A presentation on the experience of the Great Depression in Finland by Jaakko Kiander at today's ESRI conference is worth reading. It is very like that of another country. It debunks traditional assumptions about why Finland went down in 1991. It holds important lessons for Ireland as it follows the deflationary route.
Thursday, 30 April 2009
The DB labour indicator gives the best ratings to countries with the lowest level of workers' protection and has been used by the IFIs to push dozens of developing countries to undertake labour market deregulation.
In the memo, Bank staff are informed that "the EWI does not represent World Bank policy and should not be used as a basis for policy advice or in any country program documents that outline or evaluate the development strategy or assistance program for a recipient country".
The World Bank will furthermore remove the EWI from its Country Policy and Institutional Assessments (CPIA), which the Bank uses to establish countries' overall level of eligibility for loans and grants allocated by the Bank's concessionary lending arm, the IDA.
The IMF took a similar step several months ago, in August 2008, when IMF management told regional directors and mission chiefs that "in light of various methodological problems with the index, ... mission teams should refrain from using the EWI in any public documents ...". The IMF kept this directive confidential until the WB announcement, but the EWI has not appeared in most Fund country policy documents, such as Article IV consultation reports, since late 2008.
The World Bank also announced that it intends to convene a working group that would include the ILO, trade unions, employers and others to advise the Bank on revisions to the EWI, the development of a new "worker protection indicator" and an examination of DB's "Paying Taxes Indicator" (PTI), which deals with contributions to social protection programmes and other tax issues.
The IFIs' decision to suspend the use of the DB labour indicators follows several years of criticism of the indicator by the ITUC, Global Unions Federations and many trade unions at national level – including ICTU. Unions were particularly critical of that fact that the IFIs used the indicators to pressure individual developing-country governments to dismantle or weaken workers' protection legislation, such as rules on minimum wages, maximum hours, advance notice and recourse in case of dismissal, and limitations on short-term contracts. The unions also engaged with the ILO, a small group of Washington-based critics of the DB labour indicator (including Barney Frank, a Massachusetts congressman who is chairman of the financial services committee of the US House of Representatives) and some governments. During hearings on the topic in October 2007 Frank said: "It is simply wrong for the major international institution in the world, the World Bank, to be putting out a report in which the worse you treat your workers, everything else being equal, the better you are rated." Last June, the World Bank's own Independent Evaluation Group issued a report in which it questioned the methodology of the EWI and the PTI and noted that it had found no evidence for DB's long-standing claim that countries with higher EWI ratings (and less labour regulation) showed improved performance in employment creation.
“In the context of the current global economic crisis, where 50 million more workers could become unemployed this year and pressures to decrease wages and workers’ living standards are intensifying every day,” said ITUC General Secretary Guy Ryder, “it is significant that an important development institution like the World Bank is turning the page on a one-sided deregulatory view on labour issues and proposing to adopt a more balanced approach where adequate regulation, improved social protection and respect for workers’ rights will be given a higher profile.”
Ryder offered the Bank the ITUC’s full cooperation in developing an alternative approach that promotes the creation of decent work. The Bank’s decision to pay greater attention to issues such as these is consistent with the commitment of G20 leaders at their London summit to ‘build a fair and friendly labour market for both women and men’,” said Ryder. “We invite the Bank to work closely with the ILO on this theme,” he added, noting that the G20 statement called upon the ILO to assess appropriate employment and labour market policies.
This is an important step in terms of the World Bank correcting and clarifying the message it sends to developing country governments about successful and sustainable economic strategies via the Doing Business report. The real test of this very welcome development however will be the impact that it has on country-level discussions with the Bank. It is hopefully another nail in the coffin of casino capitalism and if effectively implemented has the potential to create space for the promotion of strong social safety nets, vibrant and democratic labour movements, and respect for people’s fundamental rights at work.
David Joyce is Development Policy Officer with the Irish Congress of Trade Unions
"Climate change has so far taken a back seat and that is deeply worrying. The G20 largely ignored the issue, progress in the UN talks that culminate in Copenhagen in December is (appropriately, perhaps) glacial. Some argue that we should sort out the economic crisis first, and then turn our attention to the longer term issues such as climate change, but that is to ignore the role of crises in driving change".
Yesterday, over in the States, Paul Krugman took on those who claim that 'attempting to limit greenhouse gas emissions would be incredibly costly'. Krugman pointed out that
"Opponents of a policy change generally believe that market economies are wonderful things, able to adapt to just about anything — anything, that is, except a government policy that puts a price on greenhouse gas emissions. Limits on the world supply of oil, land, water — no problem. Limits on the amount of CO2 we can emit — total disaster."
You can read Krugman's full post here.
Wednesday, 29 April 2009
Here, the new report asserts that Ireland’s wealth is down by a large €150bn in the past year. The fact is that it was never as high as the earlier figure. The market said it was, but the market got it wrong! Most economists don’t believe that the market can get anything wrong (though they do talk of market corrections… which also implies that maybe they do think that the market is not always right).
The boom was an illusion and we are still falling to ground – to realistic wealth levels. But in the meantime, I look forward to a government report into wealth distribution in Ireland. The Norwegian Minster for Finance, the leader of the Left party, has commissioned such a report. Ireland has a Tax Commission which will report in mid-summer, but under its terms of reference it is instructed not to examine wealth distribution.
I suppose this NIB report is the nearest we will get to such a report until we elect a progressive government. I’m sure many will perturbed to hear that the sale of helicopters has fallen from 66 in 2006 to only 2 (6, but 4 were flogged abroad) and luxury car sales are only one tenth of last year's figure.
Tuesday, 28 April 2009
That is what economists call a ‘shock’, and a big one. But the question that strikes me is ‘is it big enough?’ Crises are often needed to effect profound change – women won the vote in the UK after World War One had transformed their role in society; in the US the Great Depression led to the New Deal. Rahm Emmanuel, Obama’s chief of staff, famously remarked ‘You never want a serious crisis to go to waste’ and this crisis and there are signs that this crisis too is triggering some profound changes.
First, the geopolitical shift – the crisis has crystallized the rise of China. After keeping its head down during three decades of ‘peaceful rise’, Chinese diplomacy has suddenly become far more assertive, openly blaming the West for the crisis and calling for major reforms of the international financial system. The era of the G2 begins here. More broadly, the G8 is now looking increasingly obsolete – real power has shifted to the G20, with far greater recognition of the role of emerging economies such as Brazil and India, as well as China.
Second, the end of the Great Deregulation. Since finance was let off the leash in the mid 1970s, it has boomed and come to dwarf the real economy. By 2007 the daily flow of capital across borders was 100 times greater than world trade. Backed by the power to make and break economies, the whims and prejudices of financial markets acquired absurd political importance. That has now given way to an era of reregulation and shrinking. Good thing too.
But other impacts are worrying or absent. At the G20 in London this month, the world gave a huge cheque to the International Monetary Fund, in return for promises of reform. But it is far from certain that the IMF can transform itself from being a pro-cyclical devotee of the ‘Friedmanite tourniquet’ (in Polly Toynbee’s phrase) to being an advocate of the kind of Keynesian reflation that is needed in poor countries right now.
Climate change has so far taken a back seat and that is deeply worrying. The G20 largely ignored the issue, progress in the UN talks that culminate in Copenhagen in December is (appropriately, perhaps) glacial. Some argue that we should sort out the economic crisis first, and then turn our attention to the longer term issues such as climate change, but that is to ignore the role of crises in driving change.
The creation of the UN, World Bank, IMF etc – the global order of the second half of the 20th Century, was the product of both the Great Depression and World War Two. My fear is that we will need the climate equivalent of a World War before leaders act on the shift to a low carbon world. The scale, human impact and irreversibility of such a climate shock make that a very bad last resort.
Duncan Green is Head of Research at Oxfam GB. He was in Dublin last night to launch his book ‘From Poverty to Power: How Active Citizens and Effective States can Change the World’, which is published in Ireland this week. Duncan Green’s blog can be found on http://www.oxfamblogs.org/fp2p.
'From Poverty to Power' is available from all good book stores or visit or visit the From Poverty to Power site.
Monday, 27 April 2009
A significant window into the world of trade, taxation and resource transfer has been opened by research work undertaken on ‘trade misspricing’ and reported in an article by David McNair in the Irish Times recently. The nub of the argument and the main finding of research is that countries – like Ireland – have been party to a huge and difficult-to-quantify resource transfer by means of a combination of multinational price-transferring and low corporate tax. The art of ‘trade mispricing’ or simply tax-dodging is likely to be massive. Research work by Professor Simon Pak and cited in the article by David McNair suggests that
…. between 2005 and 2007, this abuse resulted in a total amount of capital flow from non-EU countries into the EU and US of €850.1 billion. If tax had been levied on this capital at current rates, non-EU countries would have raised €279 billion in revenue.
To put this in perspective:
Together, the total tax loss by emerging and developing countries is more than the annual global development aid budget and much greater than the $40 billion to $60 billion the World Bank has estimated would be required annually to meet the millennium development goals aimed at halving extreme poverty by 2015
So what for Ireland? The report found that
While most of the estimated €5.8 billion mis-priced capital that flowed into Ireland between 2005 and 2007 came from high-income countries, €268 million of that total came from the world’s 49 poorest countries. That figure was more than a quarter of Irish Aid’s total aid budget for 2008 (€899 million).
In summary, what we have been giving with one hand we have been taking back with the other. Now that ODA is being cut back drastically could it be that Ireland becomes a net beneficiary where less economically developed countries are concerned? Certainly, Ireland has benefited from the skills and contribution of immigrants in the boom years and there are other means by which countries such as Ireland benefits directly or indirectly from favourable and unfair trade deals.
Sunday, 26 April 2009
Friday, 24 April 2009
S/he will be responsible for delivering TASC's programme of research and policy analysis, and will play a central role in developing and communicating the policy proposals to realise the TASC vision. S/he will have a postgraduate qualification in a social science discipline, excellent research and analytic skills, and highly developed written and oral skills. In addition, the successful candidate will have had extensive engagement with Irish economic and social issues and will relish the challenge of developing progressive approaches to these issues.
The Head of Policy will report to the Director. There is an attractive remuneration package commensurate with experience. Secondment arrangements will be considered. TASC is an equal opportunities employer.
Click here to download a job specification, and here to download an overview of the TASC work programme.
Application with CV to be forwarded by email or post to the Director at the address below by May 15th 2009
26 South Frederick Street, Dublin 2 . T: + 353 1 6169050 F: + 353 1 6753118
Wednesday, 22 April 2009
Sli Eile: John Maynard Keynes, speaking in UCD in 1933, praised the self-sufficiency policies of various countries including, at the time, ‘Italy, Ireland, Germany’ (what a trilogy!). This was not flattering company, especially as Keynes observed that these countries ‘have cast their eyes or are casting them towards new modes of political economy’. The rest is history. A key development since 1933 has been the collapse in many world models including:
Self-sufficiency, which for Ireland ended in the tragic failure of national economic policy in the 1950s;
Communism, which could not give the people the peace, bread and land it promised and came down with the Berlin Wall without a shot being fired (almost); and
Neo-Liberalism, which dominated thinking and policy practice in that other trilogy of the USA, UK and Ireland for the past decades.
And now the demise of neo-liberalism is signalled by a monumental failure to give the people the peace, bread, land (and housing in the case of Ireland) it promised. It was an illusion based on lies about real values, prices and debts. It came crashing down in 2008 as quickly as the Berlin Wall fell in November 1989 and, like Humpty Dumpty, all the kings’ horses and all the kings’ economists couldn’t put Humpty together again - not even with another dose of recapitalisation.
So, what is next? Hard to say. One thing is sure: the world will never be the same again, and you know this when 20 eminent economists of various ideological hues write an article in the Irish Times desperately calling on the Irish Government to nationalise the banks (or what the left used to call 'parts of the commanding heights of the economy'). A few salient points are in order:
If the old models of self-sufficiency, communism and neo-liberalism failed abysmally, the new models – if there are any around to emerge in the coming years – may not work so well either;
Change is possible and hope is vital, precisely because power is everywhere and that power is vested in democracies where citizens are sovereign and Governments can take ownership of assets where the need is apparent and the common good demands it;
The notion that Ireland is finished and can only wait for an international recovery (see Paul Krugman:
Ireland appears to be really, truly without options, other than to hope for an export-led recovery if and when the rest of the world bounces back)
is fundamentally flawed because a member of the European Union can choose to spend, tax, not regulate and guarantee in particular ways. There are options, and many of these are reflected - among other sources - in the ten-point plan issued by the Irish Congress of Trade Unions.
Would a Keynesian-type domestic stimulus work in Ireland? It all depends. Specifically, it depends on four great unknowns:
The impact of the US-led Keynesian stimulus;
The length, depth and geographical distribution of the Great Recession
The way public expenditure is distributed in Ireland and its differential impacts on investment and domestic consumption; and
Events – political, social and cultural – that are impossible to tell or predict in this world of uncertainty.
The irony of Keynes' remarks in 1933 is that the Great Depression of 1929 was, ultimately, resolved by a mixture of policy responses - some of which turned out to be extremely bad (like public work programmes in fascist dictatorships) - and then a World War which solved the unemployment problem for a time. Keynes could not have fully foreseen this. But, when it happened, he worked behind the scenes to help put in place the post-War architecture of global financial institutions which reigned for almost 30 years until 1973. The legacy of social democratic Governments in that period – and more recently ‘New Labour/Third Way’ - is mixed, especially the latter. Looking to the future, Obamesque tinkering with the existing social and economic order is unlikely to deliver unless it is surpassed by fundamental change driven by the grass-roots and led from the top by a new political generation.
A fair bet is that a domestic stimulus in Ireland, alone, will not work especially if it is not accompanied by fundamental change in Irish social and economic policy – whatever happens or does not happen internationally. Part of that change must concern shifts in political power (and not just personalities, office holders and parties in power), in the way in which markets are regulated and in the balance of public, private and voluntary engagement in the provision of goods and services.
Peter Bacon was not right to say that it does not matter which nameplate appears over a bank’s door (to argue against nationalisation, in his case). But he would have been right to apply the nameplate analogy to political power, if a change of Government represents a change of persons and parties without a fundamental change in the direction of economic and social policy away from neo-liberalism to a new social order.
At the end of this sorrowful tale it will not be the Government, the banks, the EU or capital markets that will save us. We can only save ourselves by reinventing democracy and effecting social change through democracy.
0.7% GNP by 2012 from 07by12 on Vimeo.
Tuesday, 21 April 2009
Sli Eile: Over recent weeks I assessed the various economic proposals of some political parties – see previous posts on this site for Fine Gael, Labour and Sinn Féin. The choice of parties is to do with their current status as parties enjoying the liberty of opposition. As for the
three two Government parties – we know where they stand on strategy from day to day. Just read the newspapers.
So, where do the three opposition parties stand on the economy? What they currently say and what they might do in a future Government are not the same – clearly. But, for now lets assume that what they say is what they will attempt to apply in policy if they find themselves in Government. The ‘report card’ suggested in my post of 1 April was based on four core principles:
Fairness and equity (do the proposals effectively address inequality and advance a redistribution of income and opportunities towards the less well-off)?
Public, social and community infrastructure (do the proposals provide an adequate basis for delivering vital social services)?
Sustainable economic growth and competitiveness (do the proposals represent a sensible strategy to position Ireland for the inevitable upswing - eventually)?
Public finances (do the proposals address the need to re-structure taxation and improve the effectiveness of public spending in meeting key economic and social goals)?
1 Fairness and Equity
Of the three parties, Fine Gael seem to be by far the slowest to raise taxes on the very wealthy (remember controversies about capital taxes in the 1970s and 1980s). Labour is coy about how much tax it would raise and from whom. The bulk of fiscal adjustments would come from tax increases – capital, tax relief reductions, carbon taxes, excise taxes, higher top tax rate and targetting of tax exiles. Sinn Féin takes a similar approach. However, none of these parties have called for a reduction in social welfare payments.
2 Public, social and community infrastructure
All three parties emerge as strong supporters of investment in public infrastructure. Fine Gael seems to have put in the most work in costing it and has made some interesting proposals in regard to green technology and the use of a new State Holding Company for infrastructural investment. All three parties are sitting on the question of bank nationalisation. However, events may overtake them before they have a clear policy line. Interestingly, FG, LP and SF each in their own way favour the establishment of some type of public credit institution to compete in the market place.
3 Sustainable economic growth and competitiveness
All parties focus on supply-side adjustments including investment in education including school buildings. Fine Gael want reductions in public sector numbers and wage restraint. All parties agree on the need for a generous economic stimulus. So, on paper at least, the opposition is Keynesian.
4 Public finances
A key issue, here, is a long-term commitment to tax reform, and along with it reform of local democracy and reform of public service. Labour and Fine Gael say that they are clearly committed to public sector reform.
Leaving aside issues to do with Europe and the national question (which of course can’t be done in the real world) – where is Labour on the ideological plane vis-à-vis FG and SF? Much closer to SF, it would seem, than FG. However, for now, LP is ruling out a left alliance before an election and is not contemplating getting into bed with FF after any general election (which theoretically is not to say they wouldn’t if it were the only bed available). Where does that leave Labour? Back to the 1980s?
Monday, 20 April 2009
Paul Sweeney comments in response that
"While I agree with much of Krugman’s analysis, he appears to contradict his own statement that “As far as responding to the recession goes, Ireland appears to be really, truly without options,” when he is also critical of the way the bank bailout is being handled by the Government. He seems to favour the bank nationalisation route, which the government is studiously avoiding at all costs. If nationalisation is the alternative route to NAMA, then Ireland does have options. The nationalisation path, which I and others have favoured for some months now and still think may come to pass, by necessity, is preferable (than the NAMA route) as it gives far greater control to the government, the paymaster. It is a clearer path and also allows property valuations to be determined later as the market begins to operate and is not dependent on the guesses of estate agents. The idea that government civil servants would run the banks as articulated by some opponents of full state control, is of course, a distraction. Boards would be set up - as independent as possible and far preferable to the current bunches of cosy capitalists which gambled, not just with the banks’ assets, but with those all citizens of this Irish Republic. It is interesting that Krugman is keeping an eye on us, if for all the wrong reasons."
Any other views?
The bid of a mere €95m for Eircom is in stark contrast to the market value of €8.4bn when it was privatised almost ten years ago. The taxpayer got €6.2bn on an investment of only €562m (plus a pension contribution of €1bn)
The low offer price is because Eircom is now laden with debts. This is in stark contrast to the debt free, rapidly growing and heavily investing state enterprise which Mary O’Rourke stupidly privatised. Of course, O’Rourke was not alone in 1999. The whole country was gripped by the privatisation hysteria. Nearly everyone with money wanted to make a profit from the sale of the company they already owned. Nearly all got badly burnt and so learned a hard lesson about stock markets.
But the real lesson was strategic. Sadly, it has not yet been absorbed by official Ireland, constrained as it is by ideology. Eircom, as a state company, was investing massively. Broadband was vital for the knowledge economy. The second set of new owners, private equity firms, led by Tony O Reilly and George Soros, sweated the company and used its cash to pay off the cost of buying it. (The new bidders are proposing similar moves, hence the opposition by the unions). The rapidly growing mobile arm was flogged off to Vodafone.
On an investment of €676m, the private equity firm (and the ESOT) made a gain of €954 in a few years (for the details see Chapter 3 of my book Selling Out? Privatisation in Ireland). These gains included huge dividends on losses. Investment was cut to one-third of its peak when it was a state enterprise.
When Forfas, the intellectual arm of the Department of Enterprise and Employment, made a study of the deficiencies of Irish broadband, the strategic error of the privatisation was not mentioned, even in a footnote! This indicates that official Ireland does not learn lessons which are not ideologically acceptable. With mass nationalisations, will Forfas and this government now learn to put aside its out-dated ideas?
The ideology of privatisation and marketisation has collapsed as a panacea for economic efficiency. The state was portrayed as inefficient, plodding and bureaucratic. Commercial State companies, which have contributed much to Ireland’s economy and society since 1927, are not perfect. But they still have a major role to play in the economy, especially given that it is small and open. Ireland, unlike some countries, has some very fine and well-run state enterprises. With some minor changes, the lagging state companies can be made much more efficient.
With the collapse in the Anglo-Saxon model of Capitalism, will a new government learn that commercial state enterprises still have a major role to play in our future economic well being?
Fine Gael, in addition to nationalising Eircom, recently proposed setting up a State Holding Company, (remarkably similar to Congress’ proposal of some years ago). This shows that some Irish politicians are finally shaking off the defunct Anglo-Saxon economic ideology and are being innovative.
One thing is sure. We have seen clearly that banking, as the artery of capitalism, is too important to ever again to be left in the hands of the private sector. When this crisis is sorted out, it is vital, in my opinion, that one substantial Irish bank must remain in state ownership, run at arms length from the government.
In the meantime, we should re-nationalise Eircom. It’s a steal at €100m. We are spending more on subsidies to private firms on haphazard broadband provision.
Saturday, 18 April 2009
An Saoi: Let us assume that the Irish economy will decline by more than 10% in 2009 and that the consumer price index will also fall by around 7%. Without any increase in nominal debt, the value of the debt as a percentage of economic activity will increase by close on 20%.
The CSO has provided us with a reasonable picture of the position in 2008, which is set out in constant (2006) prices and at market prices. Click here to see my estimate of GDP & GNP figures using the above estimates of decline in the economy and the drop in prices.
The level of debt however has moved in a totally different direction, leaving all extremely more likely to default on their debt.
Private debt at 31st December 2008 stood at €424,865M or €344,277 M net of financial intermediation. Assuming that the level of debt remains the same, the debt to GDP ratio would move from 185% to 229% and perhaps more crucially from 220% to 263% when you use GNP. Click here to view a table showing private sector credit / GDP (GNP for Ireland) ratios, taken from Deleveraging the Irish Economy, Goodbody Stockbrokers, Oct. 2008.
Personal debt stood at €172,331M at 31st December 2008, or approx. 50% of total private (non financial intermediation) debt. While this may not increase in nominal terms, the decline in the size of the economy and in its value will dramatically increase it as a percentage of net disposable income.
While the decline in prices may seem extreme, there are substantial drops yet to be seen in the CPI. These include,
- Utility costs, e.g. ESB & gas.
- Imported goods from sterling area have more capacity to fall
- Rent reductions as more and more surplus accommodation chases fewer tenants
- Most recent interest rate cuts
- Falls in commercial rents being passed on.
- Greater competition in the retail sector
- Services sector falls in areas such as hotels, restaurants etc.
There is a great irony in this decline in prices. Ireland needs to get its costs down in comparison to its European competitors, yet the drop in prices is going to create massive other problems. The decline in the year to March has been 2.6%.
Effectively 50% of the commercial private sector debt will be transferred to State by way of NAMA. However the decline in personal income, whether it is caused by unemployment or declining incomes, is going to create a crisis separate from that caused by the developer loans. The balance outstanding on personal credit cards has increased from 2.96 times monthly expenditure in Feb 2008 to 3.8 times monthly expenditure in Feb 2009.
From this we should expect that the Government’s projections of increasing personal consumption from 2010 on will be seriously undermined by the extra debt burden and people’s attempt to deleverage. If this is the case, then their overall GDP/GNP growth projections contained in the recent budget will have to be revised downwards, with all the consequences that will mean for unemployment, investment and the fiscal deficit.
Thursday, 16 April 2009
Wednesday, 15 April 2009
The budget affects pension provision in a number of ways, and indicated that further change is on the way. Some of those in receipt of pension provision were adversely affected. For example former ministers who are paid pensions while remaining a member of the Oireachtas will no longer receive a pension. However, this still means that former ministers who are no longer members of the Oireachtas receive a pension even though they are not at the normal pensionable age. Nevertheless, this is a welcome step to reduce the exceptional cost (by international standards) of our elected representatives.
Proposals to reduce the public sector ‘pension levy’ on low income groups are also welcome. This will reduce the anomaly whereby low income groups contribute to the levy, but are not entitled to a full occupational pension because their occupational pension is integrated with the social welfare pension
The main beneficiaries are those in the public sector aged 50 and over.
In announcing a voluntary early retirement scheme (those aged over 50 may retire without actuarial reduction in their pensions), the minister stated that payment of a lump sum “at normal retirement age of 60 or 65 would be subject to current tax law provisions" or, as stated in Annex D to the Budget, “subject to the taxation provisions in force on the date the application was approved” (Annex D: Incentivised Scheme of Early retirement in the Public Service). The period of exercising this option is from May 1st until “a review before the end of the year”. A key phrase is 'current tax law'. This guarantee does not extend to those retiring beyond this early retirement window. This leaves open the possibility that lump sums will be taxed at a future date - in particular as the Minister noted that he was “looking forward to the recommendations of the Commission on Taxation” which he will receive later this year.
The minister also stated that the Government were committed to “a review of all areas of tax exempt income”. This is likely to mean that tax reliefs associated with pension provision will be examined further, subsequent to the report of the Commission on Taxation and the white paper on pensions reported to be due for publication later this year.
Those in the public sector aged 50 and above now need to carefully consider their retirement decision, perhaps several years earlier than intended. It should, however, be noted that the Minister was careful to state that the decision to retire was not solely at the discretion of the individual but “will be subject to local management arrangements to ensure that the scheme operates in an orderly manner” (Budget April 2009).
There is no doubt that this scheme is advantageous to an individual on an actuarial estimate of the value of future pensions, lump sum etc. The longer the service and the closer an individual is to 50 the greater the actuarial value. There are no costings, and it is likely that the scheme will save money now, but increase costs later on so that overall costs to the State will increase. The main effect is to redistribute costs from payroll to pensions, and to defer certain payments through time. It is likely that those about to retire or considering retirement will avail of this scheme.
However, those not near retirement age should consider their options carefully, because of uncertainty about the direction of future incomes (post tax and post various levies), the absence of alternative employment, the possible ending of favourable tax treatment for those aged 65 and over, and the future level of pension payments, as pension increases may be linked to price changes rather than current salaries.
In the current crisis, being in the labour force gives greater security to the level of current (and perhaps future) income than being retired, because income at work (even after recent increases in levies) will be higher than in retirement. In addition, pension payments are unlikely to match income rises in future periods, increasing the divergence between incomes of those who retire now and those who remain in the work force. Finally, higher current incomes may facilitate savings, to ensure continuity in living standards prior and post retirement.
One other group who benefited from announcements made with the Budget are those working in Universities (see Summary of Supplementary Budget Measures – Policy Changes, Pension Fund Transfer). Even though only partly funded, university pension schemes had an estimated deficit of €1.3 billion and the State will now meet this liability. No extra levies or changes to pension terms were announced. Universities pension schemes were never fully funded. Pensions paid at retirement were funded, but increases to pension payments after retirement came from the exchequer. This deficit arose because of the collapse in asset values and the growth in wage costs (particularly at senior levels without matching increased contributions to pension schemes). In previous years, the pension scheme was also used to fund generous early retirement schemes. The new arrangements essentially involve converting university pension schemes to a fully PAYG system. The University of Limerick and Dublin City University always operated a PAYG pension scheme and are unaffected by these changes.
Finally, the radical proposal to provide a free pre-school year for all children starting next year, although in replacement of the early child care supplement, is welcome. This is a progressive measure and supports the advocates of ‘early intervention’ as a means of ending poor achievement and a higher incidence of social problems amongst lower income groups.
Tuesday, 14 April 2009
One feature of the Celtic Tiger years was the way in which Ireland’s role as a low tax economy became part of the national identity. This led to the absurd situation in which the Labour Party could claim that it supported the ‘right’ of Ireland to have a lower corporation tax rate than other EU member states. In other words, the Irish Labour Party defined itself in Europe as the Social Dumping Party.
There are several important consequences of this low tax mantra.
Most obviously, it contributed to the situation in which the major inheritance of the boom will be just a pile of rusting SUVs – of private goods that will deteriorate, not of public goods that will last. Historically Ireland missed out of the post World War II boom years (the ‘trente glorieuses’). These were marked by substantial social investment and the creation of the physical infrastructure of the European welfare states. By contrast, our boom involved relatively little public investment. Let’s be honest. Compared to ostensibly poorer European countries, our public infrastructure is pathetic. This is most obvious in public transport, but the same is broadly true in health, education, etc.
Because we have accepted that taxation is inherently bad, we have allowed a continual denigration of the notion of public service. On the one hand, we have denied that many people work as nurses, as teachers, as civil servants etc. partly because they actually want to do something more useful than just earning more money for private consumption. On the other hand, we have accepted that the public sector is inherently inefficient. Consequently, despite all the rhetoric of partnership, the public sector unions have never become the champions of an effective public service. All too often, opposition to changes that would produce a better service has come from the unions themselves. Take the current conflict in Dublin Bus. Despite the efforts of some rank-and-file busworkers, the conflict over the cutbacks has been posed entirely as about employment. The unions have not taken any stance about the deterioration of this crucial public service that the cuts will involve.
The rhetoric of low taxation is linked ideologically to that curiously ambiguous person, ‘the taxpayer’. In a market society virtually everyone does, of course, pay tax. However, a discussion of public policy based on ‘the taxpayer’ is rather different to one based on ‘the citizen’. For example, whereas all citizens are equal, taxpayers differ in terms of how much tax they pay. So presumably those who contribute more should have more say in how ‘their’ money is spent. And the belief that taxpayers give ‘their’ money to the state ignores that ‘their’ money could only have been acquired thanks to the state and the wider society. Even the super-rich use public goods and depend on some residual social solidarity for their very existence.
Finally, the low taxation mantra was a crucial part of the PD project to move Ireland closer to Boston than Berlin. One subterranean theme in the Lisbon referendum was that ‘we’ didn’t need those snotty Europeans any more. Whereas, after 1973, membership of ‘Europe’ made Ireland less and less an island behind an island, the boom years then made Ireland more and more firmly part of the Anglo-Saxon world. Maybe it’s time to move again?
Professor James Wickham teaches in the Department of Sociology, TCD
Monday, 13 April 2009
Slí eile: Being a small island country on the edge of Europe, there was a time when we were taught at school that ‘Ireland has no natural resources like coal – we just have peat in the bogs and grass for cattle’. That was proven wrong by the long-term impact of a significant investment in education that bore fruit in the 1990s (along with other factors).
While nobody should claim that education and training are the magic silver bullet to deliver peace, prosperity and progress, the most recent Labour Party proposals for economic recovery (published 6 April, and following an earlier document on the Emergency Budget), Just the Job, hit the nail on the head in identifying investment in ‘a skilled population’ as the cornerstone of a plan to move to a new phase of economic development in this island’s history. The price placed by markets on bricks, mortar and financial pieces of paper with promises to pay someone, sometime, somewhere may have collapsed, but, as incoming President Obama said in his inaugural speech in January:
Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week, or last month, or last year. Our capacity remains undiminished.
Following, by now, the familiar pattern of numerical listings – ‘ten-point’ plan (ICTU), ‘ten lessons’ (Henriksson), ‘5 action areas (Government Smart Economy Action Areas) – Labour proposes ‘ten ideas’. Eight of these refer to education and training.
Redraw the NDP to prioritise labour-intensive projects (with specific mention of school buildings);
Incentivise job creation (including measures to eliminate employer PRSI temporarily when they employ someone out of work for more than 6 months);
Reduce the cost of doing business (especially in particular ‘sheltered’ sectors via competition policy, regulation and direct price controls where necessary);
‘Earn and Learn’ combining work and training and protection of most of worker’s income during periods of shorter working time combined with part-time training;
Bridge the GAP from unemployment to work via a ‘Graduate and Apprentice Placement Scheme’;
Reduce the qualifying time for Back to Education allowance (from 12 to 3 months);
Lift the cap on places in Post-Leaving Certificate programmes (currently at 30,000), expand VTOS and BTEI places for the unemployed as well as make better use of existing capacity in IOTs;
Create skills exchanges;
Make literacy a national priority; and
Tax back for full-time study (with a maximum claim of two years and an initial limit of 2,000 applicants)
The thrust of these proposals is correct – making better use of existing schemes rather than launching new ones, prioritising skills especially among those most vulnerable to job loss, removing some existing anomalies and disincentives to learning while working or while unemployed. ‘Flexicurity’ is already a well established practice in Scandinavian countries and the Netherlands, combining social protection arrangements with job protection. In an Irish context, a more proactive approach by public agencies in seeking out and training persons at risk of unemployment is needed.
On the downside, some of the proposals need more careful consideration and debate – in particular the following:
Is reducing employer PRSI a cost-effective way of incentivising employment, especially considering the internationally low level of employer PRSI contributions here?
While proposed schemes such as GAP and improvements to VTOS, BTEI and the like would be most welcome – should more emphasis be given to people who are effectively excluded from the labour force for one reason or another?
What role is there for ‘demand management’* policies to complement the supply-side proposals in this document?
Is the idea of giving ‘tax back for full-time study’ sensible, given that the country is awash with all sorts of tax reliefs for all sorts of deadweight activities?
* by demand-management it may be possible to generate new employment, new skills and meet new social needs in areas such as social housing, pre-school centres and primary health care teams by taking charge of ‘written-down’ assets in our soon-to-be-nationalised banks, not to mention the toxic one we have already nationalised.
In summary, we have a choice –
We can try and cut our way out of this economic impasse and, in the process, accept a rising level of unemployment with all the waste and human tragedy that this involves (that is the way the UK and Chile did it over quarter of a century ago); or
We can try and invest our way of this economic impasse and, in the process, re-position Ireland in a very different global market where more than ever educated, skilled and wise peoples will have the opportunity not only to compete with other peoples but cooperate with them to raise living standards and the true quality of life (that is the way Sweden and Finland did it in the 1990s).
Sunday, 12 April 2009
"Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.
In Russia, for instance, the private sector is now in serious trouble because, over the past five years or so, it borrowed at least $490 billion from global banks and investors on the assumption that the country’s energy sector could support a permanent increase in consumption throughout the economy. As Russia’s oligarchs spent this capital, acquiring other companies and embarking on ambitious investment plans that generated jobs, their importance to the political elite increased. Growing political support meant better access to lucrative contracts, tax breaks, and subsidies. And foreign investors could not have been more pleased; all other things being equal, they prefer to lend money to people who have the implicit backing of their national governments, even if that backing gives off the faint whiff of corruption.
But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.
The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.
Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large. "
Friday, 10 April 2009
Despite the fact that he must now be very rich if he’s getting money like that, Summers considers himself to be on the left in the spectrum of American politics. He calls for greater diversity in academia, for example, to help liberalism. "As someone who is a strong Democrat and is a liberal, and does not think that we have won the argument with the country over the last 40 years, rather to the contrary, it makes me wonder whether if you do not engage in intense dialogue with those whom you disagree with in substantial number whether your own arguments will be sharpened and honed to maximum effect," Summers said.
Actually this is an argument that seems to be based on the view that there is some kind of market for ideas, where competition will improve performance. The argument is that there is too great a prevalence of left-leaning people in academia and more from the right would increase competition and force those on the left to improve. This is specious; economics is far from dominated by the left and, in any case, there is little evidence that there is enough in common between left and right in economics for competition between them to have any effect at all.
Summers has been, to say the least, controversial in recent years. He was forced to resign from his presidency of Harvard for a number of reasons, including a speech he made suggesting that genetic differences between men and women explained why there were fewer female than male scientists, and his apparent support for Andrei Shleifer, a “star” economist who invested in Russian shares while advising the Russian government on privatisation. Shleifer, though stripped of the honour of a named chair, remains at Harvard as a full professor of economics (and he and Summers remain friends). Shleifer is one of the most cited economists in the world but his practical work – for example in advising on the establishment of a stock market in Russia – has been less than praiseworthy. His own money has been invested wisely though; one estimate of his wealth puts it at a billion dollars.
Following a case taken by the US government in response to Shleifer’s Russian activities, Harvard – still with Summers as president – made a settlement in 2005 of over $25 million. Shleifer and others (including his wife) involved in his investments in Russia in the 1990s, all also had to make payments totalling a more modest sum of less than $5 million.
With all this controversy surrounding Summers, one can’t help wondering why Obama would choose him as an advisor. It may well be something to do with the fact that there are so few prominent economists who would publically declare themselves to be on the left!
Thursday, 9 April 2009
Over at Turbulence Ahead, Gerard O’Neill says that “One consequence of the more flexible and fluid, predominantly private sector labour market that we now have in Ireland is just that: individuals and households are flexible - they make adjustments to the new circumstances that face them. Including decisions about whether to work, and for how long. I'm guessing Irish working couples will look at their paychecks this month and next and act accordingly.”
Meanwhile, Stephen Kinsella looks back at another Bacon Report and suggests that more attention should have been paid to its recommendations.
Wednesday, 8 April 2009
On the trade union front, both ICTU and Unite focus on jobs. In a statement headlined ‘Harsh Budget does not Deliver on Jobs’, ICTU’s David Begg notes that “protecting jobs, maximising employment and creating new opportunities should have been to the fore in this budget, but the measures were simply not commensurate with the gravity of the problem we face”. Unite’s Regional Secretary, Jimmy Kelly, dismissed yesterday’s Budget as doing nothing to address the underlying crisis of job losses, noting that “each job lost costs €20,000 in lost tax and increased social welfare. It also has a direct negative impact on other jobs”. Yesterday, Sli Eile examined the unemployment backdrop to the Budget.
Finally, CORI has just issued a lengthy and balanced analysis of the Budget, available here. Among a wide range of issues covered, CORI notes that “the Government’s lack of transparency in the Budget documentation is a serious cause for concern. Without the full details of expenditure on issues such as social housing it is not possible to fully evaluate the impact of a Budget”
Siptu President Jack O’Connor has said Budget does not provide for social solidarity, while Impact warned that the Budget cuts, and the reassertion that more cuts will follow in 2010 and beyond, mean we are now entering a period of public service rationing.
Meanwhile Comhlamh has criticised cuts in overseas development aid.
We will be publishing more links to reactions as they become available.
Seen in the context of this range of views, today’s budget with spending cuts and tax increases adding up to €3.3 could be viewed as falling somewhere in the middle. Quite a few commentators this evening are suggesting that the government may have got the balance more or less right by avoiding excessively deflationary measures and have avoided ‘killing the patient’.
That, I think, remains to be seen. A cursory examination of the projected impact of the tax increases (and cuts to the Early Childhood Supplement scheme) on low and middle income families presented on the Department of Finance website suggests that consumer spending is destined for further very sharp falls in the coming months. We know that about 35% of all income is earned by those earning between €20,000 and €40,000 a year. And we can be pretty sure that most of that income totalling about €37 billion is spent – on food, rent, mortgages, clothing, transport, household goods. A married couple, one in employment with two children under 5 and an income of €30,000, will have over €100 a month less to spend from May onwards – assuming the earner doesn’t loose their job due to the deflationary spiral this budget seems destined to exacerbate.
On that basis the Minister for Finance shouldn’t be surprised if his tax take from VAT and Excise turns out to be rather less than he anticipates.
Tuesday, 7 April 2009
Sli Eile: Some additional – and initial – observations about specific points in the Budget.
Leading by example?
The announced changes to pay and conditions of senior politicians do not go far enough. Too little too late. What is particularly disturbing is the lack of public contrition for the way that the Property-Political-Financial complex has ruined the economy and with it our reputation abroad.
Ireland is a special case when it comes to taxes on property, land, capital gains and wealth. Some Governments at various stages in the last 30 years meekly attempted innovation in these areas to find stiff opposition and inaction leading to withdrawal. It is a case of Thou shall not tax capital. So the move from 22 to 25% Capital Gains Tax was bordering on risky. But if it was legally and administratively possible to change CGT rates, now why not go further and change the rates up to the original 40%? For an extra €45m in a full year investors might be scared off! How much would have been yielded on a restoration of the 40% CGT rate? Enough to pay a Christmas bonus to welfare recipients?
Overseas Aid cut again
This time the cut was €100m giving a combined reduction of €195m between February and April adjustements. Trócaire has already condemned this cut this evening.The combined effect will be to push Ireland's ODA contribution to under 0.5%. The poor elsewhere, as well as the poor at home, are paying for the Irish banks.
Social Welfare payments
So recipients were spared cuts in basic rates. However, other stealth cuts apply from childcare to reductions in public services more generally and much more to come.
In a post on Irish Left Review, Michael Taft points out that – contrary to popular belief – social welfare payments in Ireland are average to low compared to in the European Union. Using the latest internationally published data from OECD, Taft shows that Irish single unemployed (for example) receive the third smallest benefits in the EU group of 15 countries.
Many commentators assume that falling prices will continue, and will facilitate cuts in social welfare rates. However, there is no guarantee that prices will continue to fall and, in fact, the Department of Finance own estimates allow for some price increases from 2010 onwards. A further point is that low-income households have different expenditure patterns and are much less affected by price falls in areas such as mortgage interest (which enter into CPI calculations).
Free pre-school provision?
This sweetener offers €170m for free universal pre-school education for all children aged 3. In case someone is about to declare a new era for early childhood education, please don't. The true cost of universal provision is likely to be a multiple of this amount, taking into consideration capital spending, adaptation of premises and not to mention training of staff, inspection and costs of staff. Nobody believes that you can provide a quality pre-school system at under €2,500 per child for a full-year, full-session provision adapted to the needs of three year olds in new or existing buildings. It simply will not work. If this offer is being traded for an elimination of the childcare payment by the end of this year, it is a particularly unconvincing move.
Colm Keena in a recent series in the Irish Times has pointed out that '9,129 people, or 0.3 per cent of earners, between them earned €6.7 billion, or 6.6 per cent of all income'. This is where a top tax-rate of 48% should apply – immediately – not after some Commission report.
Public Capital Programme
This is a very problematic area of the Budget, and one that deserves closer scrutiny. If there was one area of public spending where the Government could have made an immediate and positive impact on saving jobs this was it. Instead the PCP (less contributions to the National Pension Reserve Fund) is being cut by about €500m.
Here, there was little sign of a fundamental shift, so urgently needed in prioritising labour-intensive and socially desirable projects.
Not surprisingly, the Government went for no action on most of those areas where they could have begun to erode the unacceptably large amount of tax lost as a result of various reliefs and exemptions with little relevance to employment or output.
No signs of real reform here. Schemes to encourage people out of the service will – in the presence of an inflexible embargo on filling of vacancies - lead to chaos in critical areas of public service delivery. The centre cannot micro-manage each individual case as is currently proposed.
So €80 billion is the book value of bad debts. Who knows? Who cares? The taxpayer in 2009 and 2059.
Sli Eile: Some say a week is a long time in politics. Well, only a few weeks ago the Government was ruling out another budget (don't mention the B word) and any raising of taxes 'until the Commission on Taxation reports' (in September of this year).
That was then.
In this latest round to Budget 2009 the Government has gone for tax increases over further expenditure cuts and some softening on the borrowing line with a projected move up to 10.75% of GDP in 2009. Whatever comfort there is that Government did not follow a policy of 'slash and burn' quickly evaporates when it is realised that:
most of the tax increases fall on PAYE earners including the working poor and those on the basic minimum wage;
the Minister of Finance has clearly signalled that worse is still to come as he outlines a fiscal austerity programme for the coming 4 years to 'restore order to the public finances'.
According to its own estimates (Macroeconomic and Fiscal Framework 2009-2013) this Budget is deflationary – 'it is estimated that the level of economic activity will be reduced by about 1 percentage point on foot of the Supplementary Budget'. The realism of this estimate may be questioned.
So, no stimulus there.
The underlying assumptions and projected macroeconomic outcomes are chilling. From its typically conservative stance, the Department of Finance has moved to embrace a very pessimistic outlook projecting an unemployment rate of 15.5% in 2010 – up on a current level of over 11% and a projected figure of 12.6% in 2009. These figures are shocking. How many of the unemployed are at risk of becoming unemployable after years of being out of work? What about families dependent on social welfare with nobody in paid employment for prolonged periods and without the escape valve – for the foreseeable future – of emigration to the UK or the US?
The projected drop in GDP is now set at 7.7% for this year. The projected decline in GDP is increasing at a steady rate since last Autumn in each successive update of the figures. Have we seen the end of this upward slide? I think not, unfortunately. This is probably going to be the biggest (and fastest) drop in output of any advanced industrial country since World War 2. The implications for social well-being, social partnership, the state of public services, health, crime, civil unrest are profound. We should not panic but the scale of this downturn, its speed and its likely gathering impact on peoples' lives is shocking.
We are about to learn more hard lessons about the legacy of free-riding capitalism and its domestic application to Ireland in the last quarter century.
This said, the total will provide a widespread shock to disposable income which will exert further downward pressure on the economy. The government has done well to ignore some of the more extreme advice eminating from academia.
The major innovations in revenue are the signaled future property taxes and the carbon tax. It seems unlikely, however, that the government is planning to substantially alter the structure of revenue. A progressive approach to this question would involve a combination of a more steeply graduated income tax, substantial carbon taxation, wealth taxes (not just property taxes) and increased inheritance tax (while exempting unsold family homes).
There is little indication of the necessary employment programmes which will be increasingly central to responding the current crisis.
Despite the understandable interest in the impact of the budget on family incomes, the "bad bank" proposal may ultimately be the most significant announcement. The estimate of 80 to 90 billion in impaired loans was quite startling. The real question, of course, is how much of this is ultimately unrecoverable. This should determine what the government should pay for the impaired loans. This is, of course, effectively unanswerable because no one knows where the bottom of the property market is. It would have been far preferable for the government to create good banks under public control which would have retail lending as their purpose. This would have left the risk in private hands where it belongs. The minister's proposal potentially exposes the state to losses which it cannot afford while it does not guarantee lending by the "cleansed" banks. Further recapitalization will ultimately be needed.
Professor Terrence McDonough teaches at NUIG
The story goes that, when asked to evaluate the long-term impact of the French revolution, a student replied that it was too early to say. The long-term implications of Budget 2009 (Round Two) will as hard to assess as the impact of Round One last October. One detects a subtle shift in public mood – on the street, on the bus and in the workplace (for those still in employment) – from a predominant mood of intense anger to one of anger plus fear, with the latter beginning to swamp anger. Whatever the political (and electoral) implications of recent Government economic and fiscal policies, it is clear that ‘Ireland’ is deeply divided on where we go from here. Political leadership is called for. On the left of the political spectrum the two main parties – Labour and Sinn Féin - are enjoying a boost in the polls. Enjoy it while it lasts, say some on the Government benches.
Could we even see the emergence of a real choice between two competing visions for society in a general election some time in the next few years? – one pointing towards a high-skill, high-productivity, high-wage, high-tax, high social services, competitive social market economy – the other towards …. a continuation of the present paradigm? Some argue that the Irish people have never had a real choice in any general election since Labour first contested in 1922.
So, what is Labour saying?.....
On Thursday 2nd April, Labour published Building a New, Better and Fairer Future – Labour’s Priorities for the Emergency Budget.
Labour is cross that detailed information on budget trends and forecasts has been withheld;
Labour argues for a comprehensive and multi-annual approach to the fiscal problem;
It warns against too fierce a fiscal adjustment in the next 9 months which might only place us on a further deflationary slide (there is evidence that the Department of Finance’s overly-conservative fiscal stance in the 1950s was a major break on economic development at the time).
Labour settles for a target reduction in borrowing of around €2.8billion in a full-year term from this April – which is no small fry.
Read on ………
To be credible, Labour needs to spell out its key priorities and how it would seek to move from where we are now to one of sustainable recovery. People ‘on the street, on the bus and in the workplace for those still in employment’ are concerned about Jobs, Jobs and Jobs. Just listen. It is the economy ….. as the saying goes. Labour’s pre-budget submission does offer important clues:
Employment creation and upskilling are given number one priority
Fairness determines the adjustment in the tax base and rates
More specifically, the document proposes a range of measures, including labour market activation, a new NDP and a top-up of €1b to the National Training Fund (from bank fees for the Guarantee scheme), pre-school education roll-out with a reversal of some recent cuts in public spending (such as, for example, special education). Costings are given, but the underlying specifics are not spelt out.
Where would the adjustment of €2.8b in a full-year come from? The bulk of it would come from tax increases – capital, tax relief reductions, carbon taxes, excise taxes, higher top tax rate, targetting of tax exiles. Some estimates are given for each proposal. Good stuff as far as it goes. By contrast Fine Gael does not go near the 41 and 20 tax rates. FG is calling for 15,000 voluntary redundancies in the public service (it is not clear how this would save money in the short-term).
Courageously (for Labour) the document addresses a number of thorny public sector issues including insider labour market practices and restrictions (regarding recruitment, mobility and promotion), as well as the issue of the widening spread of pay over time (pointing out that top civil servants earn over 10 times what is earned by a lower-paid worker in the public sector compared to a ratio of 6:1 twenty years ago). Labour comes down, clearly, on the side of reducing the public sector pay bill. If this is to be done – within the context of maintaining social services – there are only two options:
Reduce average pay and/or
Reduce numbers employed.
The first option, above, can be loaded on public sector workers above a certain threshold. The document estimates that a cap of €200,000 per year on top-level salaries in the public sector would yield a saving of €100m (this must be an error or typo?). If that were true, this saving would pay for a cervical cancer vaccine for all teenage girls five times over, plus a Cystic Fibrosis Treatment Centre.
Reducing numbers would be fraught since, to begin with, by OECD country standards Ireland has a lower proportion of workers employed public sector.
Like Sinn Féin and Fine Gael (‘Rebuilding Ireland a NewEra for the Irish Economy’), Labour is calling for some type of semi-state bank tasked with lending. In this case, Labour is proposing a National Development Bank to 'fund infrastructure projects'. As with CORI, Labour calls for a discontinuation of a wide range of tax reliefs (including relief on trade union subscriptions which would save €11m per year). Tax reliefs, shelters and 'non-standardisation' of reliefs are really a type of 'low-hanging fruit', and it beggars belief that the Government has not accelerated reform here instead of referring to a time-wasting wait on the Commission on Taxation to report (although it doesn't beggar belief when you consider how, for example, the private pensions lobby is upping the case against reform – see Attacks on Pension Relief short-sighted and reckless)
But, does Labour chart a way forward in terms of a fundamental shift in the balance of economic and social power along with the distribution of income and wealth? It seems to me that a coherent, well-thought-out strategy must identify:
immediate costed, realistic steps to address - as best as possile – the five 'crises' referred to by NESC
a medium-term strategy to re-build the economy and society, and greatly strengthen the quality and level of public services; and
a long-term strategy to realise a new society based on principles of equality, solidarity and community.
The school report might say this plan has good potential but that 'the student needs to work harder'.
Monday, 6 April 2009
With the economic crisis, important microeconomic issues can be neglected. Reform of these issues a decade ago could have contributed to a much reduced economic crisis today. For example, it is widely recognised that the lack of control by the boards of major financial companies of their own top executives, led to the crisis (in this regard, today's piece in the Financial Times, on the manner in which mutual funds have contributed to excessive executive pay in the States by voting in favour of compensation plans, is of interest). Yet this vital issue of corporate governance is little discussed in Ireland.
A key debate now has to be to question the fundamental basis of company law in Ireland (and in the UK and US). The Anglo-Saxon model is based on shareholder value, almost exclusively. To focus exclusively on shareholder value leads to managements’ interests dominating, especially where shareholders are diffused. It also leads to short-termism. But all is not lost. Things are changing, and radically. However, in Ireland, we have hardly noticed.
On 12 March, the “Father of Shareholder Value”, Jack Welch, admitted that the whole basis of company law, based on shareholder value was wrong. He had espoused this narrow view everywhere in his syndicated columns, and as the domineering CEO of the huge conglomerate GE.
Welch did not just recant. He said that the shareholder value was “a dumb idea”. He had promoted “shareholder value” since he made an influential speech in 1981. Now, he says “shareholder value is the dumbest idea in the world”. Today, he admits that it is a result and not a strategy. He now admits that employees, customers and products matter!
It is essential that there is a debate on this important micro-economic area by economists, academics and business-people. It seems obvious after the economic debacle that the broader “stakeholder interests” should now be rooted in Irish company law, and the sooner the better. This would also help ameliorate Ireland’s tarnished enterprise reputation.
Even with the existing narrow standards of Irish company governance, much of which is based on voluntary codes of practice, it is still poorly executed by companies. A recent Grant Thornton Governance review on the extent of compliance with the Combined Code by Irish Companies found approximately 50% of Stock Exchange companies non-compliant. It concluded that the voluntary approach to the Code has failed, and that the only acceptable solution is to incorporate governance principles into legislation. The report pointed out that too many Irish companies are lacking in their standards of practice and adherence to the Combined Code or core principles of transparency and independence.
The government must ensure that it enacts legislation to enforce existing corporate governance measures, otherwise it will be difficult to restore international confidence in Ireland as a suitable place to invest and to do business. But just as importantly, the balance of power is too narrowly vested in top executives under the shareholder value dominated Irish company law. This must be radically reformed.
Ireland has a Company Law Review Group but, to my knowledge, it is not even debating this vital issue. The government should ask the Group to conduct a review of the area, and to recommend fundamental changes in the basis of company law. The corporate governance laws must be broadened out to give certain rights in law to all other stakeholders in companies, from suppliers, customers and employees to the community, the environment etc. However, noting the conservative composition of the CLRG, this won’t happen unless the Group itself is changed to reflect society’s interest, and not largely those of what is perceived to be business interests.
The best way to demolish Cosy Irish Capitalism, as the too oft-quoted “Financial Times” editorial called our economic governance system, is to shift power from shareholders only (usually including the top executives) to all stakeholders. Let’s try and have a debate.
Saturday, 4 April 2009
Listening to the RTE News at 9 pm some evenings is not a healthy night cap for those worried about jobs – their own or those of their loved ones. Between Rating Agencies, banking economist forecasters, Government ministers and political pundits, you could be forgiven for thinking that the end of the world is nigh. At least three features of this hysteria stand out:
There is a terribly narrow and short-term focus: the latest closure, the latest shocking live register figures, the latest rumour about more cuts and budgets on the way (does anyone think that April 7th is the end of it?)
Evidence is selective (picking those facts that suit and brushing over inconvenient facts)
The recipe is similar: cut wages, cut public spending, leave some lucrative tax reliefs in place and - not infrequently - open the way to more public asset-stripping.
To redress the balance, one should look at a working paper by the Economic and Social Research Institute. Bergin, Conefrey, Fitzgerald and Kearney make the case that things are not so bad that we do not have opportunities to address the disorder in public finances while continuing to invest in key areas such as health and education. Yes, the ESRI researchers do call for public spending cuts, including cuts in wages and salaries (as does Henricksson), but they also point out that:
If the international economy recovers as early as 2011 Ireland is set to bounce back and possibly grow faster than other countries, given the estimated size of the Output Gap (actual to potential following the 2008-09 recession) in Ireland (page 7);
When allowance is made for financial assets held at the National Treasury Management Agency, our debt to GDP ratio is not as bad as its seems – in fact it is closer to 20% and not 40%; and
The Balance of Payments is heading for surplus in 2009 (as imports fall).
So we are still some distance from a sovereign default and the IMF, ECB, Germany, etc coming into ‘sort us out’. The ESRI make a useful conceptual distinction between the structural and cyclical components of the Government deficit – a point picked up swiftly by Fine Gael and Labour in their pre-budget submissions. However, in practice, such a distinction is difficult to put into operation as the structural component, itself, is contaminated by cyclical elements (the skewed nature of our tax base and its inter-action with the Construction sector) and is related to the unusually low level of direct taxes (by international and EU level). Nevertheless, the ESRI paper says that Government should seek to address the structural component – which they estimate to be between 6 and 8 % of GDP) and the not cyclical one.
The ESRI authors make the case for a front-loading of fiscal adjustment ‘just in case’ the international recession lasts longer than two years. Clearly, they are on the side of cutting nominal wages (but not necessarily real?) as well as well public spending. They support new sources of revenue including taxes on carbon and on property. Tellingly, they comment:
If the public wishes to preserve the current level of public services, then revenues will have to be raised to between 35 per cent and 40 per cent of GNP
(not to divert to a technical discussion at this point – they should be relating taxes to GDP and not GNP since taxes are levied on all income or output generated within the State and, potentially, taxable before it flows out through profit and other income repatriation).
This is a key point and one that the political parties – by and large – have evaded since the onset of the Celtic Tiger. What level of public services do people want and how do they want to fund it? For a long time, some interests tried to evade the issue by pretending that vast improvements in public service delivery could be made through efficiencies without significantly touching the tax base and tax rates. This fallacy is being exposed in the clear light of the new economic realities. Ireland lags behind most European countries in terms of tax take as a percentage of national income – whether measured by GNP or GDP.
CORI Justice argues that Ireland’s total tax take should be raised to a level that is 1.5% below the EU-average between now and 2013 – providing two thirds of the adjustment sought by Government and the European Commission. This is a very modest but realisable goal.