Thursday, 25 June 2009

"The only show in town?"

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

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

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

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

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

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

And we are talking about subsidies to employers?

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

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

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

He goes on to argue:

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

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

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