"The only show in town?"

Slí Eile: In recent days, there has been a rush of reports (including EMU Public Finances 2009, IMF Report on Irish Economy, OECD Economic Outlook comments on Ireland), data, analysis and media reaction on the state of the economy, banking and public finances. One important part of the background landscape is the social partnership talks still going on, passing one deadline after another. Disclosures to the media leave one wondering what may or may not emerge. According to today’s media reports, the ICTU has 'doubts over aspects of plan for recovery’ but argues that the Government proposals were ‘the only show in town’.

Lets hope not. Can we get back to some parts of the ICTU ‘Ten-point plan’ of last February? Remember. It advocated:

1. Protecting Jobs & Tackling Unemployment (including ‘reprioritising the Public Capital Programme to support job protection and labour intensive activities’)
2. Sorting the Banking System & overhaul of corporate governance (with ‘public control, either through Recapitalisation or Nationalisation’)
3. Competitiveness (through reduction in energy prices, professional fees and other costs plus productivity-enhancing investments)
4. The Pay Agreement 2008 (ICTU has made the case that wages have not been cut in 2008 as claimed by some)
5. Fairness & Taxation (our tax system is woefully skewed and unfair with large tax breaks for the better off and widespread legal avoidance)
6. Restoring Consumer Confidence (‘Surely the most sensible option is to stimulate the economy, rather than dampen spending and growth?)
7. The Public Service ‘Pension Levy’ (‘Workers did not create the problem, but will contribute to resolving it - as long as the wealthy also contribute. The problem with the course currently being pursued by Government and employers’ organisations is that the weakest suffer, while the wealthy contribute nothing.’)
8. Pensions (use ‘a state backed annuity and the possibility that private pension funds could have the option of voluntarily surrendering their assets to the state, in return for a certain level of guaranteed pension.)
9. Employment Rights Legislation
10. National Recovery Bond (‘ It could also be targeted at specific sectors such as school building or public transport, so people could see tangible gains’)

If – according to media reports – the main carrot on the table during the current round of Partnership talks is an employment subsidy, one is forced to ask:

• Is there hard and compelling evidence from the recent past, internationally, that such subsidies work in terms of creating genuinely new jobs or saving existing ones?
• Even if the answer to the above is yes, how much would it cost on average – per job, per firm and in the aggregate? Would alternative expenditures of the same amount be more effective?

As matters stand, the latest EU figures on taxation indicate Irish taxes on labour are way out of line (very low reflecting a poor tradition of widespread social insurance). Irish employers’ contributions to social protection were 9.7% of total taxes in 2007 compared to a (weighted) EU average of 18.0%.

And we are talking about subsidies to employers?

Would it be easier to just drop payroll taxes on particular groups (say unemployed or particular types of employment and sectors). The problem with targeted interventions is not only deadweight effects, but the problem of excluding some sectors and categories and not others (like why would non-traded sectors be entirely excluded if they were producing sustainable social value?)

Karl Whelan has argued on irisheconomy.ie (with good reason I think) that:

….the principle reason for rising unemployment is a sharp reduction in labour demand owing to the steep nature of the recessions. Policies that are looking to offset this reduction in demand using wage subsidies are unlikely to have more than a marginal effect.

He goes on to argue:

one of the lessons emphasised by Jim Poterba in last week’s excellent Geary Lecture was that if we need to raise more revenue, it is best to do so by broadening the tax base while keeping rates low. Measures like this, which erode the tax base and have little effect on employment, are a step in the wrong direction.

Read his entire comment on these issues along with many comments on wage subsidie here.

Report card for the parties in opposition

Sli Eile: Over recent weeks I assessed the various economic proposals of some political parties – see previous posts on this site for Fine Gael, Labour and Sinn Féin. The choice of parties is to do with their current status as parties enjoying the liberty of opposition. As for the three two Government parties – we know where they stand on strategy from day to day. Just read the newspapers.

So, where do the three opposition parties stand on the economy? What they currently say and what they might do in a future Government are not the same – clearly. But, for now lets assume that what they say is what they will attempt to apply in policy if they find themselves in Government. The ‘report card’ suggested in my post of 1 April was based on four core principles:

Fairness and equity (do the proposals effectively address inequality and advance a redistribution of income and opportunities towards the less well-off)?

Public, social and community infrastructure (do the proposals provide an adequate basis for delivering vital social services)?

Sustainable economic growth and competitiveness (do the proposals represent a sensible strategy to position Ireland for the inevitable upswing - eventually)?

Public finances (do the proposals address the need to re-structure taxation and improve the effectiveness of public spending in meeting key economic and social goals)?

1 Fairness and Equity

Of the three parties, Fine Gael seem to be by far the slowest to raise taxes on the very wealthy (remember controversies about capital taxes in the 1970s and 1980s). Labour is coy about how much tax it would raise and from whom. The bulk of fiscal adjustments would come from tax increases – capital, tax relief reductions, carbon taxes, excise taxes, higher top tax rate and targetting of tax exiles. Sinn Féin takes a similar approach. However, none of these parties have called for a reduction in social welfare payments.

2 Public, social and community infrastructure

All three parties emerge as strong supporters of investment in public infrastructure. Fine Gael seems to have put in the most work in costing it and has made some interesting proposals in regard to green technology and the use of a new State Holding Company for infrastructural investment. All three parties are sitting on the question of bank nationalisation. However, events may overtake them before they have a clear policy line. Interestingly, FG, LP and SF each in their own way favour the establishment of some type of public credit institution to compete in the market place.

3 Sustainable economic growth and competitiveness

All parties focus on supply-side adjustments including investment in education including school buildings. Fine Gael want reductions in public sector numbers and wage restraint. All parties agree on the need for a generous economic stimulus. So, on paper at least, the opposition is Keynesian.

4 Public finances

A key issue, here, is a long-term commitment to tax reform, and along with it reform of local democracy and reform of public service. Labour and Fine Gael say that they are clearly committed to public sector reform.

Leaving aside issues to do with Europe and the national question (which of course can’t be done in the real world) – where is Labour on the ideological plane vis-à-vis FG and SF? Much closer to SF, it would seem, than FG. However, for now, LP is ruling out a left alliance before an election and is not contemplating getting into bed with FF after any general election (which theoretically is not to say they wouldn’t if it were the only bed available). Where does that leave Labour? Back to the 1980s?

Budget 2009: further comments

Sli Eile: Some additional – and initial – observations about specific points in the Budget.

Leading by example?

The announced changes to pay and conditions of senior politicians do not go far enough. Too little too late. What is particularly disturbing is the lack of public contrition for the way that the Property-Political-Financial complex has ruined the economy and with it our reputation abroad.

Capital taxes

Ireland is a special case when it comes to taxes on property, land, capital gains and wealth. Some Governments at various stages in the last 30 years meekly attempted innovation in these areas to find stiff opposition and inaction leading to withdrawal. It is a case of Thou shall not tax capital. So the move from 22 to 25% Capital Gains Tax was bordering on risky. But if it was legally and administratively possible to change CGT rates, now why not go further and change the rates up to the original 40%? For an extra €45m in a full year investors might be scared off! How much would have been yielded on a restoration of the 40% CGT rate? Enough to pay a Christmas bonus to welfare recipients?

Overseas Aid cut again

This time the cut was €100m giving a combined reduction of €195m between February and April adjustements. Trócaire has already condemned this cut this evening.The combined effect will be to push Ireland's ODA contribution to under 0.5%. The poor elsewhere, as well as the poor at home, are paying for the Irish banks.

Social Welfare payments

So recipients were spared cuts in basic rates. However, other stealth cuts apply from childcare to reductions in public services more generally and much more to come.

In a post on Irish Left Review, Michael Taft points out that – contrary to popular belief – social welfare payments in Ireland are average to low compared to in the European Union. Using the latest internationally published data from OECD, Taft shows that Irish single unemployed (for example) receive the third smallest benefits in the EU group of 15 countries.

Many commentators assume that falling prices will continue, and will facilitate cuts in social welfare rates. However, there is no guarantee that prices will continue to fall and, in fact, the Department of Finance own estimates allow for some price increases from 2010 onwards. A further point is that low-income households have different expenditure patterns and are much less affected by price falls in areas such as mortgage interest (which enter into CPI calculations).

Free pre-school provision?

This sweetener offers €170m for free universal pre-school education for all children aged 3. In case someone is about to declare a new era for early childhood education, please don't. The true cost of universal provision is likely to be a multiple of this amount, taking into consideration capital spending, adaptation of premises and not to mention training of staff, inspection and costs of staff. Nobody believes that you can provide a quality pre-school system at under €2,500 per child for a full-year, full-session provision adapted to the needs of three year olds in new or existing buildings. It simply will not work. If this offer is being traded for an elimination of the childcare payment by the end of this year, it is a particularly unconvincing move.

Tax Rates

Colm Keena in a recent series in the Irish Times has pointed out that '9,129 people, or 0.3 per cent of earners, between them earned €6.7 billion, or 6.6 per cent of all income'. This is where a top tax-rate of 48% should apply – immediately – not after some Commission report.

Public Capital Programme

This is a very problematic area of the Budget, and one that deserves closer scrutiny. If there was one area of public spending where the Government could have made an immediate and positive impact on saving jobs this was it. Instead the PCP (less contributions to the National Pension Reserve Fund) is being cut by about €500m.

Here, there was little sign of a fundamental shift, so urgently needed in prioritising labour-intensive and socially desirable projects.

Tax Base

Not surprisingly, the Government went for no action on most of those areas where they could have begun to erode the unacceptably large amount of tax lost as a result of various reliefs and exemptions with little relevance to employment or output.

Public Sector

No signs of real reform here. Schemes to encourage people out of the service will – in the presence of an inflexible embargo on filling of vacancies - lead to chaos in critical areas of public service delivery. The centre cannot micro-manage each individual case as is currently proposed.

Banking

So €80 billion is the book value of bad debts. Who knows? Who cares? The taxpayer in 2009 and 2059.