Friday, 24 May 2013

Bill Black on Europe's Crisis

Bill Black, former finanical regulator in the US and associate professor of economics and law gives a 15-minute interview here on austerity and Europe's crisis.

For comparison, you can also hear what he said to David McWilliams two years ago.

Ireland's Secret Deficit

Nat O'Connor: Reports about the deficit in the public finances are not as clear as they could be. For example, The Irish Times (2nd May) reports that the deficit is now predicted to be 7.5 per cent of GDP rather than 7.3 per cent. But they don't give us the figure for Ireland's GDP. Arguably, only a small number of readers are likely to look up the figures for GDP and dig out a calculator to work out what the deficit is in money terms.

The amount in billions matters, because we can only have a meaningful conversation about things like the €500 million to be raised in property tax if it can be compared against the deficit. The focus on percentage of GDP is spurred on by Ireland's annual EU targets to reduce the deficit towards 3 per cent of GDP. But a much wider public conversation about tax and spending is needed, way beyond that narrow target.

GDP was €160 billion in 2012 (CSO, March 2013 preliminary figure). So 7.5 per cent of €160 billion would be €12 billion. If GDP grows 1 per cent in 2013, it will become €161.6 billion and the 7.5 per cent deficit will be €12.1 billion.

But calculating the deficit as a percentage of national economic output doesn't really help explain where the deficit is really coming from. What part is the gap between public spending and tax revenue? And what part is due to the interest payments on the national debt?

The Department of Finance provides monthly updates on net spending and on revenue (the Exchequer Returns). Here are end-April's figures for spending and revenue.

We can see from the end-April spending figures that the State has spent €13.97 billion against a predicted spend of €14.23 billion; so we are pretty much on target. We also see from the same document that the State plans on spending a total of €43.4 billion in 2013, of which €40.3 billion is current spending and €3.1 is capital spending (i.e. one-off spending on infrastructure, etc.).

As ever, the big three spending areas (in net current spending) are Social Protection (€13.1 billion), Health (€12.2 billion) and Education (€7.5 billion). These three total €32.8 billion, or 81 per cent of all net current spending.

On the revenue side, we can see that (as of end-April), tax receipts are pretty much on target at €10.945 billion. However, this document does not give us the estimate of how much tax will be raised in 2013 in total. We find this in the budget.gov.ie website on page 12, Table 6 of the Budget 2013 - Economic and Fiscal Outlook. According to this table, the 2013 target is for €37.95 billion in tax.

Of course, the eventual tax take in 2013 will very much depend on whether or not the economy grows. And estimates for GDP growth vary with different organisations offering different predictions.

Nonetheless, if we end up spending €43.4 billion and our tax take is €37.95 billion, this gives us a deficit of €5.45 billion, which is considerably less than the €12.1 billion suggested above (when we simply take a percentage of GDP). So what are we missing in this calculation?

Off to a third website (per.gov.ie) to view the Revised Estimates for Public Services 2013 (published in April 2013). Ireland is unusual in the developed world as we publish the detailed spending plans after the Dáil has voted on the budget, not before! Anyway, this document confirms the plan for net spending of €43.4 billion (see Table, page 27 in the PDF. And no, the document does not have page numbers for some reason).

However, we can find the cost of the national debt on a fourth website (ntma.ie), where the national debt interest cost €5.68 billion in 2012. If it costs something similar in 2013, added to our €5.45 billion gap between tax and spending, that could come to around €11.1 billion - closer to the above €12 billion estimate. But is this right?

We can look at a fifth website (oireachtas.ie) to see if the Ministers for Finance or Public Expenditure and Reform have given an update on the deficit recently. Lo and behold, on 21st May the Minister for Finance predicted a deficit of 7.4 per cent of GDP this year. So we are back to where we started with The Irish Times.

But we can at last find some clarity in the Maastrict Returns Information Note of 22 April 2013. We are obliged to submit these returns twice a year to Eurostat. Here we can see (Table A, page 1) that the General Government Balance for 2013 is set to be €12.575 billion in deficit. On Table 2 (page 2), the underlying balance is given as €12.5 billion or 7.4 per cent of GDP, so we finally find a figure that corresponds with what the Minister for Finance was saying in the Dáil.

Having found this source at last, I could of course simply delete most of this post. But the point I want to make is that the Government is failing to clearly present these basic and very important facts for public understanding of the country's economic situation. At a time when people are suffering, it does not help to have the basic facts about public spending shrouded in mystery and coded language.

Ireland has just sent a letter of intent to join the international Open Government Partnership (OGP). The growing alliance of countries is committed to strengthening democracy by slowly and surely making open and transparent government into something real and useful for citizens.

One of the four minimum eligibility criteria for any State joining the OGP is Fiscal Transparency: "the timely publication of essential budget documents". The OGP currently measures this by reference to the international Open Budget Survey, but Ireland is not yet included.

It is vital for the democratic legitimacy of measures to balance the State's finances, that this information be clearly and simply presented.

To that end: in 2013 Ireland plans to raise €37.95 billion in tax and spend €43.4 billion, the vast bulk of which will (rightly) be spent on social protection, health and education. Even if we had no national debt (and no banking debt) we still have a shortfall of €5.45 billion. Hence, if we don't want to reduce public spending by another 12.5 per cent (one eighth!) than we absolutely need to raise more taxation to pay for public services. In adition, we do have an enormous national debt (including banking debt). The cost of paying interest on this adds a further €7.05 billion to the decifict, for a total of €12.5 billion.

This is the kind of clarity we need around facts, so that we can then have an open discussion about policy choices.

Wednesday, 22 May 2013

Ray Kinsella on Ireland and the Euro Zone

Nat O'Connor: Earlier this week, Professor Ray Kinsella wrote a powerful critique of current austerity policy in the Irish Examiner.

For example: "The austerity doctrine imposed the burden of adjustment to the post-2008 economic collapse on the labour market. It is an indefensible misuse of economics that the eurozone “authorities” should seek stability on the back of tens of millions of unemployed — this month’s eurozone unemployment figures reached yet another record. It is equally indefensible that, within an economic epoch characterised by intellectual capital and innovation, youth unemployment should now stand at an average of 25% — and more than double this in some of the peripheral countries which are most in need of their intellectual capital and capabilities."

I agree with practically everything in the article, but not his conclusion that a break up of the Euro zone is inevitable and desirable for peripheral countries, including Ireland. While it may be inevitable, the example of Denmark is unconvincing, as their currency is strongly pegged to the Euro.

While Ireland could in theory use its own currency for quantitative easing or other monetary policy to create inflation and grow its nominal GDP, this could be a short-lived benefit compared to the long-term costs. If Ireland or other smaller countries go too far with expanding the money supply, we could quickly run out of dollars, sterling and euro as who would want to buy the New Punt if it kept losing its value in currency exchanges? Moreover, we'd lose our position as a hub of imports and exports, and we'd be vulnerable to currency manipulation and speculation by global funds.

But if we can't easily exit the Euro, what is more worrying is that there is no quick or easy solution to the flaws in the Euro monetary union. What the peripheral countries need to do is to meet and demand a new monetary policy regime for the whole currency area. That's maybe harder to do than simply exit, but there is no other way to fill the political void at EU level than for countries to come together in their shared interests.

Tuesday, 21 May 2013

Guest Post: Vacant Land Tax to Incentivise the Development of Unused Land in Dublin

Kieran Rose: Incentivising the Development of Unused Land in Dublin City: The benefits of a Vacant Land Tax.

1. Summary
Dublin City has considerable amounts of vacant land especially in the centre city/inner city area. These extensive vacant lands are a great potential competitive advantage for Dublin as many of our competitor cities have fully developed centre city areas and have no space for the expansion of uses which need/prefer to locate in centre city areas. Uses preferring the centre city include major employers such as Google, many hotels, student accommodation, and third level colleges. So if we can achieve the development of these extensive vacant lands it would be a key element in our attractiveness as a competitive city.

These extensive vacant lands are also a significant challenge or problem for the city, including being damaging to its economic potential and general attractiveness and liveability. They can have a serious negative impact on the adjoining area, its businesses, investors, workers, residents and visitors.

Currently there is no disincentive to a landowner, including State landowners, leaving a site vacant for many years; the costs of such vacancy are borne by others and the city in general. (In contrast, in order to incentivize landlords to actively let their commercial buildings, 50 per cent Rates are payable on vacant commercial buildings.)

It should be remembered that many of these significant vacant sites remained undeveloped throughout the boom.

The proposal is that a tax be payable on vacant land to incentivize its development or sale to those who have the interest and access to resources to develop it. A proposal could be made to Government for legislation that would enable the City Council to introduce such a tax on vacant land.

2. Some Benefits of a Vacant Land Tax
A vacant land tax would have a range of potential economic benefits including encouraging the optimal productive use of city land and preventing dereliction, encouraging economic development and job creation, and with sustainability benefits in encouraging new inner city housing and less long-distance commuting.

Such a vacant land tax would also address the problem that vacant sites are also a significant economic disbenefit to adjoin businesses and residents who have invested in that particular area.

Such a tax encouraging the optimal use of land is particularly appropriate in city areas such as Dublin where there has been considerable public investment in providing services such as public transport (e.g. Luas); as these vacant sites are not delivering the economic return to the public and the city for such considerable public investment.

The Commission on Taxation (2009) considered these issues in detail and concluded:
“We are proposing a recurrent tax on zoned development land where such land is not being developed. This will be a useful policy tool to address the hoarding of land-banks and help to ensure that land is utilised in accordance with its planning categorisation.”

The Tax Strategy Group report (2010) set out the benefits of a land value tax as including:
• It encourages compact city centre development
• and the most productive use of high value land
• …. Those who have not developed valuable land are encouraged to do so
• It counteracts any market disincentive to develop the land.

3. Driving Innovation, Productivity, and Competitiveness
There is general agreement that density and proximity in urban areas drives productivity and innovation; so these extensive areas of vacant urban land are a significant drag on the city and national economic recovery.

According to urban economist Edward Glaeser in his great book “Triumph of the City”; 'the city creates productivity advantages' and 'cities speed innovation'. 'Cities are the absence of physical space between people and companies. They are proximity, density, closeness' Glaeser continues.

Encouraging the development of these extensive inner city lands provides a great opportunity to boost the productivity and innovation potential of the city.

Also, these extensive central city vacant lands are a great potential competitive advantage for Dublin in attracting international investment. Many of our competitor cities have fully developed centre city areas and have no space for the expansion of uses which need/prefer to locate in centre city areas. Uses preferring the centre city include major employers such as Google, many hotels, student accommodation, and third level colleges.

For example, Squarespace, recently announced it is to establish its EMEA Headquarters in Dublin stating: "We are a Manhattan-based company with urban sensibilities. We want to be in a large, vibrant, cosmopolitan city. Dublin was the obvious choice from that perspective."

If we can take steps to unlock the blockages to the development of these vacant central city lands, a key scarce resource, it gives us a great competitive advantage to attract highly mobile international investment.

4. City Development Plan Key Challenges and Policies
This vacant land tax would be a significant step forward towards addressing key challenges and policies set out in the City Development Plan. The City Plan recognises that considerable progress has been made in improving Dublin over recent years and this includes Docklands, Temple Bar and also Smithfield, Heuston etc. However, as the City Plan notes (p31) in its 'Approach to the Inner City'; there are the problems of 'isolated clusters' , 'a great sense of unevenness', and a 'significant number of vacant sites in the inner city that detract from its character and coherence'.

Accordingly the City Plan states; "It is a central aim … to consolidate and enhance the inner city in order to augment its crucial role at the heart of the capital city and the city region." (p22).

A vacant land tax would be a powerful way to address these key challenges for Dublin city.


Kieran Rose is Senior Planner with the Office of Economy and International Relations, Dublin City Council. This post is based on a report given to the May 2013 meeting of the Finance Strategic Policy Committee of Dublin City Council.

Ireland at the Core of Apple's Tax Avoidance Strategy

Nat O'Connor: Apple is the latest big global company in the spotlight about its tax affairs and Ireland is named and shamed as assisting the tech company to avoid massive amount of corporate tax in the USA; for example, in this New York Times article.

TASC's recent publication on Tax Injustice gives more detail about how Ireland's tax regime is used to avoid tax.

The irony is that Ireland's Finance Minister is currently leading the EU's charge against tax fraud and tax evasion, but the line between illegal evasion and legal (but increasingly aggressive) tax avoidance is more and more blurred. While a lot of the focus may be on the loopholes in US corporate tax that permits Apple to avoid tax, Ireland's role in facilitating tax avoidance needs to be critically examined as a risky strategy that is attracting negative comment around the world.

Friday, 17 May 2013

Wednesday, 15 May 2013

Ethics and regulation: complements, not alternatives


Last week former Taoiseach and President of IFSC Ireland, John Bruton, said that the banking industry needed "to focus on ethics rather than regulation". As someone who strongly supports the idea of ethical codes and a more central role for ethics in business, I found this remark and the casual way it was accepted unhelpful on many levels. Ethics are not an alternative to regulation; rather regulation is needed to support ethical behaviour. 

First, what do we mean by ethics in business?  There are many approaches; to illustrate why ethics are not an alternative to regulation, consider just three. 

You can take a deontological approach, like that that of most religions, and impose an absolute moral code.  Something is either right or it is wrong, no exceptions. You can see aspects of this in some corporate codes of conduct: some things such as fraud, insider trading or forced labour are simply prohibited, regardless of the consequences at the time. These things are unethical – everything else is OK. Because of the inflexibility of prohibiting an action, the list tends to be a short one, and not very useful for complex “grey area” situations. 

In contrast, a utilitarian or consequentialist approach hinges on the idea that the morality of any action is completely determined by its consequences.  So in its purest form, faced with a decision, you could weigh up the impact on all parties and choose the course of action that minimises harm or maximises good. So while stealing might be “wrong” under a deontological approach, utilitarian ethics might allow it under some circumstances, such as the theft of food from a profitable business to save the life of a starving child. This is pragmatic and useful, but depends on the person making the decision having been really well trained; unless business schools and professional institutes put serious weight behind teaching the process of ethical decision-making, it is unreasonable to expect individual employees to respond in the best possible way when making snap decisions in a fast-moving and high-pressure environment.   

As a final example, a virtue-based approach to ethics comes from Aristotle’s ideas of how to be, rather than what to do.  A decision on a particular situation could be reached by asking, “Am I the sort of person who would ...?” or, “Are we the sort of organisation that ..?” This can work really well for individuals, but won’t work in business unless everyone in the organisation is aware of and supports the sorts of virtues or values that the firm as a whole espouses.  Since these values are not based on rules, they must be embodied by the leaders within the organisation – a kind of ethical role-modelling which be either positive or negative, depending on who’s in charge and how they behave. 

Now the question is: which of these approaches, bearing in mind that they are only three of a myriad of ways of describing and understanding business ethics, could credibly act as an alternative to regulation in an industry as cut-throat and prone to moral hazard as banking? 

The absolute moral code of deontological ethics is barely compatible with capitalism, and would be either limited or diluted by its application to profit-seeking financial innovation. The utilitarian approach is pragmatic but time-consuming, and depends heavily on training. Virtue-based ethics comes close to a personal ideal, but depends on individuals to an unsustainable degree.   

They are all good to have in an industry, but will never work alone.
The trouble with ethics in isolation is that unless they seem coherent with the overall climate in which an individual is working, he or she will lack the confidence to “do the right thing” even where the “right thing” is clear.  I might know that stealing is wrong, for example, but if all of my peers are routinely cleaning out the stationery cupboard and falsifying expense claims, then my personal belief is constantly challenged by the daily experience. This is where regulation – clear rules of law with penalties and consequences for non-compliance – will support ethical standards, reinforcing rather than replacing them.  

Of course regulation also has the happy advantage of being effective even for people who would never embrace an ethical code. Even sociopaths fear the law. In that sense, regulation has a wider impact than business ethics, and is a baseline if we are to expect better corporate behaviour. Without punishments, some people will never obey rules.  But most employees are not sociopaths, so training in ethical decision-making will also have a useful effect, enhancing the impact of regulation, and ensuring that it is implemented in spirit as well as in statute. 

What the industry needs is not "to focus on ethics rather than regulation," but to enforce regulation and resource ethical training. Then we might see the change we need. 

Sheila Killian
@islandtotheleft

Thursday, 9 May 2013

TASC-FEPS Conference 'Reconstructing the European Economy (June 14th)

“Reconstructing the European Economy”
Croke Park Conference Centre, Dublin, Ireland

Registration is still open for the TASC-FEPS conference on 14th June: 'Reconstructing the European Economy'. This is an opportunity to hear progressive economists discussing the current Irish and European situation and proposing alternative solutions.

To register for the free-of-charge event please email Sylvia at sbyrne@tascnet.ie

The Conference is taking place in the Conference Centre, Croke Park (Ash Suite) from 9am to 5.15pm. The entrance is from St. Joseph’s Avenue (Cusack Stand, beside the GAA Museum). Please click here to download a map showing directions.

Reconstructing the European economy will require evidence-based policy making and a willingness to challenge the status quo and prevailing conventions. The annual TASC-FEPS conference is an opportunity to hear progressive, evidence-based ideas on how sustainable economic recovery can be achieved in the European and Irish economies.

The Conference will be opened by Minister for Communications, Energy and Natural Resources, Mr Pat Rabbitte TD.

Confirmed speakers include: Mr Lars Andersen (ECLM, Denmark); Dr Hannah Bargawi (SOAS, University of London); Professor Malcolm Sawyer (Leeds University); Dr Susan Newman (ISS, Netherlands), Professor Terry McKinley (SOAS), Ms Noelle O’Connell (European Movement Ireland), Dr Stephen Kinsella (University of Limerick) and Professor David Jacobson (DCU). The afternoon keynote address will be given by Professor John Weeks, Professor Emeritus and Senior Researcher at CDPR, University of London.

Context
The European economy remains in crisis. Unemployment in the Euro zone has reached a record high of 12 per cent. Almost one third of Euro zone member states have already been forced into official bail-out programmes, while other member states’ economies remain enfeebled. The financial sector remains dysfunctional and the Euro zone itself is characterised by structural competitiveness imbalances and widely diverging economic prospects. The economic crisis is a systemic crisis that requires systematic solutions. The official response to the crisis has been insufficient and often incoherent. The current responses have been preventive and reactive rather than building the institutional and economic foundations of a system that would put Europe on a different developmental trajectory where job creation and equitable growth takes centre stage.

A Europe facing the prospect of stagnation and high unemployment needs innovation and reindustrialisation from modern evidence-based industrial policy together with alternative macroeconomic policies. Likewise, the institutions of the Euro zone proved to be inadequate to deal with the scale of the catastrophe in Europe’s financial institutions, and inadequate to prevent the explosion of public and private debt. Fundamental changes to ECB and Euro zone rules may be required if the currency is to assist job growth and a strong European economy in future. Design flaws must be rectified.

The quality of the economic policy debate must be strengthened at national and European level. Reconstructing the European economy will need evidence-based policy making and a willingness to challenge the status quo and prevailing conventions. The annual TASC-FEPS conference is an opportunity to hear progressive, evidence-based ideas on how sustainable economic recovery can be achieved in the European and Irish economies.