Tuesday, 2 November 2010

At least one party gets it

Michael Taft: With the political consensus obsessed with a €15 billion deflationary juggernaut, it’s a relief that one party gets it. Sinn Fein’s pre-budget submission argues for a major stimulus programme combined with a growth-friendly consolidation package that, taken together, would increase growth and job creation. This would put deficit-reduction on a sustainable path, unlike the calls for contraction which could land the economy in what the ESRI calls a ‘deflationary cycle’.

Does that mean that every one of their proposals can’t be improved on? No. But let’s get this out of the way – put 100 progressives in a room, all working to the same strategy (an expansionary fiscal strategy) and they will come up with 100 different pre-budget submissions and a heated debate about some of the details. But as Franklin Roosevelt put it: ‘There are many ways to go forward, there’s only way to stand still.’ If one has a disagreement with the particulars of Sinn Fein’s submission, it is a disagreement within go-forward parameters. If only the national debate was so framed.

Let’s summarise: Sinn Fein aims to raise €4 billion in tax revenue through a range of reforming tax expenditures (pension contributions, mortgage interest for landlords, legacy property tax reliefs), increased capital taxes and, crucially a new wealth tax, etc.).

They are further seeking public spending savings of €1.2 billion. The biggest categories are capping public sector pay at €100,000, reduce professional fees, and charging private patients the full economic rate in public hospitals.

The main thrust of their submission, however, is the proposals for stimulus. In their main plank, they are seeking a €7 billion ‘employment/infrastructure’ stimulus over the next 3-5 years with €2 billion in 2011; all to be funded from National Pension Reserve Fund (NPRF). They are seeking to create 160,000 jobs. This is just a sample from their ambitious programme:

‘. . . focus on the more labour intensive and necessary infrastructure, such as schools, hospitals, conversion of appropriate vacant accommodation to social housing, improving energy efficiency in homes and public transport provision . . . remediating the leaking water network and extending the current pilot water collection scheme to all schools, thus saving costs on water and creating jobs; and rolling out broadband across the state.’

In addition, they are seeking a national childcare and pre-education network, a civillianisation scheme (whereby the public sector recruits to reduce administrative work currently undertaken by front-line workers), and an innovative one-stop-shop virtual helpdesk for business start-ups.

They are also seeking a ‘financial stimulus’ of €600 million for low-income households (restore Christmas bonus, introduce refundable tax credits, etc.) and to ease the public sector recruitment embargo. The financing of this would, not come from the NPRF, but from the consolidation package – effectively a progressive income distribution.

This is a bold programme to reinvigorate the economy, a programme that understands that employment is key and that the living conditions of low-income households are not an obstacle to growth but rather a pre-condition. In its broad outlines it is worthy of study, debate and support. But let’s see where it might be improved.

First, there is a danger that some of the taxation measures might impact on average income earners. The standardisation of tax expenditures – in particular, pension contributions – would increase tax liability on average income earners. This is not an argument against such standardisation – just that it should only be considered for (a) high income earners initially and (b) extended to everyone once a 2nd tier earnings-related pension is introduced through the social insurance system.

Second, the capping of public sector pay at €100,000 sounds egalitarian but it could undermine the state’s ability to compete for specialist labour (tax specialists in Revenue, financial specialists in the NTMA). The ‘savings’ of €350 million would actually result in considerably less – more than half of that would be lost in reduced tax revenue/PRSI/pension levy.

These are questions regarding details that don’t undermine the progressive thrust of the overall proposals.

Sinn Fein provides a detailed and well-argued appendix on the impact of its stimulus plans on public finances –showing how stimulus acts as the best platform for deficit-reduction.

They argue from the basis of the Lane-Benetrix multipliers and a tax-sensitivity of 60 percent (that is, an increase of GDP from investment results in a tax increase of 60% of the GDP rise). From this, they assume that a €7 billion stimulus will raise an additional €16 billion in tax revenue. This is a correct but I have two concerns:

First, Sinn Fein presents its capital stimulus as permanent increases in expenditure. I wonder how sustainable this is going into the medium-term. They acknowledge this issue when they state: ‘. . .the state might have to continue with some form of stimulus in later years . . .’.

Second, there is a strong argument that tax revenue would rise at a higher ratio than the current 33 percent tax take as a percentage of GDP when coming out of a recession – especially as Sinn Fein’s proposals would directly impact on the domestic economy. However, to what extent that 60 percent sensitivity, evidenced during the fall in output, would hold in subsequent years as the stimulus puts the economy back on a strong growth-path is something worth discussing more.

My concerns are not fatal to the economics of the party’s stimulus. For instance, were the stimulus made temporary with provision for easing in permanent increases in capital spending down the line, we might get over the problem of ‘stimulus withdrawal’. It would still retain the benefits while smoothing out the fiscal adjustments.

Sinn Fein provides a sound basis for which to construct stimulus strategies – in terms of their cost and their returns. My real concern is that their robust analysis will be largely unread and ignored in the wider debate. This is a problem that all progressives have when trying to get the national debate to understand that you can ‘invest your way to fiscal stability’. It’s far more fun (apparently) to debate how many classrooms or hospital wards we’re going to close or how much disposable income we’re going to take off low-income households – such is the degraded state of the debate.

Therefore, it is refreshing to deal with such analysis. Here’s a suggestion to make clearer the impact.

For instance, would creating a national childcare and pre-school network really cost €400 million as Sinn Fein puts it? No (and by the way, I’m sure Sinn Fein knows this – this is just presentational issue). The gross spending would be that amount but let’s go further. 70 percent of that expenditure would be on labour (‘fully-trained accredited childcare workers’). Much of that expenditure would be returned to the Exchequer through taxation. There would also be the increase in consumer spending – another boost to enterprises and the Exchequer. There would also be a reduction in the Live Register – another boost. And if the childcare element was provided at cost to parents, they would experience a reduction in childcare costs, thus releasing more consumer spending in other areas. And none of this counts the long-term benefit of higher educational standards.

Or take the proposals to boost low-income households through redistribution from higher incomes. Such proposals (Christmas bonus, refundable tax credits) are likely to translate into pure demand, boosting consumer spending and tax revenue. You can calculate the benefit of this through marginal propensities to consume. If high income groups have a MPC of 0.5 (they would spend 50 percent of any additional income) while low-income groups have a MPC of 0.9 – the economy gets the benefit of the difference, in terms of growth, tax revenue and even reduced import-content.

Or this little nugget: building schoolrooms would create a permanent saving of €24 million a year on prefab rentals. That would be after the tax/GDP boost from the capital investment of building the schoolrooms. That’s a positive calculation, even if the capital spending were borrowed in normal times (savings over interest payments), leaving aside the long-term supply-side benefits.

When we examine the effects of stimulus in the concrete, in the particular, we can better present the benefit in a popularly understood way. But that is the big challenge – all the more so in a debate that doesn’t get it.

Sinn Fein has laid down a challenge – not just to the deflationary orthodoxy – but to all progressives. They have constructed a submission that goes beyond just Budget 2011 and begins to provide a framework in which an expansionary programme can be developed. By all means, let’s debate policy particulars, let’s discuss measurements - let’s do all the things that proponents of a debased arithmetic approach don’t do (that is, actually debate the economy). But let’s not lose sight of the fact that in that discussion, we are all going forward.

That is the strength of Sinn Fein’s submission – facilitating a conversation that can start us on that path.


Anonymous said...

Excellent critique. I think Sinn Féin's proposals expose the weakness of Labours position and they being wedded to the Government's four year deficit reduction target. Labour are now talking about Social Welfare cuts, water charges and cuts to public sector pensions. They are trying to be populist and play it safe by using a simple 50/50 ration of cuts/increase taxes. The tragedy is that Labour and Fine Gael will get acres of time and space to debate their proposals while Sinn Féin will get very little.

Anonymous said...

Reduce the earnings cap for pension contribution tax relief to
€100,000 – Raises €85 million

Only €85 million?! Surely there must be some mistake?

We're always hearing on this site about how 'most' of the nearly €3 billion in pension tax reliefs goes to high-rollers accumulating Drumm/Fingleton sized pension pots.

Could it be that in reality most of this relief actually goes to ordinary middle class workers saving relatively modest amounts?

Anonymous said...

Apply charges based on the full economic cost to all use of beds in public and voluntary hospitals in the State for the purposes of private medical practice – Saves €305 million

Highly questionable.

The likely side-effects include:

- an influx of patients into the public system (same beds are filled, but now the state gets no extra subvention)

- an increase in health insurance premia (deflationary for consumers, an extra cost for companies providing health insurance for employees)

- an outflux of young, healthy VHI subscribers to cheaper plans with Quinn & Aviva (increasing the cost of the eventual bail-out VHI will need from the state)

- a long-term reduction in the willingness of the middle class to pay high rates of taxation (private patients already make a higher-than-average contribution to the cost of public beds through their taxes, whether those beds are occupied by private or public patients).

Michael Burke said...


The central point you make must be true, this is a challenge to all progessives to respond to the crisis, rather than other parties' response to the crisis. If 50:50 is the limit of ambitions this simply means, at best, creating half as many unemployed/emigrants/home dispossessions/destitute single parents as the current government.

One point; the 'sensitivity' is of government finances, not simply taxation and it is a long-standing DoF etimate, not just based on the 2009 extreme (which was 0.93).


all costings are based on DoF statements. They are not endorsed, simpy used, absent any DoF model of the impact of fiscal measures.

Anonymous said...

Interesting critique of the Republican movements proposals for a new way forward to tackle the failure of the state to come to terms with wrecking the economy, but who will listen to reason from Sinn Fein, the electorate, the scheming centre 'left' of the labour party the right wing parties? None I'm afraid and unfortunately the electorate voted them into power so unless the Sinn Fein proposals get air play the electorate will continue to vote for and get screwed by those 'sympathetic' parties

Anonymous said...

Glaring error in Sinn Féin's submission:

They manage to keep their effective tax rate low (the last Finance Act saw their effective rate increase to 20%).

In fact, the minimum effective rate specified in the Finance Act 2010 was 30%, fully half again more than SF claim.

Add in the effect of the levies and the real minimum is circa 36%, nearly twice what SF claims.

Sloppy. Very, very sloppy.

Anonymous said...

Oops. sorry. I just checked. I got my facts wrong. The effective rate IS 20%. That was just sloppy of me. Please disregard my last comment.

Anonymous said...

@Other anonymous

That is simply incorrect, the minimum effective rate is indeed 30% for the sort of high-earners that Sinn Féin refer to.

The explanatory memorandum to the finance act 2010 sets this out with absolute clarity:

Section 22 gives effect to the Budget announcement to increase, from 20 per cent to 30 per cent, the effective rate of income tax for high-income individuals who are fully subject to the restriction on the use of certain tax reliefs. The increase takes effect from the tax year 2010.

The 30 per cent effective income tax rate will apply at income levels of €400,000 and above with a graduated application of the restriction (with the effective income tax rate rising towards 30 per cent) between income levels of €125,000 and €400,000.

Anonymous said...

the Sinn Féin policy is so significant. Perhaps uniquely in Western Europe, the party has adopted a policy of increased investment which can only be conducted by state or state-linked bodies (in this case, the National Pension Reserve Fund). And, uniquely in Western Europe, this is not a programme that entails saving sections of big capital. As elsewhere it would require an enduring leadership role for the state in the economy. But it would immediately lead to the state becoming the dominant force in the domestic economy, albeit one that would require a new partnership with foreign capital, on both a more productive and equal footing.

The policy is also gaining ground. A string of popular campaigning organisations, such as Social Justice Ireland and Community Platform, have tentatively moved in the same direction, while the Irish Congress of Trade Unions has adopted a pro-investment stance but contradictorily pins its hopes on the government persuading the private sector to initiate the investments. No doubt these contradictions will be resolved in course of the struggles over the next period. http://www.progressive-economy.ie/2010/11/at-least-one-party-gets-it.html