Stating the facts again .... and again

Michael Taft: Apologies for going over this ground again but if employers’ organisations insist on misrepresenting the issues, we have to keep correcting them. Yesterday I was on Today FM’s the Last Word with Brian Fallon from the Restaurant Association of Ireland, discussing the RAI’s latest call to cut the wages of low-paid workers. Mr. Fallon claimed that workers in the Irish hospitality sector are some of the highest paid in Europe. I pointed out that he was entirely incorrect and stated that I would put up the facts on the Progressive-Economy.ie website. So that’s what I’m doing.

The EU Commission’s data collection agency, Eurostat, publishes hourly labour costs on a sectoral basis; including the Food and Accommodation sector. For the latest year, this is what they found:

Ireland is in the bottom half of the EU-15 league table – 6 percent below the average of the other countries. This was in 2008 – the last year of rising personal income. In 2009 and 2010, Irish labour costs in this sector have fallen further behind the EU-15 average.

Caution is needed here: the EU labour cost index has a different methodology and is not seasonally adjusted. But the general trend is corroborated by other indexes – the EU Ecfin Directorate and the OECD.

If the above holds, then we should expect hourly labour costs to be approximately 9 percent below the EU-average in 2010 – falling even further behind this year and next.

By all means, lets have debates about whether increasing or cutting low wages is the best direction to take.

But let’s start that debate from verifiable facts. And the fact here is that hourly labour costs in the hospitality sector are below the EU-15 average.

I look forward to seeing Mr. Fallon’s evidence and sources to the contrary.

Slight but important clarification

Tom McDonnell: I believe I was slightly taken out of context in the Irish Times today.

I was quoted as saying

“...austerity measures would not restore growth”, which is fine,

and

“He urged the Government to ramp up public investment in a manner that should “echo Roosevelt’s New Deal policies . . . and the Marshall Plan policies which engendered the recovery of Western Europe in the wake of the Second World War”.

Just to clarify that the Marshall Plan comments were meant in the context of a European wide programme of investment as a countervailing force to the austerity measures being undertaken domestically in the periphery. I was not claiming the Irish Government had access to the resources to “ramp up” investment.

Centralising monetary policy, while keeping the other instruments of economic policy in member hands, is incoherent.

In the longer-term the Euro zone members (principally Germany) will have to decide between fiscal federalism and Euro zone break-up.

The status quo cannot hold.

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.

Guest post by Arthur Doohan: The place to be is Mr. Justice Kelly's Commercial Court room on Monday morning

Buried in the terms of the latest buyback of AIB bonds is an explicit attempt to reverse the 'hierarchy of credit'.

Doesn't sound like much, does it?

Well how about saying that the Government have attempted to establish a precedent that would, potentially, invalidate every contract in the country. Does that get your attention?

You can read more of the details here and here.

The Government appears to have tried to slip through a change that would allow it to pay whom it chooses to pay and to not pay others if it chooses not to, despite any previous contracts entered into. It seems as if the Government has decided to try to empower itself to selectively not repay the interest on some bonds, while paying the due return on the preference shares issued to the NPRF for the stake in the banks that was forced into the NPRF.

This would set a ground-breaking precedent. Appeals have already been lodged and are due to be heard on Monday next. It the Government doesn’t have its way, it will be a huge climb-down for them. Equally, it seems unlikely that a successful appeal would be greeted with equanimity by the Troika. Something has to give.
Arthur Doohan is a former banker currently promoting a public policy debate on alternative solutions to the debt crisis in Ireland and to bank restructuring

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.

OECD Policy Responses to Unemployment

Sinead Pentony: The OECD has pre-released a chapter from its forthcoming Economic Outlook 2011 Report on the Persistence of High Unemployment: What Risks? What Policies? The report finds that at the end of 2010, “the average OECD unemployment rate was still close to historical peak reached during the crisis”. In countries (such as Ireland and Spain) that have been severely hit, persistently high levels of unemployment will eventually result in widespread deterioration of human capital (skills and competencies), discouragement and labour market withdrawal. This Report puts the scale of Ireland’s unemployment crisis in an OECD context and it makes three main policy proposals that are certainly worth considering as part of the Government's planned ‘Jobs Initiative’ which is due to be launched in May.

First of all, the report shows us how Spain and Ireland have been particularly badly hit by increases in unemployment. While Ireland is a few percentage points behind Spain (see Figure 1 reproduced below), it can be argued that net outward migration is having a dampening effect on the figure for Ireland. The drain of highly skilled workers out of Ireland, who are also of course members of families and communities, will have major long-term social and economic costs for the country.

Figure 1: The Increase in unemployment rates following the crisis (2007 Q3 – 2010 Q4)


The Report argues that aggregate demand policies continue to have a role to play in supporting economic recovery and in stimulating job growth. And monetary policy has been used by many OECD countries to increase aggregate demand by keeping interest rates low. However, the recent interest rate increase by the ECB - with indications given that there are more increases to come in 2011 – will hamper the efforts of policy makers in the three countries in the Euro Area (Spain, Ireland and Greece) that have seen the largest increases in the rate of unemployment in the OECD.
The Report also identifies a number of measures that have protected some countries employment levels from the worst effects of the crisis. “Labour hoarding” in particular, is singled out through the introduction of state subsidised ‘short-time working’ arrangements. The OECD place a lot of emphasis on the effectiveness of this measure in protecting employment levels, notwithstanding the risks which are outlined in the report.

The OECD also demonstrate the adjustment in labour markets in terms of the decline in output. As we can see (Figure 2 reproduced below), Ireland is an outlier in this regard. The OECD contends that “in the majority of countries, total hours worked declined less than GDP as the output shock was partly absorbed through labour hoarding.” Higher levels of job losses were also concentrated in low-productivity sectors such as construction. Countries such as Ireland, USA and Spain were identified as having higher than average proportions of workers in these sectors, which is reflected in higher than average reductions in hours worked.

Figure 2: Percentage decline in GDP and total hours worked from peak to trough


The OECD also examine nominal wage and labour costs. In most countries, wages decelerated sharply with labour costs also largely decelerating. The data presented in Figure 5 in the OECD report (reproduced below) shows changes to wages and labour costs before and after the crisis. What we find is that increases in nominal wages and unit labour costs just before the crisis hit were broadly in line with increases in the OECD. See here for a further discussion on unit labour costs. The OECD data shows that Ireland had the second lowest growth in nominal wages in the OECD between 2009Q1-2010Q2, and the largest fall in labour costs in the OECD during the same period.

Figure 5: Annualised average percentage change in nominal wages and unit labour costs before and after the crisis.




The three main policy proposals in the OECD report are as follows:

1. Temporarily extend unemployment benefits in countries where such systems are weak so as to provide needed income support ensuring that unemployed workers currently facing bleak jobs prospects do not fall into poverty or lose attachment to the labour market. This should be combined with active labour market policies that are adequately resourced to provide appropriate levels of job-search assistance and training.

The timing of the break-up and re-branding of FÁS is unfortunate given the unprecedented need and demand for targeted active labour market supports and services. The OECD identified effective and efficient services for the unemployed as “a structural determinant of outflows” from unemployment into jobs. Active labour market policies are an essential component of resolving the jobs crisis.

2. The second policy proposal relates to providing temporary hiring subsidies. The OECD highlights the fact that in many countries, the most difficult cases to match - long-term unemployed with low levels of skills - are often addressed through jobs subsidies or direct public-sector job creation targeted at specific groups. Policies aimed at stimulating labour demand included temporary cuts to employer social security contributions.

The OECD found this measure to be cost effective and involve a smaller deadweight loss. Current policy here includes PRSI exemption for taking on new employees and cuts to employer PRSI are expected as part of the forthcoming Jobs Initiative. However, Ireland already had the second lowest level of employer social security contributions in the EU 15 in 2008, which means that taxes on labour (from the employer perspective) are already very low.

The OECD identifies longer term taxation policy measures that are less damaging on employment and growth. These include a property tax, environmental taxes and consumption taxes – there is no mention of the regressive nature of consumption taxes, however, different rates of VAT could be used to lessen the regressive effects, with luxury items being liable for higher rates of VAT than items used to meet basic needs.

3. The third area relates to investment in training and education. The OECD found that younger workers have been much harder hit by the crisis than older workers and that it is younger workers who are now most at risk of chronic long term unemployment. With youth unemployment currently running at over 25 per cent in Ireland there is clearly a need for targeted interventions and supports for this group, especially those with low levels of education and skills, which puts them at a much higher risk of becoming long term unemployed.

While the number of traineeships and internships for new graduates and recently qualified workers has been expanded, they may well be insufficient to meet demand. Also, there remains a large cohort of young people that need a variety of education and training supports for the purpose of up-skilling /re-skilling if they are going to have any chance of success in re-entering the labour market.

Sovereignty

Slí Eile: Today's Irish Times reports that, according to former Minister for Finance Brian Lenihan, Ireland was 'forced' to take the IMF-EU bailout. OK. but what about the guarantee? check out the Nyberg report.

How well are organisations run?

Slí Eile: Nyberg, McCarthy, Doherty and Chopra..a busy fortnight past. Don't miss the following item in the Irish Times of Thursday 21st ("Massive bonuses for bankers? Not for those equitable Swedes'). It tells a story about one bank - in the UK but Swedish in ownership.

We are different, even in Sweden. This boils down to a fundamental humanist view. We believe that if you put trust in people, people will respond in a positive way and take responsibility and deliver results that they would not have achieved in a command-and-control environment

so said Anders Bouvin, head of Swedish bank Handelsbanken operation in the UK.

Now the Swedes know something about banking from the collapse and response of Government, there, in the 1990s. Whether an enterprise is publicly or privately owned, the way it is run, led, held accountable and focussed is all important. How ironic it is that as public debate is being prepared for a sell-off of profitable (but 'non strategic') public assets, the citizenry have been buying up dud assets and liabilities in the top Irish banks - only to be rationalised, sold off and outsourced to others who may buy in the fullness of time. And in the meantime some creditors are getting away scot free as are some who continue to benefit from the bonus culture. The problem with the way the Nyberg Report has been taken up is that 'we are all to blame' is far to convenient a means of deflecting attention from those in positions of leadership, influence, power and responsibility to escape the consequences of their actions.
Reforming the way organisations are run - public, private, voluntary - is vital along with striking the right balance between public, private and voluntary ownership of assets.

Those who live by the bond yield ...

Michael Taft: Remember all those comments in the days following the latest bank-bailout? How the markets had sent positive signals? That confidence was slowly rebuilding. 2-year yields fell from their high of 10.25 percent on March 3rd to 8.65 percent on April 13th. 10-year yields fell from 10.22 percent to 9.09 percent. Okay, far away from being able to re-enter the market – but evidence that the Government’s banking policy was gaining something approximating market credibility.

Well, say good-bye (for now) to all that.

In just a week all those gains have been wiped away and the slide continues. As of lunchtime today, 2-year yields have set a new high – at 10.35, while 10-year yields rose to 10.31 percent.

Where are the analysts now? Where are the kudos? What has gone wrong – apart from the fact that drawing even tentative conclusions from such a short time-frame is bound to disappoint?

This is all part of a continuing crisis in the Eurozone periphery. Even the assertions that Spain had effectively ‘de-coupled’ from the periphery with strengthening bond yields are being tested by the markets. Rising yields and falling investor demand is re-starting the worries. Greece and Portugal continue to slide as well.

It is long past time that policy-makes – here in Ireland or especially in the Eurozone – stop seeing this as a sovereign debt crisis and admit that this is a bank crisis, spreading contagion wherever it goes.

As Yanis Varoufakis puts it: ‘It’s the (German) banks, stupid’.

Palcic and Reeves on privatisation

Given the week that's in it, PE readers may be interested in a new book by Donal Palcic and Eoin Reeves, Privatisation in Ireland: Lessons from a European Economy. Further details are available here.

Towards the Good Society

Sinéad Pentony: As the debt, fiscal and economic crises rumble on, and as fire-fighting policy responses continue, it can be difficult to think about the bigger picture and the wider impacts the crises are having on societies across Europe. However, if we are to avoid repeating the mistakes of the past we need to understand that a paradigm shift is required. Orthodox responses to the failings of neo-liberalism are clearly not working for anyone (with the possible exception of some financial institutions), and there is a growing acceptance of the link between the crises and inequality

That’s why events such as the recent conference in Stockholm on ‘Dimensions of Equality in a Good Society’, and the accompanying online debate at the Social Europe Journal, are so important. The conference was organised by two think tanks, Germany’s Friedrich Ebert Foundation and the Swedish labour think tank, Arbetarrörelsens Tankesmedja.
The aim of the conference was to analyse the concept of inequality and to locate it within a wider framework of a new social and democratic political agenda.

The focus was on four dimensions of equality: the philosophical, economic, social and integration dimensions. I’m going to focus on the economic dimension, where the conference attempted to broaden the boundaries of the discourse on equality beyond “marginal debates on a couple of percentage points up or down in a progressive tax system”.

We can’t have equal citizenship if there is a large gap between rich and poor, mainly because the rich have the means to influence the political system and public institutions. This was considered to be a systemic problem – regulatory capture with inequality spiral – whereby the richest players influence the rules and their application, thus expanding their own advantage. Public facilities come under the influence of players who are motivated by short-term profit gain – and who buy support from media and academics for this purpose. Sounds familiar? We don’t need to look much further than the Nyberg Report, as an example of how regulatory capture manifested itself in the Irish banking system.

This systemic problem is a major contributing factor to current (and future) trends of continued increases in social, political and economic inequalities. For example, during the last US economic expansion (2002 – 2007) average per capita household income grew by 16 per cent. The top one per cent enjoyed growth of 62 per cent, while for the remainder of the population it was just 6.7 per cent. The top percentile captured 65 per cent of the real per capita growth of the US economy. During the period 1978 – 2007, the income share of the bottom half declined from 26.4 per cent to 12.8 per cent. Meanwhile, that of the top one per cent rose from 8.95 per cent to 23.5 per cent (a 2.6 fold increase).
It’s a similar story in China. During the period 1990 – 2004, the income share of the bottom half declined from 27 per cent to 18 per cent, while that of the top tenth rose from 25 per cent to 35 per cent. In Ireland, TASC’s HEAP research demonstrated a more equal distribution of incomes in 1987 compared to 2005 and the analysis also found that 5 per cent of the population control 40 per cent of Ireland’s wealth, and the top 10 per cent have a disposable income 11 times the bottom 10 per cent. The trends are similar across the developed world, and point to growing income inequality.

In terms of fiscal policy, the point was made that countries with the biggest deficits are low tax economies such as the USA, Ireland, the UK and Portugal. Higher spending countries have a better track record in controlling their deficits. They also tend to have smaller income differentials as a result of progressive taxation. The World Economic Forum has consistently shown that the most competitive economies are high spending economies, particularly in areas such as education and training, innovation, infrastructure. High spending economies have also weathered the crises much better than low spending economies, and are proving more capable of recovery.

It could be argued that the scale of the crises has also threatened democracy: you can change your government, but you can’t change the policy as this is set elsewhere. We have direct and very recent experience of this here in Ireland. Also, liabilities have been shifted from corporations to states as in the case of our banking debts. In the current context of what was described as “permanent austerity”, fiscal policy requirements determine the level of welfare state retrenchment policies and social policies have been de-nationalised and Europeanized in reaction to the debt crises across Europe.

In order to reverse the trends of growing inequality and minimise the chances of the same happening again, we need to put the global economy on a different trajectory. As we can see the problems are numerous and complex, and progressive solutions will need to be sophisticated and address systemic failures that have brought us to where we are today. A number of solutions were put forward and debated during the conference, including debt restructuring, and there was consideration of policy measures to allow the exit and re-entry to the Eurozone. Other progressive solutions included the consideration of social policy as a growth sector, since it contributes percentage points to GDP, provides jobs and the creation of new business opportunities.

The need for institutional reform was also identified with an emphasis on redesigning public institutions to be equality-focussed. In Ireland the debate on (public) institutional reform has focussed on creating greater efficiencies and achieving ‘more with less’, alongside greater transparency and accountability. While these reforms are necessary there has been no discussion on the link between public sector reform and equality. However, the link between public institutions and equality was made very strongly at the conference, whereby “high quality government institutions will increase the level of social trust, which will make reciprocity turn into solidarity, which in turn increases equality”.

These are just some of the ideas that were discussed and they reflect some of the complexities that need to be grappled with if we are to emerge from the crises on the path to more equality. ‘The Good Society’ creates a forum for debate on the problems and the solutions. Let’s hope that our politicians, their advisors and policy makers are tuning into the debate..

Has the time come?

"In 1816, the British parliament repealed the temporary income tax that William Pitt the Younger had introduced in 1789 to finance the Napoleonic war. The MPs hated the tax so much that they even agreed that all documents connected with it should be collected, cut into pieces and pulped.

When the income tax was reintroduced in Britain in 1842 by Robert Peel, everyone considered it a temporary measure to replenish the depleted exchequer. But despite generations of politicians after Peel promising to abolish it, the tax never went away.

It proved impossible to abandon a tax whose time had come". You can read the rest of yesterday's Guardian website article by Ha-Joon Chang and Duncan Green - entitled Robin Hood: A tax whose time has come - here (Hat tip to Paul Hunt for the link).

1,000 economists from 53 countries have signed a letter in advance of the G20 calling for a Robin Hood tax (aka Tobin Tax). Irish signatories include TASC economist (and PE blogger) Tom McDonnell, TASC Economists' Network chair (and ICTU economic adviser) Paul Sweeney, and EN members Terrence McDonough, David Jacobson and Marie Sherlock.

Integrating innovation drivers

David Jacobson: I have been banging on in a number of blogs over the years on the importance of innovation policy, and in particular on the incorporation of non-R&D-based innovation. Innovations can emerge from processes other than research, for example from practice and experience.

While it is entirely appropriate to encourage research and to support expenditure on R&D, expenditure on R&D is an input and what Ireland requires is an increase in innovation, which is the output. Even increases in patents are not outputs, except where those patents are actually implemented into product, process or organisational innovation.

The new government, in developing innovation policies, must be aware of this fundamental difference between R&D on one hand and innovation on the other. It is only with such awareness that Ireland will be able to focus available resources where they will have most impact on innovation, and on the improvement of the national system of innovation. An opportunity cost of providing additional funding for R&D, for example, may be support for programmes to encourage creativity among students at all levels, including the primary level.

Another such opportunity cost might be support for non-research-based, non-patentable innovations in existing companies or new start-ups. Providing all these supports - for creativity, non-research-based innovations, and R&D - is the optimum approach. The key to policy improvement is the integration of the drivers of innovation into a joined-up approach to the evolution of the national system of innovation.

This type of thinking is evident in my new book, Knowledge Transfer and Technology Diffusion, edited with Paul Robertson, just published (2011) by Edward Elgar Publishing.

This builds on the earlier book (2008), Innovation in Low-Tech Firms and Industries, edited with Hartmut Hirsch-Kreinsen also for Edward Elgar.

Troika statement: It's Friday, let's go to the pub

From the statement by the EC, ECB and IMF released today:

‘The teams’ assessment is that the program is on track but challenges remain and steadfast policy implementation will be key.’

Oh. I wonder if they are referring to the National Recovery Plan which the three institutions endorsed and became the basis of the Memorandum of Understanding; or maybe there is some secret, super-encrypted plan which the masses don’t have access to. Let’s go through the headings.

The Macro-economic Outlook

The NRP projected growth up to 2014 to be 2.7 percent annual average. The IMF projects an average of just under 2 percent. According to the ESRI, at 2 percent we risk a deflationary spiral. In addition, the IMF is projecting nominal GDP to be some €10 billion less than the NRP estimates – over 5 percent less. There’s hitting targets and then there’s hitting targets.

The Bank Sector

This doesn’t pose too much of a problem for the cheerleaders of the NRP. If €24 billion in new recapitalisation won’t do the trick, then there’s always another €20 billion waiting to be burned up. And if that doesn’t do it, there’s always the Central Bank’s Hibernian QE. There is no shortage of money to be thrown at the problem – and as we all know, the taxpayers’ pockets are black-hole deep.

The Fiscal Front

The NRP claimed it could get the deficit down to under 3 percent by 2014. The IMF projects that on current trends it will be 2017 or 2018. On that small matter of the debt, the NRP hoped to keep it 100 percent of GDP – the IMF says, no, it will be 25 percent higher.

Structural Reforms

But not to worry, the IMF believes this will do the trick. Cutting workers wages always promotes growth – and cutting low-paid workers’ wages via ‘reform’ of the JLC will no doubt double that growth.

* * *

On just about every metric the NRP, which forms the basis of the bail-out deal, is completely defunct. Yet the Troika says everything is just as it should be.

I know why. It’s Friday. What would you rather do? Admit ‘game over’, sit down and work on something new? Or sign-off on a statement and get to the pub? I mean, the Troika are only human.

And let’s forget the small matter of the debt. The NRP was hoping to keep debt at 100 percent of GDP. The IMF projects it to be 124 percent.

Stiglitz on the Irish crisis

Tom McDonnell: Joe Stiglitz's preface to a new collection of essays on Exiting from the Crisis makes for interesting reading. The publication (to which PE's Rory O'Farrell also contributed) is available for download here.

Professor Stiglitz mentions Ireland in the preface, noting that:

“Ireland has faced a crisis largely because it followed the standard free market orthodoxy: unfettered markets led to a bloated financial sector which put at risk the entire economy; while politicians boasted of the growth (the benefits of which were not uniformly shared) they took little note of the risks to which they were exposing the economy. The core lesson of Ireland’s experience – and that of the US – is that one cannot rely on unfettered markets or self-regulation.”

Myths of the Irish Crisis: Wages and Competitiveness

TASC has just issued a new discussion paper by TASC economist (and PE blogger) Tom McDonnell examining two distinct but related claims. First that Ireland lost competitiveness within the European Union in the last decade and second that high labour costs in low-wage sectors are contributing to the employment crisis.

Based on a review of the literature together with Eurostat data, the paper concludes that Ireland did not suffer an overall loss of competitiveness prior to the economic crash. The paper also refutes arguments that labour costs in the low-paid services sectors – sometimes viewed as undermining Irish competitiveness – are high by international standards. Instead, an examination of Eurostat data projects that 2010 labour costs were 9.3 per cent below the EU-15 average in the hospitality sector, and 8.8 per cent below the EU-15 average in the wholesale/retail sector. You can download Myths of the Irish Crisis: Wages and Competitiveness here.

Guess-the-speaker

Michael Taft: "Just as we managed to tame inflation in the 1980s, this decade should be the one that takes full employment seriously once again . . . (to combat growing inequality we need) strong social safety nets, combined with progressive taxation, investment in health and education, and collective bargaining rights, especially in an environment of stagnating real wages . . .employment and equity are the building blocks of stability and prosperity."

Yes, you guessed it - it's from the IMF.

12.5 per cent is no solution

Michael Burke: The Irish Times reports that the new Taoiseach refused to countenance any upward adjustment of the corporate tax rate in exchange for a lowering of the punitive tax rate applied to EU bailout funds.

The EU offer highlights the scandalous nature of their impositions, which is charging Irish taxpayers 3% more than its own cost of funds – to bail out EU banks. The offer was to reduce that premium by just 1%, which would provide a saving of €450mn per annum in lower interest payments. As already highlighted here, the FT’s Martin Wolf has argued: “For a sovereign to destroy its own credit, to save creditors of its banks, is plainly wrong. It does not make it better, but worse, that it is doing so largely to protect financial systems in other countries.”

There is a loss of sovereignty, even a conscious effort at national humiliation arising from this destruction. It can be regained, in the first instance by the State refusing to absorb bank debt.

But that does not mean that the insistence on maintaining ultra-low Irish corporate tax rates fulfils the requirements of this economy or its fiscal position. The 12.5% tax rate is the lowest in OECD. The next lowest is Iceland’s 15% - which ought to be a warning sign by itself. The highest corporate tax rates in the OECD are 39% in the US and Japan. Other ‘small open economies’ such as Denmark, Finland, Greece and Portugal all have much higher corporate tax rates (although the large waivers and exemptions, such as to the Greek shipping industry and its millionaires, are significant contributors to their fiscal crises).

Relocation

In all the commentary about Dell’s decision to relocate to Poland, there was little discussion of the fact that it has a higher tax rate, 19%. What is also has are large transfers from the EU, which are being used for investment purposes, especially in infrastructure, transport and communications.

There is no doubt that many producers argue vociferously for the maintenance of 12.5%. IBEC and the US Chambers of Commerce have been particularly vocal on this and threatened relocation if there is any adjustment. However, if all capital were absolutely mobile and primarily determined by tax rates, then ultra-low tax rates would have already attracted all Foreign Direct Investment (FDI) in the OECD to Ireland. That is plainly not the case.

Most of IBEC’s members cannot relocate anywhere- they service demand in this economy. Likewise for foreign MNCs here to service domestic demand; Tesco’s is the biggest foreign employer in Ireland and its profit rate is higher in Ireland than anywhere else. Tesco’s is going nowhere. By contrast, the US Chambers of Commerce speaks increasingly for companies who have no activity and no employees in Ireland- apart from tax specialists - and who pay an effective rate as low as 1% or less.

Fiscal Impact

It has become common currency to quote a short OECD briefing paper as to the effects of FDI as if it were the last word on this issue. Unfortunately, for advocates of low taxes the note (based on a much larger study) suggests that the impact of a 1% hike in the corporate tax take is anywhere between 0% and 5% of total FDI. That is, according to the OECD higher taxes might have no impact at all on FDI.

Even the OECD’s central estimate is that a 1% hike in the tax rate would produce a fall of 3.7% in FDI. But what is the total impact on the fiscal position? According to a sketchy note from the DoF MNCs are responsible for 30% of corporate tax revenues. On 2010 tax returns that’s just under €1.2bn- yes, corporate taxes are under €4bn, compared to over €10bn from VAT and €11.3bn from income tax.
If the tax rate was hiked to 17.5%, on the OECD’s central estimate FDI would fall by 18.5%. On an extreme assumption that 18.5% of existing MNCs will flee as result (which no-one seriously suggests) then the remaining 81.5% of MNCs would then be paying 40% more in tax (the ratio between 17.5% and 12.5%), with a higher tax take of €1.37bn resulting.

Crucially, those eager to make the case for low taxes ignore entirely the increased tax revenue from the indigenous sector, which provides the remaining 70% or nearly €2.8bn of corporate taxes. The tax take from them would also rise by 40%, to €3.92bn. The combined total in corporate tax revenues from both MNCs and domestic sources is therefore just under €5.3bn, a rise of nearly €1.4bn. Of course, all these are taxes on profits which remain abundant in this economy, and by definition cannot be ‘unaffordable’.

Drivers of FDI

UNCTAD is the main international body providing detailed research on capital flows, doesn’t even mention tax rates as an important factor impacting FDI. In a survey of the literature a host of factors is considered, growth, market size, trade openness, ‘human capital’, infrastructure, political and economic stability, etc., etc. None mentioned tax.

Other research, dealing solely with the advanced economies such as Ireland, suggests not taxes but Total Factor Productivity as the main determinant of FDI (linked here). This is because TFP determines the total return on investment, not just the tax rate on that return. Plainly 12.5% tax on a 10% return on capital is a lower net profit than 39% taxes on a 15% return.

In fact, what the OECD’s longer research didn’t consider is that there is no zero bound to the effect on FDI from lower taxes- that the effect can be negative. This is borne out in a recent survey of FDI allocators for ‘Think London’ on foot of the Tory government’s announcement of cuts in corporate tax rates from 28% to 24% (the target since lowered again to 23%). The FT reported that its FDI Barometer survey found that that the net response was the investors were less likely to invest following the announcement of lower taxes (and they were also repelled by the government’s racist immigration policies).

These two points are related. Since TFP is actually the main determinant of FDI in advanced economies, it is the factors affecting TFP which determine its flow. Productivity derives from investment and the government component of that usually includes education, transport, communications, infrastructure, etc. Lower tax rates leads to lower tax revenues and a diminished capacity to invest in those areas. Declining relative productivity follows, deterring FDI, not encouraging it.

This is close to the experience in this economy. The chart below shows World Bank data for Irish real GDP and net FDI as a percentage of GDP.

12.5% tax rates were introduced in 2003. 2004 to 2006 saw outright falls in FDI, which also fell again in 2008. Including the surge in 2003, the annual average growth in FDI since is just 1.5% of GDP. From the time of the McCreevy 1998 Budget announcement average FDI net inflows have been substantially higher, but clearly that trend has gone into reverse.

The low-tax ‘Celtic Tiger’ actually saw much slower growth than the period that preceded it, even though it was widely claimed the reverse would happen – that lower taxes would lead to increased FDI and higher growth. GDP growth peaked at 11.5% in 1997 - the year before the announcement of lower taxes was made. It has been less than a third of that rate since 2000.
Lower taxes produce lower tax revenues, lower growth and lower FDI. They do produce higher post-tax returns on capital – but that’s not an argument for maintaining them. The two EU countries with the highest post-tax returns on capital are Greece, followed by Ireland. This is a source of economic weakness, not strength.

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?

Blogging Bretton Woods and other matters

Brad DeLong's blog is worth a read.