Tuesday, 13 April 2010

Tackling unemployment is the central challenge

Tom O'Connor: In a paper delivered last month to the Labour Party economic conference in Cork, I argued that any return to economic growth would not have any significant effect on reducing unemployment. I also argued that it was unemployment which caused nearly three quarters of the exchequer deficit which net of Anglo recapitalisation amounted to 21 billion at the end of 2010.

In order to increase employment and reduce unemployment starting almost immediately and further reduce unemployment in the years to come, I suggest(ed) three stimulus packages costing €5.23 billion between them.

The first involves the government injecting money directly into viable new high- knowledge industries as put forward by the Expert Strategy Group report Ahead of the Curve (2006). These are in biomedical devices, sustainable energy, food ingredients and high quality food products, telematics, and Information and communications technology. There are currently 250 research clusters which have spent almost €3 billion in government funding for research under Science Foundation Ireland, and very few are being mainstreamed. The best of these should be mainstreamed and vetted in advance. They must start very big to compete with foreign competitors, and should be looking to employ several hundred people. As such, each should receive tens of millions in state investment through the quadrupling of the budget of Enterprise Ireland and the establishment of a state development bank. These indigenous exporting companies would not repatriate profits, and there would be very little leakage of resources out of the economy.

Package I
  • Government needs to invest at least €5 billion in stimulus 2010 + 2011
  • Companies should be vetted and viable ones aided within 3 months
  • Government should give 50% in grants in return for shares to be redeemed over 10 years and 50% in loans
  • High quality retraining should be provided in parallel through state training agencies to match the relevant skills needs
  • Re-training allowance of €330
  • Priority should be given to indigenous enterprises
  • Should include viable and strong state-owned enterprises which would pay dividends to the state
  • A state Development Bank should be established, working alongside higher budgets for Enterprise Ireland

Package II

The second arm of the stimulus package involves investment in social, health and educational infrastructure:
  • Schools building programmes (extra €400 million)
  • Revolutionising mental health services as provided for in Vision for Change (2006) = €750 million.
  • Publicly provided geriatric facilities (extra €300 million)

The third stimulus package exploits the low cost of housing for the government, and proposes having the banks fund €100,000 per housing unit enabling the Government to purchase 50,000 low-cost affordable homes to eliminate the housing waiting list. The government would initially provide over €5 billion, and when the saving in rent allowance and the recouping of the cost of €35,000 in mortgage proceeds by the banks is taken into consideration, the net cost to the state would be about €1.5 billion. This would equate to the cost of the state holding on to 15,000 of the 50,000 housing units to increase the local authority housing stock for those who would not be in a position to pay €800 a month to afford the mortgage of €100,000 in respect of the 35,000 affordable housing units provided by the state and mortgaged with the banks. Given that the government is injecting an extra €9 billion at least into the two big banks, with the government now becoming the biggest shareholder, one quid pro quo would be for the banks to grant 35,000 mortgages to those on the housing waiting lists. The data is as follows:

Package III

  • Government purchases 50,000 housing units for 5 billion @100k each
  • 35,000 sold to those on waiting lists at 100k each.
  • 15,000 rented by local authority
  • Banks finance the purchase of 35,000:
  • Govt gets back €3.5 billion, and saves € 270 mill on rent allowance. Net cost = €1.23 billion


Pope Epopt said...

Good work and good performance on Vincent Brown the other night.

IMO your proposals are too conservative (we should look to spend €5bn plus per year) and missing a no-brainer - namely renewable energy for domestic consumption and export.

We could usefully spend several billion on upgrading our electricity supply network to take distributed renewable production and export it to the UK and the rest of Europe. We are pretty much uniquely favourably placed (along with Scotland) to do this.

The smart economies are looking at energy resilience now, giving them a long term competitive advantage in an era when oil supply peaking and/or systematic speculation are forcing up prices.

I linked Tom's proposals on another blog. We have to get TASC's work out to wider notice.

Fionnuala said...

The measures seem to depend on a recovery in international economy, who will buy what we are producing.

We would need this to be cheaper that theirs, and I can't see how we can achieve this.

We don't own our own economy any more.

Michael Burke said...

As Keynes said, if you tackle unemployment, the deficit will take care of itself.

The detail of these proposals deserves some attention. But it would be wrong to under-sell the effects.

For example, while the house-purchase scheme requires no government money at all - as the funds come from the housebuyers' borrowing from banks- the council housing scheme could be genuinely stimulative in the following way:

The government can currently borrow at around 4% for 10years. At the same time, letting the €100,000 home at €120 per week, provides an annual yield of over 6%. This is below prevailing market rental rates and might serve to place a cap on them.

For the government, the net return on investment would be 2% (6% minus 4%) of €1.23bn per annum, or approx. €25mn. This could either be used to pay down debt, or better still invested further in housing, or infrastructure projects where genuine multiplier effects operate and which would actually create new employment, the stated policy aim.