Wednesday, 21 December 2011

The Pension System in Ireland: Current Issues and Reform

Sinéad Pentony: The TCD Pension Policy Research Group has recently published a Working Paper written by Jim Stewart called The Pension System in Ireland: Current Issues and Reform.

The paper provides a very useful overview of the key features of the Irish pension system and it examines five key issues:
• The sources of income of retired persons.
• The value of pension fund assets.
• The National Pension Reserve Fund.
• Implications for pension funds of the rise in long bond yields.
• Policy responses and reform.

The paper highlights the inadequacy of recent policy responses and reforms in dealing with the structural problems in our pension system which have been brought into sharp focus by the financial and economic crises. The need for fundamental reform of our pension system and the development of a new model of pension provision has been highlighted by TASC and the TCD Pension Policy Research Group.

Friday, 16 December 2011


Tom McDonnell: We've turned the corner...and gone over the cliff. See here.

The expansionary fiscal contraction crowd seem to have gone a bit quiet of late.

Thursday, 15 December 2011

There's loads of money left

Michael Burke: The FT’s Martin Wolf has an interesting piece in yesterday's paper. He discusses the latest EU summit and highlights the impossibility of achieving the state objective of reducing fiscal deficits using the stated means, further cuts in government spending. This is because the government’s net lending or borrowing is simply the counterpart to all the other net lending or borrowing by the other sectors in the economy.

This point is illustrated in the graphic below (click image to enlarge), which shows three components: the net lending/borrowing of the private sector, the overseas sector and the governments in selected Euro Area economies. These are based on IMF data and projections. These must always sum to zero- there is no other sector that can lend or borrow to/from the rest of the economy. This argument has been made elsewhere.

The situation in relation to the Irish economy is stark. Despite much bluster about corners turned, roads to recovery, etc., Ireland still has the largest fiscal deficit in the whole of the Euro Area economies listed (third graphic on the right). Yet since the external sector is a net borrower Ireland, that is, there is a current account surplus (middle graphic) , along with government, then there must be a large surplus in the private sector. This is exactly what is shown in the first graphic, where Ireland has the largest private sector balance as a proportion of GDP, over 10%.

According to the CSO the gross savings of the domestic sector were over €18bn in 2010, and are €8bn in the first half of 2011. These totals include the government deficits.

But the net lending/borrowing of the private sector can by subdivided as between the corporate sector and the household sector. In any normally functioning market economy the household sectors designated role is as a net saver. The exception was in the run-up to the last bubble when it became a net borrower. The designated role of the corporate sector is as a net borrower, for the purposes of investment. (Banks are supposed to distribute these savings in an efficient manner to the most productive borrowers).

However, only the household sector is performing its role, saving €5.2bn in the first half of this year. The corporate is not performing as it should. It too is saving, €2bn so far this year and nearly €43bn in 2010.

It is this failure of the private sector to borrow to invest which shows up in the national accounts and the investment strike which is the cause of the slump. And, since one sector’s surplus must be recorded as another’s deficit, it is this borrowing and investment strike which leads to the public sector deficit.

The effect of government policy is to transfer incomes for the household sector by cutting benefits and raising taxes (and from the corporate sector by cutting the government’s own investment). This reduces the spending power of both the household sector and the corporate sector and provides an encouragement to the latter to increase its saving, precisely the opposite of what is required.

Instead, government could increase the incomes of both the household and corporate sectors by increasing its own investment (while also stopping any further cuts in their incomes via personal incomes taxes, levies like the USC and benefits cuts). It could take some of those savings from the corporate sector and investment them on its behalf. The consequent increase in economic activity would then oblige the corporate sector to gear up for recovery, by investing and borrowing on its own account. The resulting increase in employment/reduction in the welfare bill would see the public sector deficit decline. The degree to which that occurred would be entirely a function of how much idle savings were transferred into productive investment by government intervention.

Monday, 12 December 2011

Employment is down

Tom McDonnell: It just keeps getting worse. Long-term unemployment now accounts for 56.3 per cent of total unemployment while the seasonally adjusted unemployment rate now stands at 14.4 per cent, compared with the previous figure of 14.2 per cent.

3rd quarter QNHS figures are reported here while the figures can be found here. Headline figures are here
The annual change in employment is -46,000 while the annual change in full time employment is -53,100

Euro lacks a government banker, not a lender of last resort

This article by Thomas Palley, of the New America Foundation's Economic Growth Programme, was published in the FT Economists' Forum on December 9th

Sinéad Pentony: It crunch time (again) for the Eurozone, so this article by Thomas Palley is timely, as he articulates the causes of the Eurozone debt crisis and the solutions that are needed, differently from many of the other voices in the debate.

Palley argues that the euro has a lender of last resort – the ECB – but what’s lacking is a government banker, like the Federal Reserve or Bank of England, which helps finance budget deficits and keeps rates low on government debt. Thus explaining why the US and UK can borrow at lower rates than countries such as Spain, which has a similar deficit and debt profile, but its under speculative attack.

Palley points the finger at the “euro’s neoliberal birthmark”, which laid the foundation for a diminished role of the state and enhanced power of the market. He goes on to argue that previously, national banking systems were masters of the bond market, but the euro’s architecture makes bond markets masters of national governments – and this is the problem that must be solved through the creation of a government banker.

Friday, 9 December 2011

Sargent and Sims lectures

Tom McDonnell:The Sargent and Sims Noble prize lectures are here.

Tom Sargent poses four topical questions:
1. Should Government default on their debts?
2. Should a central government bail out subordinate states?
3. Should a monetary union precede a fiscal union?
4. Should a fiscal union precede a monetary union?

Meanwhile Chris Sims looks at historical and current statistical modelling of monetary policy and its effects. He suggests only a small part of monetary fluctuations could be attributed to erratic monetary policy.

A Hayek-Keynes rap video

Paul Sweeney: Many have heard of the key debate in 20th Century Economics which was between the ideas of Keynes and Hayek. Progressives support the former, while the latter is the icon of neo-liberals.

For those who want, or rather need, a lighter note on economics - after the depression caused by the Budget and by the incapacity of the EU leadership in framing a solution - here is some diversion.

It does not appear partisan, though I have heard that the author is more neo-liberal than neo-classical. John Papola, the key producer, is a fan of Hayek and his associates appear to be linked with the right in the US. I give them credit for innovation in communication!

This seven minute rap music interpretation of economics is both entertaining and somewhat informative. But as the catholic priests used to say, "there's religion in maths" when justifying Catholic control of schools. So too with the selection of interviewees by some RTE producers and Independent media in putting across the conservative line as "independent".

Wednesday, 7 December 2011

Day 2 - Budget 2012

Sinéad Pentony: Day two of the budget focused primarily on revenue raising measures and the introduction of measures aimed at stimulating economic growth. Let’s see how some of the big announcements on day two perform against the principles of fairness, jobs and reform.

A big part of yesterday’s announcements related to measures aimed at resuscitating the property market. Although every successful advanced economy has a functioning property market that makes an important contribution to economic activity, this Budget seems to be relying on new property-based tax breaks rather than a programme of strategic investment to support economic activity.

Budgetary measures in this context included changes to Stamp Duty, Capital Gains Tax and Mortgage-Interest Relief (MIR) aimed at incentivising transactions in the commercial and private property markets. The changes in MIR include an increase to 30 per cent for first-time buyers who bought at the peak of the boom (2004-2008) along with increases to MIR for new first-time buyers and non-first time buyers in 2012. These measures fail the test of fairness for a number of reasons:

• If you bought a house during the boom you are likely to be in negative equity, but if you are still able to make repayments and have not lost your job, the changes to MIR are an added bonus and will reduce your mortgage repayments.
• If you bought a house during the boom and are in negative equity and you are in mortgage arrears, the reduction in MIR may improve your prospects of meeting your mortgage commitments, but many will never be in a position to repay the mortgage. Changes to MIR should have targeted this group along with the introduction of personal insolvency resolution mechanisms whereby personal and mortgage debts are restructured and/or written down. An announcement on the latter is due shortly.
• Many low income families were never in a position to buy their own home during the boom and will never be in a position to benefit from state subsidies for home ownership. For these groups social housing, housing associations and/or private renting are the only options.

Another measure relates to Section 23 property reliefs, the abolition of which was announced in last year’s budget but was later reversed pending an economic impact assessment. Yesterday’s measures included the introduction of a property relief surcharge of 5 per cent on annual gross incomes over €100,000.

Reforms to the budgetary process include a commitment to greater transparency, so the economic impact assessment should be published so that it can be subject to public scrutiny.

The main taxation measures include changes to the Universal Social Charge (USC), increases in VAT, carbon tax, motor tax, CGT, CAT along with the introduction of the household charge. The changes to the USC are welcome and certainly pass the fairness test on the grounds of equity on their own terms. The increases in CGT and CAT are also to be welcomed as these are taxes on the sale and transfer of assets. The application of the PRSI to other forms of income along with increases in DIRT is also good news, although the former will only come into effect in 2013.

Ireland is a poor performer when it comes to taxing assets and wealth compared to other European countries, so these increases are a step in the right direction but much more could have been done in this budget to spread the burden of the adjustment more equally.

An example of where more could have been done relates to the taxation of Irish people who are non-resident for tax purposes. The domicile levy can only be described as a failed attempt to ensure that this group of people are made to pay their fair share. Plans to abolish the “citizenship” condition for payment is unlikely to make any difference to the amount of revenue generated through this measure. The introduction of a “citizenship-based” tax or a tax on global assets are measures used to generate revenue from non-residents in other countries.

The bad news on taxation is that when you combine the changes to the USC with the decision to base the jobseekers’ benefit payment week on a 5-day week rather than a 6-day week, the likely outcome is that people earning less than €10,000 – who are probably working on a part-time basis and likely to be women - will actually lose more of their income, especially when the increases in VAT and carbon tax is included, not to mention the household charge.

Indirect flat taxation measures are blunt instruments for collecting revenue. They are regressive and take proportionately more from low income families. Such measures are also counter-productive because they reduce the spending power of such households which will further depress consumer demand and ultimately lead to more jobs losses and job insecurity. So this group of measures fails both the fairness and jobs tests.

The household charge is a good example of how not to introduce a property tax and fails the fairness test because it is going to apply to all houses (with a few exceptions) regardless of location, house size and income. While the introduction of a Site Valuation Tax has been flagged for 2014, the household charge will cause alot of pain in the meantime. TASC has developed an equality-proofed residential property tax model that could have been introduced relatively easily and used on an interim basis.

As organisations start quantifying the effects of the overall Budget,the picture that seems to be emerging is one where everyone will be affected by the budgetary measures, but once again, low income families will lose proportionately more through reductions in their income, spending power and access to essential public services.

This budget also contains cuts to areas that are not going to save the Exchequer a significant amount of money but will have a disproportionate impact on the provision of locally-delivered services and advocacy work that provides a voice for marginalised groups. These cuts include the disproportionate cut to the budget of the National Womens’ Council, cuts to the Local and Community Development Programme, Rural Transport Programme and Community Employment.

This budget is a very bad budget for women and children in particular, both of whom are at the coal face of this recession.

The latest poverty statistics illustrate the impact that responses to the economic crisis are having on women and children. Unfortunately, this budget is likely to result in a continuation in this trend, so it is more important than ever that the effects of budgetary measures are quantified and alternatives policy options put forward.

At the end of the day the budget represents a set of choices and the political priorities of the Government. Once again the wrong set of choices appear to have been made for the economy and a large part of the population.

Tuesday, 6 December 2011

Day 1 - Budget 2012

Sinéad Pentony: Yesterday’s budget was presented on the basis of three guiding principles: fairness, jobs and reform. Let’s put these principles to the test with some of the big ticket items announced yesterday.

Fairness aims to ensure that the burden of the cuts is shared fairly, but as we all know fairness, like beauty is in the eye of the beholder. Fairness is subjective and difficult to measure – equality, on the other hand, is objective and it can be measured by quantifying the gap between the highest and lowest earners. It is therefore a more robust principle than fairness because you can quantify the impact of budgetary changes on different income groups. See TASC’s initial study which quantified the effects of Budget 2011 on different income and household groups to see how this can be done.

The Department of Social Protection measures announced yesterday included maintaining primary social welfare rates and the rate of child benefit for the first and second child. Other measures to be welcomed include the reductions in the employers' rebate through the redundancy and insolvency scheme.

There are going to be cuts to the higher rates of child benefit for the third and subsequent children over two years. Having looked at Table D8 in the Department of Social Protection’s 2010 Statistical Information, you can estimate the number of children that will be affected by the changes to child benefit – 460,450 to be exact. 663,553 will not be affected directly by this change – but inflation will reduce the value of the payment indirectly.

According to SILC 2009, the at-risk-of-poverty rate for households containing two adults with three or more dependent children was 18 per cent. So the reductions to child benefit - 11.4 per cent for the third child and 9.6 per cent on the fourth child are likely to increase the risk of poverty for larger families.

The other big change relates to the introduction of restrictions to entitlement for One Parent Family Payments. This reform has been presented as “bringing Ireland’s support for lone parents more in line with that provided internationally”.

However, if this is to be real reform and not just about cutting supports to lone parents we need to see other international best practice applied here in Ireland – such as reducing the cost of childcare which is amongst the highest in the OECD by providing state subsidised high quality early year childcare and flexible afterschool care.

Activation policy also needs to be reformed to facilitate people to participate in education and training and access work experience for the purpose of upskilling and retraining. Yesterday’s budget speech included an announcement of €20 million for a Labour Market Activation Fund. This works out at approximately €65 extra for each person who is unemployed.

There are cuts to the back to education allowance, student supports and access initiatives under the Department of Education. These measures will make it more difficult for lone parents to access and participate in education and training initiatives. And where will the jobs come from?

Yesterday’s budget included announcements that public sector numbers will be reduced by 6,000 in 2012. The capital budget is also be cut by €750 million which makes up approximately one third of the overall reduction in public expenditure. Ireland is now the lowest spender in the EU when it comes to expenditure on gross fixed capital formation, and that’s even before this cut is implemented.

The economy has been starved of investment for the last number of years and we cannot begin the process of recovery in the absence of significant investment. TASC and others have made creative suggestions about how investment could be financed. The fiscal adjustment must be counter-balanced with an investment strategy aimed at embedding job creation and growth in the economy. In the absence of a twin-track approach to dealing with the crisis, we cannot create the conditions for recovery which is desperately needed.

In the areas of health and education, a number of measures to be welcomed included increased charges for the use of public beds by private patients. But this is double-edged sword because health insurers will pass on the costs to their customers, which will result in more people being a position of not to be able to afford private health cover. This will have a knock-on effect on the public system and put it under even greater pressure.

The introduction of free GP care for chronically ill patients and the ring fencing of €35m for mental health is also to be welcomed. However, the big issue for health is the staff reductions – thousands of whom have left in recent years, and many more are expected to leave in the months ahead. How can we hope to provide health services that are going to be subject to particular demographic pressures associated with an ageing population with declining staff numbers?

Finally, in the area of education, the good news is that the overall number of Special Needs Assistants (SNAs) and resource teachers will be maintained at current levels. There will be no increase in the general average of 28:1 for the allocation of classroom teachers at primary level. However, there will be phased increases in the pupil threshold for the allocation of classroom teachers in small primary schools. The pupil teacher ratio (PTR) in secondary schools is set to rise with a greater increase in the rate for private post-primary schools, which should be welcomed on the grounds of equity.

However, cuts to the capitation grants for schools will impact on subject choices and the general resourcing of schools. But schools that are able to subsidise reductions in their capitation grants with ‘voluntary contributions’ from parents will undoubtedly fair better. Cuts to school transport will add to the cost of sending children to school and this measure will have a disproportionate impact on families in rural areas where there is unlikely to be an adequate public transport system in place.

Other regressive measures include cuts to capitation grants across a range of further and adult education courses and allowances for participation in Youthreach, Community Training Centres and FAS courses. These measures are particularly bad news as they are likely to act as a barrier for many students wishing to participate in these types of training initiatives. The profile of participants in these courses tends to include many young people for whom the mainstream education system is not an option. Finally, cuts in student supports and access initiatives along with increases to the student registration fee will make it more difficult for low and middle families to support their children in Third level education.

We await Part Two of Budget 2012.

Delors has had far more to say!

Manus O'Riordan: “Euro doomed from start, says Jacques Delors” was the front page headline of Britain’s “Daily Telegraph” on Saturday December 3, dutifully regurgitated on RTE news bulletins throughout the course of the day. But this was a gratuitous eurosceptic editorial embellishment of the story underneath penned by deputy political editor James Kirkup, whose opening sentence fell somewhat short of such a joyful dance of death: “The euro project was flawed from the start”. Still less did such a headline accurately reflect the text of the Delors interview with Charles Moore printed on page 4 of that paper. While undoubtedly a eurosceptic himself, Moore accurately described Delors as follows:

“Mr Delors, who was President of the European Commission from 1985 to 1995, is the only foreign bureaucrat ever to have become a household name in Britain. In 1988 he enraged Margaret Thatcher by coming to address the British TUC on the joys of the European ‘social dimension’. Her famous Bruges speech later that month was her attempt to stand against the tide of European integration that he represented. It was Mr Delors whose report produced the plan for what we now call the euro… (but) the Delors version of what that co-operation should produce (included) the harmonisation of most taxes, plans to deal with youth and long-term unemplyment, and the social dimension for which he always called.”

As for the euro being “doomed”, Moore’s eurosceptic report of what Delors actually said is far more circumspect: “So will the euro survive? Mr Delors does not, of course, deviate from his belief in the European single currency. He is also very conscious of the danger of someone in his position saying anything that might help to destabilise the situation. I am struck, however, by his downbeat interpretation of events… ‘You must be very vigilant to make sure that you do come out of a crisis in a better state … I am like Gramsci (the Italian Marxist philosopher): I have pessimism of the intellect, optimism of the will’.”

Not that Delors is or was ever a Marxist. He suggested to Moore a different combination of factors to explain Thatcher’s antipathy towards him: “I think for Mme Thatcher I was a curious personage: a Frenchman, a Catholic, an intellectual, a socialist.” And it is undoubtedly his own brand of socialism, so firmly inspired by a radical interpretation of Catholic social policy, that explains some of the language he employs to assess responsibility for the failure to act in the face of the enormity of the current political and economic crisis: “He thinks that ‘everyone must examine their consciences’. He identifies ‘a combination of the stubbornness of the German idea of monetary control and the absence of a clear vision from all the other countries’.” But Delors also goes on to firmly finger British Government hostility, no less than that of the current German government, as a key factor obstructing the development of eurobonds: “Mr Delors adds that Britain, though not in the euro and therefore not ‘sharing the burden’, is ‘just as embarrassed’ as the Europeans by the financial crisis. ‘I can see Mr Cameron’s worries’, he goes on, ‘It is a big worry for the British if we can create and trade eurobonds in Paris and Frankfurt’.”

Since I first became a member of the Workers’ Group of the European Economic and Social Committee in October 2010, my reports published on SIPTU’s “Liberty Online” have constantly emphasised the critical need for a eurobonds initiative. (See here for the first and here for my most recent report on December 1). The politics of it all, of course, boil down to issues of EU governance. On this, Delors has had far more to say than featured in the “Daily Telegraph” interview conducted by Moore on November 30. For, exactly one day previously, on November 29, Jacques Delors had addressed us on the crisis at an extraordinary meeting held by the EESC Workers’ Group in Paris.

Delors criticised France itself for having insisted on a merely symbolic Stabilty and Growth Pact (whose terms, in any case, both France and Germany had themselves violated), while ignoring the need to both monitor and regulate the snowballing of private debt. He railed against what he called “the dictatorship of the instantaneous”, warning that “without memory, there can be no future”. He recalled that at the outset of the euro project, meaningful meetings of the euro group of 17 member states had preceded economic meetings of the 27 EU member states as a whole, but that this practice no longer had any substance. The Community method had been replaced by the inter-governmental one, and he maintained that Angela Merkel’s token gesture of support for a so-called “Union” method of governance would amount to little more than a continuation of the inter-governmental method with just an add-on of Council President van Rompuy. Delors maintained that for a European Commission to be up to the job, it had to take risks, and not just earn cushy salaries. It should even be prepared to resign if necessary. As an illustration of the type of confrontation required, he recalled his own spats with Margaret Thatcher during the UK Presidency, as she had always made a point of addressing him as “Mr”, in order to underline her contention that the office of Commission President should be one of no consequence. But when she sought to obstruct the development of the Erasmus programme, he told her he would publicly inform their joint press conference that only a UK veto stood in its way, and she backed down.

Delors denounced the retreat from Social Europe, arguing that there could not be a valid EU democracy without the twin pillars of representative government and social dialogue. He maintained that the euro crisis was being availed of in order to effect what would amount to a social counter-revolution. Welfare rights that had been pillars of Western European society since the immediate post-War years were being called into question, as were established systems of collective bargaining. Member states were being told to unravel sectoral agreements. But unemployment would have disappeared long ago if the “solution” was to be found through differentiated firm-by-firm wage setting. The call for “decentralisation” was a strategy designed to weaken trade unions, pure and simple. Neo-liberalism only measured “value creation” through stock exchange quotations. But how could markets could deliver without regulation? The spirit of so-called “free competition” was polluting everything, from the economy itself to educational systems. If social dialogue with unions disappeared, European democracy itself would end up blunted.

There were, however, other remarks of Delors that might put the frighteners on the present leadership of the Irish Labour Party. I must confess to having been flabbergasted when I heard Eamon Gilmore boast at the Desmond Greaves Summer School in August 2007 that “We’re the Party that gave you the 12.5 per cent corporate tax!” As the “Irish Independent” rather uncharitably reported: “Labour leader hopeful has his comrades up in arms… Down the back, a delegate interjected with a ‘Point of Order’ that Mr Gilmore should have given a different speech to one he would ‘give to the American Chamber of Commerce boasting about reducing corporation tax’.” Indeed, last week’s reports of the Tanaiste’s comments on Sarkozy’s Toulon speech hardly amount to an adequate response: "The position of the Irish Government is absolutely clear. We are retaining our rate of corporation tax… The President said last night things that the President and the French Government have been saying for some time. There's nothing new in that." But it is not on the French Right that he faces his toughest opponents on corporate tax, but the French Left. (See here for “Liberty Online” last June, where I argued that “while the bullying behaviour of French President Sarkozy should be steadfastly resisted, a more balanced examination and evaluation of corporate tax regimes cannot be kicked to touch ad infinitum”.)

Yet even I myself was totally unprepared for the vehemence of Delors himself on that issue. At the Paris meeting I expressed my total agreement with his emphasis on the need for cohesive action by the 17 member euro group in its own right, without being undermined by the UK. I further argued that the type of competitive devaluation that the UK had pursued in 2007-2009 was equivalent to imposing tariffs of 26 per cent and was incompatible with the concept of a Single Market. Moreover, it had a devastating impact on Irish manufacturing. Delors responded to me by agreeing that Ireland had very justifiable concerns about the stability of the euro/sterling exchange rate. But then he immediately proceeded to launch a blistering attack on Ireland for having vetoed any progress on tax harmonisation. He said that as Commission President he had alternated between “spoiling” and “teasing” Ireland in respect of regional and cohesion funds, in the hope of securing a breakthrough, but there was no give. Since Ireland had explicitly aligned itself with the UK in opposing any Treaty provisions on tax regimes, it became clear to me that Delors still viewed Ireland as somewhat of an Anglo-Saxon Trojan horse in the euro area. He was echoed on the tax harmonisation issue by French union speakers. The Irish Labour Party leader may have once said, without much success, “No!” to capitalist Frankfurt. But when Francois Hollande defeats Nicolas Sarkozy for the French Presidency, how long will the Tanaiste be able to continue saying “No!” to socialist Paris?
Manus O'Riordan was Chief Economist of SIPTU until 2012. He is currently a member of the Workers' Group on the European Economic and Social Committee. Manus O'Riordan is a member of the TASC Economists' Network

Monday, 5 December 2011

TASC's Response to the Public Spending Announcements

Nat O'Connor: We have made an initial response to the Budget 2012 public spending announcments.

The reforms to the budgetary process could be a significant improvement. But, where is the economic strategy? It seems the Government is continuing in the vein of previous budgets by focusing narrowly on the public finances while neglecting the massive (direct and indirect) effects that these austerity measures have on the economy.

It's official - austerity isn't working

Michael Burke: The Department of Finance’s White Paper Estimates for the 2012 Budget make for grim reading. The White Paper can be found here.

What this shows is that, even in the government’s own terms, the policy of imposing ‘austerity’ is a failure. Table 1 of the Estimates is shown below.

Revenues are projected to be effectively flat, €39.9bn in 2012 compared to €39.2bn in 2011. Current receipts (mainly taxation) are expected to increase by just 1.7%. As this is close to the likely inflation rate, it means that official forecasts expect no real increase in receipts at all.

The situation is even worse in terms of expenditure. Total expenditure is expected to fall to €61.5bn from €64.4bn in 2011. Yet this decline of €3bn is more than accounted for by a projected €6.3bn decline in capital expenditure for bailing out failed banks (although, despite repeated promises new bailout funds of €1.3bn will still be required in 2012, on top of €3.1bn in the issuance of promissory notes).

These Estimates, indeed the very name Exchequer, are a relic of colonial history which was to account to for how much Britain was kindly granting this country (and not at all including the private sector looting which was the purpose of the project). A similar process still takes place in the North of this island and it is a mark of how little the official outlook has changed here in the last 90 years that they are still used.

Instead, the EU insists on a definition of the General Government Balance which actually includes all aspects of government finances, not these ‘Estimates’ which are just a part of central government expenditure and income. In particular it includes, where the Estimates do not, the payments and receipts of the Social Insurance Fund, the National Pension Reserve Fund, Local Authorities and other items. The projected outcome for government finances on the GGB measure is shown below. This shows the deficit on the GGB rising in 2012. This was after €6bn was taken out of the economy in fiscal tightening in last year’s Budget, and an entirely new (and regressive) tax introduced in the form of the USC. The verdict is clea: the deficit is rising, not falling. The deficit as a proportion of GDP is projected to stabilise, but only because of a growth forecast which may, or may not be realised.

So, when government Ministers of whichever party confidently assert over the next few days that their particular Budget measures will produce deficit-reduction, the first question should be, why will these measures work when all previous measures have failed?

Perhaps the second question should be, if all the massive cuts that have caused slump, unemployment, immigration, poverty and misery demonstrably fail to produce deficit-reduction, is there actually some other, unstated aim of policy?

Sunday, 4 December 2011

More tax questions than answers

Sheila Killian: The 2012 Estimates published over the weekend make for interesting reading in the context of what has already been leaked from the budget. In particular, the tax forecasts raise two or three questions. With luck, answers will be provided when we get more details on the budget proposals next week.

The first thing to note is that for all taxes the take in 2012 is predicted to be at least as high, if not higher, than that in 2011. The msot striking prediction is on Income Tax. Despite Leo Varadkar's promise that there will be no tax change affecting people's incomes, the take is predicted to rise from 13.8 billion to ust over 15 billion. That's a 9% increase. If there's really no change to Income Tax, that could mean that what's being forecast here is some combination of nine per cent more people working and paying in tax in Ireland, or nine per cent pay increases across the board. Neither of these seems likely in 2012, especially in light of the predicted increase in Corporation Tax - presumably mirroring company profits in Ireland - of less than 2%. Perhaps the tax take will be increased by changes to the Universal Social Charge, the bands or a reduction in credits. Or perhaps the base is being broadened, or avoidance is to be tackled in a very significant way. Either way, it will be interesting to learn how this increase is revenue is to be achieved.

The take from Capital Acquisitions Tax is expected to rise by 6%, following a reform of the rules. Capital Gains Tax revenue is expected to stay static, despite a widely-flagged rate increase. This isn't surprising, given the scarcity of gains these days. Nonetheless, a higher rate will eventually bring in more revenue, and should also dampen the enthusiasm for tax schemes based around re-characterising income as gains. Customs, Excise and Stamp Duties are also predicted to remain fairly flat in 2012.

On VAT, despite the 2% increase to the top rate promised in the leaked documents, the overall take in 2012 is expected remain fairly steady at 9.76 billion, increasing by less than 1%. This makes a certain amount of sense - when prices rise, people wil buy less. Still, it begs a more fundamental question, why bother with a regressive and controversial change that is not expected to bring in much-needed revenue? I think we may return to this question, after the clarification of the budget speeches.

Bleeding Ireland Dry

Tom McDonnell: Great article by Karl Whelan here on the infamous promissory notes. Remember over 2% of our total GDP is going to be shovelled into this black hole each year for over a decade to come.

His proposal:

"It is true that the Irish taxpayer has taken on far too big a burden in ensuring that bondholders at Anglo and INBS were repaid. But quibbling about bondholders misses the elephant in the room. It is the huge burden of repaying ELA, not bondholders, that is going to bleed the taxpayer dry for the next twenty years.

It is time for the Irish government to declare that it has no intention of putting €3.1 billion towards repaying ELA in March and that it has arranged an agreement in principle with the Central Bank of Ireland that the state will repay this debt when it has fully recovered from its current crisis.

If my understanding of the legal situation is correct, then Patrick Honohan would only require the support of seven other members of the ECB Governing Council to proceed with this plan. This could easily be achieved with the support of Mario Draghi. Ireland has borne a heavy burden in the name of European financial stability. It’s time for a quid pro quo from super Mario."

Sowing whirlwinds: European elites get the crisis they deserve

James Wickham: Europeans are getting fed up with Europe. Everywhere as the crisis deepens and as some experts demand closer European integration (‘fiscal union’, Treaty change, etc.), more Europeans are becoming disenchanted with the European project.The sociologist Neil Fligstein showed that European integration has had most support from the better off and the better educated.More generally, unlike the creation of modern Italy or even modern Germany in the 19th century, the European project was never a mass movement.

Today even some national elites are abandoning Europe.Certainly here in Ireland much elite opinion seems to be now more pro-American than pro-European, and anti-German jokes worthy of Biggles and the British Daily Mail appear to be normal in the media. Yet this is hardly an Irish peculiarity. Elite disenchantment is pervasive, probably a response to the growing popular discontent.

All of this arguably stems from two long-standing trends.In the past most Europeans have passively tolerated European integration.It was plausible that it had some connection to economic growth from which they benefitted; it sometimes delivered some small but tangible benefits in terms of ease of travel, rights to health services, etc; in some countries it brought better governance and more progressive social, cultural and environmental policies.And then of course some interest groups (e.g. farmers) gained, as did some regions.

The Maastricht Treaty even created some rights for us as European citizens.

But all of that is in the past. For the last decade the EU has been chipping away at the basis of its own popular support.It stands for the privatisation of state assets, and even more crucially, the marketisation of state services - the European Court of Justice not as enforcer of citizens’ rights but of the rights of the free market.If the European Social Model is built on national welfare states, then the European project is now about weakening these – and putting nothing in their place. Why on earth should anyone apart from neo-liberal thugs support it?

More recently another trend has surfaced.Central to the European project was the creation of European institutions (above all the Commission itself) which were to act for Europe as a whole.Although necessarily the big states might dominate Europe, such European institutions would ensure the smaller states had a disproportionate voice.Furthermore, European institutions could ensure that policy differences were not just between nation states, but between different European-wide interests.

Yet as the crisis has mounted, so European institutions have been sidelined. The member states have often ensured that European posts (such as above all the President of the European Commission) are filled by nonentities who can’t threaten them. Now European politics have collapsed to the level of 19th century nation-state realpolitik, with ‘Germany’ demanding this and ‘France’ demanding that and ‘Ireland’ protesting something else.In such a situation it’s hardly surprising that ordinary people understand the crisis in equally national terms (the nasty Germans want to boss ‘us’ around, the spendthrift Irish want to squander ‘our’ taxes, etc).

So why don’t progressives start calling for a new Treaty?One that links fiscal union to European democratic control? One starting point: a European President directly elected by all European citizens?

Friday, 2 December 2011

Budget 2012: carbon tax, motor tax and motivations

Aoife Ní Lochlainn: As we get closer to the budget day (or budget days), the shape of Government plans is becoming clearer. We know, both from leaks and from the Government’s own admissions, that there will be no changes to income tax and that the majority of revenue raising will come from increases in indirect taxes.

A two per cent rise in VAT will provide the biggest source of increased revenue for the state, followed by a household charge and increases to the carbon tax and motor tax. The introduction of a property charge has been heavily debated over the last number of months and will, more than likely, continue to attract serious attention. Likewise, the decision to raise the higher rate of VAT has also attracted much comment; given its regressive nature and the implications for household consumption it will no doubt continue to do so. But how much attention will changes to the motor tax regime and increases to the carbon tax receive?

Carbon tax was introduced in Budget 2010 with the aim of providing price for carbon. It was introduced at the level of €15 a tonne and applied only to oil and gas. A carbon tax at this relatively low level will not produce a meaningful reduction in emissions. International evidence suggests that carbon taxes are most effective when combined with other policy instruments and subject to few exemptions.

As argued by the ESRI, the relative effectiveness of carbon taxes is mixed and depends on various factors such as the elasticity of energy demand and the design of the tax itself. The value of a modest carbon tax lies in its role as a price signal to consumers and businesses that Ireland is serious about carbon reduction, while raising revenue which can be used for emissions reduction programmes such as home insulation. The Government seems set to increase the carbon tax to €20 per tonne. TASC, in its pre-budget submission proposed an increase to €22 a tonne, putting the carbon tax above the current ETS level of €21.50.

However, although the rise in the carbon tax has been well-flagged and to be welcomed from an environmental perspective, it must be accompanied by measures to protect those at risk from fuel poverty. Provision must be made for an increase to the fuel allowance and the continued investment in home insulation, both private and public. If rises in the carbon tax are not accompanied by such measures then the public will conclude that the increase is a revenue raising measure rather than an environmental measure.

The motor industry has already made clear its objections to any further change to the motor tax system, as have some environmental groups. Friends of the Earth described the proposal as unfair to those who had purchased greener cars and 'a stab in the back’ for motorists”. Motor tax and VRT were restructured in 2008 to take account of carbon emissions from vehicles. This had a substantial effect in terms of new car ownership, with consumers choosing more fuel efficient cars and many drivers switching to diesel. Richard Tol and Hugh Hennessy in an ESRI paper (2011) describe the shift to diesel cars as dramatic and conclude that this shift results in lower but not substantially lower emissions, as diesel cars are heavier. They predict a rise in emissions from car travel over the next 15 years due to an increasing car stock and a preference for larger cars. This rise, they argue, “is offset by the switch towards diesel cars”, but “as distances driven do not change (and indeed may well increase), the drop in emissions is limited”.

A €5 increase in the carbon tax is projected to increase the price of petrol and diesel by 1 cent per litre. When viewed with the restructuring and increase in motor tax, motorists and the motorists’ lobby will no doubt claim that they are unjustly bearing the brunt of the increase in taxation. The effect of this may well be to change the debate on carbon tax and motor taxation policies from one on emissions reduction to attacks on motorists. Support for environmental policies are hard won and it is incumbent upon policy makers to ensure that the public understands the policies and their aims. The public embraced the changes to the VRT and motor tax systems and may regard any further changes to these systems extremely cynically. This may have the effect of making it harder to gain public acceptance of environmental policies in the future.

However, the Minister could address some of these concerns by presenting a carbon budget as his predecessor did. This would allow the public to understand the environmental aims behind the policies. Furthermore, it would demonstrate that there is a co-ordinated approach within government to emissions reductions. Carbon tax and the switch to more fuel efficient cars have their place in the policy basket, but like other environmental measures, they work better when co-ordinated with other emission reductions policies.

While reducing emissions (or indeed slowing the growth of emissions) through promoting fuel efficiency is valuable, its effect would be greater if accompanied by other measures, such as the development of better public transport. However, the Government has already delayed key public transport infrastructure projects such as the Interconnector and parts of the Western Rail Corridor, and it indicated earlier in the year that the CIE group will see a large cut in its funding (PSOs). Therefore, as highlighted by Toll and Hennessy, even with better fuel efficiency, emissions from private car use will rise due to the distances travelled.

One must conclude, therefore, that climate change concerns do not figure largely in budgetary decisions. A possible decrease in emissions from increases in the carbon tax is a welcome side-effect perhaps, but if viewed alongside the possible changes in motor tax and the decreases in support for public transport, it is clear that there is little co-ordination on this issue. If Ireland is to reach its 2020 target of a 20 per cent decrease in emissions, then better co-ordination is required. The recent decision to delay climate change legislation does not bode well for future policy making. Without the co-ordinated approach to policy making that would be required by legislation, budgetary decisions will continue to be made in a haphazard fashion, with environmental aims last on the list of policy concerns.

Child Benefit and our values

Tom McDonnell: As Peadar Kirby said in the blog earlier today:
"Budgets should be seen as opportunities to debate national choices for expenditure and taxation, choices that ultimately involve values about the sort of society we want in the future."

So what do we value in this society? Deeds not words inform us about a person's values. On Monday and Tuesday we will learn the values of Fine Gael and the Labour Party.

The children's allowance was introduced in 1944 by Sean Lemass during the Emergency. It is a valuable tool for dealing with child poverty. The payment is for the child and is intended to deal with the cost of caring for the child.

However it seems that child benefit and the other child related social transfers are now in the firing line. Evidently these are luxuries for the good times. Despite having one of the lowest tax takes in the entire Western world when measured as a proportion of GDP we are told we cannot afford such luxuries. The special interests and their mouthpieces will say that you cannot tax wealth creators (such as themselves). They will bleat that if you put a further 2% tax on those earning over two or three times the average industrial wage the poor gossoons will simply lose the incentive to work. Heaven forbid we would cut back on pension related tax breaks, 80% of which goes to the top 20%.

Child benefit payments are not a luxury. For many people they are simply about keeping above water. Carol Hunt presents an excellent argument here. As Carol puts it:
"I really wish that we lived in a world where child benefit wasn't needed. A country where so many mothers didn't wait for the first Tuesday of the month -- the pain if it falls on the 4th or 5th -- with nothing left in the fridge. Where they wait for the one and only payment that they know they can spend on their child, on groceries, on childcare and other necessities.

I wish we lived in a world where couples split their income equitably, where women's contribution within the home was financially appreciated, where women weren't taking mainly low- paid part-time jobs, where working mothers were supported with subsidised childcare.

But we don't. Instead, we have the blunt one-payment-fits-all child benefit which is meant to give a much-valued nod to the sacrifice and cost of being a parent -- specifically a mother."

Means testing of course has its own difficulties as the Guardian points out here.
- Means-tested benefits are costly to administer and prone to high levels of error. Complexity and stigma reduces take-up. Given the hostility displayed by political parties and the media towards benefit claimants, it's hardly surprising that families are loath to apply for them.One parent told the Child Poverty Action Group: "You're made to feel like you're sponging off the system."

Taxing or means testing child benefit would impact on women's labour force participation decisions. Ireland ranks 74th in the world for female-to-male labour force participation (see page 452 of the World Competitiveness Report here). This places us on a par with Botswana, Mauritania and Peru. We do not have the type of structures in place to encourage women into work that are commonplace in most Western economies, for example free child care facilities. This is a consequence of our low tax regime.

As I said. We will soon find out the values of this Government.

Budget 2012: Where's the substance?

Peadar Kirby: Amid all the kite flying, the scaremongering and the testing of the electorate’s pain threshold, the central lesson of the preparations for Budget 2012 has been lost. For more clearly than anything that the FG/Labour coalition has done since taking office, the way Budget 2012 was prepared shows that we are back to politics as usual Irish-style.

Two aspects invite attention. The first is the process and the second the content. Budgets should be seen as opportunities to debate national choices for expenditure and taxation, choices that ultimately involve values about the sort of society we want in the future. New left governments in Latin America have over recent decades experimented with forms of participatory budgetary processes that draw wide sections of the population into deliberating on these choices and, in the case of Brazil at least, having a real say in what choices are made. Instead, in Ireland we have a process made behind closed doors with various options floated to gauge public reaction but with final decisions made only by cabinet. We take this for granted but it is an appallingly undemocratic and irrational way of doing things. We might have expected that, with so much emphasis on political reform, the opportunity would be taken to open up the process on this occasion.

Inevitably, such a process undermines any prospect that preparing the budget might at least begin to address the major questions about expenditure and taxation that face this society. We urgently need a public debate on the balance between expenditure and tax increases that should characterise our adjustment and, much more importantly, about the sort of taxation system we need if we are to achieve greater resources for national development and greater equity and fairness in where we get these from. This is perhaps the single most urgent reform we need as a society and, judging from the preparations for Budget 2012, we are not going to get it.

One might be forgiven for drawing the conclusion that our political and economic leaders see a value on so distracting and frightening the citizens, that no one dares raise these wider issues. It is yet another sign, if one is needed, that we badly need the sort of vibrant citizens’ movement that is beginning to emerge in other societies. One issue at the top of its agenda should be the right to have a say in preparing the national budget.

Thursday, 1 December 2011

A new deal is required

Tom McDonnell: On Monday and Tuesday we will be treated to the latest instalments of the austerity show. While the structural deficit does need to be closed there are good and bad ways to do this. What we almost certainly wont get next week is a credible growth strategy.

It is clear the current pro cyclical fiscal stance is embedding the depression. Long-term unemployment is now at crisis levels and there is a huge risk that high levels of cyclical unemployment will transform into high levels of structural unemployment with disastrous long-term social impacts. Out debt burden (public and private) is consistent with years of future stagnation. If we cannot reduce the debt burden or spark nominal GDP growth then the next few years will be very grim.

We have a Euro zone wide failure of policy. The institutional architecture of the currency union has failed. This is not a cause for shame. Prototypes and innovations fail all of the time. But we have now put the Euro through its paces and it has burst into flames at the first sign of adversity. We must learn the lessons and causes of failure if we are to improve the model. We know the reasons for its failure. A common currency without a fiscal union is incoherent. There are a number of design flaws including:

1. Imposing a single interest rate over a non-optimal currency area amplifies booms and busts
2. The absence of a lender of last resort magnifies the likelihood of sovereign debt crises
3. There are no mechanisms, protocols or conditions for writing down debt
4. There is no EU-wide special resolution regime for banks
5. There are no centralised fiscal mechanisms to provide counter cyclical support for depressed regions
6. There is no transfer mechanism to compensate countries blighted with an overvalued currency
7. There is no centralised financial regulation
and yes
8. There is insufficient budgetary coordination and integration - although this demands greater democratic accountability

All of these mistakes need to be rectified. It seems reasonable to ask whether the Euro is worth saving. Yet the consequences of a Euro break up are likely to be catastrophic.

It is evident the Greek write-down does not go far enough. Write downs or restructurings are probably required for other countries including Ireland. We could start with the promissory notes. But reducing the debt is just one side of the equation. The other side is growth.

We need a new deal for Europe and for Ireland. A new Marshall plan. A deal that would allow the continent to recover. A sister organisation to the ECB responsible for fiscal policy and economic growth should be established. A beefed up European Investment Bank is one candidate to occupy this role.

The greatest challenge for the Irish Government and for Europe is to get its people back to work. Austerity will not achieve this. In Ireland we need programmes to transform the skill sets of the unemployed and other workers to match the needs of the economy. The G.I. bill in the United States is one model we could pursue. The G.I. Bill was a law that provided vocational or college education for returning World War II veterans. The simple fact is the skill base of the unemployed segment of Ireland's labour force is likely to be far out of step with the future needs of the economy. This is particularly the case for the 100,000+ former construction workers that have lost their jobs. For many of these workers there is little prospect of future employment in Ireland. Yes this will cost money, but we still have €5 billion in the National Pension Reserve Fund.

As the weeks pass into years hope for the long term unemployed fades farther into the distance. The Government has an opportunity to start turning the tide next week. It is time for a new deal.

The impoverishment of Ireland

Michael Taft: The CSO has produced the preliminary results from the annual EU Survey on Income and Living Conditions. And the results show an inexorable decline into poverty, deprivation and hardship (see also Sinéad Pentony's post here).

The headline figures show that those ‘at risk’ of poverty have increased from 14 percent in 2009 to nearly 16 percent last year. However, we should treat this cautiously for it is not an absolute measurement. This ‘at risk’ figure is based on 60 percent of the median income (that is, the figure at which 50 percent of the population is below and 50 percent above). When the median figure falls, as it will during the recession, so does the at-risk poverty threshold of 60 percent.

Since equivalised median income fell between 2009 and 2010, so did the threshold – by `10.2 percent each. This sets up the anomalous situation whereby someone on an equivalised income of €12,000 in 2009 would be below the at-risk threshold. If their income fell by 5 percent last year you’d assume they would be worse off (and they would be). However, since median income fell (and, so, the threshold) by a larger amount, that person is now not considered at-risk of poverty.

This doesn’t undermine the validity of the relative at-risk threshold – but we should always be careful about what relative measurements tells us and what they don’t. For instance, even with the threshold falling by 10 percent, there are still more people in the at-risk category.

There is, though, another measurement we can turn to that assesses in absolute terms another definition of poverty: the deprivation indicators. This measures how many people experience certain types of enforced deprivation. This tells a rather alarming story.

The most widespread deprivation indicator shows that one-in-five of our fellow Irish residents can’t afford to replace worn out furniture (this rises to 30 percent among those living in poverty risk but even those not living in poverty risk suffer nearly the national average).

Further, we are creating a nation whereby a number of people cannot afford simple social activities – an evening out, having friends over. These are top deprivation categories. That one-in-ten can’t afford heating at some stage (rising to nearly one-in-five for those living in poverty risk) tells a real story of unhealthy living standards.

The growth in just the past few years in people suffering these deprivation experiences tells the real story behind the growing impoverishment of Irish society.

More than one-in-five of all people suffer two or more of the above deprivation experiences. Almost as many who are not at risk of poverty also suffer these experiences. This is a serious indictment of the failed austerity policies. These proportions have risen dramatically since 2007.

It is likely that deprivation will increase. These numbers take us up to 2010. However, the last budget cut social protection rates, Child Benefit and Rent Supplement, while imposing extra taxation (though the USC and cutting personal tax credits) on the low-paid. This will drive more people into more deprivation experiences.

The idea that we can promote economic growth and repair public finances with policies that drive more people into deprivation is an economic nonsense and a social obscenity. In the run-up to the Budget all Government Ministers and backbenchers should memorise and internalise these figures.

And act accordingly.

Wednesday, 30 November 2011

Poverty, inequality and Budget 2012

Sinéad Pentony: The publication of the preliminary results from the 2010 Survey of Income and Living Conditions (SILC) is very timely in the run up to the budget as it clearly illustrates the impact of austerity measures on the levels inequality and poverty. The results also confirm the findings from TASC’s Equality Audit of Budget 2011, which clearly shows that low income groups lost proportionately more of their income than higher income groups as result of the budgetary measures for 2011. These measures will exacerbate income inequality and lead to growing numbers being put ‘at risk of poverty’ and forced to live in poverty. Given that next week’s budget looks set to continue the failed austerity policies of previous budgets, we can expect to see these trends continue for the foreseeable future. However, there are alternatives, and the choices that are made next week will clearly illustrate the political priorities of the current government.

The headline SILC results show us that income inequality between 2009 and 2010 increased, with the average income of those in the highest income quintile 5.5 times that of those in the lowest income quintile. The ratio between 2008 and 2009 was 4.3 times. The ‘at risk of poverty’ threshold decreased from €12,064 to €10,831, reflecting declining incomes and cuts in social welfare payments over the last number of budgets, and this was accompanied by a sharp rise (12 per cent) in the number of people who are now classed as being ‘at risk of poverty’ - from 14.1 per cent in 2009 to 15.8 per cent in 2010. The proportion of the population ‘at risk of poverty’ is now back to 2006-2007 levels.

One of the most striking figures is the 30 per cent increase in the deprivation rate, which is defined as being deprived of two or more essential items that are deemed essential for meeting basic living requirements. The deprivation rate increased from 17.1 per cent to 22.5 per cent between 2009 and 2010 and the CSO has highlighted the fact that much of the increase has come from those who are NOT ‘at risk of poverty’. The combination of the deprivation rate and at risk of poverty rate gives us the measure of consistent poverty, and this increased from 5.5 per cent to 6.2 per cent. While this might not sound like a lot, the number of people in consistent poverty has increased by almost 50 per cent since 2008, the onset of the current crisis.

Once again, the SILC 2010 preliminary results show us that the groups identified as being most ‘at risk of poverty’ were children and single adult households with children. Almost one in five children were ‘at risk of poverty’ in 2010, with the rate increasing from 18.6 per cent to 19.5 per cent between 2009 and 2010. The ‘at risk of poverty’ rate for households composed of one adult with children was 20.5 per cent. When we look at the rate of consistent poverty, we see once again that children are the group most likely to experience consistent poverty.

The crucial role of social transfers in providing a large proportion of the population with income supports to meet basic needs is also evident, with the results showing us that over half of the population - 51 per cent - would be deemed to be’ at risk of poverty’ if social transfers were excluded from income. In 2004, this figure stood at 39.8 per cent.

These results show us the devastating effects of the policy responses to the crisis on children in particular and on single adult households with children. The burden of the adjustment has clearly been placed on those groups in society that are least able to absorb reductions in income and loss of access to vital public services. There are also strong economic arguments for protecting the incomes of those already on low incomes, particularly in relation to maintaining and boosting demand in the domestic economy.

The National Anti-Poverty Strategy is in tatters, and that there is a need for a complete shift in policy and how we formulate policies aimed at addressing poverty and inequality. All budget proposals should be equality proofed in advance of the budget, and this can only be achieved by undertaking a full distributional analysis to identify how different groups in society are likely to be affected. Budgetary measures should be audited for their effects on different groups after implementation.

We also need to change our system of taxation and benefits to increase the incomes of the low paid and those on welfare. This will have the dual impact of reducing poverty and inequality and protecting existing jobs in the local economy by maintaining aggregate demand. So we potentially have a win-win situation for the economy, and for the society which it should serve.

Tuesday, 29 November 2011

Let's see rationales behind Budget decisions

Tom McDonnell: When Minister Noonan stands up in the Dáil next Tuesday it would be helpful if the tax measures he is introducing were accompanied by a set of documents explaining the rationale for each choice being made.

What will be the impact on growth and employment? What about the impact on the most vulnerable in society? What other measures were considered? Why were they rejected and what were the expected impacts of the rejected measures?

The empirical literature strongly argues that taxing property is the least damaging form of taxation when it comes to economic growth and employment. By comparison taxes on labour are more damaging because they directly interfere with economically productive activity. Taxes on low-income workers are particularly damaging because of these worker's high propensity to consume.

Broadly speaking property taxes are composed of:
• Recurrent taxes on immovable property (residential property taxes/site valuation taxes)
• Recurrent taxes on net wealth
• Estate, inheritance and gift taxes (this is CAT in Ireland)
• Taxes on financial and capital transactions (e.g. Tobin Taxes and CGT)

The literature is consistent in its findings. OECD estimates are here.
A shorter document is here.
Table 1 on page 6 has the main results

Each year the European Commission compares the tax burden for all 27 EU countries. The Commission identifies property, environment and consumption taxes as the least damaging to growth (see Box 1 on pages 38-40 of the document)

As an aside you can compare tax burdens for all EU countries on page 282 of the European Commission document (Table 1) – it shows Ireland had the third lowest tax burden in the whole European Union in 2009 - we are a low tax regime (we rank 25th – only Romania and Latvia are lower).

This IMF paper highlights the causal role of growing inequality in generating both the current and the 1929 crises. The authors suggest moving away from taxing the labour of low-income workers, and instead increasing taxes on economic rents, including land, natural resources and financial sector rents.

Not only are property taxes the least damaging to growth and employment but if properly designed (i.e. not a flat rate charge) they are also some of the least regressive forms of taxation. In general, consumption taxes are by far the most regressive taxes and tend to disproportionately impact on lower income groups. On the other hand property taxes tend to impact on the wealthier cohorts.

The TASC Pre Budget Submission has strongly emphasised property taxes as being the most consistent with economic recovery and consistent with social solidarity.

Monday, 28 November 2011

Budget 2012 - Choices

Tom McDonnell: According to Eurostat, Ireland will have the lowest rate of gross fixed capital formation in the EU next year (see pages 68-69 of the pdf).

Fitch partially justified their downgrading of Portugal to junk status on the basis of Portugal's stygian and austerity related growth prospects. As austerity bites harder throughout Europe, the OECD is now forecasting the Eurozone and UK economies will enter recession again next year. In this context Tony Dolphin, the chief economist of the UK think-tank "the Institute for Public Policy Research" (IPPR), has released a short piece suggesting 10 ways to promote growth in the UK economy.

No one denies the Irish Government is heavily constrained in terms of its fiscal stance. However within those constraints the Government still has the ability to make choices. As Olli Rehn wrote today in the Irish Examiner:

“the programme leaves considerable policy discretion to the Government in terms of how to meet its key objectives. It is the Government, and not the so-called "troika", that is responsible for taking the key decisions that matter to the lives of Irish people.”

Ajai Chopra has expressed similar sentiments in the past.

Those who say we have no choices are not being honest. But has the Government chosen well?

The UK's Office of Budgetary Responsibility OBR has looked at the 'impact multipliers' of changes in different taxes and types of spending on growth.

OBR Estimates of fiscal multipliers - tax decreases/spending increases
- Changes in personal tax allowance and national insurance contributions 0.3
- Change in VAT 0.35
- Welfare measures 0.6
- Current spending 0.6
- Capital spending 1.0

What is crucial for policy is the relative efficacy of the measures. Changes in personal tax/social insurance are the least effective measures at stimulating growth while capital spending measures are the most effective. Of course capital spending has the additional advantage of adding to the economy's productive capacity over the longer term. See this discussion last year in the UK parliament on fiscal multipliers. Thus it was a curious decision by the Irish Government to choose to double the level of cuts to capital expenditure. Presumably this was to avoid the politically more difficult choices of increasing taxes and cutting current spending.

Best international evidence suggests the Irish Government's policy choice was the worst decision they could have made in terms of future economic growth and employment. For example see this IMF Position Paper on fiscal multipliers. The effects of the different policy measures can be seen in the Appendices of the document starting on page 22 of the pdf. The IMF paper shows capital spending to be the most effective measure for increasing growth.

Of course cuts to capital spending are politically easier than other choices. One wonders if political concerns are overriding sound economic policy. A lamentable start by the new Government.

Ireland not an austerity role model ...

Michael Burke: This is an interesting piece from Martin Knijbbe on Ireland as a poster-boy for 'austerity' measures. In response to an article from Jurgen Stark extolling Ireland's export-led recovery, he examines that actual trends in the trade balances of key EU economies currently as well as the growth of both imports and exports. Stark remains a member of the board of the ECB for the time being and argues that 'internal devaluation', wage cuts are responsible for Irish export-led growth. This piece, which originarly appeared on Real World Economics, challenges each of those assumptions.

Crisis update

Tom McDonnell: FT Alphaville is reporting that Moody's is now talking about multiple defaults and a Eurozone break-up. See here for the Moody's press statement while the Guardian is reporting on the widespread market rumours of an impending IMF bailout of Italy. The success or failure of the Belgian, French, Italian and Spanish bond auctions this week should give us a clearer picture.

Wolfgang Munchau has taken a fevered turn and is talking about the Euro zone in terms of days to avoid collapse here. He does point out that technical solutions still exist. These solutions involve the introduction of Eurobonds, the ECB as ultimate lender for sovereigns, and the creation of a Eurozone treasury with oversight over fiscal policy.

Meanwhile Paul Krugman is having difficulty finding a plausible scenario under which the Euro survives.

Gawyn Davies looks at breakup scenarios here.

The EU Summit on December 9 may be the most important yet. This WSJ article provides clues as to the likely strategy from Germany and France. According to the IT Germany is considering elite 'AAA' bonds to be issued jointly with France, Finland, Netherlands, Luxembourg and Austria. Presumably this is predicated on France making it through the year as a AAA country.

One positive development is the increased pressure the ECB is coming under from national Governments to step up its bond buying.

Friday, 25 November 2011

The Euro Crisis: is history repeating itself?

Jim Stewart: It is a “common view ... that the world was headed for a massive payments crisis in which several European countries would default on their debts, setting the stage for a general restructuring of all international commitments”.

So writes Liaquat Ahamed in his book ‘Lords of Finance’ (p. 326) in describing the prelude to a conference in 1929 called to reach a final settlement to the German Reparations issue. The conference succeeded in reaching agreement but on terms which eventually lead to financial chaos in Germany and helped precipitate the great depression of the 1930s. Policies that are now regarded as disastrous, were held widely by key decision makers and dogmatically argued. The analogy with policy making and events in the period preceding the great depression of the 1930s and today are striking.

Personal animosities, then as now, are widespread. In 1929 the Governor of the Federal Bank of New York and in effective control of The US central banking system described his German opposite number as an “.. ..exceedingly vain man. This does not take the form of boastfulness as it does a certain naive self assurance” (Ahamed, p. 281). For recent 2011 examples, see Lord Myner's comments on Michael Barnier, the Commissioner for internal regulation. Media reports often cite German annoyance with French Government policies and proposals, see for example here. At an EU summit in October, President Sarkozy is widely reported as telling The Prime Minister of the UK "You have lost a good opportunity to shut up.". Kauder (a leading member of the CDU) has described UK policy as irresponsible and self interested.

But the main problem is the prevailing consensus (held for example by the President of the ECB, the new Prime Minister of Italy, the Governor of the Irish Central Bank etc) that the solution to current economic problems is austerity plus maintaining the solvency of the banking sector at any cost. For short hand this can be termed the Goldman Sachs consensus. The increasing irrationality of such a policy is becoming obvious even to some former supporters. Some examples:-

(1) Ireland, even though it is dependent on IMF and EU loans, and has suffered a hugh recession and economic collapse, was required to pay bondholders in a failed bank even though these bondholders were not covered by any guarantee;
(2) The ECB intervenes in the sovereign bond market while at the same time stating such support will be limited and undesirable. The net effect is that those who wish to sell government bonds such as banks have been able to do so without any medium term effect on bond yields. In effect, such intervention is another support to the banking system.
(3) Where default is both desirable and certain, as in the case of Greece, policy makers perform numerous contortions to try to ensure such a default does not trigger an ‘event’ resulting in the payout on a Credit Default Swap Contract. A Credit Default Swap is similar to insurance on a bond. If the bond defaults the insurance is paid. Such contracts would appear to be one of the greatest financial frauds perpetrated in recent history. Given that policies to ensure debt write downs are not technically a default, buying a CDS contract on government debt, means that the contract will not pay up in the event of default. In any case, in the highly desirable event of a write down of Government debt generally in indebted countries (where Government debt was greater than 60% of GDP, as in the case of Belgium, Ireland, Italy and Portugal), CDS contracts would also not pay out because the counterparty would become insolvent. This is because it is most unlikely that, following the bailouts due to the subprime crisis of AIG and other financial firms, there could be a second massive transfer of resources from the state to the banking sector.

As in earlier periods of financial crisis, commentators assume rationality by decision makers. However key decision makers should be judged by what they say, as distinct from what we hope they think. Take the case of the recently appointed President of the Bundesbank . In a recent interview with the Financial Times, the Bundesbank President stated that the correct response to Greece is “implement what has been decided”. The problem is what has been decided cannot be implemented. Greece does not have the necessary administrative or technical skills, never mind the political will, to implement IMF/EU proposals. The problems with Italy are seen as a problem of “confidence”. Italy has many problems, both political and economic. These reforms will take many years to implement. The lack of confidence in Italian Government bonds is immediate. The Bundesbank President considers the key competitive strength of Germany results from labour market reform. The key strength of Germany relates to its innovative, high productive economy, with a skilled labour force, extensive infrastructure and success in tax compliance (for example using leaked information on deposits held in Swiss bank accounts by German nationals to ensure tax compliance).

There is widespread support for issuing Eurobonds. There are arguments for and against such a proposal (see for example the recent Green Paper on Stability Bonds (Annex 2). Issuing eurobonds could help in the current crisis if applied only to new bond issues, and if existing bonds were not converted into new bonds. Instead they could be transferred to a debt management agency for all or some of the most heavily indebted countries. These bonds could then be written down in value and held until redemption. This is in contrast to the proposals in the EU Green Paper on Stability Bonds, which does not envisage or discuss writing down the value of existing bonds. In addition, the Green Paper does not refer to or discuss the very different economic policies pursued by central banks in the US, UK and Japan, that is large scale intervention in the bond market referred to as ‘quantitative easing’, and the consequent effect on bond yields.

But comments by key decision makers on such a vital topic have been meaningless. For example, the President of the Bundesbank has dismissed arguments in favour of Eurobonds by stating such a policy would be “like drinking sea water to kill thirst”. These and other comments do not give any confidence that key economic policy makers are intellectually equipped to deal with the current crisis.
There is no modern equivalent to Keynes. As in the 1930s, we may have to wait until current policies have demonstrably failed, and are widely recognised to have failed, before there is a change in policy. The cost and problems created could be enormous.

The forthcoming Budget in Ireland is given much media attention. The forthcoming EU summit on 9th December could take decisions that will influence our economic destiny for the next decade.

Who will pay more and who will be protected in Budget 2012

Sinéad Pentony: Budget season is well and truly underway and the slow drip feed of information and kite flying continues. The broad thrust of the fiscal adjustment is presented as a fait acompli – ‘we have no choice’ but to continue on the long hard road of austerity, with those least able to absorb reductions in income and access to essential services being faced with bearing the brunt of the adjustment. TASC and others continue to point out that there is an alternative and this involves ensuring that those who can afford to make a greater contribution to the adjustment are made to do so.

Once again, child benefit appears to be in the firing line and it's filling plenty of column inches. There are also plans for a range of other savings across the Department of Social Protection In the area of health, the proposals being considered include the imposition of an annual fee of €50 for medical card holders along with increases in other user health charges covering prescriptions and access to A&E services.

Even if only some of these proposals make their way into the budget, when they are combined with the confirmation that the main rate of VAT will be increased by two percentage points, this year’s budget is looking very similar to last year’s budget.

In contrast to the debate about where the cuts should be made and by how much, last week Revenue provided details on the amount of tax that was collected through the ‘domicile levy’. This levy of €200,000 was introduced in Budget 2010 on Irish people who are domiciled in Ireland but non-resident for tax purposes. The levy is applied to individuals whose income and assets exceed certain thresholds.

Revenue reported that less than €1.5 million was collected and this was based on a average return of €147,000 by ten individuals who are liable for the levy. The returns are made on a self-assessment basis. Revenue also estimated that, in 2009, there were almost 6,000 individuals who were classed as non-resident for tax purposes and that 440 of these were considered to be very wealthy.

By anyone’s standard,s the domicile levy has failed to ensure that this particular group of Irish people is made to pay their fair share as part of the adjustment. The question is - will the up-coming budget send a clear message that this situation is not going to be tolerated any longer and that other measures are going to be put in place to ensure that the wealthiest Irish people will be made to contribute to the fiscal adjustment on a more equitable basis?

The Community Platform's taxation proposals have highlighted the types of measures used in other countries to tax wealthy non-residents – the US citizen-based tax and the French tax on global assets. The TASC proposals also include measures to increase the level of taxation on assets and passive income from assets held in Ireland, along with reducing the number of days that non-residents can be present in the State from 183 to 90 days.

The economic and equality arguments have been well rehearsed at this stage for targeting taxation measures high earners residing both inside and outside the country. TASC’s Equality Audit of Budget 2011 clearly illustrates who was made to pay more in the last budget. It will come down to the political choices and priorities in relation to who will be made to pay more and who will be protected this time around.

Thursday, 24 November 2011

One more roll of the dice

Tom McDonnell: There seems to be a growing consensus (finally) that only the ECB has the capacity to end the immediate crisis in the Euro zone. The French are now pushing ECB intervention as indeed are the Spanish, Italian and Belgians. Our leaders will get maybe one more roll of the dice to save the Euro. Unfortunately the Merkel doctrine of "no lender of last resort", "no fiscal transfers", and no "countercyclical fiscal mechanism" may yet prevent a happy ending to this story. No number of agreed Treaty changes about interference in national budgets and imposing discipline is going to change that fact.

To prevent meltdown of the currency some form of Treaty change is required to alter the mandate of the ECB. Treaty change to make the ECB a lender of last resort and the introduction of Eurobonds should be expedited. If tighter fiscal oversight is the price then it is worth paying.

Treaty proposals and changes seem inevitable and in that context it is the responsibility of the Irish Government to fully engage with this process to ensure that the proposed new rules and decision making architecture are fit for purpose and consistent with long-term recovery. There is a danger that the events of the last eighteen months have permanently changed the decision making process in Europe in a way that excludes small countries. This is a disturbing development that needs to be reversed.