Friday, 29 April 2011

OECD Policy Responses to Unemployment

Sinead Pentony: The OECD has pre-released a chapter from its forthcoming Economic Outlook 2011 Report on the Persistence of High Unemployment: What Risks? What Policies? The report finds that at the end of 2010, “the average OECD unemployment rate was still close to historical peak reached during the crisis”. In countries (such as Ireland and Spain) that have been severely hit, persistently high levels of unemployment will eventually result in widespread deterioration of human capital (skills and competencies), discouragement and labour market withdrawal. This Report puts the scale of Ireland’s unemployment crisis in an OECD context and it makes three main policy proposals that are certainly worth considering as part of the Government's planned ‘Jobs Initiative’ which is due to be launched in May.

First of all, the report shows us how Spain and Ireland have been particularly badly hit by increases in unemployment. While Ireland is a few percentage points behind Spain (see Figure 1 reproduced below), it can be argued that net outward migration is having a dampening effect on the figure for Ireland. The drain of highly skilled workers out of Ireland, who are also of course members of families and communities, will have major long-term social and economic costs for the country.

Figure 1: The Increase in unemployment rates following the crisis (2007 Q3 – 2010 Q4)

The Report argues that aggregate demand policies continue to have a role to play in supporting economic recovery and in stimulating job growth. And monetary policy has been used by many OECD countries to increase aggregate demand by keeping interest rates low. However, the recent interest rate increase by the ECB - with indications given that there are more increases to come in 2011 – will hamper the efforts of policy makers in the three countries in the Euro Area (Spain, Ireland and Greece) that have seen the largest increases in the rate of unemployment in the OECD.
The Report also identifies a number of measures that have protected some countries employment levels from the worst effects of the crisis. “Labour hoarding” in particular, is singled out through the introduction of state subsidised ‘short-time working’ arrangements. The OECD place a lot of emphasis on the effectiveness of this measure in protecting employment levels, notwithstanding the risks which are outlined in the report.

The OECD also demonstrate the adjustment in labour markets in terms of the decline in output. As we can see (Figure 2 reproduced below), Ireland is an outlier in this regard. The OECD contends that “in the majority of countries, total hours worked declined less than GDP as the output shock was partly absorbed through labour hoarding.” Higher levels of job losses were also concentrated in low-productivity sectors such as construction. Countries such as Ireland, USA and Spain were identified as having higher than average proportions of workers in these sectors, which is reflected in higher than average reductions in hours worked.

Figure 2: Percentage decline in GDP and total hours worked from peak to trough

The OECD also examine nominal wage and labour costs. In most countries, wages decelerated sharply with labour costs also largely decelerating. The data presented in Figure 5 in the OECD report (reproduced below) shows changes to wages and labour costs before and after the crisis. What we find is that increases in nominal wages and unit labour costs just before the crisis hit were broadly in line with increases in the OECD. See here for a further discussion on unit labour costs. The OECD data shows that Ireland had the second lowest growth in nominal wages in the OECD between 2009Q1-2010Q2, and the largest fall in labour costs in the OECD during the same period.

Figure 5: Annualised average percentage change in nominal wages and unit labour costs before and after the crisis.

The three main policy proposals in the OECD report are as follows:

1. Temporarily extend unemployment benefits in countries where such systems are weak so as to provide needed income support ensuring that unemployed workers currently facing bleak jobs prospects do not fall into poverty or lose attachment to the labour market. This should be combined with active labour market policies that are adequately resourced to provide appropriate levels of job-search assistance and training.

The timing of the break-up and re-branding of FÁS is unfortunate given the unprecedented need and demand for targeted active labour market supports and services. The OECD identified effective and efficient services for the unemployed as “a structural determinant of outflows” from unemployment into jobs. Active labour market policies are an essential component of resolving the jobs crisis.

2. The second policy proposal relates to providing temporary hiring subsidies. The OECD highlights the fact that in many countries, the most difficult cases to match - long-term unemployed with low levels of skills - are often addressed through jobs subsidies or direct public-sector job creation targeted at specific groups. Policies aimed at stimulating labour demand included temporary cuts to employer social security contributions.

The OECD found this measure to be cost effective and involve a smaller deadweight loss. Current policy here includes PRSI exemption for taking on new employees and cuts to employer PRSI are expected as part of the forthcoming Jobs Initiative. However, Ireland already had the second lowest level of employer social security contributions in the EU 15 in 2008, which means that taxes on labour (from the employer perspective) are already very low.

The OECD identifies longer term taxation policy measures that are less damaging on employment and growth. These include a property tax, environmental taxes and consumption taxes – there is no mention of the regressive nature of consumption taxes, however, different rates of VAT could be used to lessen the regressive effects, with luxury items being liable for higher rates of VAT than items used to meet basic needs.

3. The third area relates to investment in training and education. The OECD found that younger workers have been much harder hit by the crisis than older workers and that it is younger workers who are now most at risk of chronic long term unemployment. With youth unemployment currently running at over 25 per cent in Ireland there is clearly a need for targeted interventions and supports for this group, especially those with low levels of education and skills, which puts them at a much higher risk of becoming long term unemployed.

While the number of traineeships and internships for new graduates and recently qualified workers has been expanded, they may well be insufficient to meet demand. Also, there remains a large cohort of young people that need a variety of education and training supports for the purpose of up-skilling /re-skilling if they are going to have any chance of success in re-entering the labour market.

Saturday, 23 April 2011


Slí Eile: Today's Irish Times reports that, according to former Minister for Finance Brian Lenihan, Ireland was 'forced' to take the IMF-EU bailout. OK. but what about the guarantee? check out the Nyberg report.

Friday, 22 April 2011

How well are organisations run?

Slí Eile: Nyberg, McCarthy, Doherty and Chopra..a busy fortnight past. Don't miss the following item in the Irish Times of Thursday 21st ("Massive bonuses for bankers? Not for those equitable Swedes'). It tells a story about one bank - in the UK but Swedish in ownership.
We are different, even in Sweden. This boils down to a fundamental humanist view. We believe that if you put trust in people, people will respond in a positive way and take responsibility and deliver results that they would not have achieved in a command-and-control environment
so said Anders Bouvin, head of Swedish bank Handelsbanken operation in the UK.

Now the Swedes know something about banking from the collapse and response of Government, there, in the 1990s. Whether an enterprise is publicly or privately owned, the way it is run, led, held accountable and focussed is all important. How ironic it is that as public debate is being prepared for a sell-off of profitable (but 'non strategic') public assets, the citizenry have been buying up dud assets and liabilities in the top Irish banks - only to be rationalised, sold off and outsourced to others who may buy in the fullness of time. And in the meantime some creditors are getting away scot free as are some who continue to benefit from the bonus culture. The problem with the way the Nyberg Report has been taken up is that 'we are all to blame' is far to convenient a means of deflecting attention from those in positions of leadership, influence, power and responsibility to escape the consequences of their actions.
Reforming the way organisations are run - public, private, voluntary - is vital along with striking the right balance between public, private and voluntary ownership of assets.

Thursday, 21 April 2011

Those who live by the bond yield ...

Michael Taft: Remember all those comments in the days following the latest bank-bailout? How the markets had sent positive signals? That confidence was slowly rebuilding. 2-year yields fell from their high of 10.25 percent on March 3rd to 8.65 percent on April 13th. 10-year yields fell from 10.22 percent to 9.09 percent. Okay, far away from being able to re-enter the market – but evidence that the Government’s banking policy was gaining something approximating market credibility.

Well, say good-bye (for now) to all that.

In just a week all those gains have been wiped away and the slide continues. As of lunchtime today, 2-year yields have set a new high – at 10.35, while 10-year yields rose to 10.31 percent.

Where are the analysts now? Where are the kudos? What has gone wrong – apart from the fact that drawing even tentative conclusions from such a short time-frame is bound to disappoint?

This is all part of a continuing crisis in the Eurozone periphery. Even the assertions that Spain had effectively ‘de-coupled’ from the periphery with strengthening bond yields are being tested by the markets. Rising yields and falling investor demand is re-starting the worries. Greece and Portugal continue to slide as well.

It is long past time that policy-makes – here in Ireland or especially in the Eurozone – stop seeing this as a sovereign debt crisis and admit that this is a bank crisis, spreading contagion wherever it goes.

As Yanis Varoufakis puts it: ‘It’s the (German) banks, stupid’.

Palcic and Reeves on privatisation

Given the week that's in it, PE readers may be interested in a new book by Donal Palcic and Eoin Reeves, Privatisation in Ireland: Lessons from a European Economy. Further details are available here.

Wednesday, 20 April 2011

Towards the Good Society

Sinéad Pentony: As the debt, fiscal and economic crises rumble on, and as fire-fighting policy responses continue, it can be difficult to think about the bigger picture and the wider impacts the crises are having on societies across Europe. However, if we are to avoid repeating the mistakes of the past we need to understand that a paradigm shift is required. Orthodox responses to the failings of neo-liberalism are clearly not working for anyone (with the possible exception of some financial institutions), and there is a growing acceptance of the link between the crises and inequality

That’s why events such as the recent conference in Stockholm on ‘Dimensions of Equality in a Good Society’, and the accompanying online debate at the Social Europe Journal, are so important. The conference was organised by two think tanks, Germany’s Friedrich Ebert Foundation and the Swedish labour think tank, Arbetarrörelsens Tankesmedja.
The aim of the conference was to analyse the concept of inequality and to locate it within a wider framework of a new social and democratic political agenda.

The focus was on four dimensions of equality: the philosophical, economic, social and integration dimensions. I’m going to focus on the economic dimension, where the conference attempted to broaden the boundaries of the discourse on equality beyond “marginal debates on a couple of percentage points up or down in a progressive tax system”.

We can’t have equal citizenship if there is a large gap between rich and poor, mainly because the rich have the means to influence the political system and public institutions. This was considered to be a systemic problem – regulatory capture with inequality spiral – whereby the richest players influence the rules and their application, thus expanding their own advantage. Public facilities come under the influence of players who are motivated by short-term profit gain – and who buy support from media and academics for this purpose. Sounds familiar? We don’t need to look much further than the Nyberg Report, as an example of how regulatory capture manifested itself in the Irish banking system.

This systemic problem is a major contributing factor to current (and future) trends of continued increases in social, political and economic inequalities. For example, during the last US economic expansion (2002 – 2007) average per capita household income grew by 16 per cent. The top one per cent enjoyed growth of 62 per cent, while for the remainder of the population it was just 6.7 per cent. The top percentile captured 65 per cent of the real per capita growth of the US economy. During the period 1978 – 2007, the income share of the bottom half declined from 26.4 per cent to 12.8 per cent. Meanwhile, that of the top one per cent rose from 8.95 per cent to 23.5 per cent (a 2.6 fold increase).
It’s a similar story in China. During the period 1990 – 2004, the income share of the bottom half declined from 27 per cent to 18 per cent, while that of the top tenth rose from 25 per cent to 35 per cent. In Ireland, TASC’s HEAP research demonstrated a more equal distribution of incomes in 1987 compared to 2005 and the analysis also found that 5 per cent of the population control 40 per cent of Ireland’s wealth, and the top 10 per cent have a disposable income 11 times the bottom 10 per cent. The trends are similar across the developed world, and point to growing income inequality.

In terms of fiscal policy, the point was made that countries with the biggest deficits are low tax economies such as the USA, Ireland, the UK and Portugal. Higher spending countries have a better track record in controlling their deficits. They also tend to have smaller income differentials as a result of progressive taxation. The World Economic Forum has consistently shown that the most competitive economies are high spending economies, particularly in areas such as education and training, innovation, infrastructure. High spending economies have also weathered the crises much better than low spending economies, and are proving more capable of recovery.

It could be argued that the scale of the crises has also threatened democracy: you can change your government, but you can’t change the policy as this is set elsewhere. We have direct and very recent experience of this here in Ireland. Also, liabilities have been shifted from corporations to states as in the case of our banking debts. In the current context of what was described as “permanent austerity”, fiscal policy requirements determine the level of welfare state retrenchment policies and social policies have been de-nationalised and Europeanized in reaction to the debt crises across Europe.

In order to reverse the trends of growing inequality and minimise the chances of the same happening again, we need to put the global economy on a different trajectory. As we can see the problems are numerous and complex, and progressive solutions will need to be sophisticated and address systemic failures that have brought us to where we are today. A number of solutions were put forward and debated during the conference, including debt restructuring, and there was consideration of policy measures to allow the exit and re-entry to the Eurozone. Other progressive solutions included the consideration of social policy as a growth sector, since it contributes percentage points to GDP, provides jobs and the creation of new business opportunities.

The need for institutional reform was also identified with an emphasis on redesigning public institutions to be equality-focussed. In Ireland the debate on (public) institutional reform has focussed on creating greater efficiencies and achieving ‘more with less’, alongside greater transparency and accountability. While these reforms are necessary there has been no discussion on the link between public sector reform and equality. However, the link between public institutions and equality was made very strongly at the conference, whereby “high quality government institutions will increase the level of social trust, which will make reciprocity turn into solidarity, which in turn increases equality”.

These are just some of the ideas that were discussed and they reflect some of the complexities that need to be grappled with if we are to emerge from the crises on the path to more equality. ‘The Good Society’ creates a forum for debate on the problems and the solutions. Let’s hope that our politicians, their advisors and policy makers are tuning into the debate..

Tuesday, 19 April 2011

Has the time come?

"In 1816, the British parliament repealed the temporary income tax that William Pitt the Younger had introduced in 1789 to finance the Napoleonic war. The MPs hated the tax so much that they even agreed that all documents connected with it should be collected, cut into pieces and pulped.

When the income tax was reintroduced in Britain in 1842 by Robert Peel, everyone considered it a temporary measure to replenish the depleted exchequer. But despite generations of politicians after Peel promising to abolish it, the tax never went away.

It proved impossible to abandon a tax whose time had come".
You can read the rest of yesterday's Guardian website article by Ha-Joon Chang and Duncan Green - entitled Robin Hood: A tax whose time has come - here (Hat tip to Paul Hunt for the link).

1,000 economists from 53 countries have signed a letter in advance of the G20 calling for a Robin Hood tax (aka Tobin Tax). Irish signatories include TASC economist (and PE blogger) Tom McDonnell, TASC Economists' Network chair (and ICTU economic adviser) Paul Sweeney, and EN members Terrence McDonough, David Jacobson and Marie Sherlock.

Integrating innovation drivers

David Jacobson: I have been banging on in a number of blogs over the years on the importance of innovation policy, and in particular on the incorporation of non-R&D-based innovation. Innovations can emerge from processes other than research, for example from practice and experience.

While it is entirely appropriate to encourage research and to support expenditure on R&D, expenditure on R&D is an input and what Ireland requires is an increase in innovation, which is the output. Even increases in patents are not outputs, except where those patents are actually implemented into product, process or organisational innovation.

The new government, in developing innovation policies, must be aware of this fundamental difference between R&D on one hand and innovation on the other. It is only with such awareness that Ireland will be able to focus available resources where they will have most impact on innovation, and on the improvement of the national system of innovation. An opportunity cost of providing additional funding for R&D, for example, may be support for programmes to encourage creativity among students at all levels, including the primary level.

Another such opportunity cost might be support for non-research-based, non-patentable innovations in existing companies or new start-ups. Providing all these supports - for creativity, non-research-based innovations, and R&D - is the optimum approach. The key to policy improvement is the integration of the drivers of innovation into a joined-up approach to the evolution of the national system of innovation.

This type of thinking is evident in my new book, Knowledge Transfer and Technology Diffusion, edited with Paul Robertson, just published (2011) by Edward Elgar Publishing.

This builds on the earlier book (2008), Innovation in Low-Tech Firms and Industries, edited with Hartmut Hirsch-Kreinsen also for Edward Elgar.

Friday, 15 April 2011

Troika statement: It's Friday, let's go to the pub

From the statement by the EC, ECB and IMF released today:

‘The teams’ assessment is that the program is on track but challenges remain and steadfast policy implementation will be key.’

Oh. I wonder if they are referring to the National Recovery Plan which the three institutions endorsed and became the basis of the Memorandum of Understanding; or maybe there is some secret, super-encrypted plan which the masses don’t have access to. Let’s go through the headings.

The Macro-economic Outlook

The NRP projected growth up to 2014 to be 2.7 percent annual average. The IMF projects an average of just under 2 percent. According to the ESRI, at 2 percent we risk a deflationary spiral. In addition, the IMF is projecting nominal GDP to be some €10 billion less than the NRP estimates – over 5 percent less. There’s hitting targets and then there’s hitting targets.

The Bank Sector

This doesn’t pose too much of a problem for the cheerleaders of the NRP. If €24 billion in new recapitalisation won’t do the trick, then there’s always another €20 billion waiting to be burned up. And if that doesn’t do it, there’s always the Central Bank’s Hibernian QE. There is no shortage of money to be thrown at the problem – and as we all know, the taxpayers’ pockets are black-hole deep.

The Fiscal Front

The NRP claimed it could get the deficit down to under 3 percent by 2014. The IMF projects that on current trends it will be 2017 or 2018. On that small matter of the debt, the NRP hoped to keep it 100 percent of GDP – the IMF says, no, it will be 25 percent higher.

Structural Reforms

But not to worry, the IMF believes this will do the trick. Cutting workers wages always promotes growth – and cutting low-paid workers’ wages via ‘reform’ of the JLC will no doubt double that growth.

* * *

On just about every metric the NRP, which forms the basis of the bail-out deal, is completely defunct. Yet the Troika says everything is just as it should be.

I know why. It’s Friday. What would you rather do? Admit ‘game over’, sit down and work on something new? Or sign-off on a statement and get to the pub? I mean, the Troika are only human.

And let’s forget the small matter of the debt. The NRP was hoping to keep debt at 100 percent of GDP. The IMF projects it to be 124 percent.

Stiglitz on the Irish crisis

Tom McDonnell: Joe Stiglitz's preface to a new collection of essays on Exiting from the Crisis makes for interesting reading. The publication (to which PE's Rory O'Farrell also contributed) is available for download here.

Professor Stiglitz mentions Ireland in the preface, noting that:

“Ireland has faced a crisis largely because it followed the standard free market orthodoxy: unfettered markets led to a bloated financial sector which put at risk the entire economy; while politicians boasted of the growth (the benefits of which were not uniformly shared) they took little note of the risks to which they were exposing the economy. The core lesson of Ireland’s experience – and that of the US – is that one cannot rely on unfettered markets or self-regulation.”

Thursday, 14 April 2011

Myths of the Irish Crisis: Wages and Competitiveness

TASC has just issued a new discussion paper by TASC economist (and PE blogger) Tom McDonnell examining two distinct but related claims. First that Ireland lost competitiveness within the European Union in the last decade and second that high labour costs in low-wage sectors are contributing to the employment crisis.

Based on a review of the literature together with Eurostat data, the paper concludes that Ireland did not suffer an overall loss of competitiveness prior to the economic crash. The paper also refutes arguments that labour costs in the low-paid services sectors – sometimes viewed as undermining Irish competitiveness – are high by international standards. Instead, an examination of Eurostat data projects that 2010 labour costs were 9.3 per cent below the EU-15 average in the hospitality sector, and 8.8 per cent below the EU-15 average in the wholesale/retail sector. You can download Myths of the Irish Crisis: Wages and Competitiveness here.


Michael Taft: "Just as we managed to tame inflation in the 1980s, this decade should be the one that takes full employment seriously once again . . . (to combat growing inequality we need) strong social safety nets, combined with progressive taxation, investment in health and education, and collective bargaining rights, especially in an environment of stagnating real wages . . .employment and equity are the building blocks of stability and prosperity."

Yes, you guessed it - it's from the IMF.

Wednesday, 13 April 2011

12.5 per cent is no solution

Michael Burke: The Irish Times reports that the new Taoiseach refused to countenance any upward adjustment of the corporate tax rate in exchange for a lowering of the punitive tax rate applied to EU bailout funds.

The EU offer highlights the scandalous nature of their impositions, which is charging Irish taxpayers 3% more than its own cost of funds – to bail out EU banks. The offer was to reduce that premium by just 1%, which would provide a saving of €450mn per annum in lower interest payments. As already highlighted here, the FT’s Martin Wolf has argued: “For a sovereign to destroy its own credit, to save creditors of its banks, is plainly wrong. It does not make it better, but worse, that it is doing so largely to protect financial systems in other countries.”

There is a loss of sovereignty, even a conscious effort at national humiliation arising from this destruction. It can be regained, in the first instance by the State refusing to absorb bank debt.

But that does not mean that the insistence on maintaining ultra-low Irish corporate tax rates fulfils the requirements of this economy or its fiscal position. The 12.5% tax rate is the lowest in OECD. The next lowest is Iceland’s 15% - which ought to be a warning sign by itself. The highest corporate tax rates in the OECD are 39% in the US and Japan. Other ‘small open economies’ such as Denmark, Finland, Greece and Portugal all have much higher corporate tax rates (although the large waivers and exemptions, such as to the Greek shipping industry and its millionaires, are significant contributors to their fiscal crises).


In all the commentary about Dell’s decision to relocate to Poland, there was little discussion of the fact that it has a higher tax rate, 19%. What is also has are large transfers from the EU, which are being used for investment purposes, especially in infrastructure, transport and communications.

There is no doubt that many producers argue vociferously for the maintenance of 12.5%. IBEC and the US Chambers of Commerce have been particularly vocal on this and threatened relocation if there is any adjustment. However, if all capital were absolutely mobile and primarily determined by tax rates, then ultra-low tax rates would have already attracted all Foreign Direct Investment (FDI) in the OECD to Ireland. That is plainly not the case.

Most of IBEC’s members cannot relocate anywhere- they service demand in this economy. Likewise for foreign MNCs here to service domestic demand; Tesco’s is the biggest foreign employer in Ireland and its profit rate is higher in Ireland than anywhere else. Tesco’s is going nowhere. By contrast, the US Chambers of Commerce speaks increasingly for companies who have no activity and no employees in Ireland- apart from tax specialists - and who pay an effective rate as low as 1% or less.

Fiscal Impact

It has become common currency to quote a short OECD briefing paper as to the effects of FDI as if it were the last word on this issue. Unfortunately, for advocates of low taxes the note (based on a much larger study) suggests that the impact of a 1% hike in the corporate tax take is anywhere between 0% and 5% of total FDI. That is, according to the OECD higher taxes might have no impact at all on FDI.

Even the OECD’s central estimate is that a 1% hike in the tax rate would produce a fall of 3.7% in FDI. But what is the total impact on the fiscal position? According to a sketchy note from the DoF MNCs are responsible for 30% of corporate tax revenues. On 2010 tax returns that’s just under €1.2bn- yes, corporate taxes are under €4bn, compared to over €10bn from VAT and €11.3bn from income tax.
If the tax rate was hiked to 17.5%, on the OECD’s central estimate FDI would fall by 18.5%. On an extreme assumption that 18.5% of existing MNCs will flee as result (which no-one seriously suggests) then the remaining 81.5% of MNCs would then be paying 40% more in tax (the ratio between 17.5% and 12.5%), with a higher tax take of €1.37bn resulting.

Crucially, those eager to make the case for low taxes ignore entirely the increased tax revenue from the indigenous sector, which provides the remaining 70% or nearly €2.8bn of corporate taxes. The tax take from them would also rise by 40%, to €3.92bn. The combined total in corporate tax revenues from both MNCs and domestic sources is therefore just under €5.3bn, a rise of nearly €1.4bn. Of course, all these are taxes on profits which remain abundant in this economy, and by definition cannot be ‘unaffordable’.

Drivers of FDI

UNCTAD is the main international body providing detailed research on capital flows, doesn’t even mention tax rates as an important factor impacting FDI. In a survey of the literature a host of factors is considered, growth, market size, trade openness, ‘human capital’, infrastructure, political and economic stability, etc., etc. None mentioned tax.

Other research, dealing solely with the advanced economies such as Ireland, suggests not taxes but Total Factor Productivity as the main determinant of FDI (linked here). This is because TFP determines the total return on investment, not just the tax rate on that return. Plainly 12.5% tax on a 10% return on capital is a lower net profit than 39% taxes on a 15% return.

In fact, what the OECD’s longer research didn’t consider is that there is no zero bound to the effect on FDI from lower taxes- that the effect can be negative. This is borne out in a recent survey of FDI allocators for ‘Think London’ on foot of the Tory government’s announcement of cuts in corporate tax rates from 28% to 24% (the target since lowered again to 23%). The FT reported that its FDI Barometer survey found that that the net response was the investors were less likely to invest following the announcement of lower taxes (and they were also repelled by the government’s racist immigration policies).

These two points are related. Since TFP is actually the main determinant of FDI in advanced economies, it is the factors affecting TFP which determine its flow. Productivity derives from investment and the government component of that usually includes education, transport, communications, infrastructure, etc. Lower tax rates leads to lower tax revenues and a diminished capacity to invest in those areas. Declining relative productivity follows, deterring FDI, not encouraging it.

This is close to the experience in this economy. The chart below shows World Bank data for Irish real GDP and net FDI as a percentage of GDP.

12.5% tax rates were introduced in 2003. 2004 to 2006 saw outright falls in FDI, which also fell again in 2008. Including the surge in 2003, the annual average growth in FDI since is just 1.5% of GDP. From the time of the McCreevy 1998 Budget announcement average FDI net inflows have been substantially higher, but clearly that trend has gone into reverse.

The low-tax ‘Celtic Tiger’ actually saw much slower growth than the period that preceded it, even though it was widely claimed the reverse would happen – that lower taxes would lead to increased FDI and higher growth. GDP growth peaked at 11.5% in 1997 - the year before the announcement of lower taxes was made. It has been less than a third of that rate since 2000.
Lower taxes produce lower tax revenues, lower growth and lower FDI. They do produce higher post-tax returns on capital – but that’s not an argument for maintaining them. The two EU countries with the highest post-tax returns on capital are Greece, followed by Ireland. This is a source of economic weakness, not strength.

Tuesday, 12 April 2011

Facing Up to Reality II: The Methodological Flaw in An Bord Snip Nua

This post follows on from a previous contribution.

Michael Taft: In the previous post, we saw how billions of fiscal contraction has led to little deficit reduction. After that post was written the IMF published their latest projections. They estimate the deficit this year to be -10.8 percent this year. Between 2009 and 2011, we have experienced a fiscal contraction of €10 billion - or over 6 percent of GDP. Nominal GDP will fall by €4 billion. The deficit is expected to fall by less than 1 percent. Does the Government get this connection?

In this post we will examine why the notion that cuts equals savings is one of the more pernicious that has come to dominate the debate; why there is a fundamental flaw at the heart of the methodology employed by the Special Group report. With Government ministers threatening more cuts, this is certainly topical.

The Special Group Report used the word ‘saving’ or ‘savings’ 1,096 times. It neatly equated ‘savings’ and ‘spending cuts’ when no such relationship necessarily exists. Fortunately, we have a simulation of the effects of one of the ‘savings’ that the Special Group highlighted: cutting public sector employment.

Flawed Methodology: The ESRI Stress Test

The Special Group recommended that public sector employment be cut by 17,000. According the ESRI model, reducing public sector employment by 17,000 would mean a reduction of €1 billion in public spending – or 0.6 percent of GDP. What would happen?

• GDP would fall by 0.8 percent. So, for every €1 billion cut, the GDP falls by nearly €1.3 billion.
• More worryingly, GNP would fall by 1 percent. That represents an even more deflationary impact.
• Consumer demand would fall 0.5 percent in the first year, rising to 1 percent in the second year. That’s nearly €1 billion cut from consumer spending – putting considerable pressure on domestic businesses.
• Employment would fall by 1.1 percent. In 2009, that would mean a loss of over 20,000 jobs. Unemployment would rise by almost the same amount.

These are all the factors that must be included before we can assess the ‘savings’ to the Exchequer. So what did the ESRI conclude?

• The deficit would fall by 0.2 percent in the first year and 0.1 percent in the second year.

According to the ESRI, the ‘net saving’ to the Exchequer would be 25 percent of the cut, falling to less than 15 percent in the second year. This is because when you factor in the:

• Loss of tax revenue from reduced spending
• Increase in public sector spending arising from unemployment costs
• Decline in GDP/GNP

The gain to the Exchequer diminishes greatly. This simulation – along with measurements for other spending cuts and tax increases – was available to the Special Group report. It was, and remains, the best estimate of the impact of cutting public sector employment. They didn’t utilise it or even refer to it.

The Special Group could have commissioned, through the Department of Finance, other stress-tests regarding social transfers (nearly 40 percent of the ‘savings’ in the Report was due cuts in direct and in-kind social transfers) and Government purchases of private goods and services, which make up approximately a third of spending on public services They didn’t. They have yet to explain why. But that it would have undermined their basic premise – that cuts equals savings – is fairly certain. For its methodology adopted a crude ‘arithmetic’ approach to spending cuts, not an economic one.

When Government ministers proclaim progress on public sector employment reduction, they are, without realising, actually proclaiming very little progress on deficit reduction but significant progress on deflating the economy, driving up unemployment and cutting domestic demand.

But when this realisation hits home – falling growth, continued high deficits – these same Ministers demand more of the same, again not realising that more of the same is likely to produce the same results which produces more demands for cuts until the economy gives out.

It is a vicious circle, legitimated by the false methodology at the heart of the Special Group report. Cuts do not equal savings. But common sense should tell us this – without resort to models and projections. During a jobs crisis, does it make sense to cut employment levels from the largest employer? Why should we be surprised when the result is so dismal?

We are facing into another round of cuts. Employees are now being threatened - with job losses and pay cuts; in the public and private sector. Why? Because past Government ministers either could not or would not subject their policies to economic stress-tests (any comparison with the banking crisis is not co-incidental). They assumed propositions that had little empirical justification. They suffered from ‘escalation of commitment’ – having committed to a particular strategy, they could not extricate themselves when it became clear the strategy was failing.

It is still not too late for this Government to take a step back from the brink. There is still good will towards it. They could adopt a set of transparent and public measurements whereby fiscal options are assessed on the best data available. And on the basis of such informed analysis, adopt the policies that flow from that.

The last thing the Government should do is merely continue failed Fianna Fail policies with only the most cursory of makeovers. If they do, then people will have the right to ask – what was the election for?

Blogging Bretton Woods and other matters

Brad DeLong's blog is worth a read.

Monday, 11 April 2011

Facing up to reality: Austerity is an obstacle to deficit reduction

This is the first part of a two-part post.

Michael Taft: On Sunday, Colm McCarthy wrote:

‘ . . .the programme for budgetary correction needs to be accelerated. There is one, and only one, policy instrument available to Government which will improve confidence quickly and that is the pace of deficit reduction.’

Couldn’t agree more (though equally important is to prevent private banking debt from being absorbed into Government debt). We need to reduce the deficit in a sustainable manner. Therefore, the first thing the new Government should do in its review of public spending is to consign the Report of the Special Group on Public Service Numbers and Expenditure Programmes (aka An Bord Snip Nua) to the rubbish heap. Not only is it so methodologically flawed that it tells us almost nothing about generating savings for Exchequer, the strategy which it promotes (austerity, deflation) has been a failure. Indeed, that strategy may actually be adding to the deficit and debt burden. It is time to junk the report and start a real deficit reduction programme.

Hasn’t Worked So Far

In 2009 the Special Group report called for €5.3 billion in public spending cuts, almost all current expenditure. But in the three budgets in 2009 the Government did a few billion better. They cut current spending by €6.3 billion. In addition they cut €1.5 billion from the capital budget while increasing taxation by €2.8 billion – an overall contraction of €10.6 billion.

What happened next was predictable and predicted. The Finance Minister called in the Opposition Finance spokespersons in the autumn of 2010 to tell them the deficit was still rising.

The last budget cut approximately €2.1 billion in current spending and €1.8 billion in capital; all this to try to get the deficit down to below -10 percent. What’s the prognosis? Not good.

According to newly released papers, the Department of Finance is already expecting the deficit to be higher than last budget’s projections. They were hoping for an Exchequer balance of €17.7 billion; now they project a balance of €17.9 billion – and that’s after only two months of Exchequer returns.

According to the Department:

‘Income tax will be a key determining factor in the achievement or otherwise of the overall tax revenue tax target for 2011’.

If this is the case, there should be cause for worry. The briefing paper stated income tax was down €45 million on the end-February target. The recently released March Exchequer statement showed income tax falling €125 million behind target. This ‘key’ category is weakening. So is VAT, which is down €179 on target.

But this shouldn’t be too surprising. The last Government estimated that for every 1 percent of GDP in fiscal contraction, economic growth falls by half that amount (though the IMF suggests the fall in GDP could be between twice and four times what the Government estimates). This results in falling tax revenue and rising unemployment costs, which in turn adds to the deficit burden.

Already, based on current growth projections, the deficit target has slipped by nearly ½ percent in the first three months. In other words, the Government is not likely to break the -10 percent deficit threshold. And according to the Sunday Business Post (link not available yet), the Government, along with the EU and IMF, are preparing to revise future growth downwards. This will lead to a deterioration of the deficit target.

So what have we got? The Special Group report called for €5.3 billion in spending cuts. The Government responded by cutting public spending by €11.7 billion – more than twice as much as the Report’s recommendations (and this doesn’t count the cuts in the 2009 budget). And yet the deficit still remains stubbornly high, only slight below the deficit level at the time the Report was published.

The pro-austerity camp has only one response to this running-in-quicksand scenario: more austerity. But it is austerity itself that is the obstacle to sustainable deficit reduction. How much deeper down the hole do we have to dig until we realise that it is the digging itself that is the problem?

When do we start facing reality?

Next post: why the methodological flaws in the An Bord Snip report require it to be junked.

Corporate tax rate

Peadar Kirby: The issue of Ireland’s rate of corporation tax again dominated the news agenda over the weekend with the standoff between some EU Ministers (notably the Germans) and Irish Ministers being yet again reiterated. It appears ever clearer that the refusal of the Irish side to enter into discussions on the issue is becoming the obstacle to gaining a lower interest rate on the country’s borrowings and, perhaps, other concessions also on the contents of the bailout package. What is most disturbing is the lack of any debate here in Ireland as to whether the dogged stance being adopted by Irish Ministers is in the best interests of Irish development, as to whose interests it most serves, and as to what might be the balance to be struck between moral and economic grounds for continuing the present stance. The extent to which the present policy stance has been elevated into a fundamental bedrock of national policy and the extent to which the media and commentators accept this without the slighted debate or questioning, invites comparison with the worst days of the cosy consensus of the Celtic Tiger period.

There are at least three major dimensions of the issue that require public debate. The first is the economic one and, for most of those who mention this issue, this seems the only dimension that matters. But, in addition, there is a major moral dimension that urgently requires airing, and a dimension relating to international justice and fairness highlighted recently in an interesting analysis paper published by the Debt and Development Coalition Ireland which seemed to get little media attention.

To deal with the economic issue firstly. To many it seems self-evident that raising our corporation tax rate would damage our attractiveness for foreign investors. Perhaps this is true, but it would be good to have some evidence to back up such a claim. Just what damage might a few percentage points on our low rate do to Ireland’s attractiveness as a destination for investors? In other words, among the many attractions of Ireland, just how important is the present rate of tax? Indeed, the argument of some Ministers that in effect France has a lower rate than does Ireland could lead one to draw the conclusion that the tax rate is not the determining factor after all, given that Ireland continues to attract investment in this situation. Furthermore, the argument needs to be broadened to a discussion of industrial policy, something that is urgently overdue. Numerous reports have been issued over recent decades recommending that the state wean itself off its dependence on foreign investment yet, if anything, that dependence has grown over this period. One wonders what positive advantages for the development of a more robust and consistent policy for the growth of SMEs might result from the raising of our corporation tax rate, particularly if the tax regime could be designed in a way that did help foster greater innovation in this sector. At the very least, a rise in the corporation tax rate would serve to wean our politicians and officials off the instinctive reaction that economic development and export-led growth have to depend on foreign investors.

The second important issue that is entirely absent in consideration of this issue is the moral one. Are there not very strong grounds for arguing that, in a situation where those on average and low incomes are bearing a major burden of the adjustment efforts being made by the state, that those corporations which make huge profits from Irish workers and receive very favourable treatment by the state should make some modest contribution to recovery? It is noteworthy that those many voices that are raised in criticism of the fact that Irish taxpayers are being forced to bail out French and German banks, do not see the similarities between this favouring of corporate interests over citizens’ interests and the consequences of the state’s failure to seek a greater contribution from corporations which have benefited greatly from their presence in Ireland.

A third issue concerns international justice, again a dimension that is entirely missing from Irish concerns on the issue of corporation tax despite the widespread interest among the public in international development. Attention was drawn to this in the report entitled ‘Driving the Getaway Car? Ireland, Tax and Development’ issued by the Debt and Development Coalition Ireland last month. This is a very useful overview of some of the ways in which Ireland’s low corporation tax ‘is open to abuse by multinational firms in a way that directly or indirectly damages the tax take of Southern countries’ (page 41). While the author, Dr Sheila Killian of UL, does not consider the effect of raising the rate of Ireland’s corporation tax, she does recommend a number of actions that Ireland could take to seek more effectively to ensure that these abuses do not occur. The EU’s CCCTB proposal seems designed to address some of these potential abuses.

Each of these dimensions of the issue of corporation tax requires a lively public debate. Furthermore, since this touches on moral and development issues as well as ones relating to industrial policy, it would benefit from a range of voices and concerns finding expression. Yet, I suspect that one of the reasons why this is not happening is the very efficient lobbying being done on behalf of US corporations by the American Chamber of Commerce, a very powerful lobby group. It already made the position of the US corporations very clear just as EU pressure was mounting on Ireland to raise its corporation tax. Lobby groups have, of course, every right to put the position of their members forward. However, when the state adopts a similar position with no public debate, and when the media row in behind this without raising any questions, then we are in a very troubling situation which bears far too much resemblance to the lack of debate and the caving in to vested property interests that characterised the public realm during the Celtic Tiger years.

Friday, 8 April 2011

Should there be a referendum on the IMF-EU deal?

Slí Eile: Readers may be interested in a recent Dáil debate which took place on the question of referendum on the IMF-EU deal. The Dáil Technical Group moved a motion to hold a referendum. The first part of the debate from Tuesday 5th April can be located here. Arguments for and against adopting such an approach can also be found in the continuation of the debate on Wednesday here. The final speeches and vote are reported here.

Portugal and the Tony Soprano bailout

In the excellent TV series The Sopranos there is an episode where mobster Tony Soprano tells a small-time gambler why he let him play and lose in the big stakes game. "I knew you could never afford it, but your wife had the sports goods store," he explains after stripping the store of its assets and bankrupting it.

The Sopranos is available in Portuguese. Viewers will find out more about their fate than from most media coverage now Portugal is the latest economy to fall into the clutches of the European commission and, possibly the IMF. It is a mobster's embrace, as Irish and Greek citizens can testify.

You can read the rest of PE blogger Michael Burke's piece on the Guardian website here.

Thursday, 7 April 2011

Forthcoming events

A few forthcoming events may be of interest to PE readers; continue below the fold for more information.

TASC and Smart Taxes are collaborating to host Lessons from the Crisis: Money, Taxes and Saving in a Changing World, a symposium due to be held on May 9th in Croke Park (9.30 am - 4 pm). Speakers will include Marshal Auerback of the Roosevelt Institute and Randall Wray of the University of Missouri - Kansas City, both of whom are known for their work on Modern Money Theory, as well as Tom McDonnell and Michael Taft, both known to PE readers. For further information go to

The morning session will be chaired by Paul Sweeney (Chair of the TASC Economists' Network and PE blogger), who is also President of the Statistical & Social Inquiry Society of Ireland.

A meeting of the SSISI will take place on Tuesday, 12th April 2011, starting at 6:00 pm [SHARP], in the Royal Irish Academy, 19 Dawson Street, Dublin 2. The session is titled Symposium on Research Capacity and Policy Making, and contributions will be made by Dr Rory O’Donnell (NESC), Prof. Frances Ruane (ESRI), Prof. Brendan Whelan (TILDA, TCD), and Mr Robert Watt (Department of Finance). This symposium will consider the use of research to generate evidence for economic and social policymaking in Ireland over the last 50 years, the ways in which research enters the policy formulation process and the development of Ireland’s capacity in this area.

Non-members are welcome to attend and participate in the discussion, and there is no need to book.

The 2011 AGM will take place on May 19th, when a paper will be presented on Compilation of a National House Price Index for Ireland, by Niall O'Hanlon (CSO): Royal Irish Academy, 19 Dawson Street, Dublin 2 at 6:00pm.

Wednesday, 6 April 2011

Over-enthusiastic spam checker

Apologies to any PE readers who've had their comments filtered as spam. During the past week or so, the automatic spam checker has been over-enthusiastic. Unfortunately, turning off the spam filter would result in a deluge of highly annoying material. We are checking the spam box at regular intervals - so please be patient, your comment will appear!

Tuesday, 5 April 2011

How much is the taxpayer on the hook for?

Michael Burke: Frightening people into submission is a fairly easy trick. One tactic is to frighten them with an outlandish demand – then soften the blow with a somewhat less outrageous demand. This might be called the Dick Turpin school of negotiation.

In the days leading up to the release of the latest instalment of the bank bailout programme, all sorts of numbers circulated about the size of the latest bank recapitalisation. Now, it is widely presented in mainstream media and elsewhere as a relief that ‘only a further €24bn’ is needed.

The insouciant recommendations of further debts that amount to €5,000 for every woman man and child in the state, while at the same time slashing public spending are remarkable. Another €24bn for the banks is entirely manageable, it seems, while benefits to lone parents, jobs seekers or the disabled amounting to tens of millions of Euros must be slashed, for fear of destroying the public finances

There are two practical reasons why further bailout for the banks should be rejected. First, the current level of projected debt is insupportable. Secondly, the current level of projected debt is wildly understated.

Unsupportable debt

The €24bn, even if it were the last recapitalisation, would take the bank debt to unsustainable levels. The Department of Finance table below shows the bank recapitalisations to date.

It is variously argued that the €24bn is the last of the bailouts, that this recapitalisation contains a ‘buffer’ against adverse developments and that there is a residual value in the banks. It might be objected that:

• we have heard the ‘one last heave’ argument before
• that the buffer is nothing of the kind as even the ‘stress test’ scenario includes assumptions that are more optimistic than the current situation
• and that the combined market capitalisation of AIB and BoI, the new ‘pillars’ is now only around €800mn, reflecting market expectations that the authorities are determined not to wipe out shareholders in full, if necessary by further capital injections.

These objections need to be fleshed out. But for now, they are largely beside the point. The cost of the bailout funds is close to 6%. Before these policies led to the state being excluded from financial markets interest rates had reached much higher levels. 10yr government yields are still close to 10%. On €70bn an annual average interest rate of 6% produces an interest bill of €4.2bn.

Under the terms of the impositions from the EU & IMF there is a total of €6bn in spending cuts and tax increases planned for this year, and an average of €3bn in same planned over the following 3 years. That is, very rapidly, the interest paid on the bank debt of €4.2bn exceeds the supposedly vital measures to secure public finances and reduce the deficit. It is argued that these cuts/taxes are permanent, whereas the bailout measures are temporary, and will be concluded within the life of this Dáil.

Putting it politely, this claim is pure fiction. If, as advocates for bailing out EU banks with Irish taxpayers’ money assert, interest will only have to be paid for a short number of years, where on earth are the funds to repay the principal going to be found - all €70bn of it?

If the principal cannot be repaid in that timeframe then interest will continue to be paid on it until it is repaid. It does not appear as if the IMF, still less the EU Commission and the ECB are about to become charitable institutions.

Therefore Irish taxpayers will either have to fund €70bn is a few years’time- or, more accurately will for many yeasrs to come, be paying greater interest on bank-related debt than the ‘savings’ made from a fiscal consolidationthat is billed as necessary to save the finances of the State.

Unstated debt

These numbers are an understatement of the true position, both currently and prospectively. NAMA has issued €28.6bn in bonds. Although the DoF seems desperate not to have them classified as government debt, the classificialtion is immaterial as to the source of the interest on them- Irish taxpayers. In a re-run of the net asset argument and the eventutality that the NAMA assets will at some point be worth something,that is entirely possible but again besides the point. They are ‘non-performing assets’ currently, ie bearing no interest, and taxpayers are paying interest to acquire them. Jam tomorrow is never a convincing argument. It is irrelevant when dealing with an immediate crisis.

The terms of the bailout are set out in the 'Financial Measures Programme Report' from the CBoI. This has had a wide airing in the media, but not a very criticial one. For example, in 88 pages of the report there are references to but no examiation of the impact of pojeced ECB interest rate increases over the next period.It is certainly daunting to contemplate the likely impact on the Irish economy.

It may be that the scenarios included in Appendix C include adverse changes to interests (and the possibility they are greater than currently projected by the money market yield curve), but, if so, these are not stated. There are also a number of key assumptions inboth the ‘base’ and ‘stress test’ scenarios which are highly questonable:

• The projected fall in property prices reflects the experienceof Finland, Britain and Sweden in the 1990s, none of whom were in a monetary union and responded with lower interest rates, not higher ones as the ECB threatens
• Even so, both base and adverse sceanarios project rising propoerty prices from next year (Exhibit 7), despite the earlier admission that even in those countries in the 1990s, ‘house prices tend to follow a pronounced decline for a protracted period’ (p.51)
• The base case interest yields on Irish debt are below (8.63% at 10yr) the current level (9.8%)
• Both the base and adverse cases for the fall in 2010 GDP (-0.2%) are below the latest offical estimate of the decline (-1.0%)
• The uenmployment rate for this year is variously estimated at 13.4% (base) and 14.9% (averse) when the starting-point is 14.7% and rising
Whatever the outcome, the consistent pattern is the current indicators are closer to the adverse of ‘stress test’ senario than the base scaenario.

There has been much discussion on the gap between the Blackrock projected €40bn in lifetime loan losses and the CboI’s recommendation of €24bn in recapitalsation and the assertion that this includes a large ‘buffer’. (The buffer is just €2.3bn in total, plus €3bn in continegent capital (Table 18)). But the CBoI’s own assessment is only for 3-year losses, and under the (undemanding) stress test this amounts to €27bn (Table 10, p.29).This is greater than €24bn, buffer included.

And, as with the €70bn repayment argument, is it seriously suggested that AIB and BoI will be genrating profits in 3 yeas’ time? Without the capital injections, all he insitutions would have negative capital (that is,worth less than zero) in 2013 (Table 14).

Crucially, the entire exercise is premised on large scale ‘deleveraging’ of the banks’ balance sheets, that is a further disposal of loans. There are two avenues for this, commercial disposals and public ones- NAMA. To date, total disposals have amounted to €120bn, but only €49bn of this has been commercial disposals (including write-offs). €71bn has come from dsposals to NAMA.

Over the next period a further €84.1bn delveraging is projected to take place mainly through the run-off and disposal of non-Irish loans, described as ‘non-core’. Therefore, to some extent, the whole plan relies on finding a buyer for these assets at book value- even though it is widely known the Irish banks are forced sellers. Realising further losses, beyond any write-down in loan values to date, may be inevitable under this plan. Surveying the world economy, it is certain that an optimal loan book would not be 100% concentrated in Irish and British lending, which is now the aim of policy.


Finally, in effective the same authorities who produced an economic and fiscal crisis leading to the impositions of the EU and IMF are now arguing that the related banking crisis can be resolved by parallel measures; assets sales and the protection of capital at the expense of labour. But Adam Smith noted long ago that all value is created by labour. Diminishing productive labour, failng to optimise its skill levels, increasing its naked exploitation and expelling a portion of it from the country for a prolonged period will damage the entire economy. Clearly, policymakers who have embarked on this course do not understand that economic principle or care less.

But, if they cut the wages of public sector workers and their numbers, and thereby hope to promote a ‘demonstration effect’ of lower wages in the private sector, and mortgage defaults rise as result, guess what the arguments will be? We need more capital for the banks and more cuts in public spending.
It has already begun here and here.

Is the IMF changing? A hard-hitting attack on the Washington Consensus

Paul Sweeney: As the IMF is here in Ireland, with the ECB and EU Commission, on a mission of assisting Irish citizens to bail out our banks and thus the banks of Europe, and, as a consequence, our public finances, we need to watch carefully to see what is their overall attitude and the nuances.

Yesterday, the head of the IMF, Dominique Strauss-Kahn, delivered a major speech at George Washington University where he said that the "Washington Consensus" certainties have come crashing down, with the Crash of 2008, and he spoke of the challenges that have been posed for macroeconomic policy, social inclusion and multilateralism.

He said that: “This 'Washington consensus' had a number of basic mantras. Simple rules for monetary and fiscal policy would guarantee stability. Deregulation and privatization would unleash growth and prosperity. Financial markets would channel resources to the most productive areas and police themselves effectively. And the rising tide of globalization would lift all boats.”

Mr Strauss-Kahn said that this “'Washington consensus'” not alone “caused incalculable hardship and suffering” but it did more than this. He issued a major challenge to all economists. For he said that “'Washington consensus' also devastated the intellectual foundations of the global economic order of the last quarter century.” That is some criticism.

It is hoped that this speech is heard wide and far in this land, especially by economists who are still wedded to deregulation, privatisation (and socialisation of private debt), and deflationary cuts as a panacea. I’m afraid that the 'Washington consensus' is not behind us (as he claims) here in Ireland.

In what is a possible reference to Ireland’s deep troubles DSK, as he is known, said “Europe needs a comprehensive solution—based on pan-European solidarity.” That is not exactly what is on offer. Ireland’s elite screwed up but as far as Europe cares, we are on our own, thanks to the bankers, developers, anti-regulation ethos and the government that bailed out the bondholders in our name.

He coined a new expression - “globalisation had a dark side”! This dark side was and is the growing chasm between rich and poor.

Afterwards, in replying to students' questions, he spoke of the IMF's support for countries that adopt temporary capital controls (a real surprise), of the challenges faced by European integration (challenges!! An understatement surely!) and by Greece in particular, and about the IMF's work to design carbon taxes and the issuance of new SDRs for climate-change finance.

Of course, DSK may soon resign and stand for the Socialists in France. Thus he may leave the IMF in the hands of the neo-liberals again. In the meantime, we hope his emissary in Ireland hears his words. But will his comrades in the Troika from the EU and ECB hear it too? I fear not until Ireland sinks a bit lower.

You can read his speech here.

In the meantime, the ECB is actually raising interest rates, in this climate!

And in the business pages, the ex-Anglo Irish and other bank directors are still photographed as if they are still great!. They still stride the land that they impoverished in just a few short years. No bank board member has yet to be held to account for the biggest value-destruction in the history of Ireland. Nothing seems to change when it comes to power.

March tax returns

An Saoi: The tax returns for March give us our first real feel for what is happening in the economy in 2011 through the bi-monthly VAT returns.

VAT paid in March covers the period January/ February and the VAT for November/ December was paid in January. Two of the six VAT returns due in the year have therefore been submitted and below is a comparison of VAT received for the first three months of each of the last nine years.

The figures would seem to suggest that VAT for the year is likely to fall quite a bit short of the projected figure of €10,230M. Figures for the first three months are inflated by the extension of the car incentive scheme which will end shortly. VAT payments in the first quarter normally account for around one third of annual VAT paid (31.84% (2010), 34.65% (2009), 33.71% (2008)). The underlying trend would seem to point towards VAT for the year of close to €9,500M.

The VAT figures should not come as a surprise to anyone and reflect the Retail Sales figures for January & February issued by the CSO on 28th March 2011 or the Central Bank’s Credit Card Statistics (Table A13) issued on 31st March. The real Irish economy remains in recession.

The Income Tax position also appears very problematic. The March figures were over 8.1% off the monthly target. This may be partly down to some technical explanation and if so should be corrected in the April figures. Tax deducted in March will be paid over in April and will include five weeks than the normal four and in the case of Public Sector workers, three pay fortnights rather than the normal two. However if the trend continues then the new Government will be in serious trouble.

Little or no Corporation Tax is now paid by Irish owned businesses, while a very small proportion of the net yield is accounted for by those multi nationals actually trading in the Irish economy, e.g. Vodafone & O2. The increase in yield from Corporation Tax reflects the activities of multinationals in Ireland, using Ireland as their point of sale for goods and services. The annual target for Corporation Tax of €4,020M is likely to be comfortably exceeded. The net target for March was just €10M compared to €111M actually received. Such a monthly discrepancy needs some explanation, which was not forthcoming from Dept. of Finance.

The Excise figure for March is slightly above profile, €367M against €350M. This reflects higher than expected car sales. However once the incentive scheme ends it may be difficult for the expected profile figures later in the year to be reached.

Capital Acquisitions Tax paid is just 45% of the amount paid at the same time last year, though strangely ahead of profile. The reduction in the thresholds should have gone some way to protecting the yield despite the decline in asset values.

The March returns suggest that the new Government will find it very difficult to achieve the tax figures set out just two months ago in February. Looking at the figures I would suggest the following as an early projection.

The continued deep recession in the domestic economy make it unlikely that the tax figures can be reached. If such a discrepancy arises, the Government will be under pressure to apply additional cuts to meet targets, sending the economy into a further spiral of decline.

Pressure on households to reduce debt and the lack of access to any new credit will continue to inhibit consumer spending, even if customers wanted to spend. Income taxes will remain weak as employment numbers continue to fall. Any increases in employment numbers in the multinational sector will be swamped by the tsunami of job losses in the local economy

It is not a pretty picture.

Monday, 4 April 2011

Coffey on the banking cost

Tom McDonnell: Seamus Coffey has put together a very lucid post over at Economic Incentives estimating the actual scale of the banking cost.

This kind of forensic analysis is a very useful counterpoint to some of the more hysterical comments over the last few days and should be required reading.

Affordable, manageable and sustainable

Michael Taft: Some commentary has suggested that Black Thursday wasn’t all that bad; in particular the bail-out won’t add much to our general debt. Therefore (and this is a curious QED) the debt remains sustainable. Phew. I was worried there for a moment. In our own little bubble, we can content ourselves with the notion that our debt is ‘affordable, manageable and sustainable’.

It is difficult to say how much of the €24 billion bail-out will find itself in general government debt. Government sources claim only €2 billion – but even then, this depends on how Eurostat categorises the ‘expenditure’. So let’s factor in this marginal increase. What follows projects debt-to-GDP and GNP ratios – but this is not the only ‘sustainability’ measurement (the other measures interest rates, primary balances and growth).

If we use the last Government’s overly-optimistic growth (and, so, deficit) projections our debt will have to be revised upwards to 104 percent due to the poor 2010 GDP outcome.

However, let’s substitute the more sober IMF’s projections for growth and the deficit up to 2014. They project that growth will be an annual 2 percent; this contrasts with the last Government’s 2.7 percent; regarding the deficit, the IMF projects that the balance will be -5.1 percent; the last Government hoped to reach -2.9 percent (but that’s gone by the boards under the new Government).

If we use the IMF’s projections, we find the Government debt rising to 113 percent by 2014. How does this compare to the IMF’s projections for EU countries by that year?

We will be well above the EU average, behind dysfunctional Greece and long-time high-debt Italy (which relies on domestic savings to support its debt).

But let’s look at this from another perspective – debt as percentage of GNP (or Gross National Income).

If we take the Government’s optimistic projections, we’re still far in excess of the EU-15 average, coming second in the table.

However, if the IMF projections hold, we will top the league – ahead of even insolvent Greece (note, however, that the Greek numbers will probably rise as their austerity programme is driving down growth and increasing the debt burden; just like Ireland).

With the markets convinced that Greece will default, how far behind can Ireland be? And this assumes that not one extra cent, as Minister Leo would put it, finds its way on to the state books. What odds on that not happening?

But even though we may be heading towards Greek levels of debt, we won’t have to worry. It will all be ‘affordable, manageable and sustainable’.

Just as long as we keep cutting (and cutting and cutting) social welfare, public services and investment.

Sunday, 3 April 2011

Banking on a new deal

Slí Eile: Banking is at the heart of the economy. It should serve two core social needs:
- A place of security for those who deposit savings
- A source of funding and investment to meet societal needs
Our present system of banking in Ireland together with the global financial system is mortally wounded. The speed at which the earthquake of September 2008 spread like fire and throw bond and stock markets into chaos illustrates that the global financial world is:
- More inter-connected and inter-dependent than ever
- Out of control because funds can be converted, re-priced and shifted in minutes without regard for the global consequences for millions of people across the world.
The meltdown in banking in Ireland has led to the most extraordinary and bizarre outcomes unimaginable before 2008:
- Effective nationalisation of the majority of retail and wholesale banking in Ireland
- Transfer of bad banking debts to the Irish taxpayer
- Gigantic loans of liquidity from the European Central Bank and the Central Bank of Ireland (the latter on behalf of Irish citizens) with little prospect of most of it being paid back for years
- A seizing up in the 'real' domestic economy due to domestic deflationary policies, lack of credit flow and continuing competition from low-cost selling.
Two foundation principles are needed:
1. As much as possible the fall-out from this economic crisis must not be placed on the backs of the poor, the sick, the old and the very young
2. Resources - financial, physical, environmental and human - must be directed to creating new opportunities and socially productive wealth.
As part of ensuring that the crisis is not used to punish citizens it is necessary to reverse and prevent in the future socialisation of (bad) private debt - in other words separate private banking debt from public sovereign debt. It is also necessary to protect and defend deposits and current bank infrastructure including jobs.
Seven practical steps are required:
I. Conduct a three-month audit of debt ('know in detail who owes what to who, when, where, how and why' starting from 2008 up to the present day)
II. Escalate the issue to the global through identification of common interests by forming progressive smart alliances with forces for equality and change across Europe
III. Clear out the governance of banking with new personnel, transparent reporting and democratic accountability
IV. Then hold a referendum to clarify the democratic mandate of a progress government within six months of today
V. Finally work towards an agreed approach to cancelling some debt, re-structuring other debt and sharing the impact of losses between debtors and creditors over a period of 10-15 years ('we will still be negotiating in ten years...')
VI. Re-direct savings and investment towards green, job-hungry and socially useful ends
VII. Develop a new third force banking based on credit unions, the Post Office and solidarity bonds

Friday, 1 April 2011

Learning like lemmings? Non-lessons of the crisis

James Wickham: Why did the Irish crisis happen in Ireland? Most public discussion still seems to oscillate between personalising the issue (‘greedy bankers’) and over-abstraction ('the global crisis'). Certainly, conventional economic commentary is more sophisticated, but ignores institutional features of the Irish socio-economic model which in retrospect meant the crisis was pre-ordained. Thus a focus on the combination on eurozone membership (cheap credit) and weak banking regulation conveniently ignores the fundamental political commitment to an ‘Anglo-Saxon’ financial system within a liberal market economy. This ensured a disproportionate role for banks within the national economy. And remember, after the crisis of the 1980s, a key element of the national growth strategy became the promotion of the Dublin International Financial Services Centre in which ‘light touch regulation’ was explicit policy. This is the institutional context for the ‘golden circle’ of property developers and politicians at the apex of the system.

Secondly, the key role of banking finance was interwoven with the financialisation of everyday life. To previous high levels of home ownership was added extensive mortgage credit creating a particular form of ‘residential capitalism’. Asset ownership (‘lite wealth’) expanded amongst the middle mass of the population (from cars to private pension and second homes) so that income from employment was only one determinant of life chances. The welfare state had become one of the most extreme ‘liberal’ states of the EU15, with very limited state services and most services (health, childcare…) provided through the market. Paradoxically, the financialisation of everyday life was accelerated by a key feature of the employment system itself: social partnership. Since 1987 tripartite agreements contributed to higher employment but also focused on delivering higher real wages. Accordingly reducing taxation was a priority, improving state services was not. Equally, cash benefits in the welfare system were high by European standards, but labour market activation was almost non-existent.

Thirdly, the central role of FDI in the national growth strategy also opened the way for the crash. Given the political priority for public tax-cutting, state policy towards FDI paid decreasing attention to social and physical infrastructure and focused increasingly on low corporate tax as the incentive for FDI. All of this ensured that a political conflict with other EU member states was pre-programmed. Such a conflict was further promoted by the Americanisation of Irish public discourse and economic thought, the promotion of ‘Boston not Berlin’ as a social model, and the direct and indirect influence of the Dublin American Chamber of Commerce on political decision-making.

Far from stimulating any re-think of the national development strategy, the crisis has turned the reliance on FDI into a national fetish. Bizarrely, not only the Labour Party but even the left nationalist Sinn Féin have made ‘our’ corporate tax rate into a symbol of national independence. While personal taxes have risen, the desirability of low personal tax rates also remains part of the national political consensus. Thus there is no sense that the crisis could stimulate any move towards collective provision in the face of collective adversity (the contrast with the creation of the British welfare state in post-1945 austerity is instructive). Instead, privatisation of pensions, education and (to some extent) health continues, while state assets are to be sold. Rather than strengthening the state, the response is to weaken it. The jettisoning of social partnership has ensured that other features of the Irish model have been consolidated. The Irish experience shows how, confronted by a cliff, lemmings will sometimes rush to fall over its edge.

The Roubini verdict on the recapitalisations

Tom McDonnell: Credibility is a hard earned thing. The commentariat is overrun with the views of so-called experts whose predictions have been...mixed.

Professor Nouriel Roubini of NYU, on the other hand, gained fame in the US for his prescient predictions about the economic crash.

So what is Professor Roubini saying about the latest bank news out of Ireland?

“Taking all of the losses of the banking system and putting them on the balance sheet of the government doesn’t make sense,”... “Eventually, the back of the government will be broken.”

Roubini argues that a better solution would be to take the senior secured and unsecured debt of the banks “reduce it, convert it into equity so you recapitalize the banks that way and you’re not adding further losses to the balance sheet of the government. Otherwise, you’re going to have not only a banking crisis, but also a sovereign debt crisis.”

The full article is here

Time will tell if he is right.

Tell me: Are we out of recession yet and what can be done?

Tom O'Connor: The banking crisis is topical. Unemployment isn't and hasn't been in the last three years. This blindness towards unemployment and monopolisation of everybody's efforts solely on the banks, needs to stop. Human misery, suicide, emigration and economic recession should not be displaced from the top of the agenda by anything. Unemployment should and can be dealt with in advance of a banking solution. Last week's Quarterly National Income figures demonstrate that Unemployment cannot wait. It has been waiting since 2008 until the banking mess has resolved.

A plan and a concrete investment strategy funded from our own unborrowed resources within the NPRF and NTMA needs to happen mow. What is happening now and in the last two years is that governments, most economists and the media have all but ignored unemployment, given the urgent necessity to fix the banks. Can I suggest that unemployment is even more urgent? It should have been, and should now be, dealt with, even before this banking crisis is resolved.

Most people will not read last week's CSO figures on economic growth which are designed to tell us whether or not we are still in recession. However, people in pubs, shops, clubs and workplaces really do want to know whether we are or not. They are hanging on for dear life and their children are emigrating. Will there be an improvement? If not, they want to know why not, and what is the Government going to do about it?

Let’s look at the figures: Based on the whole of 2010, they tell us we are still in recession because both measures of economic growth fell. GDP fell by 1% and GNP by 2%. This is bad news. But, policy makers will say that we are either out of recession or coming out of recession. Why? Because they will say that GNP grew by somewhere between 0 and 2% in each of the last three quarters of 2010.

People will say, however, that they can still really feel the recession and it’s not getting any better. The truth is that we are not out of recession! This indeed is also borne out by the figures for GDP, which fell by 1.6% in the last quarter of 2010. Ah, but policy makers will say that GNP is a better measure for Ireland, so that doesn’t matter!

They would be very wrong. During this recession, the GDP figures are a far better indication of whether or not the economy is out of recession. It is a better indicator of how many jobs are being lost and created. It is a better indicator of how much money people have in their pockets and also how many people will emigrate.
The figures tell us why: firstly, the fact that GDP has fallen by 1.6% in the last quarter of 2010, and GNP rose by 2%, is explained mainly by the profit repatriation practices of multinational companies. Essentially, some of the 2% growth in GNP in the last quarter of 2010 is a statistical aberration, and happened mainly because multinationals didn’t repatriate as many profits as normal in that quarter!

Nonetheless, much of the GNP increase has been fuelled by real exports which in gross terms rose by 13.6 billion from 2009-2010 and when imports are subtracted grew by 5.7 billion. This growth arose from the multinational sector in the main, which accounts for up to 90% of Irish exports. However, the jobs dividend from this growth will be very little. Why?

Much of the work on these exports has already been done in Bermuda or elsewhere and is only registered as an Irish export to take advantage of the low 12.5% corporation tax. Multinationals' employment levels have been relatively stable over that last number of years, fixed at around 100 to 120,000 workers. The new technology which continues to revolutionise these companies also reduces the numbers employed.

But hold on, there are 2 million people needing jobs! There are 444,000 people on the live register of unemployment. The figures tell us the continuingly depressing story of the demise of these people. We knew already that 150,000 have lost their jobs in construction or construction-related work.

The big drivers in creating Irish jobs have always been based on what people produce domestically. However, the figures tell us that all domestic output fell, apart from business output which rose, and which is strongly influenced by multinationals. For example: the value of building and construction to the Irish economy fell from 8.4 billion to 5.7 billion from 2009 to 2010; the value of agriculture and fishing has fallen by 227 million; the distribution, transport and communication sectors fell by 336 million; the value of other services fell by 2 billion. Incidentally, in 2007 the value of construction output stood at 13.6 billion compared to 5.7 billion at the end of 2010.

Taking all the above into consideration, the clear message is that the loss in jobs in the Irish economy, which is reflected in the fall of GDP in 2010 and particularly in the fourth quarter of 2010, is indicative of a deep recession. Apart from multinationals, Ireland is haemorrhaging jobs out of its economy and driving up emigration.

Examining the expenditure economic growth figures, the overall demand in the economy has fallen by 7.9 billion. The fact that multinational net exports grew by 5.7 billion makes little difference as it produces few extra jobs. It does nothing to improve the catastrophic effects of the loss of jobs in the sectors of the Irish economy mentioned above which actually do provide jobs, and which have all fallen.

The current GNP figures only statistically mask this huge problem which is obvious from the fall in GDP of almost one billion in the last quarter of 2010 alone. The masking of this by a statistical increase of over 2 billion in GNP terms, based on lower repatriation of multinational profits, shows that the GDP figures are giving the correct picture.

Last year I warned against trusting the predictions of a strong economic recovery at the end of last year and the dangers of growing unemployment and emigration. Unemployment has increased to 444,000 at present, and emigration is running at 80,000 a year. The reasons are obvious from the above. Unemployment and recession will not be solved by any government which lies to the population by quoting GNP figures. They mislead the people by promising that the economy is out of recession; that it has ‘turned the corner’; or that unemployment will drop significantly going forward.

As I have stated since June 2008, the government needs a sustained set of stimulus packages to provide job beneficial growth. It needs three stimulus packages worth 8 billion over two years and includes: A state development bank to lend money to viable businesses coming from the un-borrowed cash reserves of the government at the National Treasury Management Agency and at the National Pension Reserve Fund. This is crying out to happen as money invested by businesses fell by a staggering 27% in 2010 according to the current figures. This needs to prioritise indigenous business by investing 3 billion in social partner-vetted business growth and new ventures.

A further 2 billion needs to be invested in hundreds of new schools, primary care health centres and mental health facilities; finally, 100,000 houses need to be bought by the state at never-to-be-repeated bargain basement prices which would cost 3 billion in net terms. Through low cost affordable housing and social housing with reasonable rents, thousands can be taken out of unemployment traps and the black economy, and with economic stimulation, be brought in to taxpaying real jobs, also taking them off social welfare.

This piece is written from an ideological position that the economic consensus that operating up to now, called variously by terms such as total free market philosophy, has failed. In the words of a book by Paul Krugman, Nobel Prize Winner for Economics in 2008, “A Country is not a Company”. Each business leads its own business only; the government needs to lead overall. The current debacle will continue to fail as long as there is a failure by the state to lead economic development. The direction of change at this point should be firmly rooted in a new and lean Keynesian economic model.