stimulus 2010 + 2011
• Companies should be vetted and viable one’s aided within 3 months
• Government should give 50% grants in return for shares to be redeemed over 10 years and 50% in loans
• High quality retraining should happen in parallel through state training agencies to match the skills needs necessary
• Re-training allowance of 330 euros
• Priority should be given to indigenous
• Viable and strong State Owned Enterprises which would pay dividends to state and should be part of this
• A state Development Bank should be set and work alongside higher budgets for Enterprise Ireland.
The alternative of not investing significant resources from the NPRF and significant employment creation is: most of the 10,000 researchers including PhDs will continue to do more post docs as they do now or emigrate; there will still be only a trickle of a dozen or less than 20 most which will be spun out in to the market and because of their small venture capital funding and small size they will employ less than 10 people and then get taken over by TNCS who will reap the benefits of years of Research and Development which will have cost the state up to 3 billion Euros and where the Irish state acts as a nursery for global capital. Once knowledge has been harvested, these companies may then site elsewhere.
A plan of this nature could create thousands of jobs. It would create sustainable employment and start the process of making Ireland a leader and not a follower. It would be attractive to all social partners, benefitting workers and entrepreneurs. It would also give to country an opportunity to start breaking the high risk twin dependence on both construction and global capital
Global companies will always play a huge part in Irish economic development, but we need to start the process of taking control of our own economic affairs and through large Irish companies, in high knowledge areas going forward, such as sustainable energy, biomedical, telematics and food, we can start to insulate the country from the economic shocks which cause recessions. In this way, the current recession can be used as an economic opportunity.
Monday, 8 March 2010
All the wrong options have been pursed: open letter in today's Irish Times
28 economists, social scientists and economic analysts (many of them familiar to PE readers) have written an open letter, published in today's Irish Times, arguing that the Government's economic strategy is failing, and warning that the current approach of spending cuts combined with tax increases on low and average income earners will bring about a low-growth, high-debt future. The result, they say, will be a joyless, jobless recovery. Instead, they argue, we need a reversal of policy and a new investment strategy which can not only address our serious economic and social deficits but can generate employment in the short-term. Investment coupled with a restructuring of taxation and expenditure in a progressive and expansionary manner to ensure a job-rich recovery - this, and not the current deflationary strategy, is the road to prosperity.
Click here to read the full text.
Click here to read the full text.
Tuesday, 5 January 2010
Lessons from Detroit's decline
Paul Sweeney: Progress is not linear. If NAMA goes wrong and if the Deflationary School of Economics (most mainstream economists) wins on policy, Ireland could decline - much further. We have already made a Great Leap Backwards to 2003 national income levels. Lessons can be learned from the remarkable decline of Detroit. Economic geographers can learn a lot from this city’s fall and industrial economists from the US auto industry’s mighty fall, too.
Henry Ford offered his famous $5 a day to work in his car plant in Hamtramck, Detroit from 1914. Black people fled northwards to Detroit for work and better rights. Motown the music city was a by-product. Today Motown, or Motor City, has fallen mightily. It fell as GM, Ford and the other US car makers have fallen. GM was indisputably the world’s greatest company for most of the 20th century. It was the biggest company in the world and the most profitable for many years. It set the standards for management and production for multinationals. Today, GM, Ford and Chrysler - the US auto industry - are on government welfare.
US manufacturing, so dominant since 1890, has shifted offshore. Auto manufacturing had many spin-offs. It was killed because GM, Ford and Chrysler did not make cars people wanted to buy.
In 1955, four out of every five cars in the world were made in the US, half of them by GM. GM's main US rival, Ford, was half its size. The largest foreign carmaker, VW, was only slightly bigger than GM's own German subsidiary, Opel, and it had only had one model - the VW Beetle.
In the 1960s, US firms did not innovate in the design of cars. They made money by increasing the size and weight of their vehicles. They did this by adding extras, like air conditioning, power steering, and new sound systems. It was the European manufacturers who developed disc brakes, rack-and-pinion steering, air-cooled and diesel engines. And Toyota was changing its production system to become leaner and more efficient. It was the oil crisis in the 1970s that first illuminated the problems of US automakers.
After the 1970s Oil Crisis, smaller cars became popular, and US consumers found that cars like the Toyota Corolla were an attractive alternative to big American cars. When oil prices fell in the 1980s, there was a new false dawn for US carmakers – the SUV. Helped by a 25% tariff, and allowed to bypass US fuel efficiency laws, this proved to be a temporary, state-backed respite (like Ireland’s low corporation tax is still believed by most policymakers – especially free marketers – to be a real, rather than a temporary, competitive advantage!).
The tens of thousand of union workers did not just build Cadillacs, some bought them for themselves. Since the 1970s, Japanese carmakers gained market share. By the 1990s, all big Japanese carmakers had transplanted car factories in the South of the US – automated, utilising better production methods, often non-union, and most importantly making cars people wanted to buy.
Detroit’s unemployment is 17%, the highest of large US cities and well ahead of the national figure of 9.8%. It population peaked n the 1950s at over 2 million, but today it is barely 900,000. These are scattered over 138 square miles - “a quarter of which is not just uninhabited, but is utterly empty. No people, no structures – just tall grass bending in the summer breeze, mixed with nodding blue cornflower and Queen Anne’s lace,” according to Fortune (12 October 2009).
But Motown did not just decline because of the decline of the motor industry. It is truly Motor City, where the car is the only way around, dictated by the industry. You won’t find a metro, tramline or commuter train in Motor City. The vast prairie-like wastelands would not have blossomed in the heart of the city and suburbs if they had been linked by public transport systems. The auto industry saw to it that they were never built. Today, even LA and Washington have metros. Dublin does not. And we never had an auto industry.
The average house price in Detroit was $98,000 in 2003. Today it is $15,000. In some areas, like Hamtramck, houses are on sale for $100. One-third of the population is below the US poverty line, and the city lost one quarter of its population since 1990. Some are talking of putting farms into blighted city areas - both agricultural and wind farms.
This and other photos of Detroit’ fall, by Yves Marchand and Romain Meffre, are available here.
Today all US car companies are on corporate welfare. The great hope for Detroit is the hybrid Volt, again well-subsided by Uncle Sam. Indeed, 30 years ago the mayor of Detroit even bulldozed 465 acres of housing businesses to make room for a new automated Cadillac factory at Hamtramck. 4,200 Polish and African Americans were kicked out of their homes to make way for this new, gleaming factory.
Two other plants, employing 18,000, were closed down for the new automated plant. The 6,000 jobs never materialised – 4,000 did but the figures is well below 3,000 today. Now the hope is to make the hybrid, the Volt, in the plant. Taxpayers invested $50bn into GM and now still own 60% of it. $945m in grants and tax breaks are being given to develop alternative vehicles in Detroit.
We can learn from Detroit’s failure. We must learn from the abject failure of the once extraordinary success of the US auto industry which paved the way for all industry in the 20th century. The decline and near collapse (the apex of “free” enterprise - GM, Ford and Chrysler – would be dead and buried had they not been rescued by the reviled state).
Progress is not linear. Visits to great Roman sites should remind us of this. Ireland can quickly revert back to the 1950s standard of living. We are already back at 2003 levels now, thanks to the “success” of the tax-cutting and de-regulation policies of McCreevy and Cowan in a boom. Our policymakers, economists and government failed to take advantage of the great strengths of the real Celtic Tiger period to cut direct taxes less, not to cut indirect taxes at all, to regulate the banks and to use the exploding tax revenues to invest more and better and to save more for this wet, rainy day. The policies currently being pursued are leading us, not to Boston, but to Detroit, to decline.
Henry Ford offered his famous $5 a day to work in his car plant in Hamtramck, Detroit from 1914. Black people fled northwards to Detroit for work and better rights. Motown the music city was a by-product. Today Motown, or Motor City, has fallen mightily. It fell as GM, Ford and the other US car makers have fallen. GM was indisputably the world’s greatest company for most of the 20th century. It was the biggest company in the world and the most profitable for many years. It set the standards for management and production for multinationals. Today, GM, Ford and Chrysler - the US auto industry - are on government welfare.
US manufacturing, so dominant since 1890, has shifted offshore. Auto manufacturing had many spin-offs. It was killed because GM, Ford and Chrysler did not make cars people wanted to buy.
In 1955, four out of every five cars in the world were made in the US, half of them by GM. GM's main US rival, Ford, was half its size. The largest foreign carmaker, VW, was only slightly bigger than GM's own German subsidiary, Opel, and it had only had one model - the VW Beetle.
In the 1960s, US firms did not innovate in the design of cars. They made money by increasing the size and weight of their vehicles. They did this by adding extras, like air conditioning, power steering, and new sound systems. It was the European manufacturers who developed disc brakes, rack-and-pinion steering, air-cooled and diesel engines. And Toyota was changing its production system to become leaner and more efficient. It was the oil crisis in the 1970s that first illuminated the problems of US automakers.
After the 1970s Oil Crisis, smaller cars became popular, and US consumers found that cars like the Toyota Corolla were an attractive alternative to big American cars. When oil prices fell in the 1980s, there was a new false dawn for US carmakers – the SUV. Helped by a 25% tariff, and allowed to bypass US fuel efficiency laws, this proved to be a temporary, state-backed respite (like Ireland’s low corporation tax is still believed by most policymakers – especially free marketers – to be a real, rather than a temporary, competitive advantage!).
The tens of thousand of union workers did not just build Cadillacs, some bought them for themselves. Since the 1970s, Japanese carmakers gained market share. By the 1990s, all big Japanese carmakers had transplanted car factories in the South of the US – automated, utilising better production methods, often non-union, and most importantly making cars people wanted to buy.
Detroit’s unemployment is 17%, the highest of large US cities and well ahead of the national figure of 9.8%. It population peaked n the 1950s at over 2 million, but today it is barely 900,000. These are scattered over 138 square miles - “a quarter of which is not just uninhabited, but is utterly empty. No people, no structures – just tall grass bending in the summer breeze, mixed with nodding blue cornflower and Queen Anne’s lace,” according to Fortune (12 October 2009).
But Motown did not just decline because of the decline of the motor industry. It is truly Motor City, where the car is the only way around, dictated by the industry. You won’t find a metro, tramline or commuter train in Motor City. The vast prairie-like wastelands would not have blossomed in the heart of the city and suburbs if they had been linked by public transport systems. The auto industry saw to it that they were never built. Today, even LA and Washington have metros. Dublin does not. And we never had an auto industry.
The average house price in Detroit was $98,000 in 2003. Today it is $15,000. In some areas, like Hamtramck, houses are on sale for $100. One-third of the population is below the US poverty line, and the city lost one quarter of its population since 1990. Some are talking of putting farms into blighted city areas - both agricultural and wind farms.
This and other photos of Detroit’ fall, by Yves Marchand and Romain Meffre, are available here.
Today all US car companies are on corporate welfare. The great hope for Detroit is the hybrid Volt, again well-subsided by Uncle Sam. Indeed, 30 years ago the mayor of Detroit even bulldozed 465 acres of housing businesses to make room for a new automated Cadillac factory at Hamtramck. 4,200 Polish and African Americans were kicked out of their homes to make way for this new, gleaming factory.
Two other plants, employing 18,000, were closed down for the new automated plant. The 6,000 jobs never materialised – 4,000 did but the figures is well below 3,000 today. Now the hope is to make the hybrid, the Volt, in the plant. Taxpayers invested $50bn into GM and now still own 60% of it. $945m in grants and tax breaks are being given to develop alternative vehicles in Detroit.
We can learn from Detroit’s failure. We must learn from the abject failure of the once extraordinary success of the US auto industry which paved the way for all industry in the 20th century. The decline and near collapse (the apex of “free” enterprise - GM, Ford and Chrysler – would be dead and buried had they not been rescued by the reviled state).
Progress is not linear. Visits to great Roman sites should remind us of this. Ireland can quickly revert back to the 1950s standard of living. We are already back at 2003 levels now, thanks to the “success” of the tax-cutting and de-regulation policies of McCreevy and Cowan in a boom. Our policymakers, economists and government failed to take advantage of the great strengths of the real Celtic Tiger period to cut direct taxes less, not to cut indirect taxes at all, to regulate the banks and to use the exploding tax revenues to invest more and better and to save more for this wet, rainy day. The policies currently being pursued are leading us, not to Boston, but to Detroit, to decline.
Thursday, 10 December 2009
Budget 2010 will do nothing to get the economy out of recession
Tom O'Connor: Budget 2010 will cause immense hardship and will do nothing to get the economy out of recession. The four billion in savings could have been found in a variety of ways which would not drive people in to unemployment, poverty and housing repossessions, as this one will.
The current approach has been driven by a business group agenda which is hell-bent on driving down wages and social welfare across the economy. More of the same will be sought next year, with further demands for wage reductions and cuts in welfare spending. If left unchallenged, this will ultimately bring Ireland in to the low wage and poor welfare state model of the USA.
The government has cut public service pay by 5% on a €30,000 earner with a sliding scale of further cuts on extra slices of income between 7.5 and 15% ranging over incomes from 40,000 up to 200,000 and beyond.
A young fireman or nurse will be earning 34,000. At present, before their tax credits are applied, they pay 36.5 % of their income in taxes: In addition to the 20% basic tax rate, they pay an income levy of 2%, a pension levy at 6.2%, a health levy of 4% and PRSI at 4%. The budget pay cut will now reduce his and her income by 1,800 to 32,200. All of the above deductions will now still apply.
The tax take on this 32,200 will now amount to 7,932, so (s)he will come home with 22,268. Before last year’s budget 09 and the supplementary budget, at Oct 08, (s)he would have taken home 28,650. In 14 months to date, the nurse and fireman have lost 6,382 which is 22.3% of their disposable income. They will also have read on the papers that only 30% of private sector workers have taken any pay cut all.
Now consider the man or woman who earns over 500,000 per annum and who is self employed. Up to now (s)he has been able to avoid paying taxes through taking advantage of the 111 tax avoidance schemes that were in operation. Over the Celtic Tiger, s/he may have earned millions per year. Irrespective of how many millions he earned, s/he would only have paid a maximum of 20% in tax by taking advantage of tax shelters.
Now given that s/he has fallen on hard times and his/her income is down to maybe 500,000, s/he will have to pay 30% while still using many of the same avoidance schemes. The government only hopes to save 55 million in these schemes in 2010 even though, it is estimated that the current value of all of these is about 4.5 billion.
We can compare this position to a physiotherapist in a public hospital who now earns about 54,000. In the past 14 months, she has seen her overall tax burden, including the pension levy of 7%, PRSI, health levy and income levy grow to 57% on income over 35,400. So she wonders why now the self employed income earner only pays 30% on income of half a million or even 10 million.
Now her income after the cuts of 5%-7.5% is 50,700. She now also has a total tax and deductions bill of 18,159, taking home now only 32,541 paying tax and other levies at 58% on the income over 35,400. Going back 14 months, her total deductions were 14,370 out of her then income of 54,000, when she paid marginal tax and PRSI at 46%. Her net income then was 39,630. She has now lost 7,000 of her disposable income, a cut of 22% in little over a year.
The fireman, nurse and physiotherapist are now led to believe that pay cuts of the same order are in store for next year, and even a further pay cut the year after. It is more than likely that many of them have already become part of the 27,000 people who are currently defaulting on their mortgages. The public are also being told that they are part of the problem with the public finances.
However, people have forgotten that 13 billion Euros were spent on tax breaks to the wealthy up to 2006 which was over half the exchequer deficit this year. Essentially, if these tax breaks were not delivered, then our exchequer deficit now would be only 12 billion.
These public servants know that they did not cause the current crisis in public finances. So also do the 425,000 people on the dole who worked hard to fuel the Celtic tiger. Many of these were young people who worked in construction at 18-19 years of age, and who are now being offered 100 or 150 per week, less than half of what they were getting, even though they are not able to find work, given the collapse of construction.
These are part of the hundreds of thousands of unemployed who know that despite cutting their dole massively, the government is doing nothing to create jobs. The so called ‘stimulus package’ in the budget amount s to a modest cut in alcohol prices and a paltry scrappage scheme. This will keep the 425,000 people on the dole.
What these jobseekers don’t know is that the government has 14 billion in reserve in the National Pension Reserve Fund, and they won’t use a single cent of it to stimulate the economy. It is clear that 7 billion of this has been given to the banks but the government will spend nothing to get the economy going.
Why? Insiders in the financial world have stated that it is the government’s intention to give this 14 billion to the banks to bolster their share capital base, while leaving hundreds of thousands on dole queues and cutting welfare payments to the point where people may even suffer ‘food poverty’, the fancy name for hunger.
The huge loss of income to the public service, welfare cutbacks and the huge cut in capital spending of over 7 billion from the government capital spending programme will prevent any possible move out of recession next year. It will drive growth next year down well beyond the 3% fall projected to at least double that number. It may well prevent the economy recovering even by 2011.
The social cost of this budget in terms of massive unemployment, a definite sharp rise of those in serious poverty, a likely strong rise in emigration, cuts in community services, and its certain effect of increasing housing repossessions will be enormous. Hundreds or even thousands of young unemployed people living in rent allowance accommodation will almost certainly be driven to homelessness.
The reason for this unthinkable harshness has been the government’s pandering to those in the high echelons of international financial markets and large business groups in Ireland. The breakdown of the public service pay talks has now been shown to be a result of a desire to please IBEC.
The government could have introduced a wealth tax and raised 1.5 billion, and could have ended 1.5 billion worth of tax breaks. It could have raised the PRSI Ceiling to force those earning over 75,000 to pay PRSI earning about 700 million. It could have doubled the income levies across the public and private service for those earning over 50,000, and this would have brought in 1 billion. It could have agreed the ICTU proposals saving 1 billion and avoiding strikes and public service reform, including lower numbers and higher productivity would have been agreed.
The government chose to do none of those things. This budget is pushing Ireland towards a Hong Kong or Taiwan model of economic and social development. It will cause immense hardship, strikes and push half the population to the brink. This is both economically and socially unnecessary. In fact it is disastrous on both counts.
The current approach has been driven by a business group agenda which is hell-bent on driving down wages and social welfare across the economy. More of the same will be sought next year, with further demands for wage reductions and cuts in welfare spending. If left unchallenged, this will ultimately bring Ireland in to the low wage and poor welfare state model of the USA.
The government has cut public service pay by 5% on a €30,000 earner with a sliding scale of further cuts on extra slices of income between 7.5 and 15% ranging over incomes from 40,000 up to 200,000 and beyond.
A young fireman or nurse will be earning 34,000. At present, before their tax credits are applied, they pay 36.5 % of their income in taxes: In addition to the 20% basic tax rate, they pay an income levy of 2%, a pension levy at 6.2%, a health levy of 4% and PRSI at 4%. The budget pay cut will now reduce his and her income by 1,800 to 32,200. All of the above deductions will now still apply.
The tax take on this 32,200 will now amount to 7,932, so (s)he will come home with 22,268. Before last year’s budget 09 and the supplementary budget, at Oct 08, (s)he would have taken home 28,650. In 14 months to date, the nurse and fireman have lost 6,382 which is 22.3% of their disposable income. They will also have read on the papers that only 30% of private sector workers have taken any pay cut all.
Now consider the man or woman who earns over 500,000 per annum and who is self employed. Up to now (s)he has been able to avoid paying taxes through taking advantage of the 111 tax avoidance schemes that were in operation. Over the Celtic Tiger, s/he may have earned millions per year. Irrespective of how many millions he earned, s/he would only have paid a maximum of 20% in tax by taking advantage of tax shelters.
Now given that s/he has fallen on hard times and his/her income is down to maybe 500,000, s/he will have to pay 30% while still using many of the same avoidance schemes. The government only hopes to save 55 million in these schemes in 2010 even though, it is estimated that the current value of all of these is about 4.5 billion.
We can compare this position to a physiotherapist in a public hospital who now earns about 54,000. In the past 14 months, she has seen her overall tax burden, including the pension levy of 7%, PRSI, health levy and income levy grow to 57% on income over 35,400. So she wonders why now the self employed income earner only pays 30% on income of half a million or even 10 million.
Now her income after the cuts of 5%-7.5% is 50,700. She now also has a total tax and deductions bill of 18,159, taking home now only 32,541 paying tax and other levies at 58% on the income over 35,400. Going back 14 months, her total deductions were 14,370 out of her then income of 54,000, when she paid marginal tax and PRSI at 46%. Her net income then was 39,630. She has now lost 7,000 of her disposable income, a cut of 22% in little over a year.
The fireman, nurse and physiotherapist are now led to believe that pay cuts of the same order are in store for next year, and even a further pay cut the year after. It is more than likely that many of them have already become part of the 27,000 people who are currently defaulting on their mortgages. The public are also being told that they are part of the problem with the public finances.
However, people have forgotten that 13 billion Euros were spent on tax breaks to the wealthy up to 2006 which was over half the exchequer deficit this year. Essentially, if these tax breaks were not delivered, then our exchequer deficit now would be only 12 billion.
These public servants know that they did not cause the current crisis in public finances. So also do the 425,000 people on the dole who worked hard to fuel the Celtic tiger. Many of these were young people who worked in construction at 18-19 years of age, and who are now being offered 100 or 150 per week, less than half of what they were getting, even though they are not able to find work, given the collapse of construction.
These are part of the hundreds of thousands of unemployed who know that despite cutting their dole massively, the government is doing nothing to create jobs. The so called ‘stimulus package’ in the budget amount s to a modest cut in alcohol prices and a paltry scrappage scheme. This will keep the 425,000 people on the dole.
What these jobseekers don’t know is that the government has 14 billion in reserve in the National Pension Reserve Fund, and they won’t use a single cent of it to stimulate the economy. It is clear that 7 billion of this has been given to the banks but the government will spend nothing to get the economy going.
Why? Insiders in the financial world have stated that it is the government’s intention to give this 14 billion to the banks to bolster their share capital base, while leaving hundreds of thousands on dole queues and cutting welfare payments to the point where people may even suffer ‘food poverty’, the fancy name for hunger.
The huge loss of income to the public service, welfare cutbacks and the huge cut in capital spending of over 7 billion from the government capital spending programme will prevent any possible move out of recession next year. It will drive growth next year down well beyond the 3% fall projected to at least double that number. It may well prevent the economy recovering even by 2011.
The social cost of this budget in terms of massive unemployment, a definite sharp rise of those in serious poverty, a likely strong rise in emigration, cuts in community services, and its certain effect of increasing housing repossessions will be enormous. Hundreds or even thousands of young unemployed people living in rent allowance accommodation will almost certainly be driven to homelessness.
The reason for this unthinkable harshness has been the government’s pandering to those in the high echelons of international financial markets and large business groups in Ireland. The breakdown of the public service pay talks has now been shown to be a result of a desire to please IBEC.
The government could have introduced a wealth tax and raised 1.5 billion, and could have ended 1.5 billion worth of tax breaks. It could have raised the PRSI Ceiling to force those earning over 75,000 to pay PRSI earning about 700 million. It could have doubled the income levies across the public and private service for those earning over 50,000, and this would have brought in 1 billion. It could have agreed the ICTU proposals saving 1 billion and avoiding strikes and public service reform, including lower numbers and higher productivity would have been agreed.
The government chose to do none of those things. This budget is pushing Ireland towards a Hong Kong or Taiwan model of economic and social development. It will cause immense hardship, strikes and push half the population to the brink. This is both economically and socially unnecessary. In fact it is disastrous on both counts.
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