Wednesday, 28 March 2012

Welcome to the inequality cycle

Michael Taft: We are now starting to get data to assess just who in society is getting hit and who is getting by. Of course, we know about unemployment rates, deprivation rates, and income inequality rates. But the CSO’s 2010 Survey of Income and Living Conditions gives us an insight as to who has lost how much in the first two years of the crisis, namely 2009 and 2010. Let’s take a particular look at three deciles – the lowest, the highest and the middle 6th decile.

First, what levels of income are we discussing within these groups?

• The lowest decile includes households with gross incomes of less than €13,249 or less; or approximately €10,000 per adult in the household.

• The middle decile includes households with gross incomes between €37, 467 and €46,561; or approximately between €18,000 and €21,000 per adult in the household. (Question: is this the squeezed middle that the Irish Times series was recently chronicling?).

• The average for the highest household is a gross income of over €171,000; or approximately €62,000 per adult in the household.

For the lowest decile, income levels are extremely low while in the middle decile, incomes are extremely modest. Incomes at the higher level are in another place altogether.

Now, let’s look at disposable income – that is, income after tax.

Nationally, weekly income fell by nearly 12 percent on average. However, as seen the worst hit were those who could least afford it , with the lowest 10 percent income earners experiencing a fall of over 20 percent. The next biggest decline is found in the middle 6th decile. All deciles experienced a fall in double digits with one exception: the highest earners pretty much escaped the impact of the recession.

However, the story is a little more complicated.

In 2009, the lowest decile experienced a minimal impact. It was the middle decile that took the biggest hit with the highest income earners also experiencing a significant decline. However, the picture changed in 2010. The lowest income groups experienced substantial income decline – in this year social transfers were cut. The middle income group suffered further decline. However, the highest income groups returned to growth.

The SILC data shows that income inequality experienced a large rise in 2010, rising from a ratio of 4.3 to 5.5 (the ratio of the income of the top 20 percent to the bottom 20 percent). This was the biggest single year jump in income inequality experienced in any country since the EU started recording this data. In 2010, Ireland ranked 9th in the EU-27 for income inequality.

These trends are likely to continue and may even accelerate. The 2011 budget saw further cuts in social transfers combined with highly regressive tax measures (the USC and the reduction in personal tax credits). The 2012 budget – which the ESRI described as the most regressive of all budgets introduced since the crisis began – will further exacerbate this.

So we have a new cycle to discuss – alongside the deflationary cycle, the debt cycle and the long-term unemployment cycle: the inequality cycle. And this is likely to be as vicious and socially degrading as the others.

Tuesday, 27 March 2012

There is an alternative and we have choices

Tom Healy: Today the Nevin Economic Research Institute is being launched. The website contains information about the new Institute as well as download copies of the Quarterly Economic Observer and the Quarterly Economic Facts. Our key message and conclusion based on research to date is that:

* fiscal austerity is killing the domestic economy

* unemployment - especially youth - is the main social problem confronting the EU

* Ireland is still deficient in key areas of infrastructure - energy, water, retrofitting, broadband and provision of early childhood care and education.

* An investment stimulus of €15bn over 5 years would begin to reverse some of the negative impacts of fiscal austerity to date.

* Such a stimulus could be sourced from public, private and EU (EIB) sources in such a way as to avoid adding to General Government Debt. It could also lower the public sector deficit as a result of tax buoyancy and lower unemployment costs.

Monday, 26 March 2012

Dishonesty and the 'structural deficit'

Michael Burke: An article in the Irish Times by Stephen Collins which asserts that the new Treaty “seeks to do is to put an end to the kind of populist and inept fiscal policies that brought Ireland to the brink of ruin” has already drawn strong rebuttals here and here.

It is an entirely valid argument that fiscal policies brought Ireland ‘to the brink of ruin’- but only because the actual sequence of events was that it was the political decision to bail out the failed private sector banks that fatally undermined the state’s finances.

But there is no legitimacy to any suggestion that the new rules would have required successive Irish governments to act in a significantly different manner, until after the crisis hit. The table below shows that the EU commission assessed there was no structural deficit at all until 2007.

It is worth simply pointing out what the EU Commission has recorded on the Irish ‘structural deficit’.

In fact, even this low ‘structural deficit’ is dishonest. It is an example of what statisticians call ‘data-fitting’; that is, adjusting the data to get the desired outcome. Here’s what the Commission was saying in late 2008, after the crisis and the Irish slump had begun. Somehow a 2008 deficit of 4.9% has become a deficit of 7.2%.

The point of the ‘structural deficit’ is that is exceptionally malleable- it can be made to fit almost any desired level at all. In this article, the impeccably mainstream ‘Investor’s Chronicle’ magazine argues that the ‘structural deficit’ is a myth.

Nor was there a debt problem in Ireland which raised any issue regarding the 60% of GDP limit, not until 2009 for Ireland. As can be seen, it was the so-called ‘core’ countries which were the serial offenders on debt levels before the crisis.

The assertion that the new Treaty would have prevented the crisis in Ireland is groundless.

Friday, 23 March 2012

Government spending policy is deepening the crisis

Michael Burke: The latest national accounts data are worse than they look. The headlines have been about a ‘technical return’ to recession with two quarters of negative growth at the end of 2011. But on two measures, the situation is much worse than the short-term occurrence of a double-dip recession.

• Measured by GDP the economy has been in recession since the end of 2007 and remains €21bn below its peak. This is a decline of 11.6%
• GNP, which excludes the profit flows of overseas multinational corporations, has fallen by €26.3bn, down 17.3%. This takes GNP back to the last century

It remains the case that investment (Gross Fixed Capital Formation, GFCF) is overwhelmingly the source of the slump, having fallen by €23.4bn. This is greater than the decline in GDP and accounts for over 90% of the decline in GNP. Clearly, there can be no recovery without a recovery in investment.

But, acknowledging that all these data are subject to revision, investment is not currently the motor force of the decline. Investment rose in Q4, as did household consumption, according to these initial data. Combined, they added an annualised €2.5bn to growth in the 4th quarter.

The motor force of the slump has become reduced government spending. In the 4th quarter of 2011 government spending fell by €1.9bn in the quarter which is a majority of the total decline of €2.8bn in the period.

The data show the dynamic of the economy. The investment collapse accounts for the slump as a whole. Yet even the tentative increase in investment currently recorded at the end of 2011 is unlikely to persist while there is a contraction in government spending.

The private sector investment strike is the cause of the slump. But government policy is deepening the slump, not alleviating it.

Thursday, 22 March 2012

Back in recession

Tom Healy: While quarterly national accounts data are always to be taken with caution the latest CSO data clearly indicate a return to recession - technically two quarters in a row. And total domestic demand has fallen by 26% from the peak in late 2007 to the end of 2011. We are now entering the fifth year of domestic recession. This significant 'inflection' point has been dwarfed by Mahon, Promissory Notes and other matters. Paul Krugman has a very telling chart issued a few hours after the CSO release here. A picture tells a lot.

Wednesday, 21 March 2012

Europe from the periphery

Paul Sweeney: These days, Europe appears to be a cold place viewed from the periphery in Ireland. We are being bailed out and supported in many ways by the Troika of the EU, ECB and IMF, but the terms imposed upon citizens largely reflect the liberal economic perspective. We are four long years into austerity. Indicators are no longer falling, but little is rising, particularly green shoots.

At this inauspicious time, a progressive vision for Europe demands a strong focus by progressive parties and organisations on the European Social Model and a clear understanding what is meant by the abused word “competitiveness.” This small western island hjas been laid low by liberal economics but,with European solidarity and support, rather than punishment and austerity, can rebound as a model member state. As progressives, we also need to consciously set out to restore the wage share in national income to improve equity, social cohesions, personal income distribution, longer term wealth distribution, macroeconomic stability and the composition of aggregate demand.

Persuading Voters that the Post-War European Social Compact is Alive and Well

Economic and social progress in Europe since the war has been remarkable. Living standards and improvements in housing, health and peoples’ security have been excellent. There had been a consensus with conservatives that national income and wealth would be shared, but with the prolonged crisis, growing numbers of conservatives no longer want to share. The cake is no longer growing – thanks to their policies - and they want to keep more of it for themselves.

But the best way to grow national income is though social solidarity, education, investment, efficient public services and equitable incomes.

Re-building the European Social Model must be the priority of all progressive forces in Europe. Many Europeans fear that governments are neglecting citizens and are obsessed by appeasing the financial markets; have a very narrow view of “competitiveness”; and with fiscal rectitude. This means that the Post-War European Social Compact appears to be dying or dead for increasing numbers of European citizens.

Apparent confirmation of its death was given by the key unelected European leader, Mario Draghi, who was quoted in the Wall Street Journal earlier this year as saying that “Europe's vaunted social model is "already gone”." Thus a clarion call for all progressive parties must be that the European Social Model is very much alive. Not alone will it continue to be a core objective in progressives’ policy implementation in government, but we should guarantee that the Social Model will be enhanced in line with economic and social progress.

The prolonged ineptitude of European leaders, predominantly conservatives, in dealing with the crisis effectively has undermined public confidence in the European project. The failure of austerity measures has led the same leaders to pursue them with more vigour, instead of learning from their mistakes. The Fiscal Compact will exacerbate the problem.

Mr. Draghi also argued that “austerity, coupled with structural change, is the only option for economic renewal”. Like ancient Greek priests, appeasing the gods with sacrifices, he wants to feed even more of our living standards to the markets, saying "Backtracking on fiscal targets would elicit an immediate reaction by the market."

On top of this deep crisis, there are great challenges with ageing populations straining pensions, rising health costs, environmental issues and much more. There is a hollowing-out of the middle with the growth in “Cool Jobs and Crap Jobs” worldwide. Solid pensionable jobs like banking, computing, parts of accounting, engineering etc. are being de-skilled and outsourced from Europe. The polarisation of jobs is a vital area which has to be addressed.

Some of these challenges may mean doing things very differently, but all can be overcome. Revitalising the Social Model is the key to rebuilding confidence in Europe. One step in this direction is to have a clear understanding of one of the most abused concepts in modern economics- “competitiveness".

Competitiveness is Poorly Understood

The most abused word in modern political economy is “competitiveness.” It is not just that each economist has a different definition, but even the same economist may define it in several ways. For most of them and for many institutions it is simply a description of short-term movements in wages. A more sophisticated definition is of short run movements in unit labour costs, but both are too often ideological, using easily available data to beat up workers and trade unions. This is now a tired abuse of what can be a helpful concept in modern economics in measuring national economic progress. Unless we all subscribe to the same understanding, we must avoid this abused word/concept.

A good definition (as given in the 2003 European Comission Report on Competitiveness) is: “Competitiveness is understood to mean high and rising standards of living of a nation with the lowest possible level of involuntary unemployment on a sustainable basis.” But this does not inform on how to measure it.

I suggest the complexity of the issue is best understood by examining the work of Ireland’s tripartite National Competitiveness Council, which represents unions, employers and Government (albeit with only one-eighth union representation). It produces an annual Benchmarking or Scorecard report covering Ireland’s competitiveness performance in a comprehensive and coherent way. It has a collection of statistical indicators against a whole-of-economy comparison to 17 other economies and the OECD or EU average. Costs and labour costs are included but they are only a small part of the overall measurement of a country’s competitiveness. It is deeply disappointing that sophisticated analysts such as the OECD, IMF etc. still define competitiveness only in terms of unit labour costs. But perhaps it is deliberately ideological?

It is worth remembering that only 9% of EU GDP is exported (measuring the exports in value added, not gross, terms), which means EU countries are very largely competing with themselves. We do buy European, already! However, competitiveness is worth benchmarking, if done properly.

A View from a Troubled Western Island

It is essential to avoid the core/periphery break up in Europe. Ireland grew from one of the poorest of the poor in Europe to one of the richest in twenty years, thanks in no small part to its membership of the Union. It is facing enormous economic problems at present, but provided we get support in facing our staggering and perhaps insurmountable private banking debts, Ireland will recover and revert to become a net contributor to the Union’s funds.

Ireland‘s economic collapse in 2008 was not due to poor competitiveness, nor to public sector profligacy, but to gross irresponsibility by a small elite in the private sector, operating within what had become an ultra-liberal economic system. It was the private banking collapse, which the government foolishly under-wrote which brought Ireland down. Commissioner Rehn demanded, in Latin, “pacta sunt servanda” and in English that the Irish taxpayers “respect your commitments and obligations”. However, these debts are not ours, but those of the private defunct banks, which our sacked government guaranteed, in our name, without our consent.

Prior to this, European banks queued up to lend to our reckless banks, while the ECB looked on benignly. Tax policy – cutting direct taxes on incomes and profits, tax breaks especially for property investment and tax-shifting – also contributed substantially to Ireland’s current economic crisis. The third factor was de-regulation.

Today Irish taxpayers are repaying the bank creditors (EU banks and hedge funds) of the six Irish banks which were socialised. This is an impossible task for 1.8 million people at work, where GDP has collapsed by over 13 per cent between 2008 and 2011, GNP by over 16 per cent and domestic demand by a staggering 24.9 per cent and is still in decline. Unemployment is at 14.6 per cent. When discouraged workers, those who would like to work full time, are included the official figure rises to 25 per cent. Youth unemployment is soaring and long term unemployment is 60.3 of the total.

When the trade unions first met the ECB, EU, IMF Troika in late 2010 when Ireland was placed in Examinership, we pointed out that Ireland has many core strengths, but that the bailout package agreed by the Government with them made the economic recovery very difficult. We said that the deflationary impacts of the measures in the package are such that growth has little chance of reviving. This has been proven to be correct - unless one gives credence to the technical definition of “the end of recession” with a few recent quarters of very weak growth in GDP. It will take many years to makes up for the fall of 13 per cent at current rates, especially with citizens’ taxes diverted to fund the apparently endless private bank bailout.

The previous government tried an experiment in Internal Devaluation because there could be no devaluation in a single currency area. Fortunately, this strategy failed.

Had it worked, the recession would be even worse. It would have sucked more demand out of the economy. Overall, the average employee who remained in work saw no decline in real hourly earnings from the beginning of 2008 when the Crash began. For some workers, in the export and other dynamic sectors, there have been small wage rises. The real losses were the considerable numbers (a huge 14 per cent fall) who lost their jobs. A recent study of how employers dealt with the total wage bill found that there had been cuts, but “however, these cuts were primarily achieved though employment reductions with relatively low contributions at the aggregate level from changes in average hourly earnings and average weekly paid hours” (see Walsh, Kieran “Wage bill change during the recession: how have employers reacted to the downturn?” Statistical and Social Enquiry Society of Ireland, February, 2012)

This relative stability in real incomes of those who kept their jobs since the Crash of 2008 has also been extremely important in ensuing that the terrible collapse in domestic demand – of one quarter in less than four years – was not worse. This is because averagely paid workers generally spend most of their incomes. The last government also cut the minimum wage by 12 per cent but the new government reversed this immediately. It also did not cut welfare rates and there is a deal with the public service whereby there will be no further pay cuts (two of which averaged 14 per cent) provided there is support for substantial change, which is occurring.

The relative stability in real incomes, in welfare rates and in public employment is the key to the explanation of why there has been no rioting in Ireland, despite our travails. It is crucial that the core economies which are performing well, act in solidarity and not in punishment to the underperforming peripherals.

Nor should we entertain the idea of a ‘two speed’ Europe, which could allow an inner core to move towards closer economic and political union supposedly “to protect the Union as a whole.” To move in that direction is to abandon solidarity and to miss this opportunity to build a cohesive Europe.

Restoring the Wage Share of National Income

The share of national income going to wages has fallen considerably in most developed countries since the early 1970s. There has been a slight reversal in recent years, but it is forecast to fall back again. One explanation for the falling labour share and rising share to capital might be that there has been an intensification of capital investment. However, against that, there has been a huge improvement in human capital with all countries seeing major increases in educational and skills attainment. It seems that the investment in human capital is not being rewarded by increases in labour’s share of national income. As less national income is going to workers, this has a secular impact on aggregate demand and thus on growth.

The issue of the decline in labour income share involves equity, social cohesion and personal income distribution, longer-term wealth distribution, macroeconomic stability and the composition of aggregate demand.

The “American Dream” of the next generation enjoying a higher standard of living than their parents has been dead since the early 1970s. Since 1975 US workers’ median incomes have not risen. There are hard lessons to be learned from America. The stagnation in incomes was masked for some time because the working and middle classes borrowed against their homes. Now the home ownership dream has turned into a nightmare for many with negative equity and big debts. It was also masked by a dramatic fall in the prices of many goods now imported from Asia which reduced the cost of living. It was further masked by the growth in dual-income families, where there had only been one earner in the past. Male, unionised and in well paid manufacturing, these American workers had previously seen themselves as firmly in the “middle class”.

The fall in labour’s share of national income was also driven by globalisation, accelerated by technology, falling prices in transport and instant communications. In turn, these trends were accentuated by liberalisation of borders and markets, especially labour markets.

The value of the fall between 1973 and 2011 is substantial in monetary terms. Even with the smallest decline which as in France of 3.5%, it is still a transfer of €71bn from labour’s share of GDP to capital. For Germany it is €137bn.[Click to enlarge table below].

The decline of trade unions and the paucity of vision and lack of ambition in progressive parties, which should be counterforces to such trends, also facilitated the stagnation of incomes of the majority, in spite of economic growth and growth in labour productivity.

There is also a view that corporations and the rich should not have to pay “too much tax” as it is a disincentive to investment. Simultaneously, people are demanding more and better public services, but have been increasingly unwilling to pay for them through taxation. The aversion of many governments and major institutions like the IMF and OECD to progressive income taxes which they now pejoratively term “taxes on labour” means that if acted upon, taxation will fail to be a redistributive mechanism. It also means that the great polarisation of incomes will continue unchecked and citizens will grow even more angry and frustrated.

A Common Fiscal Policy is key to addressing inequality, sorting out the banks and boosting demand by underwriting an EU wide stimulus programme. It may begin with a small budget overall, but a small budget in EU terms is still a lot of cash. I would go for tax coordination rather than harmonisation where member states can set rates, within bands, though a common tax base for companies makes sense in a single market.


The real irony in Europe is that this deep crisis was caused by neo-liberal economic policies. Yet it is conservatives who are in power in most member states. They are prolonging the crisis with the same old failed policies and general incompetence. Some are even reverting to narrow nationalism. Instead, bold action with an EU-wide stimulus and policies informed by a longer term vision of European solidarity is required.

There is a lesson in this for us all. That is to replenish our vision by going back to core ideas, sticking to them in a principled way and being innovative in our policy responses.
Part of this post is based on a a presentation given to a meeting of progressive groups, parties and individuals in the French Parliament on Friday March 16th entitled "The Renaissance of Europe". It was sponsored by four EU think-tanks: FEPF, Jean Jaures, Friedrich Ebert Stiftung and Italianieuropei. This event will be followed by seminars in Rome and Berlin in advance of the Italian and German elections.

Tuesday, 20 March 2012

Ireland's funding options: Time to end the 'race-to-disaster' debate

Tom McDonnell & Michael Taft: Even before the wording has been published and a referendum date named there is one issue that looks set to dominate the debate over the Fiscal Treaty; namely, what future financing options does Ireland have in the eventuality of a ‘No’ vote. While we are not taking a position on the substantive issue in this post, the following is intended to aid the debate by helping to answer that question.

The ‘Indispensable’ Condition

First, regardless of the Treaty vote, Ireland is guaranteed funding under the current programme – as long as it meets its targets. A Yes or No vote will not change this.

In the event of a No vote with Ireland unable to fully return to the markets, what would the situation be?

‘ . . . the granting of assistance in the framework of new programmes under the European Stability Mechanism will be conditional, as of 1 March 2013, on the ratification of this Treaty by the Contracting Party.’

This clearly states that new financing under the European Stability Mechanism is contingent upon ratification of the Treaty. However, we would put the following points that suggest that the issue contains potentially significant ambiguity.

First, the text of the European Stability Mechanism Treaty states that there are two conditions for providing support for ESM members:

‘The purpose of the ESM shall be to mobilise funding and provide stability support under strict conditionality, appropriate to the financial assistance instrument chosen, to the benefit of ESM Members which are experiencing, or are threatened by, severe financing problems, if indispensable to safeguard the financial stability of the euro area as a whole and of its Member States.’

The two conditions for support under the ESM appear to be (a) a member-state requires assistance, and (b) such assistance is ‘indispensable’ to the stability of Euro area. The indispensable clause, not surprisingly, is stated four times in the ESM treaty; unsurprising as this is the purpose of the ESM – to safeguard the Eurozone’s stability.

For argument’s sake, let’s assume Ireland – a member of the ESM but having voted No in the referendum – is in demonstrable need of financial assistance; and further, it can be objectively established that, without such assistance, there is a threat to Eurozone stability (issues of both state and bank default which may arise if assistance isn’t forthcoming). A literalist reading of the Fiscal Treaty would seem to settle the issue – Ireland, if voting No, would be excluded from the fund. But how final is this literalism?

‘Indispensable’ to the financial stability of the Euro area does not become less indispensable merely because Ireland, an ESM member, has not incorporated rules (rules that it has already agreed to) into its constitution through a process unique in the Eurozone – that is, a popular referendum. It is difficult to imagine a situation where the financial stability of the Eurozone (and Eurozone countries from Spain to Germany) is at risk and the resolution of that risk is barred because of a referendum result in a member-state. This would effectively undermine the intent of the ESM and its ability to respond to financial risks in the Eurozone.

What this crisis has shown is the flexibility of the Eurozone and EU institutions to respond to the crisis, whether we agree with the policies or not. For instance, the European Central Bank is legally barred from acting as a lender of last resort to sovereign states. But that did not stop it from, first, participating in the secondary bond markets and, second, from providing over €1 trillion in liquidity to European banks through their Long-Term Refinancing Operations (LTROs). The LTRO was intended to indirectly ease pressure on Spanish and Italian bond yields and was effectively a roundabout method of overcoming the bar to lend to sovereign states. Both of these were innovative and flexible responses. This resort to flexibility has implications for Ireland in the event of a No vote.

The Fiscal Compact refers to ‘new programmes under the European Stability Mechanism’. The ‘new’ may provide some flexibility, especially if Ireland is unable to re-enter the market and seeks a continuation of the current programme. This could be buttressed by the statement by the EU Heads of State or Government in July of last year. This, too, is definitive:

‘We are determined to continue to provide support to countries under programmes until they have regained market access, provided they successfully implement those programmes.’

Minister Michael Noonan confirmed this after the summit:

'There is a commitment that if countries continue to fulfil the conditions of their programme the European authorities will continue to supply them with money even when the programme is concluded . . . The commitment is now written in that if we are not back in the markets the European authorities will give us money until we get back in the markets.’

That both the EU leaders commitment and the Minister’s statement followed on from agreement to establish the ESM – with the same clause that disbursement of funds is based on the same ‘indispensability’ condition referred to above – suggests that there is considerable room for all sides to manoeuvre, even in the eventuality of a No vote. We are not suggesting that this is a definitive outcome. However, resort to a literal reading could lead us to the conclusion that Ireland, even if voted Yes, could be denied funding under the ESM if it was concluded at EU level that assistance was not indispensable to Eurozone stability. We seriously doubt this scenario which is why literal readings of one section of one treaty can lead us to unjustified conclusions. This holds when discussing the outcomes of either a Yes or No vote.

Alternative Sources of Funding

Regardless of the above, there is a credible argument that Ireland, in the eventuality that it needs a second bailout, has access to funding sources apart from the ESM; namely the IMF. This is the same ‘insurance’ or ‘back-stop’ that all EU countries are entitled to as members of the IMF. More EU countries have accessed IMF support than EU support in the last decade: Latvia, Lithuania, Poland, Bulgaria, Romania, Hungary, and Estonia.

The IMF programmes have recently undergone considerable reform in order to tailor support for the specific need of a country. Further support from the IMF does not necessarily have to come via the Extended Facility that Ireland currently participates in. Some of these programmes may even be more suitable to the Irish economy than an ESM programme modelled on the current one. This is because IMF programmes can provide credit lines on a precautionary basis. In these circumstances, Ireland may be able to enter the market even on a partial basis but have recourse to the IMF if and when further support is needed. A particular strength of some of these programmes is that Ireland may not have to draw down any funds (though it would make a ‘down-payment’ to participate in the particular programme).

There is a range of programmes that Ireland may be able to avail of:

Stand-by Arrangements with high-access precautionary provisions. The IMF describes this as its ‘workhorse lending instrument’.

The Flexible Credit Scheme which does not carry with it any conditions (and which the IMF claims ‘reduces the perceived stigma of borrowing from the IMF’.

The Precautionary and Liquidity Line is another line of support which provides finance and, according to the IMF, ‘is intended to serve as insurance and help resolve crises’.

Rapid Financing Instrument provides a quick response to an outside shock – including economic shocks.

These programmes are separate from the current Extended Facility programme we are in. Some have conditions attached to them; one does not (the Flexible Credit Scheme). They have a range of participating and payback periods, with provision for roll-over. We are not suggesting that Ireland would comply with all of the above; however, it shows the considerable potential sources of funding. There are two issues that might arise in considering these alternatives.

First, will Ireland be eligible for future financing? IMF financing is based on quotas assigned to each country with programmes laying down specific amounts that can be lent. However, all the programmes have exceptional access policy whereby limits are waived – with the exception of the Flexible Credit Line which, in any event, has no cap on funding.

In fact, for many countries there is a natural progression from the type of IMF funding Ireland is currently in (an Extended programme) to the programmes listed above. Poland is an example which started out in an Extended Programme, progressed to a Standby Arrangement and is now in a Flexible Credit Line which has no conditions attached. Ireland could make a similar progression.

Second, it has been suggested that the IMF actually regards Ireland as a high-risk country and may, therefore, refuse to lend further. In the first instance this would certainly be curious. To date, Ireland has abided by the programme that the IMF itself helped design (it’s fairly typical of IMF extended facilities). If the IMF suddenly claimed Ireland was too risky, this would be tantamount to an admission of their own failure. Would Ireland be penalised by the IMF for adhering to a programme that the IMF helped designed?

There is a strong argument that Ireland fulfils all four criteria for an ‘exceptional access’:

(a) The member is experiencing or has the potential to experience pressures resulting in a need for Fund financing that cannot be met within the normal limits.

(b) There is a high probability that the member’s public debt is sustainable in the medium term. However, in instances where there are significant uncertainties that make it difficult to state categorically that there is a high probability that the debt is sustainable over this period, exceptional access would be justified if there is a high risk of international systemic spillovers.

(c) The member has prospects of gaining or regaining access to private capital markets within the timeframe when Fund resources are outstanding.

(d) The policy program of the member provides a reasonably strong prospect of success, including not only the member’s adjustment plans but also its institutional and political capacity to deliver that adjustment.

We would draw attention to the condition in (b); in particular where exceptional access is justified if there is a high risk of international ‘spillovers’. There is a strong argument that Ireland is in such a situation. That the IMF participated in the current bail-out, despite the staff country report in December 2010 stating that Ireland would entail ‘substantial risks’, only confirms their determination to participate in programmes where the risks of spillovers are significant.

Another issue is the scale to which Ireland has already borrowed from the IMF. Currently, Ireland is the third largest debtor to the IMF – behind Greece and Portugal. Poland has a similar level of contingent debt, while Mexico is much higher – though these countries are in the Flexible Credit Line have not drawn down funds. There is a limit to which a country can borrow – even if complying with the provisions of the exceptional access. The IMF has lent a considerable amount to EU countries already and while it still retains considerable reserves, and while further precautionary lending to EU countries would not impact unduly, the possibility of larger countries needing assistance (Spain, Italy) could squeeze available funds to Ireland.

Taking all of the above on board, that the IMF has decided to extend its assistance to Greece in the form of a second bail-out suggests that Ireland would be a credible candidate for further support if it cannot access the international markets. If so, this could be a viable alternative to ESM funding.

Appalling Scenarios and a Legitimate Debate

None of the above can be certain. But that is no reason to resort to counter-posing ‘appalling scenarios’. Some argue that Ireland will be frozen out of both market and institutional funding if we vote No. Clearly, this would be an appalling scenario. Others argue that it would never come to this because of the impact on the Eurozone (defaults, contagion) – another appalling scenario.

This is not a satisfactory way to debate this issue. This will trap us in a ‘race-to-disaster’ debate which will be particularly uninformative. We have attempted to outline concrete scenarios for Ireland apart from the ESM. Whether these would become available is a subject for legitimate debate. The fact that Ireland may have a secure safety net with IMF funding is likely to induce cooperative, if ad hoc, relationships with the EU. Competing disaster scenarios will only undermine our understanding of these difficult issues.

In one respect, debating non-market funding has an air of unreality about it – if we are to heed the Government’s dismissal of a second bail-out as ‘ludicrous’. The fact that this issue is being taken seriously is a testament to the common sense of the debate. While we respect the fact that no Government will intentionally play down the prospect of being able to borrow on the international markets, in our own opinion a second bail-out is a real and probable outcome of current policies.

And this is not in the best interests of the Irish economy, whether that support comes from the IMF, the EU’s ESM , some other ad hoc EU support or any combination of these.

Nama Wine Lake on the Promissory Notes

Tom McDonnell: Here is a timely recap by Nama Wine Lake of the grotesque farce that is the Anglo promissory note debacle.

Saturday, 17 March 2012

Emigration a 'lifestyle choice'?

Tom Healy: Today's 'feel good' story in the Irish Times ran as 'Emigrants leaving by choice'. Nice to know that some people still have choices. Politicians seem to believe there is much less choice than before. How much migration is really taking place and who is emigrating - and even still immigrating to the State? There is much less hard data on this than many assume. The CSO estimate an annual gross outward migration of 76,000 in the year ending 2011 - many are young and single. 50% of respondents to the Ipsos MRBI poll reported in today's IT felt it was their 'choice' to emigrate when asked 'Did you feel forced to emigrate or was it your choice'. 42% said the left Ireland for 'a change of experience'. Writer Stephen Collins says: 'The findings appear to back the contention of Minister for Finance Michael Noonan that emigration is a lifestyle choice for many who have left the country in recent times'. While one does not wish to take from yet another feel good story building on all the other good news recently a few questions are in order -
how is it that gross outward migration - most of which is 'by choice' was estimated to be running at 76K per annum in 2011 and 36K per annum in 2006?
If 59% of migrants left by 'choice' what about the other 59%? (a serious statistical question in any opinion survey?)
would it be possible to actually report the questionnaire and precise questions?
it should not be thought that because most emigrants were in employment prior to emigrating that the nature, hours and reliability of employment was anything but inadequate.
how was the sample of 300 persons chosen - the detail given is scanty and one wonders about possible bias.

all of this not to question necessarily the reliability of the results. Just caution is needed. Have a great St Patricks weekend commemorating an immigrant who was forced here in the first place - well he chose to come back a second time.

Friday, 16 March 2012

The Alcohol Industry - A case study of health versus wealth

Nat O'Connor: The recently completed (Feb 2012) Steering Group Report On a National Substance Misuse Strategy has taken a public health approach to the issue of alcohol, and it estimates the costs to Irish society of dealing with alcohol abuse to be €3.7 billion. At the same time, the alcohol manufacturing and retail industry provided €2 billion in VAT and excise to the State, as well as 50,000-60,000 direct and indirect jobs.

There’s just no way to reduce the €3.7 billion of social harm and retain the same levels of tax and jobs. One of the recommended societal goals is to reduce alcohol consumption by nearly a quarter (page 7), which would have to significantly affect the alcohol industry.

It's a good case study of a genuine dilemma facing the Government about how to curb the societal harm and economic costs from alcohol abuse while minimising the loss of jobs or tax revenue from the alcohol industry.

Minority reports from both the ABFI and MEAS disagree with the steering groups findings. This suggests that the alcohol industry sees the report's recommendations overall as a financial threat, although it would be unfair to infer from this that the industry is unwilling to deal with the issue of abuse.

Table 7 (page 78) gives the breakdown of the €3.7 billion cost to society:
• €1.2 billion (32%) Costs to healthcare system of alcohol-related illnesses
• €1.2 billion (32%) Alcohol-related crime
• €526 million (14%) Alcohol-related road accidents
• €330 million (9%) Output lost to alcohol-related absence from work
• €197 million (5%) Alcohol-related accidents at work
• €167 million (5%) Alcohol-related suicides
• €110 million (3%) Alcohol-related premature mortality

The economic role of alcohol production and consumption is addressed too (page 71):
• €7.2 billion personal expenditure on beverages
• €2.9 billion turnover in drinks manufacturing, including €1 billion in drinks exports
• The on-trade provides 43,629 full-time job equivalents, and off-licences another 2,850.
• Manufacturing and retail provide €2 billion in VAT and excise.

Alcohol consumption in Ireland (at 11.3 litres per capita) is higher than the OECD average of 9.1 (page 64), but more significantly, Irish adults binge drink more than any other European country, with one quarter of Irish adults binge drinking every week (page 7).

A summary of some of the recommended actions (listed in full on pages 54-62) are as follows:
• Increase the price of alcohol over the medium term to ensure that alcohol becomes less affordable, using excise, including linking excise more closely to alcohol content;
• Minimum pricing per gram of alcohol;
• Increase enforcement of some existing laws, including physical separation of alcohol in mixed retail outlets;
• Develop proposals for an all-island initiative in relation to alcohol issues;
• Allow the HSE to object to the granting of a court certificate for a new licence or renewed licence;
• Introduce a statutory code of practice on the sale of alcohol in the off-licence sector;
• Develop a system to monitor the enforcement of sale, supply, delivery or online advertisement of alcohol to minors, with particular emphasis on age verification;
• Consider the possible need to strengthen the legislative controls on distance sales;
• Establish standards for mandatory server training programmes in the on-trade and off-trade sectors;
• Engage with EU colleagues to explore the feasibility of introducing common restrictions on advertising on a European level.
• Restrict alcohol advertisement generally, including a 9pm watershed for tv and radio, alcohol ads for over-18s cinema screenings only, and prohibition of all outdoor advertising of alcohol;
• Phase out drinks industry sponsorship of sport and other large public events by 2016;
• Introduce appropriate hospital procedures to provide alcohol testing of drivers who are taken to hospital following fatal/injury collisions;
• Monitor and regularly publish the volume of driver alcohol testing by An Garda Síochána;
• Introduce a ‘social responsibility’ levy on the drinks industry;
• Reduce the low-risk weekly guidelines to match the UK levels;
• Develop and implement more detailed clinical guidelines for health professionals relating to the management of at-risk patients;
• Increase information on alcohol products sold in Ireland to include grams of alcohol, calorific content and health warnings;
• A wide range of preventative measures, especially targeted at high risk groups, particular communities, and children and families of those abusing alcohol;
• Encourage the provision of alcohol-free venues for young people, with an emphasis on those most at risk (e.g. Youth cafés, alcohol-free music and dance venues and sports venues);
• Further integration of alcohol strategy with other national addiction and mental health strategies;
• Various clinical guidelines and protocols;
• Improve detoxification services;
• Continue to implement and develop, as appropriate, epidemiological indicators and the associated data collection systems and a research programme to examine the economic, social and health consequences of alcohol and the impact of alcohol policy measures.

Of course, some of these actions, particularly local action and prevention, may require additional financial resources at a time when the Government is still battling a massive deficit. Yet, the economic gains of tackling alcohol-related harm may be a good social investment that will pay dividends in later years.

From an equality perspective, excise increases will disproportionately affect people on low incomes. While there are good arguments in favour of using price to disincentive negative behaviours (i.e. pignovian taxes), this compounds poverty and an already unfair distribution of income. Ideally, we should ensure a minimum adequate income for everyone in Ireland before relying on flat taxes to dissuade people from alcohol abuse. There is also a risk that people with an alcohol addiction and/or related mental health problems will simply spend more of their incomes on alcohol and less on everything else. Therefore education and other action to support people in tackling alcohol addiction will be crucial, and this will require significant investment in healthcare and social support services, not least specialist interventions with the highest risk groups.

Many of the recommendations, particularly the earlier ones, will cost money to the alcohol industry to implement. Not least the call for a ‘social responsibility’ levy on the drinks industry, which could help pay for the required healthcare and social services. So the stage is set for conflict between the long-term health costs and the short-term economic benefits of alcohol to the Irish economy and society.

Thursday, 15 March 2012

Oireachtas Dysfunction on Economic Policy?

Paul Hunt (a regular commentator on PE) has written a lengthy analysis in the Dublin Review of Book linking the dysfunction of the Oireachtas with the woes of the Irish economy.

There is a lot to agree with in the article, such as his assertion that “open, transparent, adversarial disputation of public policy proposals based on facts, evidence and analysis is the most effective means of ensuring good governance”. However, some aspects of the analysis are tenuous.

The article ranges from a discussion of the economic history of the twentieth century to a comparison of the influence of different European powers over their respective governments. As result, the treatment is inevitably somewhat simplified in places but gives a relatively clear overall narrative from the author's perspective.

In the closing pages, the analysis veers dangerously close to cynicism, if not outright conspiracy theory. There is a lack of evidence supplied to justify writing off the entire policy making system as a monolithic industry using propaganda and spin to provide post hoc justifications for decisions that benefit vested interests and harm the public interest. It can feel like that sometimes, but it is an oversimplification and exaggeration.

While the essay is surprisingly tolerant of failures of investigative journalism, on the basis that the media is “probably insufficiently resourced and lacks the incentive”, there is a need for more nuances about why policy-making can be dysfunctional in Ireland. Failure by successive governments to invest in social scientific policy research is one component, as is a failure to develop career structures and human resources policies that would incentivise the kind of numerate, analytical skills required in a modern civil service.

There are a few specific points that I find particularly contentious.

The assertion that neo-liberalism was “theoretically sound” whereas Keynesianism was “naïve” and “beguiling” shows a certain bias. Different aspects of these theories have been both bolstered and undermined by a range of evidence at this stage, and both have major flaws.

Likewise, I cannot agree that the early Irish state “placed a premium on governance without effective scrutiny, restraint or accountability”. On the contrary, the stability of parliamentary democracy in Ireland – probably due to our geographical and cultural connections to stable regimes in the UK and USA – provided a forum where civil war enemies could hold each other to account for their use of state power and limit the abuse of national resources. Arguably, the Dáil worked much better to achieve these aims eighty years ago than it does today and I endorse the article's conclusion that it is now dominated by the Government.

Finally, I reject the assertion that “most voters are broadly content” with a weak Oireachtas. I do not believe that people are apathetic either. I think there is a great anger and frustration with the political system and the PR-driven nature of political communication in recent years. Participatory experiments like those done by Claiming Our Future and We The Citizens provide evidence to suggest that people are able to get their heads around tricky issues and would welcome much more frank, detailed and nuanced policy discussions by politicians.

There is one contradiction in the article, between the idealised – perhaps even naïve – depiction of the role of governments and parliament near the end, where it is claimed that they should always act in the public interest, versus the earlier analysis that interest groups “are behaving rationally” by each “pursuing their interests” using whatever “power and influence they can exercise”.

Much as I agree with the article that a much stronger and independent research and analytic capability should be made available to the Oireachtas, in reality democratic politics is largely an agreement to replace violent conflict with competition between different vested interests, with parties in Government constrained to spread just enough benefits around to satisfy their diverse voter bases or lose the next election.

Is this cynical in turn? I don't think so, because alongside the reality that politics is inevitably partisan, I believe that there are public servants and politicians on all sides who sincerely care about the public interest or 'common good' and try to arrive at balanced policy solutions. But there is a risk that even the best of them are lulled into a sense that the Oireachtas and Government are doing the best they can, in a technocratic way. Parliamentary activity - and policy making more generally - should not be seen as a merely technical activity, where the optimal solutions can arise from dispassionate analysis of facts and figures. On the contrary, values matter too and what policy is considered 'optimal' almost certainly depends on one's moral perspective.

I welcome the article's contribution to the public debate on political reform, but I believe that any drive for deep reform of the Oireachtas, including heightened scrutiny and holding of governments to account, must be fuelled by the knowledge that the costs and benefits of public policy decisions are not distributed equally. This sense of urgency and unfairness should remind those politicians who care about the public interest that their duty is to question and oppose bad policy, even if that means losing their salaries and their careers.

Tuesday, 13 March 2012

Cleaning up the debate

Michael Taft: In Saturday’s Irish Times Stephen Collins wrote:

‘Far from outlawing Keynesian economics, what the treaty seeks to do is to put an end to the kind of populist and inept fiscal policies that brought Ireland to the brink of ruin. The treaty on its own won’t achieve that objective but it should at least make it more difficult for politicians to behave irresponsibly in the future – and that can only be a good thing.’

Eoin O'Broin has already pointed out the many flaws in Collins’ piece. Here I just want to examine one point – namely, whether the Fiscal Compact would have either ended ‘populist and inept fiscal policies’ or ‘make it more difficult’ to pursue such policies; and to do so from the EU Commission’s perspective.

Collins is no doubt referring to the structural deficit rule whereby, regardless of a Government’s General Deficit, it must maintain a structural deficit of -0.5 percent or less (-1 percent for countries with a general debt of 60 percent or less). There is also an assumption that the Government’s fiscal policy during the speculative boom period, while in compliance with the Maastricht guidelines, was running structural deficits. If so, this would have inevitably led to a mismatch between revenue and expenditure, as the former would have been bloated by the property bubble.

Therefore, Collins assumes that had the Fiscal Treaty been in place during that period, it would have first, exposed this structural defect and, secondly, required the Government to repair it.

All of this is mistaken - at least according to the EU Commission (see Note at end of post).

According to the EU Commission, Irish Governments ran, on average, both general and structural surpluses, not deficits. The above estimates come from the latest EU Commission forecasts – not the ones made prior to the recession.
Had the Fiscal Treaty been in place during that period, Ireland would have been allowed a structural deficit of -1 percent since we had a general debt of less than 60 percent of GDP. But only twice during the 8-year period did Irish budgets run afoul of the structural deficit rule – and in 2003 it was quickly transformed into a surplus.

So according to the EU Commission Ireland’s fiscal performance during the period up to the recession was fiscally responsible. Had the Fiscal Treaty been in situ it would have made no difference whatsoever to Irish budgetary policy. Indeed, the ‘inept fiscal policies’ that brought us to ruin would have been vindicated by the Fiscal Treaty.

This should, of course, lead to questions as to how one can trust this type of formulation since the EU Commission completely missed the speculative bubble in the Irish economy. And it was a big bubble to miss. Even years after the fact the EU Commission insists that Irish budgets were fundamentally sound and the economy was performing normally.

Collins could have brought this easily accessible information to his readers’ attention and pointed out, whether one supports or opposes the Treaty, that these measurements are suspect, to put it mildly. He could have also brought to his readers’ attention the Government’s own verdict on the EU Commission’s methodology for calculating the structural deficit – namely that it is ‘highly uncertain’ and ‘unrealistic’. He didn’t.

Instead, he made an assertion that is wholly unsupported by the evidence.

Unfortunately, we are likely to get a lot of that during the debate. Therefore, it is imperative when such unfounded assertions are made in the debate, they are quickly challenged.

On this score, we can only hope that the statement that the Fiscal Treaty would have prevented or modified the budgetary policies prior to the recession is never repeated again.

NOTE: 2001 and 2002 structural deficit estimates come from the Spring 2010 EU Commission estimates as they were not available in the current estimate.

Friday, 9 March 2012

The referendum - what to do?

Jim Stewart: The Treaty on Stability, Coordination and Governance is flawed in many respects. Martin Wolf, writing in the Financial Times on 6th March, itemises some of these flaws. The obvious one is the requirement in clause 1b limiting the ‘structural deficit to 0.5% of GDP’. Countries must adjust rapidly to this position as agreed by the European Commission. In addition if the ratio of government debt to GDP is greater than 60%, article 4 requires the excess amount to be reduced over a twenty year period. So that a country where a debt/GDP ratio is currently 100% is required to reduce this amount by 2% per annum. In effect this means running a budget surplus of 1.5%. This is impossible to achieve, without debt writedowns. In the absence of debt writedowns attempting to achieve this target would deepen the current recession in Ireland and other countries, and prevent any economic recovery.

The Treaty states that the rule will be deemed to have been “respected if the annual structural balance of the general government is at its country-specific medium-term objective”. The problem is how can this be known? Both Ireland and Spain would have satisfied this budget criteria before the economic crisis. The key question was whether government finances were stable over time? This means that (1) the financial crisis would have to be forecast, (2) policy responses would have to be forecast, and (3) the effect of both the financial crisis and policy responses on government finances would have to be forecast. Some economists got point (1) right. Official Ireland was spectacularly wrong. No economist forecast all three nor would this be possible. The proposal from Philip Lane (Irish Times Feb. 7) for Ireland to develop a capacity (funded by the State) for “independent, high quality assessments of structural trends in the economy and the public finances” will have the effect of creating jobs for economists but little else.

Further issues arises in relation to the measure of debt. For example, activities transferred to a commercial State owned company, such as the proposed Water Authority, would also have associated debts transferred. Current measures of GDP are favorable to Ireland because GDP is inflated by profit switching transfer pricing by foreign owned firms. This may not always be the case. How can rational economic policy be based on a ratio, in which both the numerator and denominator are subject to revision, especially in the case of GDP?

This does not mean that over a period of time Government expenditure and government revenue, should not be sustainable. Being sustainable does not mean expenditure should be almost identical with revenue. An economy that is growing strongly can have both government deficits and maintain a stable debt/GDP ratio. Successful economies can have widely varying ratios of debt to GDP over long periods of time, for example Japan.

The fiscal treaty can be added to the list of flawed policy making that has helped turn an economic crisis (largely of our own making) into a national catastrophe. It is particularly dangerous because it will be incorporated in the constitution making change very difficult and incorporates the right of another one of the signatories to the treaty to bring a case to the European Court of Justice (article 8.1) and face financial sanctions in the event of non-compliance. It is the same thinking that initially set penal interest rates on Irelands borrowing under the EU/IMF Programme.

Hence the question arises why would rational people vote in favour of a Treaty which has so many flaws. John O’Hagen (Irish Times, 8th March) asks of those opposing ratification to explain “how day-to-day State expenditure will be funded from 2013”. The simple answer is that according to the Government, after the current programme has ended, (that is at the end of 2013, not ‘from 2013’ see EU/IMF Programme, p. 16 ) Ireland will turn to the bond markets for financing (Minister of State Brian Hayes quoted in Irish Times 6 March, 2012), and a point also made by Jean-Claude Juncker, chairman of the Eurozone finance ministers, to the European parliament on Feb 29.

But the point has been made unless the Treaty is ratified financial assistance will not be granted from the European Stability Mechanism at the end of 2013 should it be needed. So the question is how likely is a second bailout and to what extent will it be required? The answer to this question is uncertain. Funding is in place from the existing programme until the end of 2013. While bond redemptions amount to €11 billion in 2014, they will be zero in 2015 (NTMA annual Report 2010, p. 15). In addition, national savings contributed about €4.3 billion in 2011, and could rise further.

A further uncertainty arises from the stated intention of Francois Hollande, the front runner in the French Presidential election to renegotiate the treaty (Hugh Carnegy and Quentin peel, Financial Times, March 4, 2012). At the same time the main architect of the treaty Merkel, has lost credibility in Germany with the resignation of the candidate she supported as President. Because of this and other issues, Der Spiegel (2/21/2012) reports difficulties within the coalition government and states “many are now asking how much longer it can survive”. The second bail out package for Greece required the support of the opposition Social Democrats and Greens (Der Spiegel 2/27/2012). Opposition parties and likely participants in a successor government espouse policies such as emphasising growth rather than austerity to balance budgets, a Eurobond and a Financial Transaction Tax.

Spain recently announced a new higher target for the budget deficit of 5.8% compared with 4.4% agreed with the Commission, some hours after signing the new Treaty. Furthermore the Spanish Prime Minister announced that the budget deficit was a matter for the Spanish Government and not the Commission. It is also interesting to note that there was very little change in yields on Spanish government bonds (benchmark 10 year yields rose from 4.91% to 4.96%) on the first day of trading after this announcement and the signing of the Stability Treaty, indicating, perhaps that markets recognise that increased austerity is bad for economic growth and bad for bond markets. Further budget cutbacks in the Netherlands could result in a general election in which political parties opposed to budgetary cuts would make large gains (Financial Times, March 1, 2012). It is likely that government policy in relation to the financial and economic crisis will change in key EU countries as a result of political change.

The strategy to adopt in the face of this uncertainty is to delay holding a referendum for as long as possible. At government level we in Ireland have ‘world class skills’ in delay. The Department of Justice is especially skilled in this regard. A delay is likely to mean that political change in EU countries, such as France, will result in change to the Stability Treaty. Peripheral countries (Greece, Ireland, Portugal, Italy, Spain) will thus have an opportunity to influence treaty change to their benefit. Writing detailed fiscal stability rules into a constitution is flawed reasoning, and treaty change could remove this threat. Delay will help clarify if and to what extent a second bail out is needed.

What about the promissory notes? If as some have suggested there is an agreement to reduce the cost of the promissory notes, should this influence or decision? On this An Taoiseach is correct: there is no linkage. The cost of the promissory notes can and should be reduced under existing rules and should have no influence on voting intentions on the Treaty for stability.

It is difficult but vital that economic policy is taken from those without any democratic mandate, and without any economic policy other than a dogmatic adherence to the imposition of austerity. It is indeed unfortunate for Ireland and the EU that we have a Commissioner for Economic and Financial Affairs who is bereft of ideas. It is doubly unfortunate for Ireland that those directly responsible for implementing the programme (Mr. Székely, Director and European Commission mission chief to Ireland) are unable to produce a single idea that is growth enhancing (see for example the recently published review of the economic programme for Ireland).

Wednesday, 7 March 2012

Gender equality and the economy

Sinéad Pentony: As we face into years of more austerity, it will be no surprise to learn that the European Union birth rate is dropping, highlighting a longer-term trend of women in developed countries having less children in the countries that help them least.

While Ireland is experiencing a baby boom at the moment the overall trajectory for birth rates is downwards. The OECD average (total) fertility rate is 1.6 births per woman, when 2.1 is needed to stay stable. Immigration will offset some of this decline, but not completely.

In the UK, the Resolution Foundation’s new research, The Price of Motherhood, shows how vital women’s work is to household income: in 1968, women provide 11 per cent of household income while men provided 70 per cent. In 2009, men provided 40 per cent of household income and women provided 24 per cent. The lack of good part-time jobs means that nearly half of mothers take lower-grade jobs than their qualifications – and lose out forever.

The latest report from the European Commission on the Gender Pay Gap shows that the gender pay gap is alive and well, with women in the EU earning 17 per cent less per hour than men. Ireland’s gender pay gap is the same as the EU average. The impact of the gender pay gap means that women earn less over their lifetime and this results in lower pensions and a greater risk of poverty in old age.

A recent study on Older Women Workers’ Access to Pensions clearly illustrates the difficulty of contributing towards pensions due to low pay. Current pension policy also reinforces income inequality in old age due to the regressive nature of pension tax reliefs whereby those who earn more benefit more from such reliefs. The report’s recommendations echo those made by TASC and the NWCI in relation to a universal state pension equal to 40 per cent of average earnings and reducing tax reliefs in a way that eliminates the inequities in this system.

However, ensuring that women do not experience income inequality and poverty in old age means that the right policies need to be in put in place when women start their working lives. The three studies mentioned above identify a wide range of policy responses that are needed to address gender inequality. These include the following:

- A comprehensive gendered approach across all social welfare policies, such as childcare, maternity benefits, paternity leave etc..., along with the introduction of family friendly employment policies aimed at helping parents minimise childcare costs by allowing them to balance caring responsibilities between themselves. The provision of affordable quality childcare and afterschool care, is a decisive factor in improving fertility rates. Most women want and need to work: if having more children prevents them from this they will stop having babies.

- The lack of flexibility offered by full-time employment makes it very difficult to juggle work and family commitments. Access to well paid, high skilled employment on a part-time basis also has form part of the policy mix.

- Even in the midst of the current economic crisis it is important to keep the issue of gender equality and the closing of the gender pay gap alive. Policies aimed at addressing the gender pay gap include legislative measures, transparent pay systems, collective pay agreements the establishment of Equal Pay Commissions along with a range of awareness raising campaigns aimed at closing the gap.

- It is vital that gender equality is not further undermined by budget cuts. TASC’s equality audit of Budget 2011 – Winners and Losers clearly shows how women on low incomes lost proportionately more of their income than other groups following the budgetary measures that were introduced. This research highlights the need for the budget to be equality proofed.

Gender equality is essential for achieving employment growth, competitiveness and economic recovery, so any strategy for growth must include the range of policy measures listed above, as part of the economic engine.

Tuesday, 6 March 2012

Lies, damned lies and the Dept. of Finance's statistics

An Saoi: The Department of Finance has issued the February 2012 tax figures, which can be viewed here. The figures are so confusing a detailed explanatory note has been issued to explain the discrepancies.

Let us start with the headline figure. It is 12.53% over profile. However we now have three different explanations as to why the figures are so far over target.

a) Corporation Tax which came in too late for inclusion in 2011. See here for an explanation – discrepancy €261M
b) Corporation Tax refunds not processed - discrepancy €50m?
c) 2011 Income Tax, wrongly accounted for as Social Insurance – discrepancy €350M estimated (see below for explanation)

This gives a total discrepancy of around €661M and reduces the total from €5,891M to €5,230M or close to the expected target €5,237M.

Firstly in looking at the Income Tax figures, let us start with the Social Insurance Fund. The estimated yield for the SIF in 2011 was €7,148M while the outcome was €7,543M, a discrepancy of €395M. Income Tax for 2011 was €327M below target. Income tax began falling behind profile in the latter half of the year and it completely beggars belief that the Collector General and his staff were not aware of the movement in the two, Social Insurance over target and Income Tax below target by a very similar amount. It is unbelievable that they had to wait until the filing of forms P35 to discover the discrepancy. Anyone who has any experience of Revenue computer systems and its Management Information Systems knows that this discrepancy would have been picked up. While as the Department correctly points out that it doesn’t change the overall position, it does improve the tax position for 2012 while weakening the Social Insurance Fund. Effectively a lump of 2011 Income Tax was hidden as Social Insurance in 2011 and that money is now being taken back in 2012.

By taking this action, the position of the Social Insurance Fund has been considerably weakened. The size of the deficit in the SIF will be far greater than originally expected. In a classic neo-liberal tactic, are we about to see the State's financial hole depicted as the fault of Welfare spending, allowing it to be targeted in to bear most of the cuts for 2013?

The complete opposition of Dept of Finance to the Insurance principle and the opposition of Fine Gael to the extension of Social Insurance to other sources of income further weakens the position of the Social Insurance Fund.

Many questions were raised about the Income Tax target at Budget time. We now of course know why the Minister for Finance was so sure that the figure would be reached. Apart from the pensioners, he had this €300M tucked away. He also has a once off bonus of several hundred million Euro coming his way later in the year. Facebook’s Irish staff will be receiving their Restricted Stock Units some six months after the Initial Public Offering and with nearly 10% of their worldwide staff here, there should be lots of additional tax due. The Financial Times recently estimated that the total value of these RSUs will be in the region of $23,000M, with the tax due on vesting.

There should also be a substantial yield from a further investigation relating to those receiving foreign pensions, as described by Niamh Connolly in the Sunday Business Post on 19th February last.

Income Tax looks likely to well exceed its annual target for 2012.

Moving on to Value Added Tax, the target for the month was €220M net. The State received €194M net or just 88.2% of its target, which is only four weeks old. March’s figures which will cover the Jan/Feb period will reflect the cold blast of the retail sales decline and is highly unlikely to get anywhere near target.

Excise figures were €14M off reflecting the problems in the motor trade. It is unclear whether this is a temporary blip or something more permanent. Finance for the purchase of new cars is readily available to the solvent customers, both from the specialist lenders owned by the motor groups and from Credit Unions.
The inability to process CT repayments in a timely manner reflects the loss of staff. Taxpayers are going to have to get used to this as it will become the norm.
The other tax heads show figures on or very close to target.

The real story however is the further evidence of the cynical manipulation of tax figures to ensure that the 2012 figures look good. First, the movement of corporation tax from December to January and now we hear about this problem with income tax. One wonders what else has fallen down behind the sofa cushions?

Friday, 2 March 2012

What exactly will we be asked in the fiscal treaty referendum?

Nat O'Connor: The Taoiseach has signed the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (also known as the 'fiscal compact' or the Fiscal Stability Treaty). However, it will only be ratified by Ireland if it is agreed by the Irish people in a referendum.

There is still some uncertainly about what exactly we will be voting about. Putting a debt brake in the Constitution would be a very different prospect from merely a ratification clause. We will know more when we see the actual wording of the referendum. Will it be simply "The State may ratify..." or will it include other constitutional changes and some formula of words in the Constitution to create a "binding, permanent" mechanism that will constrain future governments in relation to fiscal policy and how they deal with deficits and the national debt?

At this time, the advice of the Attorney General has not been published, so we do not know why a referendum will be held. We can probably assume that it is for the usual reason. That is, Ireland has had a series of referendums (modifying Article 29 of Bunreacht na hÉireann) to permit the Government to ratify European treaties such as Maastricht, Amsterdam and Nice. The wording of Bunreacht na hÉireann for recent treaties is straightforward: “The State may ratify the Treaty…”

On that basis, it is likely that the reason for Ireland to hold a referendum is again for the people to give the State permission to ratify the Fiscal Stability Treaty.

However, a second potential reason for Ireland to hold a referendum comes from the working of the Treaty itself. The Treaty calls for the Contracting Parties to "transpose the 'balanced budget rule' into their national legal systems, through binding, permanent and preferably constitutional provisions". Although there is no obligation in the Treaty to place the balanced budget rule (or 'debt brake') in Ireland's constitution, there is an implication that the rule should be transposed in a way that is stronger than ordinary legislation. The creation of a "binding, permanent" provision may therefore be part of the reason why Ireland is having a referendum. When we have clarity on this matter, it will easier to judge the long-term economic and democratic impact of the referendum.

Pathways to Work - can it deliver?

Sinéad Pentony: Pathways to Work was launched last week and it sets out to achieve some much needed reform in relation to labour market activation measures. The ambition “is to develop a new approach to engagement with people who are unemployed which meets international best practice”. Plans to increase the level of engagement with people who are unemployed and greater targeting of activation places are essential ingredients of an effective active labour market policy. Pathways also includes measures aimed at ‘incentivising’ unemployed people to take up employment opportunities and incentives for employers to take on unemployed people. The final element focuses on reforming institutions to deliver services to people who are unemployed. But can it deliver?

Pathways to Work rightly draws on international best practice which has increased levels of engagement with unemployed people as a central plank in its active labour market measures and this measure will be rolled out through the National Employment and Entitlement Service (NEES). This will take time, resources and institutional reform if it is going to achieve the objective of a work-focused welfare payment and effective and targeted service delivery.

Unfortunately, it appears that increased levels of engagement will only target those who are newly unemployed and in a number of pilot areas, in the first instance. This means that the vast majority of people currently on the live register will not benefit from an improved service. There are also plans to target activation measures at approximately 15,000-20,000 people who are long term unemployed per year, up until 2015. Again, the scale of the interventions planned for the long-term unemployed is not sufficient to deal with the scale of the problem, with over 180,000 classed as being on the Live Register for more than one year.

To get an idea of the scale of investment as a percentage of GDP by countries which have highly developed active labour market measures - in Ireland (2009) we spent 0.87 per cent of GDP on active labour market measures, while countries such as Denmark and Sweden spent 1.62 per cent and 1.13 per cent, respectively. This spending also needs to be put in the context of the fact we have many more people unemployed and long-term unemployed than these countries.

International best practice is drawn from countries that have highly developed activation measures. Nordic labour policy fosters the human capital of the population, while at the same time deploying activation mechanisms which also include an obligation to work. The services provided place a strong emphasis on quality – and the occupational and skill requirements with regard to the staff are high. Regular evaluations and examinations of their knowledge are the norm.

The institutional reform required in Ireland cannot be underestimated. If Pathways to Work is going to achieve best practice, this will require a different set of skills and capacities within the NEES, which may not currently exist. The ESRI report on Activation in Ireland shows how far we need to go in providing the types of training that are needed to improve people’s prospects of re-entering the labour market. The report highlights the pre-dominance of general and low skill training activity, which is unlikely to have strong positive impacts on employment prospects. The research also found that training provision is out of sync with the educational profile of unemployed people and that it does not address the structural employment among former construction workers. Finally, the report calls for a radical restructuring of training provision.

If the NEES is focused on providing a quality service where people are supported through individual progression plans, there should be very little need for ‘sanctions’ to be applied because the vast majority of people are desperate to find a job. However, there is a danger that rolling out such a service in the absence of building the institutional capacity and the capacity of those delivering the service may result in the over-use of ‘sanctions’ on those who are considered to be ‘not engaging’ with the service because there is little/no emphasis put on finding out why a person may not be engaging with the service or if there are aspects of the service that are not meeting the needs of the service user.

Another element of Pathways to Work is ‘incentivisation’ – of those who are unemployed to take up jobs, along with incentives for employers to take on unemployed workers. In the case of employers there are a range of measures that reduce the cost of employing people, which make sense in times of recession and high unemployment.

In the case of ‘incentivising’ unemployed people, a number of reforms are planned to streamline working age payments, child income support and disability allowances. These reforms include moving lone parents onto working age payments over time. However, the main barrier preventing lone parents from accessing education and training opportunities and/or employment opportunities is the provision of affordable childcare and afterschool care, and the absence of jobs with flexible arrangements. So, what will happen to lone parents who are expected to be ‘available for work’ but are unable to take up education/training opportunities or employment because of the absence of flexible arrangements and affordable child/afterschool care? Will they be sanctioned?

Other changes include increasing the USC threshold to €10,036, which is welcomed but the benefits of this are likely to be offset by reducing the social welfare week from 6 to 5 days. In general, the last number of years have seen cuts in direct and indirect social welfare payments, which is having a devastating impact on low income households. This is reflected in growing numbers of families at risk of poverty and experiencing poverty along with growing income inequality as evidenced by the latest SILC statistics. The recently published report on A Minimum Income Standard for Ireland also clearly demonstrates that many households in situations of reliance on social welfare or the national minimum wage live on an insufficient income. It is essential that reform of tax and welfare measures should not be equated with cuts, but that reform results in the better targeting of resources and supports at those who need them the most. Only then will we see a reversal of the current poverty and inequality trends.

The final element of Pathways to Work is institutional reform, which has been mentioned above. This includes plans to introduce ‘payment by results’, whereby the private sector is contracted to provide activation services for long-term unemployed. The report cites experience in the UK and Australia, asserting that it has “proven effective in supporting the unemployed to secure employment”. This system is operating less than a year in the UK and there are no independent evaluations available at this point in time.

However, the UK National Audit Office recently published a report on the introduction of the Work Programme in the UK, which examines ‘payment by results’. Some of the findings include “a significant risk that ministers’ assumptions about the numbers who can be found jobs may be over-optimistic”. The contractual arrangements with private providers are also questioned because of the programme’s demanding targets which “may encourage providers to target easier-to-help claimants while not helping others... and reduce the level of service provided in order to reduce costs...” There are also issues identified in relation to private providers operating in areas of high unemployment and how “they may struggle to meet nationally set targets”. The Report clearly articulates a whole host of other ‘risks’ associated with the Programme, which highlight the complexities behind what can often appear straightforward ‘payment by results measures’, which can actually result in diminished services and 'cherry picking' people who are easier to place in employment.

The Report also identifies the future state of the economy as a key indicator of success and this means the availability of jobs. While Pathways to Work will hopefully deliver some much needed reform, its success will depend on whether or not the economy is growing and creating jobs. Unemployment is primarily a ‘demand-side’ problem which needs demand-side solutions, and central to this is investment, along with measures that protect low incomes, which maintain aggregate demand in the domestic economy.