This post was originally written on April 21st in response to an article in the Sunday Business Post. We are re-posting it following last night's Prime Time Investigates programme on social welfare fraud.
Peter Connell: As the Irish economy has spiralled downwards over the past six months, those with an interest in attempting to understand what’s happening and evaluating the solutions being proposed are, at least, being exposed to an increasing informative public discourse. You may not always agree with what economists write as opinion pieces in the national media, over at Irish Economy, here at PE or elsewhere in the blogosphere but, generally, you’re presented with reasoned, well informed arguments that represent genuine attempts to enlighten.
Instinctively when you prepare to read an opinion piece on the solutions to the country’s economic ills by Dr. Ed Walsh, ex-president of the University of Limerick (UL), you know it will be written from a particular ideological perspective. No problem there. We all have ideological perspectives, whether acknowledged or not. Dr. Walsh, since being appointed the first president of UL (then the National Institute for Higher Education) in 1970, has almost four decades of experience of public policy formation in Ireland and has held numerous influential positions in areas key to the country’s economic development including chairperson of the Irish Council for Science Technology and Innovation that advises the government on science policy. So, you could reasonably expect to find some good ideas in Dr. Walsh’s piece in the Sunday’s Business Post entitled ‘Back to when we were winners’.
According to Dr. Walsh it’s all about competitiveness. We were winners in 2000 when we were the fourth most competitive country in the world. Then we ‘lost the plot’. In 2007-8 we were back in 22nd place. And why are we down in 22nd place? The World Economic Forum said the poor quality of our infrastructure was the most problematic factor for those wanting to do business in Ireland. So, does Dr. Walsh identify some innovative ways in which we can fund investment in our infrastructure? Or perhaps he has some insights into how we might convert the significant state investment in fourth level education into innovative, hi-tech enterprises? The strange thing is he doesn’t mention the state of our infrastructure at all and, in this article at least, has nothing to say about the role that technology and innovation might play in growing jobs and creating wealth, an area in which he has considerable expertise. Instead, his piece identifies our overly generous welfare system, high wages in the public sector and failure to tax those on low incomes. Into the mix he adds rigid labour laws, the undue influence of teachers unions in curriculum development and the lack of reform in local and national governance as being the cause of our problems. That’s quite a list. And he backs his arguments up with some figures.
First of all, he suggests that we reduce the size of the public sector workforce by 85,600 to get us back to the level in 2000. Even at the crudest level we can say that, thankfully, we’ve about half a million more people in the country than we had in 2000. That’s about 70,000 more children of school-going age who require teachers in schools that have some of the highest class sizes in the OECD, and it’s up to 40,000 extra older people aged 70 and over who depend on public services more than other sections of the population. In 2000 our health service was just beginning to receive the investment it required to repair the damage done by cuts in the late 1980s. Since then an additional 9,000 nurses have been recruited, but I guess they’re surplus to requirements if we’re to ‘get back to when we were winners’. Certainly, there’s scope to reform the public sector, but not with a demolition ball.
Next up, public sector wages. Dr. Walsh argues that ‘benchmarking against other EU countries provides the framework within which Irish public sector salaries can be brought into line’. He goes on to claim that Irish teachers are paid 37% more than their British counterparts and 26% more than those in Germany. This claim appears to be a quote from Danny McCoy of IBEC writing in the Irish Independent in November 2007. The data is from 2004. But OECD data from 2005 shows something quite different (see pages 384-387). While Irish teacher’s salaries were towards the top of the table internationally, they were lower than in Germany, somewhat higher than in England, but lower than in Scotland. The OECD report also shows teacher’s salaries as a ratio of GDP per capita as a way of assessing the relative value of teacher’s salaries across countries. A secondary school teacher in Ireland with 15 years experience earns a salary equal to 1.2 times GDP per capita. This places the Irish teacher at 14th in the international league table of 30 countries reviewed by the OECD.
Next, Dr. Walsh, pleading the case of high earners, quotes the discredited statistic that the top 6.5% of earners contribute half of all income tax collected, and that 38% of the workforce paid no income tax at all. Colm Keena of the Irish Times, in an article I quoted in an earlier post, presents an alternative perspective on the data on which these statistics are based focusing on individual earners rather than revenue cases. If Dr. Walsh cares to examine the data, he will find that perhaps the most striking fact is that just 9,129 individuals earned €6.7 billion in income, while the lowest 1.2 million earners had an income of €13.3 billion between them.
And now we come to welfare fraud. According to Dr. Walsh ‘welfare fraud and welfare tourism are now a major burden on taxpayers’. And the evidence? Apparently, there are 1,044 welfare claimants at Ballyconnell Welfare Office and the town only has a population of 747 according to the 2006 census. This, he remarks, is an alarming statistic. The source of his information on the number of claimants is a Department of Social Welfare and Community Affairs press release issued by Mary Hanafin. And the implicit aim of the press release is to lay the blame for the doubling of unemployment rates in the border counties on fraudulent claimants.
Unfortunately the situation is worse than Dr. Walsh thinks. The most recent figure for March 2009 is 1,161. This information is readily available from the CSO website, which is generally a more reliable source of information than ministerial press releases. Anyone who has ever dealt with a Social Welfare Office would also know that they serve wide hinterlands, not just small towns. Preliminary research suggests that the Ballyconnell office serves a population of about 14,000. It’s one of two covering the whole of Co. Cavan. Unfortunately there are over 6,500 people now unemployed in the county, many of them young local men who worked in the construction industry.
Dr. Walsh suggests that this welfare tourism is down to our over-generous welfare payments. I suggest he reads Michael Taft’s excellent piece on this topic over at Notes From the Front. Referring to another league table, he shows that we’re in 13th position out of EU 15 when it comes to the level of unemployment benefit paid to a single claimant. Dr. Walsh chooses to compare Irish rates with wages in Lithuania and Romania.
So, unfortunately I wasted seven or eight minutes reading Dr. Walsh’s piece in Sunday’s Business Post. It’s disappointing that one of our brightest opinion formers didn’t do his homework, but presented an argument based on press releases and snippets of information chosen to bolster a particularly extreme view of where we’re at and how we can solve our problems.
In any case I’m not convinced that we should set our sights exclusively on climbing the competitiveness league table. We’re now 22nd. Above us, in 20th place, is Iceland.
Tuesday, 8 December 2009
Monday, 7 December 2009
Congress tax menu
While a number of papers and submissions have been analyed in the media and elsewhere during the past few weeks, one paper seems to have escaped journalists' attention.
Last week ICTU published a list of 'Areas where taxes can and should be raised in the Budget' - essentially, a menu of taxes which could be levied in Wednesdays 2010 Budget. ICTU estimates that these taxes could raise over €2 billion in total.
Among their recommentations is the suggestion that more be raised from those who currently pay least, by raising the minimum effective rate on those who utilise the tax "incentive" schemes schemes. ICTU suggests that the minimum effective tax rate be raised from 20% to 35%, and that the threshold be reduced to those earning over €100,000 utilising these schemes but that the scheme be applied to pensions too.
The document is available for download here.
Last week ICTU published a list of 'Areas where taxes can and should be raised in the Budget' - essentially, a menu of taxes which could be levied in Wednesdays 2010 Budget. ICTU estimates that these taxes could raise over €2 billion in total.
Among their recommentations is the suggestion that more be raised from those who currently pay least, by raising the minimum effective rate on those who utilise the tax "incentive" schemes schemes. ICTU suggests that the minimum effective tax rate be raised from 20% to 35%, and that the threshold be reduced to those earning over €100,000 utilising these schemes but that the scheme be applied to pensions too.
The document is available for download here.
Sunday, 6 December 2009
Transfering public goods to bondholders in zombie banks
Slí Eile: As the pressure mounts on all sides – media, politics, radio phone-in shows – to cut public spending a question arises about the relationship between what is about to happen, on the one hand, and the on-going bailout of banks, on the other. Orthodox commentary pronounces that there is no relationship between two.Following earlier comments by Colm McCarthy Pat McArdle in the Irish Times (26 November) - ‘No silver bullet rescue from fiscal predicament’ – argues that fiscal adjustment has nothing to do with the banking bailout. Call this the Nil hypothesis.
Lets have another look at the Department of Finance Pre-budget Outlook (PBO) and see if any clues are possible.
The core of the Nil Hypothesis is the following two assertions:
The fiscal deficit – defined as the General Government Balance - must be reduced to a level of 3% by an agreed date with the European Union (that being 2014 in the latest round of concessions to Member States that have exceeded their Stability and Growth Pact guidelines).
The recapitalisation of the banks by the Government has nothing to do with fiscal adjustment since any public liabilities or payments in the current period are ‘off balance sheet’ as far as the measure of General Government Balance is concerned.
There is a lot of deft accountancy footwork going on. The Pre-Budget Outlook Table 6 (Technical Budgetary Projections 2009-2010) throws up some interesting but hard-to-explain shifts in spending composition. The estimated or projected General Government Balance appears in the final row of this table and indicates that the GGB says at a level of -12% of GDP. It reads in the text below:
The current Government working forecast, on the basis of a €4 billion adjustment being delivered in the Budget in December, is for an Exchequer Borrowing Requirement of around €19½ billion in 2010 and a General Government Balance of -12 per cent of GDP.
So, a huge adjustment of €4bn (whatever its composition between tax and spending changes) gives no change in the projected GGB – the measure that exercises Government, EU, ‘the markets’ and most journalists.
A lot of pain for a little in return.
The documentation states that the GGB would be -14% ‘without corrective action’. So, Government proposes to take €4bn out of the economy in the first instance (without calculating the negative multiplier effects of this which are addressed elsewhere by notes-on-the-front drawing on ESRI model data) to yield a saving of 2% points of GDP in the GGB.
But, would such a level of adjustment be required if other parts of the budgetary arithmetic were different? McArdle’s key argument is:
‘If the exchequer were to inject another €4 billion capital into Anglo Irish Bank in the morning, this would increase the EBR (Exchequer Borrowing Requirement) by an equivalent amount but would have no impact whatsoever on the GGD (General Government Deficit).’
The reason given by McArdle is:
‘This is because the international rules treat such capitalisation as a “below the line” transaction, ie investment in a commercial State body which is outside the government sector, rather than current expenditure which affects the deficit.’
This is not a convincing line of argument. Surely, the point about not including contributions to the National Pension Reserve Fund(or any other fund from which taxpayers money is ultimately destined for bank recapitalisation) in the GGB measure is not because it will be cycled through some technically private vehicle (a dubious concept and practice, at best) but because the taxpayer is purchasing assets or share-holding (e.g. preferential share-holding) in banks – be they public, private, zombie or other. The theory is that such payments from the exchequer constitute purchases of assets with long-term value and pay-back and should not, thereby count in the GGB. This conforms to international statistical accounting (Eurostat). So far so good. McArdle is right – technically. Payments to the banks via NPFR or other mechanisms are ‘off balance sheet’ and don’t count towards GGB.
However, GGB is not the only criterion of public solvency – nor indeed are all public liabilities necessarily counted in the components of GGB. An example illustrates the point:
In 2009 Government paid €3bn into the NPRF (instead of the normal €1.5bn per annum). This shows up under the Capital Budget in Table 6 of the PBO. The 2010 entry is zero. Why? Presumably (and I am not aware of any public statement to contradict this) the (extraordinary) upfront payment into the NPRF was to replace funds used to recapitalise the banks. If the State’s holding in these banks proves profitable and effective in generating lending, growth and jobs – in the long-run – then this is arguably a good and necessary investment. But, what if a large chunk of the recapitalisation is going into a black hole known as a zombie bank that has no chance of reclaiming large portions of its debt? In that case, the innocent looking payments into the NPFR in 2009 (which will surely need to be repeated again in 2010 and later years if the banks continue to be short of capital) assume a different meaning. Put another way, ‘there is no free lunch’ – there is an economic opportunity cost beside every payment and transaction. €3bn spent this year instead of €1.5bn into the NPRF means that there is €1.5bn less to spend on health or education or social welfare – no matter what the components of EBR or GGB are.
So, McArdle’s ‘Nil hypothesis’ looks most unconvincing and serves to show that the commentariat is too eager to prove a point when it comes to fiscal adjustment. Parking the banking crisis to one side as either ‘being dealt with’ or ‘irrelevant’ to the size of the deficit that matters is not right.
To sum up – there is a lot of non-transparent shifting of funds – embedded into the aggregate pre-budget figures. The scale of it makes the issue of cuts in the public sector pay bill or child benefit cuts pale into relative numerical insignificance. As always, especially during the boom years, eyes were on this year’s figures and next without any consideration of:
* Long-term damage of inflating or deflating the economy at given point in the economic cycle;
* The hidden long-term acquired costs of particular decisions or non-decisions; and
* The inter-connectedness of economic phenomena rendering markets, profit and income flows, tax receipts and spending decisions extremely vulnerable to sudden shocks and unprojected systemic collapses when one card is pulled from the pile.
In other words, we are in the throws of a global crisis of production and consumption based on short-term private greed. Dysfunctional private sector behaviour exacerbated by dysfunctional political institutions and poorly operating regulatory public services are undermining the capacity of national governments and global inter-governmental agencies to restore balance to public, corporate, household and trade balance sheets. The alternatives to this state of affairs will need to be created by future generations. The current generation needs to address the deficit in fairness and hope created by an orthodoxy that worships at the shrine of just one deficit idols.
One thing I will agree with is McArdle’s comment on:
the failure of successive governments to reform our archaic system of budgetary accounting.
Lets have another look at the Department of Finance Pre-budget Outlook (PBO) and see if any clues are possible.
The core of the Nil Hypothesis is the following two assertions:
The fiscal deficit – defined as the General Government Balance - must be reduced to a level of 3% by an agreed date with the European Union (that being 2014 in the latest round of concessions to Member States that have exceeded their Stability and Growth Pact guidelines).
The recapitalisation of the banks by the Government has nothing to do with fiscal adjustment since any public liabilities or payments in the current period are ‘off balance sheet’ as far as the measure of General Government Balance is concerned.
There is a lot of deft accountancy footwork going on. The Pre-Budget Outlook Table 6 (Technical Budgetary Projections 2009-2010) throws up some interesting but hard-to-explain shifts in spending composition. The estimated or projected General Government Balance appears in the final row of this table and indicates that the GGB says at a level of -12% of GDP. It reads in the text below:
The current Government working forecast, on the basis of a €4 billion adjustment being delivered in the Budget in December, is for an Exchequer Borrowing Requirement of around €19½ billion in 2010 and a General Government Balance of -12 per cent of GDP.
So, a huge adjustment of €4bn (whatever its composition between tax and spending changes) gives no change in the projected GGB – the measure that exercises Government, EU, ‘the markets’ and most journalists.
A lot of pain for a little in return.
The documentation states that the GGB would be -14% ‘without corrective action’. So, Government proposes to take €4bn out of the economy in the first instance (without calculating the negative multiplier effects of this which are addressed elsewhere by notes-on-the-front drawing on ESRI model data) to yield a saving of 2% points of GDP in the GGB.
But, would such a level of adjustment be required if other parts of the budgetary arithmetic were different? McArdle’s key argument is:
‘If the exchequer were to inject another €4 billion capital into Anglo Irish Bank in the morning, this would increase the EBR (Exchequer Borrowing Requirement) by an equivalent amount but would have no impact whatsoever on the GGD (General Government Deficit).’
The reason given by McArdle is:
‘This is because the international rules treat such capitalisation as a “below the line” transaction, ie investment in a commercial State body which is outside the government sector, rather than current expenditure which affects the deficit.’
This is not a convincing line of argument. Surely, the point about not including contributions to the National Pension Reserve Fund(or any other fund from which taxpayers money is ultimately destined for bank recapitalisation) in the GGB measure is not because it will be cycled through some technically private vehicle (a dubious concept and practice, at best) but because the taxpayer is purchasing assets or share-holding (e.g. preferential share-holding) in banks – be they public, private, zombie or other. The theory is that such payments from the exchequer constitute purchases of assets with long-term value and pay-back and should not, thereby count in the GGB. This conforms to international statistical accounting (Eurostat). So far so good. McArdle is right – technically. Payments to the banks via NPFR or other mechanisms are ‘off balance sheet’ and don’t count towards GGB.
However, GGB is not the only criterion of public solvency – nor indeed are all public liabilities necessarily counted in the components of GGB. An example illustrates the point:
In 2009 Government paid €3bn into the NPRF (instead of the normal €1.5bn per annum). This shows up under the Capital Budget in Table 6 of the PBO. The 2010 entry is zero. Why? Presumably (and I am not aware of any public statement to contradict this) the (extraordinary) upfront payment into the NPRF was to replace funds used to recapitalise the banks. If the State’s holding in these banks proves profitable and effective in generating lending, growth and jobs – in the long-run – then this is arguably a good and necessary investment. But, what if a large chunk of the recapitalisation is going into a black hole known as a zombie bank that has no chance of reclaiming large portions of its debt? In that case, the innocent looking payments into the NPFR in 2009 (which will surely need to be repeated again in 2010 and later years if the banks continue to be short of capital) assume a different meaning. Put another way, ‘there is no free lunch’ – there is an economic opportunity cost beside every payment and transaction. €3bn spent this year instead of €1.5bn into the NPRF means that there is €1.5bn less to spend on health or education or social welfare – no matter what the components of EBR or GGB are.
So, McArdle’s ‘Nil hypothesis’ looks most unconvincing and serves to show that the commentariat is too eager to prove a point when it comes to fiscal adjustment. Parking the banking crisis to one side as either ‘being dealt with’ or ‘irrelevant’ to the size of the deficit that matters is not right.
To sum up – there is a lot of non-transparent shifting of funds – embedded into the aggregate pre-budget figures. The scale of it makes the issue of cuts in the public sector pay bill or child benefit cuts pale into relative numerical insignificance. As always, especially during the boom years, eyes were on this year’s figures and next without any consideration of:
* Long-term damage of inflating or deflating the economy at given point in the economic cycle;
* The hidden long-term acquired costs of particular decisions or non-decisions; and
* The inter-connectedness of economic phenomena rendering markets, profit and income flows, tax receipts and spending decisions extremely vulnerable to sudden shocks and unprojected systemic collapses when one card is pulled from the pile.
In other words, we are in the throws of a global crisis of production and consumption based on short-term private greed. Dysfunctional private sector behaviour exacerbated by dysfunctional political institutions and poorly operating regulatory public services are undermining the capacity of national governments and global inter-governmental agencies to restore balance to public, corporate, household and trade balance sheets. The alternatives to this state of affairs will need to be created by future generations. The current generation needs to address the deficit in fairness and hope created by an orthodoxy that worships at the shrine of just one deficit idols.
One thing I will agree with is McArdle’s comment on:
the failure of successive governments to reform our archaic system of budgetary accounting.
The economic crisis: some suggestions
Jim Stewart: The economic crisis has revealed failures in many areas:- regulation, industrial policy, tax policy, corporate governance and planning. Recent flooding has underlined the almost total failure of our planning system. In view of these failures, the view of the Government in the pre-budget outlook that “repairing the banking system”, “restoring the public finances” and “fostering sustainable employment through improving competitiveness” would provide conditions for economic recovery is absurd. The paucity of new ideas is perhaps best illustrated by one of the OECD’s proposals to reform the labour market, requiring “voice-over actors, freelance journalists and session musicians” to be subject to competition law (OECD, 2009, p. 122). Proposals such as these indicate, perhaps, an urgent need to review our monetary contribution to the OECD.
A central plank of policy on competitiveness is that wages in the public sector are far higher than those in the private sector. Recent reports by the OECD and IMF have largely repeated these assertions. However, Foley and O’Callaghan, in a recent SSSI paper, convincingly argue that the differences have been exaggerated (for example, more public sector employees have a third level qualification or are managers or professionals than in the private sector).
However, it is also the case that wage levels for certain key sectors are too high. The differential between the lowest paid and the highest paid is also too high in all public and private sector organisations. Reducing this differential in the public sector would not solve the economic crisis by itself. It would contribute to reducing the budget deficit but more importantly, it would make more earnings revisions acceptable to other groups whose earnings are well above average levels in Ireland, or comparable groups in other countries (academics, hospital consultants, elected politicians, judiciary, regulators, etc.).
A well-targeted fiscal stimulus should be a vital part of current strategy. Such a fiscal stimulus should be aimed at job-intensive sectors such as tourism. Well designed incentives could encourage those who are currently in employment, and who have increased their savings rate, to increase consumption. Careful targeting and design could ensure that this increased consumption benefited the Irish exchequer through increased VAT yields, rather than the UK exchequer.
Graduate and youth unemployment should be tackled by subsidising employers to provide work place experience and training. Employers would not be required to pay such individuals; rather, payment could consist of continuing or establishing social security payments. Subsidies to employers of young non-graduate adults should be higher to compensate for the likely greater costs and inputs by employers.
Industrial and innovation policy needs to be seriously rethought, and not just as a cost cutting exercise as in the McCarthy/Department of Finance proposals. For example, there has been strong criticism of McCarthy/D of F proposals in relation to funding of research in universities, but the point not made by McCarthy/D of F, is that other countries have very successful innovation, internationally competitive firms and a strong science base without the presence of world class Universities (Germany has no university in the THES top 50, and just 2 in the top 100). Economic success does not necessarily follow from the presence of ‘world class Universities’. These issues need urgent focus.
There is scope for raising additional taxation through removing tax expenditures. The Commission on Taxation (p. 315) identify 17 tax expenditures not examined because decisions were taken in the budgets of 2006 and 2009 to discontinue them. However, many live on for existing projects and ‘projects in the pipeline’, as in the case of accelerated capital allowances for hotels.
There is considerable scope for reform of tax regime for pensions in order to support existing State pensions and supplementary pension arrangements. For example:- extending taxation on tax-relieved lump sums, in particular those above the limit of €5 million set in 2005, and reducing tax allowances for those who are retired and have earnings well above average earnings.
The renewed programme for Government as originally published planned a uniform tax rate of tax relief on pensions of 30%. This was subsequently republished as 33%. However, as advocated by TASC, relief should be granted at the standard rate
A central plank of policy on competitiveness is that wages in the public sector are far higher than those in the private sector. Recent reports by the OECD and IMF have largely repeated these assertions. However, Foley and O’Callaghan, in a recent SSSI paper, convincingly argue that the differences have been exaggerated (for example, more public sector employees have a third level qualification or are managers or professionals than in the private sector).
However, it is also the case that wage levels for certain key sectors are too high. The differential between the lowest paid and the highest paid is also too high in all public and private sector organisations. Reducing this differential in the public sector would not solve the economic crisis by itself. It would contribute to reducing the budget deficit but more importantly, it would make more earnings revisions acceptable to other groups whose earnings are well above average levels in Ireland, or comparable groups in other countries (academics, hospital consultants, elected politicians, judiciary, regulators, etc.).
A well-targeted fiscal stimulus should be a vital part of current strategy. Such a fiscal stimulus should be aimed at job-intensive sectors such as tourism. Well designed incentives could encourage those who are currently in employment, and who have increased their savings rate, to increase consumption. Careful targeting and design could ensure that this increased consumption benefited the Irish exchequer through increased VAT yields, rather than the UK exchequer.
Graduate and youth unemployment should be tackled by subsidising employers to provide work place experience and training. Employers would not be required to pay such individuals; rather, payment could consist of continuing or establishing social security payments. Subsidies to employers of young non-graduate adults should be higher to compensate for the likely greater costs and inputs by employers.
Industrial and innovation policy needs to be seriously rethought, and not just as a cost cutting exercise as in the McCarthy/Department of Finance proposals. For example, there has been strong criticism of McCarthy/D of F proposals in relation to funding of research in universities, but the point not made by McCarthy/D of F, is that other countries have very successful innovation, internationally competitive firms and a strong science base without the presence of world class Universities (Germany has no university in the THES top 50, and just 2 in the top 100). Economic success does not necessarily follow from the presence of ‘world class Universities’. These issues need urgent focus.
There is scope for raising additional taxation through removing tax expenditures. The Commission on Taxation (p. 315) identify 17 tax expenditures not examined because decisions were taken in the budgets of 2006 and 2009 to discontinue them. However, many live on for existing projects and ‘projects in the pipeline’, as in the case of accelerated capital allowances for hotels.
There is considerable scope for reform of tax regime for pensions in order to support existing State pensions and supplementary pension arrangements. For example:- extending taxation on tax-relieved lump sums, in particular those above the limit of €5 million set in 2005, and reducing tax allowances for those who are retired and have earnings well above average earnings.
The renewed programme for Government as originally published planned a uniform tax rate of tax relief on pensions of 30%. This was subsequently republished as 33%. However, as advocated by TASC, relief should be granted at the standard rate
Friday, 4 December 2009
Tax Breaks
Nat O'Connor: TASC has estimated that tax breaks ('tax expenditure' to use the technical term) on personal income tax and corporation tax will cost €7.4 billion in 2009 in lost revenue. Tax breaks benefit the better off, whereas social welfare cuts will increase the number of people at risk of poverty. TASC argues that the Minister for Finance should cut tax breaks. You can read TASC's full submission here.
In this blog post I want to explore our (the broad public's) complicity in our tax break regime and what we can do next to make it economically and socially beneficial.
The OECD's Economic Surveys: Ireland reports that in 2005 (which is the latest full data) tax expenditure on personal income tax in Ireland cost three times as much as the average of 22 other EU countries. Tax expenditures on corporation tax costs seven times as much. In total, in 2005, tax expenditure cost €10.7 billion (not including personal credits).
Some questions:
1. What's the problem?
2. How did this happen?
3. What do we do about it?
Some answers:
1. There are three problems. Firstly, economic inefficiency. Secondly, inequality. Thirdly, the resulting non-progressive tax system.
An example of economic inefficiency was shown by the Goodbody and Indecon reports on property- and area-based tax breaks published as annexes to Budget 2006. They showed considerable deadweight - that is, people benefiting from tax breaks for investments that probably would have happened even without the tax breaks. This inefficiency was accepted by Government and these tax breaks are being discontinued.
An example of inequality is that high earners have disproportionately benefitted from pension relief (see this recent post).
The non-progressive tax system results because better off households can use more tax breaks. There is probably an income/wealth threshold after which it is cost-effective to pay a tax advisor, which in turn opens up more possibilities to avoid tax. Hence, we have a theoretically progressive tax system, with a higher rate for higher earners, but the reality of income tax paid is more like a curve. Low earners pay little of their salaries in income tax, middle earners pay a higher proportion, but higher earners pay a lower proportion.
Both the inefficiency and the inequality stem - in part - from a lack of caps and limits being placed on tax breaks. Whether or not you think that tax breaks are a valid and useful tool for Governments to use to encourange economic activity, it seems that successive governments were inexpert in designing and implementing tax break schemes. They may not have been concerned about equality, but is there evidence to show that successive Ministers for Finance signed off on tax breaks that would deeply harm the economy in order to benefit a small number of wealthy people?
2. There are probably a number of suggestion for why tax breaks grew in number and cost. Paul Sweeney, for example, has suggested they were seen as "costless" by some ministers. They certainly dovetailed with a low tax ideology. Maybe in the past ministers found it easier to persuade their colleagues to grant tax breaks, rather than increase departmental budgets.
It has been suggested that tax breaks permitted State supports to enterprise that would have been more difficult or forbidden under EU rules.
Many specific tax breaks are a response to the demands of specific sectors, such as construction, farming, mining, fund management, etc.
Tax breaks were also introduced to achieve parity with tax concessions or spending in other sectors. So more tax breaks were created to even out markets that had been distorted by other tax breaks. One cannot escape the classic image of someone sawing off the ends of table legs with increasing fervour in order to correct a relatively minor original imbalance.
3. The remaining problem is that many households, on low and middle incomes, benefit from tax breaks. Although this is nothing like the extent to which high net worth individuals have benefitted, an immediate cut of tax breaks (such as mortgage interest tax relief) would represent hundreds of euro per month taken out of many households' net incomes. The prices people paid for their homes were in turn inflated by the distorting effect of mortgage interest tax relief in the housing market, so cutting the tax break immediately would be a double blow. Nevertheless, we really do need to make major cuts in tax breaks.
One immediate solution is for the Government to impose strict caps and limits on the full range of tax breaks - including the many tax relieving measures that the Commission on Taxation identifies as part of the benchmark tax system. Strict caps will means that low to middle income households will not suddenly face a few hundred euro less in their net incomes (which is significant). Higher income households will benefit less. Over the following few years, more and more tax breaks can be cut completely, to lessen the shock to any particular part of the economy (except tax advisors).
Tightening up on tax breaks should also be more efficient than increasing income tax, as the amount of tax actually paid is much more effected by breaks than rates.
In this blog post I want to explore our (the broad public's) complicity in our tax break regime and what we can do next to make it economically and socially beneficial.
The OECD's Economic Surveys: Ireland reports that in 2005 (which is the latest full data) tax expenditure on personal income tax in Ireland cost three times as much as the average of 22 other EU countries. Tax expenditures on corporation tax costs seven times as much. In total, in 2005, tax expenditure cost €10.7 billion (not including personal credits).
Some questions:
1. What's the problem?
2. How did this happen?
3. What do we do about it?
Some answers:
1. There are three problems. Firstly, economic inefficiency. Secondly, inequality. Thirdly, the resulting non-progressive tax system.
An example of economic inefficiency was shown by the Goodbody and Indecon reports on property- and area-based tax breaks published as annexes to Budget 2006. They showed considerable deadweight - that is, people benefiting from tax breaks for investments that probably would have happened even without the tax breaks. This inefficiency was accepted by Government and these tax breaks are being discontinued.
An example of inequality is that high earners have disproportionately benefitted from pension relief (see this recent post).
The non-progressive tax system results because better off households can use more tax breaks. There is probably an income/wealth threshold after which it is cost-effective to pay a tax advisor, which in turn opens up more possibilities to avoid tax. Hence, we have a theoretically progressive tax system, with a higher rate for higher earners, but the reality of income tax paid is more like a curve. Low earners pay little of their salaries in income tax, middle earners pay a higher proportion, but higher earners pay a lower proportion.
Both the inefficiency and the inequality stem - in part - from a lack of caps and limits being placed on tax breaks. Whether or not you think that tax breaks are a valid and useful tool for Governments to use to encourange economic activity, it seems that successive governments were inexpert in designing and implementing tax break schemes. They may not have been concerned about equality, but is there evidence to show that successive Ministers for Finance signed off on tax breaks that would deeply harm the economy in order to benefit a small number of wealthy people?
2. There are probably a number of suggestion for why tax breaks grew in number and cost. Paul Sweeney, for example, has suggested they were seen as "costless" by some ministers. They certainly dovetailed with a low tax ideology. Maybe in the past ministers found it easier to persuade their colleagues to grant tax breaks, rather than increase departmental budgets.
It has been suggested that tax breaks permitted State supports to enterprise that would have been more difficult or forbidden under EU rules.
Many specific tax breaks are a response to the demands of specific sectors, such as construction, farming, mining, fund management, etc.
Tax breaks were also introduced to achieve parity with tax concessions or spending in other sectors. So more tax breaks were created to even out markets that had been distorted by other tax breaks. One cannot escape the classic image of someone sawing off the ends of table legs with increasing fervour in order to correct a relatively minor original imbalance.
3. The remaining problem is that many households, on low and middle incomes, benefit from tax breaks. Although this is nothing like the extent to which high net worth individuals have benefitted, an immediate cut of tax breaks (such as mortgage interest tax relief) would represent hundreds of euro per month taken out of many households' net incomes. The prices people paid for their homes were in turn inflated by the distorting effect of mortgage interest tax relief in the housing market, so cutting the tax break immediately would be a double blow. Nevertheless, we really do need to make major cuts in tax breaks.
One immediate solution is for the Government to impose strict caps and limits on the full range of tax breaks - including the many tax relieving measures that the Commission on Taxation identifies as part of the benchmark tax system. Strict caps will means that low to middle income households will not suddenly face a few hundred euro less in their net incomes (which is significant). Higher income households will benefit less. Over the following few years, more and more tax breaks can be cut completely, to lessen the shock to any particular part of the economy (except tax advisors).
Tightening up on tax breaks should also be more efficient than increasing income tax, as the amount of tax actually paid is much more effected by breaks than rates.
Shopping Outside the Box
Colm O'Doherty: Last week the Irish Times carried two stories which when examined together provide an instructive commentary on contemporary Irish citizenship. On November 25th (the day after the Public Sector strike) we were informed by the Times that Hordes of Southern Shoppers had invaded (sic) Newry, and on the 28th November we learned that Up to 6000 Irish investors were wooed (sic) by the desert state of Dubai.
The Newry story was heavily freighted with images of irresponsible citizens (hordes, invading), lacking in patriotism, engaging in abnormal and un-natural activities. The tone of the Dubai story was measured and represented the investors as victims – kids in a sweet shop, innocents abroad.
The bad shoppers in Newry were represented as amoral deviants – refusing to play by the rules. What these two stories highlight is the manner in which citizenship is now defined. An understanding of Gramsci’s concept of hegemony is essential to this analysis. Maintaining power by persuading people that dominant attitudes are common sense is the hallmark of governing citizens. So shopping in Dubai for personal benefit – to the tune of approximately 600 million Euro - is legitimate and patriotic, while shopping in Newry for basic items such as food and consumer durables is a betrayal and unpatriotic.
Irish entitled citizens – bankers, investors, entrepreneurs - are encouraged to shop for property across the globe, but Newry is off limits to citizen consumers, particularly the treasonous public sector who dared to take industrial action and shop outside the state. There is clearly a political agenda here. and it is really worrying that the Irish Times, in its biased reporting, appears to be complicit in this manufactured moral panic.
In this regard the Times is supporting the dominant economic classes who harness the state’s autonomous power but are not subordinated to it. This alliance allows them to operate freely within the Irish state and between states. Meanwhile, the consumer class are disciplined for their moral treason in venturing beyond their compliant worker roles and legitimate designated shopping perimeters.
The Newry story was heavily freighted with images of irresponsible citizens (hordes, invading), lacking in patriotism, engaging in abnormal and un-natural activities. The tone of the Dubai story was measured and represented the investors as victims – kids in a sweet shop, innocents abroad.
The bad shoppers in Newry were represented as amoral deviants – refusing to play by the rules. What these two stories highlight is the manner in which citizenship is now defined. An understanding of Gramsci’s concept of hegemony is essential to this analysis. Maintaining power by persuading people that dominant attitudes are common sense is the hallmark of governing citizens. So shopping in Dubai for personal benefit – to the tune of approximately 600 million Euro - is legitimate and patriotic, while shopping in Newry for basic items such as food and consumer durables is a betrayal and unpatriotic.
Irish entitled citizens – bankers, investors, entrepreneurs - are encouraged to shop for property across the globe, but Newry is off limits to citizen consumers, particularly the treasonous public sector who dared to take industrial action and shop outside the state. There is clearly a political agenda here. and it is really worrying that the Irish Times, in its biased reporting, appears to be complicit in this manufactured moral panic.
In this regard the Times is supporting the dominant economic classes who harness the state’s autonomous power but are not subordinated to it. This alliance allows them to operate freely within the Irish state and between states. Meanwhile, the consumer class are disciplined for their moral treason in venturing beyond their compliant worker roles and legitimate designated shopping perimeters.
November tax figures - not as good as they seem
An Saoi: Newspaper headlines suggest that the decline in tax revenues is bottoming out, and indeed the November figures themselves look at first glance quite reasonable. But a more detailed analysis may suggest otherwise.
The first issue to consider is how the Central Bank strike last Friday influenced the figures. I understand from friends in the Revenue that repayment instructions were not sent to the Central Bank for some days before the strike, effectively stopping Revenue refunds from 25th November onwards. This is particularly significant in a VAT filing month, such as November, where many repayment claims were only filed electronically on 23rd of the month.
The second issue is the departure of much of the Revenue’s middle and senior management on the Government’s ISER programme. Approval for larger refunds requires sign-off from higher grades, who have been clearing their desks and offices since early November and have not been replaced. Many advisors have complained recently about delays in getting approval for large repayments, and this position will only get worse with the departure of perhaps 25 per cent of Senior Grades.
Thirdly, the fairy godmothers have been at it again. Corporation Tax now exceeds the annual target with one month remaining. This is an incredible performance considering the huge level of corporate tax refunds made this year. For a summary of corporation tax repayments made in 2009 see the written reply to Joan Burton’s question, Ref No: 42636/09 on 24th November.
Looking at the figures themselves, I am afraid I cannot see the signs of bottoming out suggested by for example the Irish Times new right wing guru Pat McArdle. The self-employed Income Tax figures are swollen by the way the Income Levy is assessed. It is charged on income before deducting pension contributions and capital allowances. It is therefore assessed on a figure perhaps much higher than the taxable income. This perhaps raises the question of Alternative Minimum Tax. The effectiveness of such a restriction on the use of tax schemes can be seen in a written response received by Ms. Burton on 3rd November last, ref. 38989/09.
The VAT returns also look very weak, particularly if there is between €100M- €125M in un-issued refunds lurking. There is no sign of either an increase in consumer spending, which would lead to increased VAT being paid or conversely in VAT repayments arising out of investment. The continued low level of customs duties is another sign of these weaknesses.
It is important to note that these figures are before the implementation of any further deflationary cuts by the Government and also and perhaps more importantly the withdrawal by the European Central Bank of their support mechanisms, which have kept the Irish banks’ afloat. I will try after next Wednesday’s slaughter of the innocents to provide an updated view of 2010 projections. Comments welcome, particularly from Dept. of Finance.
The first issue to consider is how the Central Bank strike last Friday influenced the figures. I understand from friends in the Revenue that repayment instructions were not sent to the Central Bank for some days before the strike, effectively stopping Revenue refunds from 25th November onwards. This is particularly significant in a VAT filing month, such as November, where many repayment claims were only filed electronically on 23rd of the month.
The second issue is the departure of much of the Revenue’s middle and senior management on the Government’s ISER programme. Approval for larger refunds requires sign-off from higher grades, who have been clearing their desks and offices since early November and have not been replaced. Many advisors have complained recently about delays in getting approval for large repayments, and this position will only get worse with the departure of perhaps 25 per cent of Senior Grades.
Thirdly, the fairy godmothers have been at it again. Corporation Tax now exceeds the annual target with one month remaining. This is an incredible performance considering the huge level of corporate tax refunds made this year. For a summary of corporation tax repayments made in 2009 see the written reply to Joan Burton’s question, Ref No: 42636/09 on 24th November.
Looking at the figures themselves, I am afraid I cannot see the signs of bottoming out suggested by for example the Irish Times new right wing guru Pat McArdle. The self-employed Income Tax figures are swollen by the way the Income Levy is assessed. It is charged on income before deducting pension contributions and capital allowances. It is therefore assessed on a figure perhaps much higher than the taxable income. This perhaps raises the question of Alternative Minimum Tax. The effectiveness of such a restriction on the use of tax schemes can be seen in a written response received by Ms. Burton on 3rd November last, ref. 38989/09.
The VAT returns also look very weak, particularly if there is between €100M- €125M in un-issued refunds lurking. There is no sign of either an increase in consumer spending, which would lead to increased VAT being paid or conversely in VAT repayments arising out of investment. The continued low level of customs duties is another sign of these weaknesses.
It is important to note that these figures are before the implementation of any further deflationary cuts by the Government and also and perhaps more importantly the withdrawal by the European Central Bank of their support mechanisms, which have kept the Irish banks’ afloat. I will try after next Wednesday’s slaughter of the innocents to provide an updated view of 2010 projections. Comments welcome, particularly from Dept. of Finance.
Thursday, 3 December 2009
Current government policy is misguided
Jim Stewart: The current stated policy of the Government is to reduce the fiscal deficit as a percentage of GDP to 3% or under by 2014 (formerly 2013). This target is unlikely to be achieved and the attempt to do so will delay recovery..
According to the recent OECD report on Ireland, almost every other country in the OECD has pursued a policy of a fiscal stimulus to varying degrees (OECD, p. 52 and fig.2.3). Even countries which are likely to have a higher deficit as a percentage of GDP than Ireland such as the UK are pursuing a fiscal stimulus policy. A member of the MPC in the UK is quoted in the Financial Times (17/11/09) as stating “it would be a mistake for government to rush too quickly to unwind fiscal deficits.” While recognising the deficit should be reduced, this is seen as “a long term project” that is over five years or more. Those countries that have pursued a fiscal stimulus policy such as the UK and Germany, have recorded recent increases in output.
All the larger countries in the Eurozone will have a budget deficit in 2009 greater than 3%. The forecast average for the Eurozone for 2010 is 6.9% (http/www.euractiv.com/en/euro/). It is likely that all will have a debt/GDP ratio greater than 60% in 2010 (Finland may be an exception). The forecast average debt/GDP for all eurozone countries for 2010 is 88.2%. The forecast debt/GDP ratio for Ireland is 78% (excluding cash balances held by the NTMA and the NPRF it is 51%)[*see note below]. It is likely that several countries in the Eurozone will have a fiscal deficit greater than 3% in 2014.
What is our Borrowing Requirement?
The Pre-Budget Outlook (See Department of Finance, November 2009, Table 6) estimates the Exchequer Balance to be €25.75 billion for 2009, but €3 billion of this relates to a payment to the NPRF in order to provide the banks with extra capital. This expenditure represents a financial transfer to a state agency (NPRF) which used the funds for a financial investment. This investment is most likely to result in a net gain (but the gain accrues to the NPRF rather than the Exchequer, and should be excluded from any analysis of the underlying or structural balance). A further €9 billion relates to capital expenditure. Assuming this capital expenditure has positive net present values it should again be excluded from the underlying or structural imbalance.
The NTMA has a policy of over funding. Free cash balances in December 2007 were €4.7 billion, €20 billion in December 2008, were almost €30 billion in October (NTMA Press Release 6/10/09) and Are likely to be higher now. There is very little economic analysis of this strategy. A policy of over-borrowing adds to the interest bill. Assuming a gross cost of 4.5%, and a 1% rate of interest earned on depositing funds with the ECB results in a net cost of 3.5%. On cash balances of €30 billion this would amount to annual cost of approx. €1 billion thus increasing the current budget deficit. It may also result in a slightly higher interest rate because of increased supply. It does however indicate no issue with raising debt. This is consistently demonstrated in bids for Irish government at a multiple of amounts on offer. The interest rate on Irish Government 10 year bonds has since the start of the banking crisis in November 2008, remained around 1% above the average Eurozone bond yield, but the differential has fallen compared with Germany (see diagram), and is lower than Greece since 13th November. Recent rises in Irish Government debt yields following the Dubai crisis, are unlikely to be lasting. Sovereign debt in the Eurozone area is unlikely to be the next subprime crisis, and will not result in the breakup of the Eurozone. Those who consider this to be the case (See Financial Times articles by Wolfgang Munchau 30/11/2009 and Gillian Tett 23/11/2009), underestimate the political and economic investment in creating the Eurozone, especially by Germany.
Expenditure Cuts Alone Will not Solve the Problem
Expenditure cuts alone cannot be the sole basis for a rational economic strategy. This is so in particular because a little more than half the projected deficit is accounted for by current spending and the rest by capital expenditure and contributions to the NPRF which in turn funded the banks. Cutting capital expenditure without assessing its role in the future economic success is neither sensible nor prudent.
There is however scope for reducing current expenditure. The Report largely produced by the Department of Finance (misleadingly called the McCarthy Report as many of the chapters are very similar to responses by the Department of Finance to proposals from individual departments, see:- Department of Finance - Evaluation Papers from Department of Finance) does have several sensible suggestions, for example, reducing the number of reports that are translated into Irish, ceasing payments into the National Pension Reserve Fund, amalgamating the Pensions Regulator with the Financial Regulator, reducing added years in public sector pension entitlements).
The case for solving the economic crisis by expenditure cuts alone has not been made. Other policies are needed.
My next post will suggest some policy options.
*Note: This excludes liabilities of semi-state companies such as Anglo-Irish Bank and loans issued to NAMA but the same conventions apply in measuring debt/GDP ratios in other Eurozone countries.
According to the recent OECD report on Ireland, almost every other country in the OECD has pursued a policy of a fiscal stimulus to varying degrees (OECD, p. 52 and fig.2.3). Even countries which are likely to have a higher deficit as a percentage of GDP than Ireland such as the UK are pursuing a fiscal stimulus policy. A member of the MPC in the UK is quoted in the Financial Times (17/11/09) as stating “it would be a mistake for government to rush too quickly to unwind fiscal deficits.” While recognising the deficit should be reduced, this is seen as “a long term project” that is over five years or more. Those countries that have pursued a fiscal stimulus policy such as the UK and Germany, have recorded recent increases in output.
All the larger countries in the Eurozone will have a budget deficit in 2009 greater than 3%. The forecast average for the Eurozone for 2010 is 6.9% (http/www.euractiv.com/en/euro/). It is likely that all will have a debt/GDP ratio greater than 60% in 2010 (Finland may be an exception). The forecast average debt/GDP for all eurozone countries for 2010 is 88.2%. The forecast debt/GDP ratio for Ireland is 78% (excluding cash balances held by the NTMA and the NPRF it is 51%)[*see note below]. It is likely that several countries in the Eurozone will have a fiscal deficit greater than 3% in 2014.
What is our Borrowing Requirement?
The Pre-Budget Outlook (See Department of Finance, November 2009, Table 6) estimates the Exchequer Balance to be €25.75 billion for 2009, but €3 billion of this relates to a payment to the NPRF in order to provide the banks with extra capital. This expenditure represents a financial transfer to a state agency (NPRF) which used the funds for a financial investment. This investment is most likely to result in a net gain (but the gain accrues to the NPRF rather than the Exchequer, and should be excluded from any analysis of the underlying or structural balance). A further €9 billion relates to capital expenditure. Assuming this capital expenditure has positive net present values it should again be excluded from the underlying or structural imbalance.
The NTMA has a policy of over funding. Free cash balances in December 2007 were €4.7 billion, €20 billion in December 2008, were almost €30 billion in October (NTMA Press Release 6/10/09) and Are likely to be higher now. There is very little economic analysis of this strategy. A policy of over-borrowing adds to the interest bill. Assuming a gross cost of 4.5%, and a 1% rate of interest earned on depositing funds with the ECB results in a net cost of 3.5%. On cash balances of €30 billion this would amount to annual cost of approx. €1 billion thus increasing the current budget deficit. It may also result in a slightly higher interest rate because of increased supply. It does however indicate no issue with raising debt. This is consistently demonstrated in bids for Irish government at a multiple of amounts on offer. The interest rate on Irish Government 10 year bonds has since the start of the banking crisis in November 2008, remained around 1% above the average Eurozone bond yield, but the differential has fallen compared with Germany (see diagram), and is lower than Greece since 13th November. Recent rises in Irish Government debt yields following the Dubai crisis, are unlikely to be lasting. Sovereign debt in the Eurozone area is unlikely to be the next subprime crisis, and will not result in the breakup of the Eurozone. Those who consider this to be the case (See Financial Times articles by Wolfgang Munchau 30/11/2009 and Gillian Tett 23/11/2009), underestimate the political and economic investment in creating the Eurozone, especially by Germany.
Expenditure Cuts Alone Will not Solve the Problem
Expenditure cuts alone cannot be the sole basis for a rational economic strategy. This is so in particular because a little more than half the projected deficit is accounted for by current spending and the rest by capital expenditure and contributions to the NPRF which in turn funded the banks. Cutting capital expenditure without assessing its role in the future economic success is neither sensible nor prudent.
There is however scope for reducing current expenditure. The Report largely produced by the Department of Finance (misleadingly called the McCarthy Report as many of the chapters are very similar to responses by the Department of Finance to proposals from individual departments, see:- Department of Finance - Evaluation Papers from Department of Finance) does have several sensible suggestions, for example, reducing the number of reports that are translated into Irish, ceasing payments into the National Pension Reserve Fund, amalgamating the Pensions Regulator with the Financial Regulator, reducing added years in public sector pension entitlements).
The case for solving the economic crisis by expenditure cuts alone has not been made. Other policies are needed.
My next post will suggest some policy options.
*Note: This excludes liabilities of semi-state companies such as Anglo-Irish Bank and loans issued to NAMA but the same conventions apply in measuring debt/GDP ratios in other Eurozone countries.
Wednesday, 2 December 2009
Ireland after NAMA - New Blog
Sean O Riain: There is a new and interesting blog written mainly, but not exclusively, by geographers at http://irelandafternama.wordpress.com/
For a start, people may want to take a look at this map of vacant properties developed after 2006 - the national vacancy rate in 2006 was 15% but this updates the pattern with data on vacancies in properties developed after 2006, with some small areas going above 50%.
For a start, people may want to take a look at this map of vacant properties developed after 2006 - the national vacancy rate in 2006 was 15% but this updates the pattern with data on vacancies in properties developed after 2006, with some small areas going above 50%.
Sunday, 29 November 2009
Principle 5 - Up the Game - Compete on new knowledge and Services
Slí Eile: The current economic crisis is forcing us to move away from strategies that rely on a combination of dependence on foreign direct investment with patterns of indigenous development that still rely too much on low-skill and low-wage competitive advantage. We need to up the game. What worked in the past may not work in the future.
The Government report ‘Building Ireland’s Smart Economy’ envisaged a move towards 70% of Irish exports in traded international services by 2025. To realise this goal would call for a huge change in the way we organise production and the distribution of skills and knowledge. An active, engaged State working hand-in-hand with private and voluntary interests needs to invest in new areas of value-production. These could include new areas of long-term huge potential such as:
- International education services
- International health services
- Consultancy services in sustainable planning and habitation
- Green technologies and services for export
How will these new growth areas be planned for now? What is the role of education and training?
The Government report ‘Building Ireland’s Smart Economy’ envisaged a move towards 70% of Irish exports in traded international services by 2025. To realise this goal would call for a huge change in the way we organise production and the distribution of skills and knowledge. An active, engaged State working hand-in-hand with private and voluntary interests needs to invest in new areas of value-production. These could include new areas of long-term huge potential such as:
- International education services
- International health services
- Consultancy services in sustainable planning and habitation
- Green technologies and services for export
How will these new growth areas be planned for now? What is the role of education and training?
Paper by Niamh Hardiman - Impact of the Crisis on the Irish Political System
Slí Eile: The paper by Niamh Hardiman last Thursday has been widely acclaimed as a signficant contribution to the debate on political economy. You can download it here.
Ireland and Dubai
Paul Sweeney: The Irish economy could collapse? Is this possible? The editorial in Saturday’s Financial Times (28th November 2009), on Dubai, implied that it was possible.
It said: "Markets will not soon return to the panic of September 2008: the financial sector now has state backstops. But because of these guarantees, fearful investors have started to worry about how safe sovereign debt is. Investors are growing nervous about Greece and Ireland in particular."
Last week, interest rates on Greek and Irish government bonds rose, whereas they fell for many other states.
The fall of Dubai is another blow to the neo-liberal economic paradigm. Dubai was hailed as the golden boy of free market capitalism ... which it was not. The myth of free markets, low taxes and no regulation was underwritten at every turn by the Dubai state itself.
Only a few weeks ago, Dubai was selling itself as a threat to the 'over-regulated and over-taxed' City of London. Not alone had Dubai weathered the global financial hurricane, but it was the place for mobile firms to go to avoid regulation and taxes, according to the Dubai International Financial Centre, in a gig two weeks ago in London.
The link between Ireland and Dubai is that Dubai's collapse has focused attention on Ireland (and Greece) as potential defaulters on sovereign debt.
This is not likely. Yes, the government’s guarantees to the banks were risky, NAMA is risky; but we are in the EU; in the Euro; sit on the ECB board; we already have €31bn in state borrowing ready for next year, and don’t really need to go to the markets for more borrowings. Most of the economy is still sound (aside from banking and construction, and both are being sorted - sort of). But markets are fickle. They are too often run by lemmings who all follow each other (over the cliff, occasionally), and the current scare on Ireland is misplaced.
Dubai is an autocratic desert state which only gets 2% of its revenue from oil and gas. The rest is construction, retailing and wholesaling – hardly leading economic sectors.
Dubai was also hoping to attract investment in its banks. It was planning to be a safe haven for rich people running from volatile areas. By implication, it was after illicit money from drugs, tax evasion and crime. Now that Switzerland is finally being hammered on its bank secrecy laws by the OECD, the US and the EU, new havens like Dubai were not welcomed by those of us who pay our taxes and want to continue the move from casino capitalism.
It is run by an autocrat, Sheik Mohammed al Maktoum, who has a few horses here. It is run with little transparency.
The indoor desert ski resorts, palm-shaped reclaimed islands - not to mention the 'World of Islands' - should, like Sean Dunne’s Ballsbridge ego-mania, have warned off any potential investors with sense. It had tried to diversify into tourism, property, tax free zones, trade, transport and banking, but was wildly over-optimistic.
Dubai has debts of $80bn - a huge amount for a small country. It is now (after a delay) being helped out by Abu Dubai, within the United Arab Emirates, because it is thought the autocratic ruler Maktoum did not want to admit the model of free-wheeling desert capitalism had failed.
Dubai’s collapse wiped a significant 2.3 per cent of the FT100 and 3.8 per cent off the Nikkei, and yields on bonds also fell significantly.
Ireland has a sea of troubles but, if we can pull together and deal with them equitably, we won't fall as far as Dubai. The extension of the Recovery Period beyond 2013, advocated by the Congress of Trade Unions, opposed by all classical economists (we [we?] must have lots of harsh pain, quickly, for redemption!) and quietly conceded by Government, is a very hopeful sign. A less deflationary Budget will also help us recover faster.
It said: "Markets will not soon return to the panic of September 2008: the financial sector now has state backstops. But because of these guarantees, fearful investors have started to worry about how safe sovereign debt is. Investors are growing nervous about Greece and Ireland in particular."
Last week, interest rates on Greek and Irish government bonds rose, whereas they fell for many other states.
The fall of Dubai is another blow to the neo-liberal economic paradigm. Dubai was hailed as the golden boy of free market capitalism ... which it was not. The myth of free markets, low taxes and no regulation was underwritten at every turn by the Dubai state itself.
Only a few weeks ago, Dubai was selling itself as a threat to the 'over-regulated and over-taxed' City of London. Not alone had Dubai weathered the global financial hurricane, but it was the place for mobile firms to go to avoid regulation and taxes, according to the Dubai International Financial Centre, in a gig two weeks ago in London.
The link between Ireland and Dubai is that Dubai's collapse has focused attention on Ireland (and Greece) as potential defaulters on sovereign debt.
This is not likely. Yes, the government’s guarantees to the banks were risky, NAMA is risky; but we are in the EU; in the Euro; sit on the ECB board; we already have €31bn in state borrowing ready for next year, and don’t really need to go to the markets for more borrowings. Most of the economy is still sound (aside from banking and construction, and both are being sorted - sort of). But markets are fickle. They are too often run by lemmings who all follow each other (over the cliff, occasionally), and the current scare on Ireland is misplaced.
Dubai is an autocratic desert state which only gets 2% of its revenue from oil and gas. The rest is construction, retailing and wholesaling – hardly leading economic sectors.
Dubai was also hoping to attract investment in its banks. It was planning to be a safe haven for rich people running from volatile areas. By implication, it was after illicit money from drugs, tax evasion and crime. Now that Switzerland is finally being hammered on its bank secrecy laws by the OECD, the US and the EU, new havens like Dubai were not welcomed by those of us who pay our taxes and want to continue the move from casino capitalism.
It is run by an autocrat, Sheik Mohammed al Maktoum, who has a few horses here. It is run with little transparency.
The indoor desert ski resorts, palm-shaped reclaimed islands - not to mention the 'World of Islands' - should, like Sean Dunne’s Ballsbridge ego-mania, have warned off any potential investors with sense. It had tried to diversify into tourism, property, tax free zones, trade, transport and banking, but was wildly over-optimistic.
Dubai has debts of $80bn - a huge amount for a small country. It is now (after a delay) being helped out by Abu Dubai, within the United Arab Emirates, because it is thought the autocratic ruler Maktoum did not want to admit the model of free-wheeling desert capitalism had failed.
Dubai’s collapse wiped a significant 2.3 per cent of the FT100 and 3.8 per cent off the Nikkei, and yields on bonds also fell significantly.
Ireland has a sea of troubles but, if we can pull together and deal with them equitably, we won't fall as far as Dubai. The extension of the Recovery Period beyond 2013, advocated by the Congress of Trade Unions, opposed by all classical economists (we [we?] must have lots of harsh pain, quickly, for redemption!) and quietly conceded by Government, is a very hopeful sign. A less deflationary Budget will also help us recover faster.
Thursday, 26 November 2009
4th Principle: Defend public services in health, education, welfare and housing
Slí Eile: In recent previous blogs I have suggested a number of high-level Principles to inform a progressive alternative to the current TINA.
Here is a fourth principle for debate, disagreement and action.
Next to a right to a basic income, every citizen of this Republic has a right to continuing education, health services and housing – regardless of their individual incomes. Such a scandalous notion is founded on human rights and the capabilities of societies endowed as we are with rich resources of human skill, community, institutions and physical capital. The notion of a right to a basic income or consumption of public service goods flies in the face of conventional wisdom which dictates (to borrow a McCarthy phrase) that ‘when the harvest fails the elders must take a cut in their allowance’. In other words, the conventional wisdom says that fairness or human rights is not the issue – it is down to ‘what we can afford’ and presently we cannot afford 2008 spending levels at 2003 levels of revenue flow. In this way of looking at things ‘what we can afford’ is a relatively fixed quantum determined – ultimately - by conditions in world export markets, the EXISTING DISTRIBUTION OF INCOME AND WEALTH (which is always a datum and not something to question) along with ‘market sentiment’ (be afraid you plebs !) and the gentlemen from the Ministry otherwise known as OECD, IMF and EU who have the poor to advise and punish – especially the latter two.
The pre-modern notion before the modern welfare state was founded stressed family, charitable societies and community should pick up most of all of the cost when harvests, health and employment fail. Well in theory, perhaps, but not in practice because not since in the real world families and communities don’t have the same access to the harvest.
In many ways, Ireland is bankrupt politically, morally and institutionally but it is not bankrupt in terms of its skills and communities. Even if national income (which is only one limited measure of human progress and well-being) were to decline by much more than is expected this year and next (plus 12% from peak Output in 2007), we can still continue to provide at least the current level of public service to citizens – if we chose to raise taxes through closing off specific reliefs, widening the tax base and increasing effective rates on capital gains, high salaries income and windfall profits in specific sectors. Cuts in the quality and quantity of public services in key areas would represent a devastating and unwarranted attack on social infrastructure – which as matters stood before the recession – was and is hugely inadequate. We risk undermining the very conditions for future growth in prosperity by failing to invest in a healthy and well-educated society for your children.
Public sector workers should be protesting not just over pay, jobs and pensions but together with private sector workers should all join together to protest over education, health and social welfare because at the end of the day we will know sickness eventually, vulnerability and the learning needs of a new generation. Consumers and producers need each others in public and private sectors to re-start the economy. And we are more than just consumers and producers. We are citizens of Republic meant to be founded on principles of solidarity and defence of the weakest.
Yes, we can create a more dignified society and one that is more just, caring and equitable founded on principles of democracy and genuine respect for human rights. The unrealistic ones are those who constrain choices to the Iron Law of the Market and imagine no alternatives. Lets shake off the pessimism, divisiveness and apathy engendered by the illusions of such an Iron Law.
Here is a fourth principle for debate, disagreement and action.
Next to a right to a basic income, every citizen of this Republic has a right to continuing education, health services and housing – regardless of their individual incomes. Such a scandalous notion is founded on human rights and the capabilities of societies endowed as we are with rich resources of human skill, community, institutions and physical capital. The notion of a right to a basic income or consumption of public service goods flies in the face of conventional wisdom which dictates (to borrow a McCarthy phrase) that ‘when the harvest fails the elders must take a cut in their allowance’. In other words, the conventional wisdom says that fairness or human rights is not the issue – it is down to ‘what we can afford’ and presently we cannot afford 2008 spending levels at 2003 levels of revenue flow. In this way of looking at things ‘what we can afford’ is a relatively fixed quantum determined – ultimately - by conditions in world export markets, the EXISTING DISTRIBUTION OF INCOME AND WEALTH (which is always a datum and not something to question) along with ‘market sentiment’ (be afraid you plebs !) and the gentlemen from the Ministry otherwise known as OECD, IMF and EU who have the poor to advise and punish – especially the latter two.
The pre-modern notion before the modern welfare state was founded stressed family, charitable societies and community should pick up most of all of the cost when harvests, health and employment fail. Well in theory, perhaps, but not in practice because not since in the real world families and communities don’t have the same access to the harvest.
In many ways, Ireland is bankrupt politically, morally and institutionally but it is not bankrupt in terms of its skills and communities. Even if national income (which is only one limited measure of human progress and well-being) were to decline by much more than is expected this year and next (plus 12% from peak Output in 2007), we can still continue to provide at least the current level of public service to citizens – if we chose to raise taxes through closing off specific reliefs, widening the tax base and increasing effective rates on capital gains, high salaries income and windfall profits in specific sectors. Cuts in the quality and quantity of public services in key areas would represent a devastating and unwarranted attack on social infrastructure – which as matters stood before the recession – was and is hugely inadequate. We risk undermining the very conditions for future growth in prosperity by failing to invest in a healthy and well-educated society for your children.
Public sector workers should be protesting not just over pay, jobs and pensions but together with private sector workers should all join together to protest over education, health and social welfare because at the end of the day we will know sickness eventually, vulnerability and the learning needs of a new generation. Consumers and producers need each others in public and private sectors to re-start the economy. And we are more than just consumers and producers. We are citizens of Republic meant to be founded on principles of solidarity and defence of the weakest.
Yes, we can create a more dignified society and one that is more just, caring and equitable founded on principles of democracy and genuine respect for human rights. The unrealistic ones are those who constrain choices to the Iron Law of the Market and imagine no alternatives. Lets shake off the pessimism, divisiveness and apathy engendered by the illusions of such an Iron Law.
Guest post by JJR: Shifting the tax burden from business to employees will not create jobs
JJR: Fine Gael frontbenchers may not take their lead from the Obama administration, but when White House Chief of Staff, Rahm Emanuel, said last year that one should ‘never waste a good crisis’, they seem to have taken this to heart.
In advance of the 2010 budget, the party has proposed a permanent €900m tax cut for business, financed by matching tax hikes for workers. This is not a tax cut ‘targeted at the most vulnerable jobs’ as they suggest; it is a tax cut that will boost corporate profits with only minimal and incidental job creation. The net effect would be a significant and regressive re-distribution of wealth.
The proposal includes a 20% cut to the standard rate of employers’ PRSI, costing €830m, and a 50% cut in the lower rate, costing €57m. This is to be financed by abolishing the PRSI ceiling for workers earning more than €75k, supposedly bringing in €470m, and through a carbon tax, bringing in €480m, disproportionately from the lower paid. Incidentally, the Department of Finance insist that abolishing the PRSI ceiling would raise €120m, some €350m less than asserted by Fine Gael.
According to Fine Gael, this tax cut will benefit 1.7 million workers. In actual fact, this near €1bn tax cut is aimed solely at improving the bottom line for business. Even accepting that FG’s costings are accurate, half of their tax cut is to be paid for by those earning over €75k as PRSI would be applied to their income over this level. The other half would be financed by a regressive carbon tax with no compensating measures for low income workers.
In fact, the biggest problem with this bumper business tax cut is that it is not targeted. It is a blanket cut that would reduce labour costs for employers for all existing jobs. And now for the ‘science bit’: Economists call this a ‘deadweight loss’; Fine Gael propose costly incentives for businesses to hire people, regardless of whether they were going to hire them anyway. The focus of Fine Gael’s proposal is on ‘infra-marginal’ rather than ‘marginal’ hiring decisions and, in economic terms, that is its core weakness. Acknowledging this fact, party spokespersons nonchalantly brush off this vast waste of money by saying ‘doing nothing would cost more’.
The party insists that ‘these changes are particularly targeted at lower-paid and entry-level jobs’ and the young unemployed. This is clearly not the case. Cynically, they are proffering the limited economic rationale for halving the lower rate of employers’ PRSI, at a cost of €57m, as justification for a blanket cut to the standard rate at 15 times the cost.
If Fine Gael were serious about protecting and creating jobs, they would be proposing tax breaks focused on jobs created or saved; they would focus on the ‘margin’. Reducing or suspending employers’ PRSI for people taken off, or kept off, the dole would be truly targeted and far more cost-effective. But this isn’t about job creation; This proposal is about securing tax breaks for business supported by spurious claims that this would support jobs.
Fine Gael’s proposal implies ESRI endorsement. In terms of tackling the jobs crisis, the ESRI concludes, in the Recovery Scenarios document cited by the party, that ‘priority needs to be given to labour market initiatives that will effectively tackle this skills deficit among many of the unemployed. In preparing for a recovery, the economy would also benefit from increased policy attention to measures to enhance productivity and innovation in the tradable sector of the economy.’ At no point does the ESRI propose a blanket cut in employers’ PRSI as an appropriate policy response to the crisis we face.
PRSI, whether it comes from workers or employers, is not really a tax at all. It is the social contribution made by workers so that they will receive state support if they fall on hard times; it is paid by employers to provide a safety net for staff in times of economic hardship.
Ireland has among the lowest level of social contributions in any advanced economy. Fine Gael cite other countries where reducing social security contributions have formed part of fiscal stimulus packages, but this overlooks the very low base at which Ireland is already operating. Our welfare system is barely keeping its head above water.
In Ireland, social contributions are paid into the Social Insurance Fund, out of which are paid employment-linked welfare payments. When the economy was booming, and at full employment, this Fund was billions of euro in surplus. With unemployment heading for half a million, it is set to move into deficit in 2010. Slashing PRSI contributions would undermine the viability of Ireland’s welfare system altogether and render the Social Insurance Fund defunct. Clearly, Fine Gael’s answer to this conundrum is to slash welfare rates for people who have already taken a hit by losing their jobs.
Make no mistake, this big business tax cut is a Trojan horse for slashing welfare and public services. Fine Gael want to cut the 2010 budget deficit by €4bn, €3.8bn of which would come from cuts to current spending. This would take slash-and-burn economics to a level that even the Fianna Fáil government considers to be beyond the pale.
Under this proposal, ordinary working people would carry the entire burden while corporate Ireland gets a near billion euro handout. This is not compassionate conservatism, or even so-called ‘common sense’ conservatism – this is cynical conservatism at its worst.
JJR is, obviously, anonymous.
In advance of the 2010 budget, the party has proposed a permanent €900m tax cut for business, financed by matching tax hikes for workers. This is not a tax cut ‘targeted at the most vulnerable jobs’ as they suggest; it is a tax cut that will boost corporate profits with only minimal and incidental job creation. The net effect would be a significant and regressive re-distribution of wealth.
The proposal includes a 20% cut to the standard rate of employers’ PRSI, costing €830m, and a 50% cut in the lower rate, costing €57m. This is to be financed by abolishing the PRSI ceiling for workers earning more than €75k, supposedly bringing in €470m, and through a carbon tax, bringing in €480m, disproportionately from the lower paid. Incidentally, the Department of Finance insist that abolishing the PRSI ceiling would raise €120m, some €350m less than asserted by Fine Gael.
According to Fine Gael, this tax cut will benefit 1.7 million workers. In actual fact, this near €1bn tax cut is aimed solely at improving the bottom line for business. Even accepting that FG’s costings are accurate, half of their tax cut is to be paid for by those earning over €75k as PRSI would be applied to their income over this level. The other half would be financed by a regressive carbon tax with no compensating measures for low income workers.
In fact, the biggest problem with this bumper business tax cut is that it is not targeted. It is a blanket cut that would reduce labour costs for employers for all existing jobs. And now for the ‘science bit’: Economists call this a ‘deadweight loss’; Fine Gael propose costly incentives for businesses to hire people, regardless of whether they were going to hire them anyway. The focus of Fine Gael’s proposal is on ‘infra-marginal’ rather than ‘marginal’ hiring decisions and, in economic terms, that is its core weakness. Acknowledging this fact, party spokespersons nonchalantly brush off this vast waste of money by saying ‘doing nothing would cost more’.
The party insists that ‘these changes are particularly targeted at lower-paid and entry-level jobs’ and the young unemployed. This is clearly not the case. Cynically, they are proffering the limited economic rationale for halving the lower rate of employers’ PRSI, at a cost of €57m, as justification for a blanket cut to the standard rate at 15 times the cost.
If Fine Gael were serious about protecting and creating jobs, they would be proposing tax breaks focused on jobs created or saved; they would focus on the ‘margin’. Reducing or suspending employers’ PRSI for people taken off, or kept off, the dole would be truly targeted and far more cost-effective. But this isn’t about job creation; This proposal is about securing tax breaks for business supported by spurious claims that this would support jobs.
Fine Gael’s proposal implies ESRI endorsement. In terms of tackling the jobs crisis, the ESRI concludes, in the Recovery Scenarios document cited by the party, that ‘priority needs to be given to labour market initiatives that will effectively tackle this skills deficit among many of the unemployed. In preparing for a recovery, the economy would also benefit from increased policy attention to measures to enhance productivity and innovation in the tradable sector of the economy.’ At no point does the ESRI propose a blanket cut in employers’ PRSI as an appropriate policy response to the crisis we face.
PRSI, whether it comes from workers or employers, is not really a tax at all. It is the social contribution made by workers so that they will receive state support if they fall on hard times; it is paid by employers to provide a safety net for staff in times of economic hardship.
Ireland has among the lowest level of social contributions in any advanced economy. Fine Gael cite other countries where reducing social security contributions have formed part of fiscal stimulus packages, but this overlooks the very low base at which Ireland is already operating. Our welfare system is barely keeping its head above water.
In Ireland, social contributions are paid into the Social Insurance Fund, out of which are paid employment-linked welfare payments. When the economy was booming, and at full employment, this Fund was billions of euro in surplus. With unemployment heading for half a million, it is set to move into deficit in 2010. Slashing PRSI contributions would undermine the viability of Ireland’s welfare system altogether and render the Social Insurance Fund defunct. Clearly, Fine Gael’s answer to this conundrum is to slash welfare rates for people who have already taken a hit by losing their jobs.
Make no mistake, this big business tax cut is a Trojan horse for slashing welfare and public services. Fine Gael want to cut the 2010 budget deficit by €4bn, €3.8bn of which would come from cuts to current spending. This would take slash-and-burn economics to a level that even the Fianna Fáil government considers to be beyond the pale.
Under this proposal, ordinary working people would carry the entire burden while corporate Ireland gets a near billion euro handout. This is not compassionate conservatism, or even so-called ‘common sense’ conservatism – this is cynical conservatism at its worst.
JJR is, obviously, anonymous.
Wednesday, 25 November 2009
New report shows over €8 out of every €10 of pensions tax relief goes to top earners
Gerry Hughes: In a series of reports on our pension system, TASC and the TCD Pension Policy Research Group have argued that the tax relief on pension contributions should be given at the standard rate of tax, in the same way as are the tax reliefs on health insurance and mortgage interest payments.
A report from the ESRI provides new evidence on key pension policy issues which shows that over 80 per cent of the tax relief accrues to taxpayers who are in the top 20 per cent of the income distribution. The report estimates that if the tax relief were given at the standard rate of tax it would provide revenue of over €1 billion per year which could be used to sustain State pension levels in the future as the population ages.
It could also be used to sustain the income of current pensioners. A report from Older & Bolder on older people’s experience of the recession notes that older people have been adversely affected by a range of expenditure cuts including the suspension of the Christmas bonus and reductions in frontline health and social care services. In addition the fear factor for older people has been increased by suggestions that social welfare should be cut in the forthcoming budget and the likelihood that tax revenue which could have been used to improve public pensions, long-term care and primary health care will be used instead to pay interest on the national debt.
A report from the ESRI provides new evidence on key pension policy issues which shows that over 80 per cent of the tax relief accrues to taxpayers who are in the top 20 per cent of the income distribution. The report estimates that if the tax relief were given at the standard rate of tax it would provide revenue of over €1 billion per year which could be used to sustain State pension levels in the future as the population ages.
It could also be used to sustain the income of current pensioners. A report from Older & Bolder on older people’s experience of the recession notes that older people have been adversely affected by a range of expenditure cuts including the suspension of the Christmas bonus and reductions in frontline health and social care services. In addition the fear factor for older people has been increased by suggestions that social welfare should be cut in the forthcoming budget and the likelihood that tax revenue which could have been used to improve public pensions, long-term care and primary health care will be used instead to pay interest on the national debt.
Tuesday, 24 November 2009
Getting behind the Madoff Curve?
James Wickham: One convenient justification for high pay is that the more people are paid, the harder they work and the greater their output will be. Ok but only up to a point...
The banking crisis is sometimes said to have been caused by bankers having the wrong incentive structure: they were rewarded for short term gains and encouraged to take excessive risks. Arguably something more fundamental was involved. After a certain point, the gain from higher pay may actually be negative. We could call this relationship the Madoff curve after a well-known American entrepreneur. Consider for example doctors: after a certain point paying doctors (and especially surgeons) more money probably attracts people into the profession who simply want to make more money rather than having any commitment to healing people.
Mrs Thatcher claimed that 'Greed is good'. By contrast, Max Weber, the German sociologist, wrote that it should be taught 'in the kindergarten of cultural history' that modern rational capitalism has nothing to do with greed. Maybe part of our problems is that in the last twenty years capitalism has increasingly become equated with greed, in other words, with immediate short term gains? Clearly we have become accustomed to thinking that the only possible reward is monetary reward, denigrating the rewards of public esteem. Hence the absurdity of government ministers and very senior civil servants demanding parity with the private sector. Traditionally in democracies such people have been rewarded with a modest salary and public respect for public service. Pay them more, and you get less (or people who behave like bankers, which probably is the same thing).
The banking crisis is sometimes said to have been caused by bankers having the wrong incentive structure: they were rewarded for short term gains and encouraged to take excessive risks. Arguably something more fundamental was involved. After a certain point, the gain from higher pay may actually be negative. We could call this relationship the Madoff curve after a well-known American entrepreneur. Consider for example doctors: after a certain point paying doctors (and especially surgeons) more money probably attracts people into the profession who simply want to make more money rather than having any commitment to healing people.
Mrs Thatcher claimed that 'Greed is good'. By contrast, Max Weber, the German sociologist, wrote that it should be taught 'in the kindergarten of cultural history' that modern rational capitalism has nothing to do with greed. Maybe part of our problems is that in the last twenty years capitalism has increasingly become equated with greed, in other words, with immediate short term gains? Clearly we have become accustomed to thinking that the only possible reward is monetary reward, denigrating the rewards of public esteem. Hence the absurdity of government ministers and very senior civil servants demanding parity with the private sector. Traditionally in democracies such people have been rewarded with a modest salary and public respect for public service. Pay them more, and you get less (or people who behave like bankers, which probably is the same thing).
The hall of mirrors
Michael Taft: A number of commentators have referred to the fact that Irish public expenditure is ‘rising faster’ than almost any other European country; that it now gobbles up over 50 percent of our GNP. In stating this, the assumption is that to rectify the deficit we should cut public expenditure. However, when we subject this to closer inspection we find ourselves in a hall of distorting mirrors, seeing reflections of a reality that is so distorted we are in danger of losing perspective.
Yes, public expenditure, as a proportion of GNP, is rising to over 50 percent though to what extent depends on how you calculate the numbers. The following excludes payments to the Pension Reserve Fund (including the payment for this year slightly exaggerates the level of spending as it includes the 2010 payment as well). How much of the GNP does total government spending make up?
2007: 37.8 percent
2009: 51.2 percent
That is a big jump – an increase of well over a third. But what are the numbers behind the numbers – what is the real image that is potentially being distorted by this spend/GNP ratio? There are two sides to this ratio.
Side One: between 2007 and 2009, total government spending increased by €8.8 billion, or 14 percent. What are accounted for this increase? 66 percent was due to the rise in the Social Affairs budget, while 21 percent was due to the extra cost of debt service. All the rest of the Government’s budget (including public sector pay) made up only 11 percent. In other words, the increase in public expenditure is mainly recession-driven.
Side Two: and what a recession. Between 2007 and 2009, GNP has contracted by a massive €25 billion, or -13.6 percent. Compare that to a Eurozone average contraction of -3.5 percent. With the economy falling that fast and that far, public expenditure, even if it remained static, would still be rising at a relentless pace.
So let’s break down all the contributing factors to this rising GNP/debt ratio.
Nearly half the rise in the public expenditure/GNP ratio is down to the contraction in the GNP itself. Social welfare and debt servicing – both recession driven – make up another 46 percent. Public expenditure increases in all other areas make up only 6 percent.
Now here’s the kicker – the deflationary impact of public expenditure cuts mean that the actual cut actually contributes little to reduced the spending/GNP ratio. While spending may be reduced somewhat, GNP is also reduced (e.g. cutting public employment by 5 percent will save €488 million but will come at a cost of a decline in the GNP of €1.1 billion).
What we have to do is step out of this distorting hall of mirrors. The proposition that you can cut your way out of recession means we will be trapped staring at mirrors only to see shapes so distorted that they bear no resemblance to the real world.
Yes, public expenditure, as a proportion of GNP, is rising to over 50 percent though to what extent depends on how you calculate the numbers. The following excludes payments to the Pension Reserve Fund (including the payment for this year slightly exaggerates the level of spending as it includes the 2010 payment as well). How much of the GNP does total government spending make up?
2007: 37.8 percent
2009: 51.2 percent
That is a big jump – an increase of well over a third. But what are the numbers behind the numbers – what is the real image that is potentially being distorted by this spend/GNP ratio? There are two sides to this ratio.
Side One: between 2007 and 2009, total government spending increased by €8.8 billion, or 14 percent. What are accounted for this increase? 66 percent was due to the rise in the Social Affairs budget, while 21 percent was due to the extra cost of debt service. All the rest of the Government’s budget (including public sector pay) made up only 11 percent. In other words, the increase in public expenditure is mainly recession-driven.
Side Two: and what a recession. Between 2007 and 2009, GNP has contracted by a massive €25 billion, or -13.6 percent. Compare that to a Eurozone average contraction of -3.5 percent. With the economy falling that fast and that far, public expenditure, even if it remained static, would still be rising at a relentless pace.
So let’s break down all the contributing factors to this rising GNP/debt ratio.
Now here’s the kicker – the deflationary impact of public expenditure cuts mean that the actual cut actually contributes little to reduced the spending/GNP ratio. While spending may be reduced somewhat, GNP is also reduced (e.g. cutting public employment by 5 percent will save €488 million but will come at a cost of a decline in the GNP of €1.1 billion).
What we have to do is step out of this distorting hall of mirrors. The proposition that you can cut your way out of recession means we will be trapped staring at mirrors only to see shapes so distorted that they bear no resemblance to the real world.
Privatisation costs
"Privatising healthcare is a costly business. Increasing privatisation in Ireland has coincided with an increase in health spending of, on average, 8.8 per cent per annum between 2000 and 2006 – the second-highest rate of increase in theiv thirty OECD countries, after Korea".
You can read the rest of Gerry Burke's editorial in the Irish Medical Times here.
You can read the rest of Gerry Burke's editorial in the Irish Medical Times here.
Monday, 23 November 2009
A Social Dis-Grace
Slí Eile: "Why, then, is there such an emphasis on cutting public expenditure and on the McCarthy Report (when services in health, education, prisons and so on are often so inadequate), and so little emphasis on the Report of the Commission on Taxation?’ asks Jesuit Gerry O’Hanlon at a recent Citizenship service in Dublin. He goes on to say:
'Given the behavior of our banks, given NAMA, why are we talking about reducing social welfare rates, in effect suggesting that ‘Ireland’s poorest people are being forced to pay for the recklessness and corrupt activity of a number of extremely wealthy people and institutions’ (Social Justice Ireland, Budget 2010)
The entire talk can be downloaded here.
It is a case of forgive us our debts but not as we forgive those who owe us – prison for non-repayment of loans and fines and bail outs for those at the top of the pile.
Quite correctly the Jesuit did not mince his words in drawing on liberation theology:
‘Truly all this is a social dis-grace’
He does also endorse public sector reform and draws attention to the ‘fact’ that ‘we’ have been paying ourselves ‘too much in both public and private sectors’ (well depends on who the ‘we’ is … but he is right if you look at the big earners in each sector). As Garret Fitzgerald keeps saying we are an under-taxed country as Government focuses exclusively on cutting spending (and to a large extent Fine Gael as it plumps for a ratio of 3:1 on spending cuts: tax hikes within the annual €4bn fiscal adjustment that the three major political parties are now committed to (part of the Dublin Consensus now melded into a Brussels-Paris-Washington Consensus for the Irish = cut your way out and do it by 2014).
Finally, Noel Coghlan, has some thoughtful things to say in a recent article in Studies(‘What now for Ireland?’). It deserves to be read in its entirety here.
He observes that ‘A low tax economy had relentlessly dismantled the social safety nets upon which so many now depend.’
But we have seen nothing yet. All the fuss over how much blood will be drained out of Welfare, Health and Education (the big Social Three) this year is only one year in a now-to-be five year purgatory to lead us back to fiscal balance and competitiveness. The poor don’t count. In an eloquent display of positivist economics, Jim O’Leary, in a piece directly aimed at the ICTU, reminded us last Friday ‘Notions of Fairness Should not Dictate Fiscal Policy’ Don’t worry. They don’t.
'Given the behavior of our banks, given NAMA, why are we talking about reducing social welfare rates, in effect suggesting that ‘Ireland’s poorest people are being forced to pay for the recklessness and corrupt activity of a number of extremely wealthy people and institutions’ (Social Justice Ireland, Budget 2010)
The entire talk can be downloaded here.
It is a case of forgive us our debts but not as we forgive those who owe us – prison for non-repayment of loans and fines and bail outs for those at the top of the pile.
Quite correctly the Jesuit did not mince his words in drawing on liberation theology:
‘Truly all this is a social dis-grace’
He does also endorse public sector reform and draws attention to the ‘fact’ that ‘we’ have been paying ourselves ‘too much in both public and private sectors’ (well depends on who the ‘we’ is … but he is right if you look at the big earners in each sector). As Garret Fitzgerald keeps saying we are an under-taxed country as Government focuses exclusively on cutting spending (and to a large extent Fine Gael as it plumps for a ratio of 3:1 on spending cuts: tax hikes within the annual €4bn fiscal adjustment that the three major political parties are now committed to (part of the Dublin Consensus now melded into a Brussels-Paris-Washington Consensus for the Irish = cut your way out and do it by 2014).
Finally, Noel Coghlan, has some thoughtful things to say in a recent article in Studies(‘What now for Ireland?’). It deserves to be read in its entirety here.
He observes that ‘A low tax economy had relentlessly dismantled the social safety nets upon which so many now depend.’
But we have seen nothing yet. All the fuss over how much blood will be drained out of Welfare, Health and Education (the big Social Three) this year is only one year in a now-to-be five year purgatory to lead us back to fiscal balance and competitiveness. The poor don’t count. In an eloquent display of positivist economics, Jim O’Leary, in a piece directly aimed at the ICTU, reminded us last Friday ‘Notions of Fairness Should not Dictate Fiscal Policy’ Don’t worry. They don’t.
Authoritarian Capitalism
Nat O'Connor: A Wall Street Journal article raises the question of whether authoritarian capitalism is a robust alternative to liberal democratic capitalism.
In the first ten years after the Berlin Wall fell, there was an initial rush of democratization, but since 1999 to 2009 there has not been an increase in the proportion of liberal democracies in the world (which remains at 46 percent). And countries such as China and Russia, as well as highly developed countries like Singapore, are examples of resilient authoritiarian regimes despite the fact that they adopted capitalist economic systems.
I think this is an important 'big picture' question. For example, it challenges the long-held assumption that global free trade with non-democratic regimes is OK. It was always assumed that internal prosperity and a growing middle class would lead to more freedoms and ultimately democracy in those countries. (Note, I wouldn't throw out this argument just yet, but it is open to challenge as the evidence develops).
One particularly interesting comment came from Prof. Francis Fukuyama. Talking about China's unexpected success at developing a capitalist economy while keeping one-party rule, Prof. Fukuyama said: "They've mastered economic development under authoritarian circumstances, and you can argue they've done it faster because they're authoritarian,"
If it is the case (and it's an 'if') that authoritarian regimes can be more effecient at capitalism than liberal democracies, than we perhaps need to make it very clear that we are not willing to sacrifice democratic freedoms for more efficiency. This may sound obvious, but it is not an argument that has been much discussed or fully articulated, because of the assumption that liberal democracies have the most efficient capitalist economies. That is, we've never had a situation where the indicators of capitalist success were in tension with the indicators of democratic strength.
Of course, the relative 'success' of capitalist economies around the world depends on how they are measured. And much of the success enjoyed by China and Russia may rely on GDP growth measures (which include for example polluting industries, resource depletion, arms manufacturing and poor labour conditions) rather than more nuanced socio-economic measurements. This in turn reinforces the arguments for finding and developing other ways of measuring economic performance and social progress, such as the recent work of Stiglitz, Sen and Foutoussi.
We may ultimately need alternatives to GDP, not just to direct our economies in a more progressive direction, but also to explain why we regulate capitalism to protect democracy.
In the first ten years after the Berlin Wall fell, there was an initial rush of democratization, but since 1999 to 2009 there has not been an increase in the proportion of liberal democracies in the world (which remains at 46 percent). And countries such as China and Russia, as well as highly developed countries like Singapore, are examples of resilient authoritiarian regimes despite the fact that they adopted capitalist economic systems.
I think this is an important 'big picture' question. For example, it challenges the long-held assumption that global free trade with non-democratic regimes is OK. It was always assumed that internal prosperity and a growing middle class would lead to more freedoms and ultimately democracy in those countries. (Note, I wouldn't throw out this argument just yet, but it is open to challenge as the evidence develops).
One particularly interesting comment came from Prof. Francis Fukuyama. Talking about China's unexpected success at developing a capitalist economy while keeping one-party rule, Prof. Fukuyama said: "They've mastered economic development under authoritarian circumstances, and you can argue they've done it faster because they're authoritarian,"
If it is the case (and it's an 'if') that authoritarian regimes can be more effecient at capitalism than liberal democracies, than we perhaps need to make it very clear that we are not willing to sacrifice democratic freedoms for more efficiency. This may sound obvious, but it is not an argument that has been much discussed or fully articulated, because of the assumption that liberal democracies have the most efficient capitalist economies. That is, we've never had a situation where the indicators of capitalist success were in tension with the indicators of democratic strength.
Of course, the relative 'success' of capitalist economies around the world depends on how they are measured. And much of the success enjoyed by China and Russia may rely on GDP growth measures (which include for example polluting industries, resource depletion, arms manufacturing and poor labour conditions) rather than more nuanced socio-economic measurements. This in turn reinforces the arguments for finding and developing other ways of measuring economic performance and social progress, such as the recent work of Stiglitz, Sen and Foutoussi.
We may ultimately need alternatives to GDP, not just to direct our economies in a more progressive direction, but also to explain why we regulate capitalism to protect democracy.
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