Pain, but no gain

Michael Burke: In a recent piece in The Guardian, Dean Baker argues that politicians are ignoring Keynes "at their peril".

Arguing that it would be reasonable if deficit-reduction easures produced positive results, but they do not, Baker says, this is a case of "pain, but no gain."

"Ostensibly, there will be a lower interest-rate burden in future years, but even this is questionable. First, the contractionary policy being pursued by the deficit hawks will slow growth and lead to lower inflation or possibly even deflation. It is entirely possible that the debt-to-GDP ratio may actually end up higher by following their policies than by pursuing more expansionary policy."

This is exactly what has happened. The Fianna Fail-led government has had a fiscal contraction totalling 8.9% of GDP (€14.6bn in fiscal tightening compared to 2009 GDP of €163.5bn).

This is the profile of Ireland's general government borrowing as a proportion of GDP, according to the EU Commission's data and forecasts (click to enlarge). Those for the Euro Area are shown alongside (Euro Area Report, Spring 2010, Table 37)

By contrast, the Euro Area had an average fiscal stimulus of 4.4% of GDP, according to the EU Commission, European Economic Forecast, Autumn 2009, although since that was written both Germany and France announced further significant stimulus at end-2009, pushing the average over 6%.

If we take 2009 as the major year of fiscal stimulus in the Euro Area and of fiscal contraction by the Dublin government, then we have a startling conclusion. It seems that the EU average GGB deficit is barely more than the fiscal stimulus itself, at approximately 6% of GDP. Yet at the same time government policy has saved Irish taxpayers from a far worse fate. If it hadn't been for 'tough decisisons to reassure the markets', by taking 8.9% out of the economy, the deficit would be 21% of GDP in 2011 (8.9% + 12.1%, not including Anglo).

Advocates of fiscal stimulus are accused of believing in the tooth fairy. But this is a tale out of the Brothers Grimm.

The advocates of slash&burn can neither explain the semi-magical way in which the Euro Area's deficit is no greater than the stimulus measures, and is now falling. And they invite us to believe in a horror story, where a gargantuan deficit, unique to Ireland has been averted, leaving just a monstrously-sized one in its stead, which is forecast to rise again in 2011.

But there is another explanation, one which would incorporate the hugely divergent trends in Euro Area government finances. It can be summarised as follows: Stimulus works. Slash-and-burn doesn't.

Proinnsias Breathnach on export competitiveness - myths and facts

Over at Ireland after Nama, Proinnsias Breathnach is taking an in-depth look at the myths and facts surrounding the issue. Part I of his three-part paper is available here, and Part II here. A link to Part III will be posted shortly.

Property Tax

Nat O'Connor: The Taoiseach has been talking about the introduction of property tax (Irish Independent, Irish Times).

A part of this is tax on people's residences, although it is important to remember that 'property' has a much wider meaning, in terms of financial assets, other material goods, etc. There is a real risk that discussion of any new tax will focus solely on people's homes and not on other assets.

In the UK, 5 per cent of people own 40 per cent of non-residential assets. The situation in Ireland seems likely to be similar. This is also property wealth and a legitimate question to ask from an equality perspective is what other assets will be taxed by any future property taxes? Given the scale of the gap in the national finances, there is no doubt that assets beyond housing will need to be taxed and could make a vital contribution.

Additionally, on the subject of residential property, there are four inter-related issues that ought to be tackled at the same time: the moral hazard of any mortgage rescue scheme, stamp duty, private renting and local authority funding. But first of all, how much money could property tax bring in?

How much?
One factor affecting property tax is how many housing units are there in Ireland? The 2006 Census reports 1.46 million occupied dwellings, of which c. 1.1 million are owner-occupied. I'm assuming social housing won't be included and landlords (and therefore tenants) are already meant to be paying the €200 per year charge on second or subsequent houses, so let's assume 1.1 million dwellings will be eligible for the tax.

If property tax was also €200 (on average), this would generate €220 million in a year (less operating costs and assuming full compliance). Not bad, but not on the scale of really dealing with the €8.3 billion non-cyclical gap between tax revenue and spending identified in an earlier blog. So, you'd really need to be talking €1,000 per year (on average) before making a real dent, which would bring in €1.1 billion. To put this in context, the projected tax take for 2010 is c. €32 billion.

The next question is how much can people afford to pay? Well, this varies a lot. However, many people on low incomes in rented accommodation won't be affected. A flat tax of whatever amount will be regressive; costing proportionately more to those on lower incomes. Hence, there needs to be a strong link between the tax and both the value of property and people's ability to pay. Wealthier people in bigger houses in nicer locations should pay multiples of what lower income people in small apartments in peripheral areas pay.

In terms of those who can afford to pay more, there is an opportuntiy to introduce something like the (now dropped) policy of the UK's Lib-Dems to introduce a 'mansion tax' of 0.5 per cent of the value of houses over ST£1 million (which was estimated to cost 250,000 householders over ST£4,000 per year)? Given that house prices grow steeply at the high end, it seems reasonable to expect that property tax will also be high for so-called 'trophy homes'.

Those reliant on the state pension who own their own homes will be the most vulnerable, as they may be 'asset rich but cash poor'. People in these situations could be allowed to defer the tax with no interest until their decease, whereon their estate could pay.

Yet, to return to the possible figure of €1.1 billion from property tax (at an average of €1,000), this would play a useful role in closing the €8.3 billion gap. However, the remaining €7.2 billion indicates the need to look beyond residential property. Hence, taxes on other non-housing assets may be a necessity.

The Moral Hazard of Any Mortgage Rescue Scheme
One of the real consequences of any residential property tax is that it may push householders struggling to pay their mortgages over the edge. Yet, any waiver for people with problems paying their mortgages must be seen as a type of mortgage rescue, which therefore invokes the question of moral hazard; that is, why should the State help people (who perhaps borrowed too much) to pay their debts so that they can own property, when other taxpayers did not put themselves in this situation. This question will need to be addressed. Either property tax will be allowed to be the final straw for thousands of mortgage-holders, or else (if there's a waiver) the moral hazard question arises. One solution would be to allow tax deferral, like for people with valuable housing but low incomes. This way everyone pays their fair share, but people with high mortgages are not pushed into default.

Stamp Duty
One suggestion of the 2009 Commission on Taxation report was that "homeowners who have paid stamp duty would be exempt from the annual property tax for seven years from the time they bought their property." (Irish Times report). This is a small compensation to those who paid tens of thousands in stamp duty. Yet, is the current proposal to eliminate stamp duty, or will property tax add to it? If we eliminate stamp duty (projected to provide just under €1 billion in 2010) residential property tax won't add much to tax revenue in the short-term, but it should stabilise revenue from this source (e.g. stamp duty collapsed from a height of €3.7 billion in 2006, and is unlikely to return to anything like that level). Given the crisis in the national finances, it makes sense to keep stamp duty in place as well as property tax.

Private Renting
Property tax will raise the cost of home ownership. Combined with everything else that's gone wrong in the economy, this factor is likely to lead more people to rent long-term. Yet another reason for the State to strengthen the protection of tenants to make renting a family-friendly option and an older age-friendly option.

Local Authority Funding
One possible role for property tax is to fund local authorities, which are set to spend a large chunk of the Department of the Environment's €2.2 billion allocation in 2010 (Revised Estimates 2010). On the local government scale, €1.1 billion in property tax could form the backbone of a coherent funding system (along with commercial rates, motor tax, waste charges and water charges). This would open up the possibility of local authorities varying the amount of property tax they charge, which might be more appropriate than a one-size-fits-all national formula, given how housing prices vary greatly across the country.

The original decision to abolish domestic rates undermined local government funding (followed by the legal case that removed agricultural rates also). The introduction of property tax is an opportunity to fix this system, above and beyond merely adding another patch to the national finances.

Money for some, just not us

Michael Taft: ‘Folks, the money ain’t there. There is no untaxed honey-pot of rich people to be taxed. Put top rate taxes up to where they were in the 1980s (we are more than halfway there already, by the way) and see how much money we raise. It won’t make a material difference and might just make things worse. Explain to the public sector that they were hired, with the best of intentions, on a premise that proved to be false. The money to pay them just doesn’t exist. That does not mean they are not valued or that they are not doing a superb job in a dedicated way.

The ‘no cash’ constraint is, unfortunately, absolute and binding.’

No wonder the debate over the economy is so degraded - if this is the quality of commentary we are getting from our broadsheet media. Let’s examine this ‘no-cookies-in the-cookie-jar’ argument that Chris Johns, chief executive of Bank of Ireland Asset Management, put forward in the Sunday Business Post.

First, there are cookies for Anglo-Irish - up to €20 billion cookies that will never be repaid.

Second, we will pay (and it is we – through Government guarantee) approximately €50 billion for largely under-performing, if not downright worthless, assets from the banks.

One may argue these expenditures are necessary; or that we could have achieved the same thing for less cost (the Government is already reconsidering the option of closing down Anglo-Irish over the long-term – an option they initially dismissed). One may argue that we had to clean up the banks’ balance sheet (but we could have paid a lot less if we were willing to take larger a stake in the banks). One may argue a number of things – but one thing is certain: the ‘no-cash’ constraint is, in these cases, neither absolute nor binding.

Third, the ESRI estimates the Government will have nearly 30 percent of GDP – or nearly €50 billion – in Exchequer cash balances and National Pension Reserve Fund assets. Yes, we need a large liquid buffer, especially as the Government’s deflationary policies have failed to protect the integrity of Irish sovereign debt. And, yes, some of this money is tied up in bank recapitalisation. And, no, this is not an argument for raiding the cookie jar. What it shows, however, is that there are some free-floating cookies that could be put to use: investing in the economy, generating jobs and growth, increasing tax revenue, reducing unemployment costs and, so, reducing the deficit. We may debate how much; but the ‘absolute and binding’ argument is not so absolute when we lift the cookie jar lid.

Let’s look at the ‘honey-pot’ assertion. The Commission on Taxation, to take just one small example, stated that of the €700 million spent on mortgage interest relief expenditure (in essence, a cash subsidy), nearly half went to the top two income deciles which, according to the EU Survey on Income and Living Conditions, averaged €140,000 in gross income. A question arises: if ‘the money ain’t there’, why are we subsidising high-earning households to the tune of over €300 million a year?

Or take the current exemption from the Health Contribution Levy enjoyed by rental and dividend income; Fine Gael estimates this subsidy costs €89 million. This, again, is likely to benefit the top income deciles – at a time when the ‘money ain’t there’.

Or take Labour’s proposals to limit the tax relief for pension contributions for high income groups. They estimate this subsidy costs €350 million – a lot of money to be paying those on high incomes there ain’t no money.

So the money is there – through these subsidies – for certain folk. It just depends on one’s priorities.

Probably the most disturbing thing about this analysis is its rejection of investment as a tool for growth and revenue generation. For instance, the Irish Times reported on an internal HEA report:

‘The HEA report says an investment of over €4 billion will be required to upgrade dilapidated buildings and provide space for a 30 per cent surge in student numbers.’

Clearly, this would be a wise investment – not only in our future knowledge capital but in getting people back to work now on productive activity. What if we were to take that money in just those three examples I’ve used (there are lots, lots more – see TASC’s report on tax expenditures) and redirected it into upgrading our third-level institutions? A back-of-the-envelope multiplier calculation indicates that it would boost tax revenue by nearly €900 million over a six year period while employing thousands of workers directly and creating thousands more jobs downstream. It gets even better when one factors in reduced unemployment expenditure.

From just this one small example, building on small examples, we see how redirecting money that is being foolishly spent (and subsidising high-income groups in a recession is about as daft as you can get) into productive investments exposes arguments based on ‘no cookies in the cookie jar’.

The fact is that money is there. It depends on priorities. We can argue the toss over how much and how best it should e spent. I’m sure Mr. Johns would agree that state investment in Bank of Ireland is a good investment based on the probability of return and the protection of our banking system. Clearly, Mr. Johns would say that the ‘no-cash constraint’ is not absolute and binding in this case.

If so, then how much more the case for the economy and growth and employment.

Toxic Town? Financial Times on Ireland

Paul Sweeney: This weekend’s Financial Times magazine has a six page feature on Ireland called “Toxic Town”. It is worth a read on how we have fallen – brought down by “the venal politicians who actively discouraged regulation and provided a phenomenal array of tax breaks to builders and an environment of cheap money and easy credit.” These politicians were of course, aided and abetted by leading business people, too many of the top civil servants in the economic departments and many journalists and economists in the liberal frenzy of the boom.

The article, written by David Gardner, describes Bertie Ahern as “the Taoiseach who presided over the alchemical prolongation of the boom and hides his shrewdness behind a blokish bonhomie and mangled syntax.” In 2006 he said “the boom was getting more boommier”.

It quotes Fintan O Toole on the “Celtic informational twilight of things which are known but not known.” Patrick Honahan is described as “the most respected economist of his generation.” As the Governor of the Central Bank he is refreshingly quoted as saying “we put our hands up and it admit it: the regulator simply did not do his job.”

The article is highly critical of Irish business governance. It describes it as the “cat’s cradle of cross directorships, the same names recurring across the privates and public sectors.” This is timely, as TASC’s superb Mapping the Golden Circle report published last week details so graphically. Honahan describes the property bubble as “rich and powerful people talking to rich and powerful people; that’s my experience.”

Gardner says there is little ideological difference between FF and FG, both "populist, centre-right and run like family firms.” One of Bertie’s predecessors defined the difference between the two as “When we’re in – they are out.” The FT says “no wonder Ireland lost the run of itself.”

Are we bound to let history repeat itself or will we truly reform politics and business? Despite the anger, the evidence that the elite will allow radical reform is thin. They cant wait for the magical “green shoots” and to get BTBAU – “back to business as usual.”

Hutton in Dublin

UK author and policy analyst Will Hutton was in Dublin on Wednesday for a lecture and debate hosted by the Irish Congress of Trade unions; speakers also included Congress President David Begg, Labour Finance Spokesperson Joan Burton and TASC Director Paula Clancy. His powerpoint presentation - focusing on the need for an 'Innovation Revolution' is available for download here, and a video of the event is available here.

Do cuts work?

Michael Burke: The Irish economy is in a Depression. Real GDP has fallen by 9.9% from its peak and real GNP by 13.8%. Even these terrifying data are flattered by the onset of deflation. Nominal GDP has fallen by 13.8% and nominal GNP by 18.5%.

The Government’s stated aim is to repair the public finances. Yet the crisis in government finances is a symptom of that economic slump, not its cause. The Government and its supporters argue that their actions have forestalled an even greater crisis- that revenues would have fallen further without tax increases and that expenditures would have climbed even higher without spending cuts. The argument for fiscal austerity stands or falls on this proposition.
This argument has been forcefully deployed. But it is false.

This can be shown by comparing the fiscal measures with the outturn in both government finances and the economy. Table 1. below sets out measures taken by the government in the name of restoring government finances and reassuring the financial markets. The December 2009 Budget measures, which will impact in 2010 and beyond, are not included. Those amounted to another €4bn in expenditure cuts.

Table 1. Budget Measures, 2008-2009

The total tax increase amounted to €5.944bn and the total cuts in expenditure amounted to €4.614bn, for a total of €10.558bn, equivalent then to 6.44% of GDP. It is argued that these measures prevented a further deterioration in government finances.

But this assertion has no merit. If it were true, then without the fiscal measures taxes would now be €5.944bn lower than currently and spending €4.614bn higher. Table 2. below sets out the actual change in both tax revenues and votes spending and adds these to Budgetary contraction measures, both spending and taxation, ie takes the government assertion at face value.

Note: all in nominal terms, for consistency with both the reality and accounting of government finances.

Table 2. Wishful Thinking on Slash&Burn- The Government Case for Cuts

Source: calculated from DoF, CSO data

We therefore arrive at the ludicrous situation where the Government and its supporters argue that they have saved Government finances from a far worse fate- one in which Government activity accounts for 107% of GDP. Even if the supposed effectiveness of fiscal austerity fell by 18%, it would still leave the State finances accounting for 100% of the change in GDP during the recession. Or if we apply the government’s preferred measure of GNP, the State finances are still equivalent to 94% of the change in GNP. This is not a serious proposition. It is a level of State dominance of the economy not reached even in the Democratic People’s Republic of Korea.

Instead, in national accounts government expenditure is a component of GDP and a part of investment (Gross Fixed Capital Formation). Cutting either depresses economic activity both directly and indirectly, as other sectors adjust to the lower level of final demand.

The alternative view, that government spending cuts can ‘crowd in’ private sector expenditure to replace it, has demonstrably failed to materialise. Since fiscal tightening began in late 2008 every component of GDP has declined, household consumption, government spending, exports and inventories have declined by. Declining investment remains the driving force behind the recession, with gross fixed capital formation falling by a further €10.4bn over that period. All sectors of private activity have fallen at much faster rate than the decline in public spending. They have not been ‘crowded in’.

Government finances are in crisis because of the collapse in tax revenues, based on the slump in private sector activity. Only the restoration of growth will restore those taxes, along with a balanced tax regime. Current policy is not working.

How to prevent stunning failures of corporate governance?

Nat O'Connor: In a major speech on the economy to the North Dublin Chamber of Commerce, the Taoiseach said that "Individuals were left in dominant positions within individual financial institutions for too long a period. There were stunning failures of corporate governance and not enough turn-around in management personnel in those institutions."

There is a growing consensus that we need to put in place new rules and laws to prevent the recurrance of such stunning failures. But the detail matters. How can corporate governance be strengthened?

The Taoiseach's speech mentioned the "the outlawing of unforgivable malpractices", but specific commitments on new laws are limited.

One specific statement was "We must also ensure that there are new standards of corporate governance including limits on the timescale which any chief executive or chairman can serve in a bank. If legislation is needed to achieve this it will be introduced." (The alternative to legislation is to continue with the existing voluntary code of practice, which asks companies to comply or else explain in their annual reports why they did not comply).

When announcing the details of new rules on bank directors' corporate governance, the Taoiseach's speech merely states that "The Financial Regulator has recently announced new corporate governance rules. This involves a clear separation between the roles of chairman and chief executive and new standards relating to the composition of boards of directors."

But 'rules' are not the same thing as 'laws'.

The new financial regulator has made a number of addresses lately, including a presentation to the Oireachtas's Public Accounts Committee where he stated that: "Regulation in Ireland was not robust enough to prevent the asset bubble and the Financial Regulator‟s reliance on some boards and management to meet their corporate governance responsibilities was misplaced." Most of his speech focuses on the strengthing of the supervisory and regulatory rules and procedures of the financial regulator, such as improving skills, implementing a new risk model, building enforcement capacity, etc.

Yet, regulation is not the same thing as corporate governance. The latter is when companies take it upon themselves to have a robust mechanism where tough questions are asked, and decisions scrutinised, in the long-term interest of the company and its stakeholders. The regulator may sometimes check up on governance, but good governance its valuable for companies for its contribution to the long-term success of their enterprises.

There are also some mixed messages in the regulator's speech. At one point he says that "The cost of regulation will undoubtedly rise. But judged in the context of the huge cost of a financial crisis, the increase in the cost of regulation must be seen as a price worth paying." Yet later on, he states that "Ireland needs to be wary of the Sarbanes Oxley experience. It is important to be cautious about new measures which could significantly increase costs, especially if the standards being audited are too vague or extensive."

There are two points to raise about the above. Firstly, they mostly address financial institutions and do not necessarily apply the same level of rigour to other areas of corporate governance. Secondly, while there is a strong focus on rules and regulation, very little substantive legal change is proposed for corporate governance. Indeed, very little is being said about how companies run their affairs.

On the specific question of loans, the regulator may have identified one of the 'unforgivable malpractices' that the Taoiseach wants outlawed. The regulator said that "Loans to bank directors and senior management have been subject to abuse and excess, if not outright subterfuge." He is proposing a legal code of practice to ensure lending occurs on an 'arm's length' basis.

The only other mention of legal requirements are the Taoiseach's proposal to legislate, "if necessary", for limits on the length of time directors serve on boards.

TASC's Mapping the Golden Circle research identified that the potential risks to good corporate governance are present in Ireland, including directors potentially having a lack of time and facing divided loyalties. And also excessive remuneration and a lack of diversity on boards lending themselves to 'groupthink' and other potential risks. Chapter 6 of TASC's analysis looks at corporate governance in more detail.

TASC proposes that new, stronger legislation on corporate governance is needed to protect the public interest, not only for financial instituions, but for all private companies.

TASC's specific proposals include:
- Limiting the number of multiple directorships a single person can have. The law in Ireland currently allows 25 (where a group of subsidiaries only counts as 1). The regulator has suggested 3 maximum (in the financial sector).
- Limit remuneration
- Require boards to have 40 per cent women (like Norway, France and Spain).
- Require boards to have employee representation (like some US States, Germany and many other European countries).

TASC also argues that State-owned bodies should come under stronger law about corporate governance, not weaker (as is the case at present, at least in some areas like the amount of information made available in their annual reports).

These are not outlandish suggestions, but rather reflect successful models of corporate governance from other countries. When we consider how many hundreds of thousands of people lost their jobs or lost massive parts of the their pension funds or lost their investments, it should be clear that the public interest matters. We are all stakeholders in the good, open governance of businesses. Hence it is time for strong legislation to make it clear to the boards of directors across the private sector the standards and ethics that are expected of them, including protecting all stakeholders and respecting the wider public interest.

How progressive is Irish taxation?

Michael Taft: This follows on from Nat O’Connor’s post on taxation and concerns an issue raised by Seamus Coffey in a considered comment; namely, how progressive is Irish taxation.

Reliance on Revenue Commissioners’ tables can only take us so far. There is much that is not included in this data. For instance, this only assesses income for the purposes of income tax. It doesn’t include capital income such capital gains, inheritances, gifts, etc. Even for the purposes of income tax, it doesn’t include all income. Revenue lists some of the income, profits or gains it doesn’t include (e.g. stallion fees, patent royalties, forestry profits, artists’ income, etc. - a list is attached to the Revenue tables). The Commission on Taxation also lists a number of exemptions which may not be included in the Revenue income tables.

Further, the Revenue tables don’t show social insurance payments, which are reduced for high income earners owing to the contribution ceiling (never mind that PRSI is not levied on capital income). And, of course, the tables don’t show the payment of indirect taxation which is regressive.

Using the Revenue tax tables to test the progressivity of the tax system is fraught with problems. Unfortunately, there is no single data source for a comprehensive view of income and taxation. However, the EU Survey of Income and Living Conditions can give us some pointers – as it includes more income and more tax than the Revenue tables. Of course, it is a survey – voluntary and subjective. Still, it is accepted as a reliable data source throughout the EU.

Using the 2008 equivalised income figures we find that the top 10 percent earn 31.7 percent of all direct income (income from work) in the state and pay 38.7 percent of all income tax and social insurance. While progressive, it is not overly so (for those in the middle 6th decile, most of whom earn less than average income – they earn 9.1 percent of all income and pay 7.9 percent of all tax/PRSI).

It should be noted that SILC includes employers’ PRSI in calculating both income and tax for individuals. This takes account not only of the ‘social wage’ but of real benefits such as employers’ contributions to pension, heath insurance, etc. benefits.

Effective Taxation

As to effective tax we find that the top 10 percent face a tax/PRSI liability of 29.7 percent. This contrasts to a national average tax liability of 24.4 percent. Again, this is at the softer end of progressivity.

We should note that SILC doesn’t take into account irregular income, of which inheritances and gifts would be a major category. Unfortunately, we don’t have a deciles breakdown of this income (if there is one, I would appreciate a source), but it is reasonable to assume that the larger proportion goes to high income groups. In this regard, a ‘child’ receiving €750,000 through an inheritance would face an effective tax liability of only 11 percent.

However, the main omission from the above calculations is VAT and other indirect taxes. That SILC omits this is understandable – respondents in a survey are not in a position to identify the amount of VAT they pay.

The ESRI and Combat Poverty Agency assessed the distributional impact of VAT and excise taxes and found that the top decile paid less than 10 percent of their income on indirect taxes while the poorest 10 percent paid nearly 21 percent. This shouldn’t be too surprising as indirect taxation is generally regressive.

The following applies the findings of the ESRI/CPA on the SILC data using gross income (including social transfers). This is not wholly satisfactory. First, we are dealing with different data sources. Second, the indirect tax data was published in 2005 based on the 2000 Household Budget Survey – so it is a bit dated. The following, therefore, should not be taken as conclusive but rather serve as an indicator.

As can be seen from the chart, when indirect taxation is included, the tax liability of the highest income group – 37 percent – is not much more than the national average – 34 percent. Given that the lowest income decile pay 26 percent, the level of progressivity is highly limited.

To repeat, this is just an exercise. However, we shouldn’t be too surprised at the lack of progressivity in the Irish taxation system. Eurostat finds that Ireland relies more on indirect taxation than any other EU-15 country. Whereas indirect taxation makes up, on average, less than 35 percent of all tax revenue in other EU-15 countries; in Ireland, it makes up 43 percent. This heavy reliance on regressive taxes is likely to undermine a progressive tax base.

In conclusion, while we still wait for a comprehensive survey of taxation and income, there is evidence to suggest that progressivity in the Irish tax system is limited. If, as Nat suggests, that we will need to substantially increase taxation, it is imperative that we not only define strategies that are the least deflationary and the most equitable; we need to get an accurate picture of the equity, or lack of, in the current system.

Guest post by Anne O'Brien: Reconstructing the Tourism Economy

Anne O'Brien: The volcanic ash crisis is not the only problem facing the Irish tourism industry this summer. Other, less dramatic and less publicly discussed problems exist, which will fundamentally influence if or how the sector recovers following the crisis post-2008.

The twentieth year of impressive continuous growth for the Irish tourism sector was marked in 2007. While in the late 1980s tourism arrivals were at 2.4 million, the industry employed 69,000 people, and revenue earnings were £1,153 million (€1,459 million) (Bord Fáilte, 1992) by 2007 tourist arrivals achieved a peak of 7.7 million, the industry employed 322,000 people and revenue earnings were €6.45 billion (Fáilte Ireland, 2008).

However, in the latter part of 2008 Irish tourism collapsed dramatically. The decline began in the third quarter with 174,000 less overseas visitors travelling to Ireland. In total overseas visits to Ireland decreased by 4% in 2008, despite a growth of 2% in world arrivals. Nonetheless, a total of 7,435 million overseas visitors came to Ireland in 2008 and 8,339 million domestic trips were taken, tourism contributed €1.5 billion in taxes in 2008 of which €1.1 billion was from foreign visitors (Fáilte Ireland, 2008). In 2009 the decline continued and the total number of visitors to Ireland was down by 11.6% to a total of 6,927 million (CSO). Business trips were down 20.5% (and spending down 25%). Overnights in hotels were down 19.7% (Guesthouses and B&Bs 20.6%) Total earnings from tourism were €3,879 million (CSO).

The crash has impacted in particular on the hotel sector, in part because accommodation constitutes a large proportion (28% in 2009) of the tourist spend in Ireland. Also the domestic market was heavily hit by the Irish recession, and the hotel sector had become increasingly dependent on the domestic market in recent years. In 1997 the domestic market accounted for just 46% of all hotel guest-nights, by 2008 this figure had risen to 65% of all guest-nights (Howarth, Bastow Charleton, 2008 & 2009). For hotels, lower demand was thus a problem but this was further aggravated by massively increased room stock capacity, which was at its highest level ever (58,467 rooms in 905 hotels). Since 1997, over 30,000 additional rooms and 480 new hotels had been built, representing an investment of €4 billion, and room stock had increased by 98.7% over the previous ten years (Howarth, Bastow Charleton, 2008).

Investment in the hotel sector grew after 1987 when the Business Expansion Scheme introduced tax incentives for tourism facilities, including accommodation. Between 1996-2006 the number of rooms doubled from 26,000 to 52,000 (Fáilte Ireland). In 2007 “the conclusion of the building boom in hotels brought over 8,000 new rooms to the hotel stock” in that year alone (Howarth, Bastow Charleton, 2008). Since 2003 the number of hotel rooms grew more rapidly than demand but the domestic market maintained occupancy until the crash in 2008 when the level of oversupply became obvious. For over a decade investment in Irish hotels came, not from sound fundamentals within the sector, but from the existence of capital tax allowances.

The Bacon Report in November 2009 outlined how hotel-construction tax breaks had distorted the market, by generating an oversupply of rooms. Accelerated tax allowances had been available for investment in hotels since the Finance Act 1994 and only terminated in 2006. Under the incentives investors in hotel property development could claim 15% of the capital cost of a hotel for each of the first six years of operation and the remaining 10% in year seven, against tax liability.

The Bacon Report details the vested interests that gained from these incentives by outlining a scenario where a developer applies for planning for a mixed development. As part of the planning process planning authorities would request the inclusion of a hotel development – on the basis that tourism is promoted, local employment provided, development levies are paid to the local authority, the hotel is a basis for rates payments to the local authority and the hotel constitutes a facility for local residents. The developer subsequently allocates some land and plans for a hotel with, for instance, 50-60 rooms and a construction cost of €10 million. He or she can maximise the ‘cost’ of the hotel end of the development and in this way get the tax incentive on access infrastructure costs. The developer and some ‘high net worth individuals’ with large tax liabilities for the following 7 years, fund the €10 million. In return the investors will get tax allowances of €4.2 million, and agree to fund the developer €2.1 million. The remaining €7.9 million is funded by borrowing from a bank on an interest only basis (in the investors names but with no recourse to other assets). The hotel is built and leased to an operator, often as part of an international chain franchise. (The lease income is used by the developer to pay the interest on the bank loan). The tourism development agencies support this arrangement because the accommodation base is ‘strengthened’. The exchequer supports it because it raises new taxes. The banks get to provide a loan to ‘high net worth individuals’ ‘secured’ on a property. By 2008-09 the banks had €7 billion in loans to the hotel sector. At the end of the 7 years of tax relief the hotel and loans are transferred back to the developer or sold for a profit. The general idea is that “Unless property prices fall sharply, the sale will raise sufficient funds to pay the loan and provide a profit to the developer” (Bacon, 2009: 39-40).

As Bacon comments “None of these decision makers expect to experience a downside and so none of them examine the fundamentals of the hotel industry in order to question the justification of the investment” (2009: 39-40). The final result of the tax incentives was that there were 26,802 new rooms added to the register in the period 1999-2008, with an estimated total investment of €5.2 billion and debt of €4.1 billion, most new hotels had on average been insolvent since 2002, and the situation was particularly bad in respect of hotels constructed between 2005 and 2008 (These comprise 217 hotels with about 15,600 rooms) (Bacon, 2009:ii- iii). The Bacon Report bluntly stated with regard to tax relief based investment that “it was categorically not driven by the fundamentals of the hotel industry… the investments never made sense from the point of view of operating hotels and would have been insolvent if market conditions had stayed as they were at the time of the investment” (2009:ii- iii).

The Bacon report offers a solution of sorts to this problem, which involves the ‘removal’ of between 12,300 and 15,300 rooms from the market. However Bacon further proposed that ‘barriers to exit’ for insolvent hotels should be removed “without disadvantaging the initial investors… capital allowances that have already been claimed in respect of any hotel should not be subject to any claw back by the Revenue… (2009:iv). While Bacon claims that ‘The costs to the Exchequer of removing this barrier to exit would be zero given the situation that has arisen’ (2009:iv), in a previous post on progressive-economy.ie, Pentony argues that the total potential loss to the Exchequer amounts to a bail-out for developers and adds up to over €1.5 billion. Allowances yet to be claimed have an estimated value of €527 million and allowances already claimed, have a value estimated at €1 billion.

Against this backdrop, as part of the Government’s framework for Sustainable Economic Renewal Building Ireland’s Smart Economy, a Tourism Renewal Group was appointed by government to work on a development plan for tourism for the five year period 2009-2013. The report noted that Irish tourism has the capacity, if supported and developed, to deliver as part of an export-led economic recovery but the Chairman outlined a number of issues and priorities, which needed to be urgently addressed. These included maintaining investment in the brand, cutting access costs, providing access to working capital, maintaining state agencies and acknowledging nationally the role that tourism can play in economic renewal. The report set out a number of different scenarios for recovery and the ‘realistic scenario’ illustrated what could happen if the right steps were taken against a ‘challenging’ background. This Scenario

• Sees overseas tourists stabilising at 2009 levels and returning to growth by 2011 with modest growth of 3 to 4% per annum linked to 7.5 to 7.9 million arrivals by 2013.
• Revenues from these tourists would fall in 2009 and 2010 but would show modest growth in 2011-13.
• With regard to domestic tourism the report sets a target for growth by 2011-12 and a target of 8.3 million trips by 2013.

Mid term actions for recovery focused on key issues such as putting tourism at the heart of government, increasing the knowledge and innovation base of the industry, more marketing, retraining, sustaining investment in the tourism product (strangely investment in accommodation is still included), securing more World Heritage Site designations, more e-commerce, focusing on leisure and business tourism, making access easier for tourists, keeping costs low and easing ‘the burden of regulation’(TRGR, 2009).


While Bacon comments that even if the group achieves its objective the growth signalled will not be enough to maintain many existing hotels, nonetheless there are some grounds for optimism. The UNWTO documents that while international tourist arrivals declined worldwide by 4% in 2009 this can be interpreted as a sign of comparative resilience when compared with the estimated 12% slump in overall exports (2010: 1). Moreover, in the last quarter of 2009 growth of 2% was recorded in international visitor numbers and the UNWTO forecast global growth in international tourist arrivals of between 3% and 4% in 2010. In an Irish context Howarth Bastow Charleton’s Hotel Survey for 2008 noted that effectively targeting business tourism will assist in alleviating some of the difficulties that the industry is facing. The introduction of the National Conference Centre to Dublin in 2010 was expected to create up to €50 million per annum for the economy and €1billion by 2012.

However the TRG report needs to get to grips with some fundamental problems within Irish tourism, which have existed since the early 2000s, and which don’t simply concern volcanic ash. As outlined above, there is a structural issue with the hotel sector - average room occupancy rates have been declining since 2000, and there’s a surplus in supply that needs to be addressed. The political dynamics that underpinned the prolonged use of tax relief to incentivise private sector investment in an overdeveloped hotel sector needs to be examined so that it is not repeated. Cost competitiveness in Irish tourism began to deteriorate in the early 2000s. The industry claims this is due to relatively high labour costs, high domestic inflation and the strength of the Euro against the dollar and sterling (ITIC, 2008:3). Increasingly in media discourse of late the minimum wage (rather than, for instance, profit levels in the sector) is cited as central to the problem. This common misunderstanding continues despite TASC’s report ‘A Square Deal’ which points out that the abolition of wage agreements for restaurant workers will only heighten inequality and depress consumer demand and that removing wage agreements for restaurant workers would mean a reduction of just 61 cent per customer for a meal costing €60 for two.

A more relevant issue is signalled by Fáilte Ireland, which noted that visitor satisfaction with value for money declined consistently since 2000 when 63% of visitors found value for money in Ireland good or excellent, this declined to 45% in 2002 and to 16% by 2007 (Fáilte Ireland 2003 & 2007). A further fundamental problem is that there has been a serious lack of innovation and development of the tourism product in the last decade or two (which was not subject to the same tax incentive scheme as hotel development). However possibly most centrally, there appears to be a problem with the politics of tourism development. It has been generally accepted that the main driving force behind the major success of Irish tourism over the past 20 years was the private sector. And while agencies like ITIC and the IHF were undoubtedly key in the past, there’s a central need now for the state and its agencies to act not merely to protect the sector but rather to redirect its efforts and agencies to more effective ends, namely to generate a developmental growth strategy for the sector- one preferably not premised on the demise of the minimum wage!
Dr Anne O’ Brien is an academic co-ordinator with Kairos Communications Ltd. for Media Studies programmes at the School of English, Media and Theatre Studies in NUI Maynooth

Who will pay the inevitable tax increases?

Nat O'Connor: As part of our analysis of the Finance Act 2010 we looked at the national finances. An Saoi has pointed out that tax revenue is more or less on target. But even if those targets are met, the size of the deficit makes tax reform essential.

The primary role of the Finance Act is to make sure that the State's tax revenue is stable, sustainable and sufficient to fulfil its functions. But our analysis shows serious deficiencies in this area.

The following two diagrams illustrate the Department of Finance's headline figures on revenue and expenditure. Source for 2001-2008 data: Department of Finance (2009) Budget and Economic Statistics 2009. Source for 2009-2010 data: Department of Finance (2009) Pre-Budget Outlook November 2009. Figures for 2009 are provisional and figures for 2010 are projections.

Figure 1: Central Government Revenue and Expenditure (2001-2010), in Millions of Euro, net figures

Figure 1 includes all revenue and expenditure (including sources of revenue in addition to tax, such as selling State assets, loans to the State, etc).

Figure 2: Tax Revenue and Current Expenditure (2001-2010), in Millions of Euro, net figures

Figure 2 limits the figures to tax revenue and year-on-year ('current') expenditure only. This is to remove 'one-off' effects, such as from capital spending.

Simply looking at the illustrations shows the extent of the fiscal crisis. Both figures show the sharp drop in tax revenue (by a third, €14.2 billion) between 2007 and 2009. Some of the tax decline is due to the overall global economic recession. Optimistically, maybe half. The rest of the decline is due to the collapse domestically, especially in the construction and housing sectors. This is tax revenue that is not likely to ever return to mid-2000s levels.

Figure 2 also shows that the Department of Finance's 2010 projection for tax revenue is for less than 2009, whereas expenditure is increasing. In other words, the current deficit is getting larger, not smaller.

Figure 1 shows the reverse only because of large one-off cuts in capital expenditure, plus the effect of non-tax sources of revenue. In the absence of additional capital spending items to cut, any serious attempt to close the current deficit at the next Budget must involve more deep cuts in current spending and/or significant increases in tax.

Tax revenue for 2010 is projected to be €30.8 billion, whereas current expenditure is projected to be €47.5 billion. That's a gap of €16.7 billion.

Let's assume that global economic recovery will close half the gap in tax revenue over time (which is a big assumption). On this basis, using the Department of Finance's projections for 2010, the gap that remains to be bridged by spending cuts and/or tax increases is at least €8.3 billion.

(Note) This is a simplification of the overall situation. I am assuming that it is necessary to balance tax revenue with current expenditure because the major cuts on capital spending between 2009 and 2010 cannot be repeated and are not a permanent way of bridging this gap. I am also assuming that non-tax sources of revenue (currently including the Pension Levy) are not a stable replacement for tax revenue, although they provided over €800 million in 2009 and are projected to provide €2.3 billion in 2010. There is always disagreement about measuring the deficit, and of course State-led economic stimulus could also help decrease the gap by boosting economic activity. Yet, I think it is worth focusing on the basic mismatch between tax revenue and current spending because the gap is so large. And it seems certain that the Government must deal with the €8.3 billion question soon.

Unlike the last budget, which involved cutting one-off capital spending and making a pre-payment to the National Pensions Reserve Fund (NPRF), a continuation of the cuts strategy will require much more to be taken from front-line services. If the Croke Park deal holds, with its commitment for no more pay cuts, it is hard to see where billions in cuts can happen. Hence, I come to the conclusion that some significant tax increases are inevitable to help bridge the gap.

Tax increases at this time may further depress the economy, especially if they are based on income tax or consumption taxes. So there is a need to look at broadening the tax base to include different forms of tax, including taxes on wealth, in order to minimise the dampening of consumer spending. For example, ex-Taoiseach Bertie Ahern's regret at abolishing property tax may just be one example of the discussion on new taxes yet to come.

From an equality perspective, there is a clear need to examine how much tax everyone currently pays, relative to their income and their needs, and to seek the establishment of a much more progressive tax system, where those who benefit more from the economy also pay proportionately more tax. At the same time, we need to establish a target, such as the 45 per cent of GDP suggested by John Fitz Gerald of the ESRI, because we are not talking about temporary tax increases to weather out the crisis, but a long-term restructuring of the tax system to make it more sustainable and sufficient for the level of public spending that we settle on.

There is a real risk that new taxes (and service charges) will fall disproportionately on low and middle income households, while those on high incomes continue to benefit disproportionately from tax expenditure. While any move to consolidate Western European levels of tax and spending will require virtually everyone to pay more tax, there is nevertheless a need for more public discussion now on the future shape of our tax system, including how much taxation should be paid by different groups in society.

(II) What is the likely outcome of the Greek Crisis?

Jim Stewart: Some likely outcomes can be anticipated from a recent speech by German Chancellor Angela Merkel:-

(1) There will be new rules and penalties for Eurozone members. The Commission and/or the member States will become more active in monitoring annual budgets. Aspects of the annual budget may be agreed/negotiated with Brussels. In the case of Ireland this is not necessarily a bad thing given our over reliance on tax expenditures as a policy instrument (See TASC: Failed Design). Some implications:-

(a) Those countries with largest deficits are likely to have the greatest scrutiny;
(b) Measurement of key variables and comparisons with other eurozone economies is key. For example, few international commentators have noticed that Ireland's net debt as a fraction of GDP is a little over one third the gross debt position. Many countries have large off-balance sheet financial liabilities (France, Germany and Ireland) because of the banking crisis. Should these be included in net debt positions?
(c) Negotiations and alliances with other Member States, active involvement in policy formation at an EU level, and persuasive argument, will become central for Governments that wish to deviate from EU (and especially eurozone) norms. That is a new political economy will emerge.

(2) A country using the Euro would be allowed to become ‘insolvent’. It is because of this risk that Greek bond yields have increased from around 5% at the start of the year to over 10%. This effectively means that there is minimal trading in Greek Government bonds. The rise in yield and fall in price also means that the market value of Greek Government debt as a percentage of GDP is far lower than the nominal value. Hence on a market value basis the ratio of government debt to GDP is far lower than the often quoted figure of 120%. The markets have solved one aspect of the Greek Crisis! Some implications:-

(a) Banks holding Greek Government debt will face large losses if the debt were sold. France accounts for €75.7 billion of Greek government debt, Switzerland €64 billion and Germany €43.2 billion (Anne Seith, Der Spiegel, 28/4/2010). Greek banks will face large losses. Conversely, financial assistance (especially the financial stability program) which prevents insolvency is of direct benefit to banks, which is why German and French banks have been required to contribute to the bail out.
(b) If Greece remains a member of the Euro, but becomes ‘insolvent’, This is likely to mean existing debt will be rescheduled, meaning the redemption date could be extended, or there may be a write down in the nominal value to current market values, or interest rates could be renegotiated down. This has implications for issuers of CDS instruments. Given the size of Greek Government debt many of these could in turn face liquidity/solvency difficulties, thus unmasking the false claim that such instruments provide “insurance”.
(c) But even with ‘insolvency’, an issue still remains - how will new finance be raised? One solution would be to issue Euro denominated debt by for example the European Bank for Reconstruction and Development (EBRD), and then hand this to Greece. This debt could then be ranked ahead of existing debt. Alternatives have been discussed, for example allowing the ECB to buy Greek debt directly. Proposals do not make clear whether this would be new debt (thus financing Greece) or existing debt thus supporting the market. ECB intervention is more likely to happen in the case of other countries affected by the Greek crisis such as Portugal and Spain, and in some lists Ireland.

(3) Proposals to expel a country from the Euro area as advocated by the German finance minister (Schaeuble) would require a renegotiation of EU treaties. This is unlikely in the short term, and such a proposal may be merely for domestic political reasons in Germany.

Conclusion

It is likely that key countries such as France and Germany will support other Eurozone countries if required, by providing loans. But the rules under which countries in the Eurozone will operate has changed fundamentally. There will be far greater emphasis on external control over budgetary decisions.

The main effect of the crisis so far has been a welcome devaluation of the Euro against Sterling, (partly reversed post the UK general election), and the dollar but an unwelcome increase in interest rates in countries such as Portugal, Spain and Ireland. It is also likely to mean the further evolution of the single currency area towards economic coordination and in effect fiscal transfers, although these take place via the ECB on loans at subsidized rates of interest.
These developments will require the development of a new political economy – the subject of the next post on the crisis by David Jacobson.

The emotional life of markets (re UK election)

Nat O'Connor: Both the BBC and RTÉ coverage of the UK election have included prominant reference to the reaction of markets to the results.

It is reasonable to identify correlations and possible causes between a hung parliament and currency exchange rate changes, etc. However, the citations seem to often lack sources. For example, RTÉ state that "Markets fear a stalemate could lead to political paralysis, hampering efforts to tackle the nation's spiralling debt and secure recovery from the worst recession since World War II." Firstly, what analysts are saying this? Secondly, why are the markets being treated as a singular entity with consciousness, rather than the aggregate of diverse individual and corporate investors? It would be much more accurate to report which investors are expressing concern or fear, and on what basis.

The BBC does a much better job. They state that "The markets are concerned that a weak government might be unable to reduce the UK's high budget deficit quickly." But they explain this 'concern' by going on to name specific sources for specific quotes. Some of these quotes indicate concerned investors, although it is not clear that they represent 'the markets'; if indeed, anyone can. Also, some sources (like the two ratings agencies mentioned) do not seem too concerned. Aren't they part of 'the markets' too? Or are they only part of the collective when they too reflect a negative emotional state?

The Crisis in Greece - Part I

Jim Stewart: One puzzling aspect of the Greek crisis is that the greater the aid promised the worse the crisis seems to become. Commentators, while noting this effect, ascribe it to scepticism in the financial markets as to whether the bailout will work (Ian Traynor, Guardian Newspaper, 6 May, 2010). Other views expressed in the Financial Times (see David Shellock, May 5) are that it is not enough, that it addresses liquidity rather than solvency issues, and that is provides finance without addressing the underlying structural issues.

Such comment misses the point that the Memorandum of Understanding agreed with Greece is unworkable. For example a levy on illegal buildings is proposed to raise €1.5 billion over the period 2011-2013 and it is also stated a levy on unauthorised establishments will raise “at least €800 million per annum” (p. 5). It is fantasy to consider that these targets can be met.

Proposed measures to foster growth will probably impede growth, such as introducing competition amongst providers of railway services, and in the wholesale electricity market. Other measures to increase competition in particular sectors are likely to be growth enhancing, but are unlikely to be implemented. Many will be familiar with the particular sectors from our own experience – such as the legal profession, pharmacists, auditors, etc.

The proposal to introduce “a strong audit program to defeat pervasive evasion by high wealth individuals and high income self employed” (p. 5) is highly desirable but, as in many other countries, difficult to achieve. At least the proposals to extend the age of retirement will ensure that trained professionals in tax administration will continue at work to the benefit of the Greek state's finances, in contrast to the position in Ireland where many of these individuals have been encouraged and given incentives to retire early!

Some proposals will help economic recovery, for example improve the “absorption rates” of Structural and Cohesion funds, but even here the requirement that, in consultation with the Commission, there is a rapid implementation of a “financial engineering instrument” has the potential for great harm.

Take the recent case of the use of Credit Default Swap (CDS) instruments on trading in Greek government debt. James Rickards (The Financial Times 11/2/2010) had a particularly clear account of the role of CDS trading in the value of Greek Government debt. Essentially, the problem with these instruments is that they allow insurance but with no insurable interest (one analogy is with rival criminal gang members taking out life insurance on their opponents). Furthermore, Goldman Sachs was one of the central parties in developing innovate financing that enabled Greece to massage its true borrowing, and at considerable cost in terms of fees to the Greek State (see “The eurozone: Athenian arrangers” by Kerin Hope, Megan Murphy and Gillian Tett, Financial Times 17/2/2010).

A key part of the Memorandum of Understanding is the establishment of a Financial Stability Fund of €10 billion, financed from the aid package, with key officers appointed by the Governor of the Bank of Greece, but with no control or influence by the Greek State. This fund is designed to ensure the stability of the Greek banking system, and to reduce risks to banks and the banking system in other countries.

The program requires a great deal of data provision in order to allow quarterly disbursements. This data and compliance reports will be provided to the European Commission, the ECB and IMF. The program will involve new laws, changes in the tax system, pension system and wholesale reorganization of public administration, including a review of official macroeconomic forecasts by “external experts”. If Greece had difficulty in implementing existing laws and regulation prior to this intervention, how can they conceivably implement drastic change now - even without political opposition?

The whole program is unlikely to be implemented for a number of reasons: for example, administrative difficulties (there is an extensive and complex legislative program); or because it is irrational; or because of political opposition. It is also likely that the tax-raising measures will reduce economic growth, while the measures designed to improve economic performance will be insufficient, resulting in no deficit reduction.

In a recent speech by German Chancellor Angela Merkel, reported in The Guardian 6 May), the commitment of Germany to the Euro was emphasized. The German Finance Minister Schaeuble has been quoted as stating "it would be disastrous to risk ... a member of the European currency union, Greece, now becoming insolvent." (New York Times May 7). Some have argued (Wolfgang Munchau in the Financial Times) that the decision by the last German Government to pass an amendment to the constitution limiting the federal budget deficit to 0.35% of GDP by 2016 will cause the breakup of the Euro (See also Adam Tooze, Financial Times, May 5). It is more likely that a further constitutional amendment will be introduced, although reluctantly, to allow for a deficit that is consistent with maintaining services at the German State and local level, as well as meeting commitments consistent with membership of the Eurozone.

A central issue is - will enough of the program be implemented to satisfy donors and if not what are the effects? This will be the subject of my next post.

EU Commission forecast

Paul Sweeney: The European Commission today published its economic forecast for the European Economy including the Eurozone members (different colour on the linked map) for this and next year. It is a positive but guarded outlook for Europe.

On the map in the link you can see how each country has done in 2008 and ‘09, and is projected to do this and next year. The data covers growth (GDP), inflation, unemployment, the deficit and the current account balance.

Ireland is the worst performer by most, though not all, measures. Our unemployment has soared from just over 4% to 13.4% these days. It has “stabilised”, they say, happily? This rate is substantially less than Spain. Lithuania, Latvia or Estonia. But this is thanks to mass flight from the country and many staying at home and in education.

The Commission says that “The economic recovery is underway in the EU, although it is set to be a gradual one.” It says that the recession technically came to an end in the EU in the third quarter of last year. However, it also says that this was largely due “to the exceptional crisis measures put in place under the European Economic Recovery Plan,” but also owing to some other temporary factors.

The Commission says “the speed of recovery is forecast to increasingly vary across EU countries, reflecting the extent of the housing-market correction needed (massive in our case!), the size of the financial-services sector (also super massive in our case) and the degree of internal and external imbalances (not so good either)".

We need more public agreement and disagreement

Nat O'Connor:An article in the Irish Examiner presents the recent encounter between the Secretary-general of the Department of Finance (Kevin Cardiff) and the Dáil Public Accounts Committee, on the subject of available economic expertise and advice.

"Quizzed about the department’s performance during the current economic crisis, Mr Cardiff acknowledged that it needed to be more open to a wider range of advice than in the past."

"Conceding the department did not have enough expertise among its staff, Mr Cardiff nevertheless said it received expertise assistance from the National Treasury Management Agency, the Central Bank, the Financial Regulator, as well as Merrill Lynch and Rothschilds."

I hope the above list is an example of the narrow range of advisors that the Department intends to broaden out from. In fairness, I don't think that well-evidenced reports or submissions are dismissed out of hand by Finance, regardless of their source. But the methods that are used in business, economics and finance are ultimately social scientific methods. They are built upon a set of philosophical or ideological assumptions; even when these are part of statistical models and must be identified from the exclusion of 'externalities' that are difficult to measure. Hence, there is real value in seeking out and listening to different interpretations of the same factual information, as different assumptions can lead to radically different conclusions. It would be useful for the Department to continue to publish a list of who it goes to for advice, or even to institute a semi-permanent panel for this purpose.

Our decision-makers may well listen to a wide range of advice from different sides in private, but they should be more confident about publicly agreeing and disagreeing with specific ideas. Currently, it seems to be politically impossible for policians to agree in case it undermines the competition between their respective political parties. Instead, alternative perspectives are more likely to be dismissed out of hand with a refusal to engage with evidence or argument. Likewise, even the rationale and evidence underpinning official decisions are rarely given in public, in case it provides ammunition to rivals.

Ideally, our politicians and other senior policy-makers would be obliged to publish (or at least publicly explain and justify) the arguments and evidence for major decisions. The public debate on the issues should also allow room for dissenting minority opinions and alternative perspectives that were heard, even if ultimately rejected. We have a problem that public disagreement is seen as 'disloyal' and a threat to the public's confidence in Government decisions. On the contrary, the public might have much more faith that the State can deal with current crises if more information on decisions was forthcoming.

For example, Alan Dukes, now chair of Anglo Irish Bank, has stated that keeping the bank open remains the best option for taxpayers, based on calculations available (e.g. on RTÉ News). I heard him give the explanation on radio that they commissioned a range of studies and keeping the bank open was better than closing it quickly, for fear of losing more of the €70 billion or so that is owned to Anglo. It was much more convincing to hear him give some of the detail and rationale for the decision, yet the detailed studies are not available and even the level of explanation he gave was after some questionning. Why not have more faith in the public's intelligence and give a clear rationale for decisions from the outset? And if civil society counters that with better evidence, all the better for the quality of decisions made on behalf of the public.

April figures

An Saoi: I said last month that April is a boring tax month with little happening. I had half intended skipping over making any comments but these figures are intriguing. They clearly show something is happening in the economy. What exactly it is, I am not sure.

The increase in Customs duties is massive and if it continues over the next few months will be a clear sign of increased activity in the economy. The increase in Excise maybe mainly down to the increase in car sales but currency movements and the decline in duty on alcohol may also be influencing the figures. Again this is a sign of increased stabilising or increased activity. The almost complete collapse in Capital Gains Tax reflects little or no activity in the disposal of assets. What little activity there is may be arising from forced sales, where any gain is being offset against existing losses.

The increase in CAT may be a product of the drop in CAT thresholds last year and also increased Revenue audit activity in the area. A small number of settlements would be enough to increase the yield significantly. The lack of any movement in stamp duty suggests that there is little movement in the property market. Income tax has stabilised at a very low level, despite the huge personal tax increases by way of the levies. Planned Public Sector job cuts and continued reduction in spending may see Income Tax falling again from summer onwards because there is little sign of the private sector hiring. The VAT increase is I assume from the same source as the Customs duties, on imports from the outside the EU (VAT at point of entry still applies)

Corporation Tax is up significantly, but this maybe down to just one or two multinationals. The amount over target suggests that at least an additional €1,000M “profits” were washed through Ireland. This of course happened with little or no employment gain!

We will see within a few months whether this is the month where things turned or is it just one more false dawn.

Monthly Figures
Table 1                                                                      Actual               Projected

Cumulative Figures
Table 2                                                                        Actual           Projected

May is now a crucial month with many of the largest Corporate tax payers due to make payments (those with 30th June & 30th November year ends), together with the March/April VAT returns. Assuming the big corporate payers come good, and some slight improvement in retail activity, the Government may exceed its target for the month of €3,253M. Income Tax for May should be well over the current month as April had 5 pay weeks for the weekly paid and 3 pay fortnights for all those fortnightly paid Civil Servants & Teachers. Indeed the May estimate for Income tax looks very low.

The Central Bank’s monthly statistics for March, available here, show signs of spending on credit cards levelling out and the March/April VAT returns due later this month, may see a slight upward movement. The problem is that core employment and economic activity remains anaemic. The cumulative effect of the next round of Government cuts and increases in lending rates will also act as a serious damper on activity.

It remains problematic whether the Government can reach its end of year targets. We may be close to the bottom, but there remain few signs of increased activity. Multi-national exports are unlikely to create many jobs. Any growth is unfortunately likely to be of the jobless variety.

Ireland is in top 10 Exporters of Services in 2009

Paul Sweeney: Last year saw huge collapses in economies all over the world and a massive fall in trade. China overtook Germany as the world’s greatest exporter, a position it is likely to retain by virtue of its size. Ireland was 9th largest exporter of services in the world in 2009.

The 12% drop in the volume of world trade in 2009 was larger than most economists had predicted. World trade volumes fell only on three other occasions since 1965 (—0.2% in 2001, —2% in 1982, and —7% in 1975), but none of these falls approached the magnitude of last year’s economic slide (Chart 1). A factor which reinforced the 2009 trade slump was its synchronized nature. Exports and imports of all countries fell at the same time, leaving no country or region untouched.

Chart 1: Volume of world merchandise exports, 1965-2009 (click to enlarge)
(Annual % change)

(Source: WTO)

Germany was the world’s biggest exporter until overtaken by China last year, though when it comes to exports of service, the US leads by a long haul.

What is most interesting is Ireland’s position as one of the greatest exporting countries in the world – for services. This in spite of our small size.

Ireland is in the top 10 exporting nations of the world in 2009 - at the 9th largest exporter of services as the table below shows (LHS). We sold $95bn in services last year. Interesting as the table also shows (on RHS), we are also big importers of services – even higher in the league, at 8th place, at $104bn. With a fraction of 1 per cent of the world’s population, we export almost 3% of services. This probably means that we import lots of IP software, add a bit of value and export it again. Yet services can have a very high value added and unlike goods, they are not losing as much in value terms – gaining in many instances - with falling terms of trade for goods.

Services exports in the world fell by 13% in 2009 to $3.31 trillion as the table below shows, but this was less than the overall collapse in merchandise trade of 22% in nominal terms. This was the first time since 1983 that trade in commercial services declined.

Services are of growing importance globally and especially for Ireland. In 2007 services exports made up 43% of total Irish exports - way up from just 21% seven years earlier. Exports of goods have been sluggish in recent years and with the collapse in trade worldwide, services exports have helped the economy significantly.

Leading exporters and importers in world trade in commercial services, 2009 (click to enlarge)
(Billion dollars and percentage)

a Preliminary estimate.
b Secretariat estimate.
Note: While provisional full year data were available in early March for 50 countries accounting for more than two thirds of world commercial services trade, estimates for most other countries are based on data for the first three quarters.
Source: WTO

Ireland’s Balance of Payments is in good shape, with imports falling rapidly as demand falls. Domestic demand is collapsing due to rising unemployment and reduced consumption, thanks in no small part to the government’s deflationary policies and the uncertainty engendered, leading to greater savings. We had a whopping trade surplus of €38bn last year, with imports down a massive 29% on peak in 2007 in value terms. Irish exports only fell slightly in 2009.

The WTO is optimistic about the immediate future. It concludes, “After the sharpest decline in more than 70 years, world trade is set to rebound in 2010 by growing at 9.5%.” Will this rising tide lift Ireland’s wee boat, as the conservatives hope, in the face of falling demand?

TASC launches 'Failed Design? Ireland's Finance Acts and their Role in the Crisis'

This morning, TASC launched Failed Design? Ireland's Finance Acts and their Role in the Crisis. The accompanying press statement is available here. All comments welcome!

"The problem is we live in an economy, not a society"

Slí Eile: This was the observation of a contributor to the Commission of Inquiry into the Future of Civil Society in the UK and Ireland. The full report of the Commission may be downloaded here.
Some of the key themes identified in regard to the role of civil society in the financial economy were:

increasing transparency and accountability of financial institutions through various forms of mandatory reporting;
Enhancing pluralism in the financial sector through greater civil society involvement; and
Growing civil society’s power and influence in relation to the financial industry.

The concept and term of civil society has enjoyed a popular revival in recent years especially as some have sought a type of 'third way' in which not-for-profit associations complement and work with various State and Market institutions. However, to having currency and meaningful impact it it necessary to define more clearly the nature and types of various civil society organisations and movements and how they play a role in providing ideas, products and services. It is all too easy - as was evident in the last 10-15 years - for politicians to sponsor 'civil society' and 'social capital' and yet avoid the lack of effective commitment to social equality and a properly funded and resourced public service. Moreover, calls for more responsible moral behaviour and better articulation of 'civic norms' must go hand in hand with initiatives to transform and democratise political institutions as well as curb the recklessness of unregulated markets and accumulation of economic and political capital by a few.
However, the work of this Commission is a useful contribution to a debate on the role of civil society here. Of note is the message that Government is not comfortable with an active, critical and engaged civil society as witnessed by the way in which some agencies and associations have had the funding cut or withdrawn - even prior to the advent of recession in 2008-09. Much was invested in terms of effort and time in a 'national conversation on active citizenship' by the Taskforce on Active Citizenship in 2006-07 only to be largely undone by the lack of follow-up and implementation and the de-facto disbanding of the Office of Active Citizenship in 2009 (along with the merger of Combat Poverty into the civil service and the effective clipping of the Equality Authority). A re-charged civil society may prove vital to a renewal of democracy in Ireland and the beginnings of a movement to harness new economic resources and recovery.