Unite's Notes On The Front

No More Cookies Left in the Cookie Jar

These days any question of increased resources – whether for investment, public services or social protection – is met with ‘how can we afford it?’, ‘the fiscal rules won’t allow it’ and ‘you just want to return us to the bad ol’ days’.  In short, there are no more cookies left in the cookie jar.  Such is what passes for debate over fiscal policy.

The fact is that in many cases we can afford it (always, of course, within limits), the fiscal rules do allow it and the only ones determined to return us to the bad ol’ days is the government itself. 

In the immediate aftermath of Budget 2017 there were serious voices raised that we were about to descend into fiscal chaos and imprudence.  The Irish Fiscal Advisory Council claimed that the tax and spend numbers went ‘beyond what was prudent and was set to breach key EU rules’.

The Irish Times was even more dramatic: 

‘The notion of a prudent Budget appeared threadbare after Michael Noonan announced a package of measures in the Dáil stretching the so-called “fiscal space” to near-destruction.'

And, yet, Ireland has one of the better deficit records in the Eurozone.

We’re well into bottom half of the table, far away from fiscally-troubled countries like Spain, France and Portugal.  This is not chaos.  Even our debt level is well below the Eurozone average.  In 2017, the Government estimates government debt to be 74.3 percent of GDP; Eurozone debt is 90.6 percent.  Ireland is closer to the parsimonious Germans (with a 65.7 percent debt to GDP) than the Eurozone average.  Irish debt is falling faster than any other country – from nearly 120 percent of GDP in 2013.

This is not to be complacent but it is a warning against scare-mongering.  As for the ‘can’t afford it’, etc. arguments, let’s run through some points.

First, the Government cut the deficit more than was necessary in Budget 2017.  The fiscal rules require we reduce the structural deficit by more than 0.5 percent.  Instead, the Government cut the structural deficit by 0.8 percent.  This may seem fractional but had the Government stuck to the rules this would have provided an additional €550 to €800 million more for investment, public services and social protection.

Second, the Government has been actively cutting its own revenue.  In the last three budgets, the Government has cut tax revenue by €2.6 billion.  Some of these cuts were valid enough – removing the PRSI step-effect for minimum wage workers, for instance.  There might be other valid tax cuts such as inflation indexing thresholds and credits (that would have only been relevant for next year).  But if the Government had been less reckless at cutting the tax base – say 50 percent less – then there would have been €1.3 billion extra to spend in 2017.  If you keep cutting your own revenue you will have, as a matter of arithmetic, less to spend on.  

Third, the Government is intent on continuing to drive revenue into the ground, thus depriving us of more resources.  Tax revenue will be cut by over €2.6 billion by 2021.  This will reinforce our low-tax status.  In 2014, tax revenue as a % of GDP (this could be the last year we can use the Fiscal Council’s adjusted GDP to allow for the activities of multi-nationals) was €14 billion below what it would be had we been taxed at the Eurozone average .  We are €22 billion below the average of our peer group – other small open economies; but who’s counting. 

And then there are those who complain we’re still borrowing.  Recently one commentator lamented that we were still borrowing to keep the lights on; over €20 million a week (that’s to scare the children with big numbers).  The fact is we don’t borrow for day-to-day expenses.  Next year we will have a €2 billion surplus on the current side; that will buy a lot of light bulbs.  We are borrowing for investment and in a saner world with saner rules we’d be borrowing a lot more for investment, especially with interest rates on the floor.

This is all about choices.  And there’s another choice coming up.  The EU Commission has done an about-turn and is now urging Governments to fiscally expand.  EU austerity may not be over but it is, at least, being temporarily suspended – no doubt a response to the social disquiet that the far-right is exploiting.

They are proposing that governments spend an additional 0.5 percent of GDP on expansionary programmes.  It’s only once-off and far too little to get the EU out of its rut, but you take what you can get.  In Ireland it would be worth approximately €1.2 billion.  The Government seems hesitant but a rational response would be to take this money and kick-start housing builds in Dublin.  This could build an additional 6,000 to 7,000 units.  Again, a relatively small amount but forensically targeted could help key disadvantaged groups such as the homeless. 

Don’t reduce the deficit so fast, increase spending (even if it’s allowable under the fiscal rules), increase taxes, take a fiscal holiday – isn’t all this a return to the bad ol’ days?  Hardly.  It’s the Government that is returning us to pre-crash fiscal policy:

• Eroding the tax base which leaves us exposed to external shocks - think Trump protectionism, think Brexit
• Pumping the property market through mortgage and rent subsidies
• Over-reliance on an emerging tax revenue bubble - this time, corporate tax revenue
• Basing projections on dubious assumptions – the Government’s budgetary numbers don’t factor in the potential structural change in the UK sterling exchange rate
• And don’t, no don’t, mention the A word, the potential impact of the Apple ruling and the acceleration of European tax coordination – just like not mentioning astronomical house prices prior to the crash

Now that’s a return to the bad ol’ days.

We have choices.  Yes, there are limitations.  How could there not be after years of recession and austerity?  We cannot solve every problem today or tomorrow and, therefore, are forced to prioritise resources.  That puts an even bigger premium on smart allocation and prioritisation. 

But the next time you ask the Government for a cookie and they just shrug their shoulder and point to an empty jar – just remember:  it was the Government who stole the cookies. 

They Really Can’t be Serious

Fresh from making a mess of home-ownership policy – in particular, the mortgage subsidy scheme which will increase house prices and end up in the pockets of developers – the Government seems intent on doing the same thing in the private rental sector.

As even the dogs in the street know, we have a bit of a rent crisis.  The Savills report suggested that rents could rise by over 20 percent over the next two years.  And if you thought that couldn’t possibly happen, Daft.ie showed that rents have risen by nearly 12 percent in the last year – the highest annual rise since they started collecting this data in 2002.

The Government intends to publish a policy document on rents in the next few weeks but already some details are starting to leak out.  First, the Government is not expected to bring in rent regulation which could tie annual rent increases to some inflation benchmark.   It is not known whether they intend to temporarily roll-over the current freeze on rent increases for sitting tenants.  But I can’t say that any of this is too surprising.  When you have been raised all your life on the unfettered operation of markets, it’s hard to convert to fettering, even in a crisis.

But the real chestnut is the suggestion to expand rent subsidies.

‘A new system of payments to middle-income families to subsidise the cost of high rents is being considered by the Government.  The payments would be aimed at households with a combined income of up to €55,000 as a temporary measure to prevent more families entering social housing programmes. The aim of the proposed payment is to help those whose income places them above the threshold to avail of Housing Assistance Payment (HAP), in which councils make payments to landlords.’

Here’s a pop quiz:  if there is a high demand for a good or service that is in short supply, what happens when you give the ‘purchasers’ more money?  You’d be right to say that this will only drive up prices even further.  With rental inflation running in double-digits, this is a proposal that can only accelerate this trend and end up being a significant drain on the Exchequer.

To call it ‘temporary’ is only to create a potential income trap.  Let’s say that a household is given €2,000 a year in rental subsidy.  In time rents hit an equilibrium (elevated because of the subsidy).  Is it being suggested that the subsidy would be withdrawn?  What would that do to living standards?

Readers would be right to point out that we already have a rent subsidy programme – Rent Supplement and its eventual successor, the Housing Assistance Payment which is being rolled out.  Wouldn’t increasing these payments, as many housing campaigners have argued, drive up rents?  Yes, but these payments are limited to low income groups and currently rent can’t be increased for sitting tenants until 2019.  Campaigners who have made this demand are aware of this danger and have also called for increased supply.  But there is no doubting that even socially essential measures can have, hopefully minor, impacts in a sector that is so imbalanced. 

But the mantra ‘increase supply’ simplistically assumes a linear relationship between supply and demand in a market where credit, availability of land, planning permission and hoarding also feed into prices.  If the Savills model is correct, supply may well increase but this won’t take the heat out of the rental sector unless it (a) increases supply by substantially more than rising demand and (b) can lower the vacancy rate.  Otherwise, we have a situation whereby units come on stream, rents rise, tenants pay higher rents in a circle without seeming end (sound familiar).

And if you want to increase supply you have to maintain a high investment yield or even increase it which only drives up rents even further.  In fact, when you hear ‘encourage supply’ watch out – this is about maintaining or even increasing high yields, usually through tax cuts for the providers (sound familiar).

And if the market signals are not working on all cylinders supply could overshoot demand and you end up with losses, bankruptcies and a slump (sound familiar).

In other words, it is a minefield.  But expanding subsidies in a sector with a supply crisis doesn’t help us out of the field – it just plants more mines.

There is another starting point:  create the institutions and agencies – public, non-profit, even commercial (particularly, long-term investors such as pension funds) – that can produce and rent out units at cost (for commercial investors, a guaranteed yield) and then link rent increases to inflation, interest rates, etc.  Then you can introduce widespread rent subsidies without fear of it being consumed in higher prices.

That’s a better staring point.

* * *

NOTE:  You can sign a petition to Minister Simon Coveney calling for rent regulation here at the Uplift/Secure Rents campaign site:  https://action.uplift.ie/campaigns/41

The Slow Steady Rise of Irish Conservatives

In the last few weeks people have understandably been following the US presidential elections.  However, since the last general election there has been a slow trend emerging in the Irish landscape; namely, the rise of the combined vote in the two main conservative parties. 

I have used the Red C and B&A polls since they come are basically tracking polls coming out nearly once a month (as opposed to the irregular ipsos-MRBI and Millward-Brown polls).  I have used the seat projections of Dr. Adrian Kavanagh with one exception – the most recent B&A poll; he hasn’t posted his projections yet but I have used an average ratio of seats to vote in his previous projections. 

There has been a steady rise in the combined vote of the two conservative parties – from 50 percent in the General Election to 58 percent in the latest B&A poll.  Since the election, the combined vote averaged 53 percent, only once dipping below the election result.

Adrian’s seat projections show a similar trajectory with the combined conservative seat total rising from 94 in the election to (using my applied ratio) 110 seats in the latest B&A poll, with an average of 101 seats throughout all the projections.

Given that there has been no slide in the smaller conservative bloc – the Independent Alliance, conservative non-party TDs – this means that the shifting fortunes of progressive parties have been just a rearrangement within the envelope.  For instance, taking the combined Dail seat projections for Sinn Fein and the AAA-PBP, they have averaged 30 seats in all the polls since the general election – an increase of one seat since the election.

This shouldn’t be too surprising.  The 2016 election result was a disappointment for progressives.  The Fianna Fail and Fine Gael combined seat total fell substantially in 2011 – from 77.1 percent in the previous election to 57.8 percent of the Dail total, due the collapse in Fianna Fail seats.  However, in 2016 this stabilised and rose slightly – to 59.5 percent.   The average seat projection since the election shows the combined conservative vote is now nearly 64 percent.  While this is still a ways off from their 2007 result, it is heading steadily in that direction.

If this is not surprising it certainly is frustrating.  The progressive parties have been raising the right issues in parliament – banded hours, the 8^th amendment, rent regulation; issues that one might assume to have traction with a large section of the population.  And it may be that this progressive positioning may take time to translate into votes and seats.  However, to date this hasn’t occurred.

I’d put forward three reasons why the Left hasn’t taken off yet. 

• First, because the Left has yet to develop a common brand. In the last election, there was no sense that the Left could win or be in a position to form a government because there was no sense of ‘the Left’.  The consensus was that whatever the result, Fine Gael would lead the next government (though Fianna Fail made a heroic run); the only question was what kind of government.  After the election, progressives became highly fragmented with a number of parties and independents, making it harder to build that brand.

• Second, during the recession and austerity years, the Left’s narrative was one of protest. This is understandable – the Right controlled the agenda and positions of power.  Opposition to their agenda was vital but as the economy moved from recession to stagnation and then to recovery, the Left is still marked as a protest grouping by many.

• Third, much of the Left still uses a vocabulary that is becoming less relevant to more people. We hear the phrase ‘the recovery hasn’t filtered down to many people’.  This is all too true.  However, it is slowly becoming less so every month.  Over the last two years, more than 100,000 people have entered employment while unemployment has fallen by 66,000.  Wages are creeping (in many sectors, creeping is the operative term) upwards, more so in the market economy; but now the public sector has begun to experience wage rises.  There is early evidence that emigration is slowing. And even though the tax cuts are a bad policy and are being eaten up by rising living costs, people are relieved that it’s a long ways from the days when their take-home was actively being cut through tax rises.

This is not to paint a rosy picture; anything but.  However, the challenge for the Left is to transform its language and ideas from a period when we were in recession to the current period where there is a recovery that is reaching more and more people.  And to address the challenges facing us:  Brexit, fiscal stability, quality of work, housing (where the Left has some good ideas), the poor performance of our domestic market economy, high living costs, real reform of our public services, etc.  

We need to project a vision of where we want to be in ten years’ time, how we will live and how we will work.  The projection of a broad architecture allows us to build the house; what’s more, it allows people to participate in that house building and feel confident that this is the right space to be; indeed, the space where they want to be.  This calls for blue-sky thinking combined with specific policies to get us there. 

Most of all we need to maximise cooperation and put behind the divisions; stop fighting last year’s battles.  If the Left aims to bring in voters who are now lining up behind the conservative parties (especially Fianna Fail), then a good start would be to bring together those who voted for non-conservative parties.

Trends are just that, trends.  The current one is discouraging.  But this can be changed – through ideas, hard work and cooperation.  We must change it.  Otherwise, the conservative parties will continue to inch their way back to domination of Irish politics.

After years of recession and austerity, when the policies of Irish conservatism were exposed, this would be a tragedy.

Trump-Land

I suppose it would be expected of a progressive discussing the US Presidential election to describe Donald Trump negatively:  a bigot, a liar, a tax avoider, a sexual predator, a charlatan who connives at arm’s length with the most profoundly anti-American groups (such as the Ku Klux Klan).  But what’s the point?  We know all that and more – and we have Donald Trump to thank for that; he’s the one who’s provided the conclusive evidence.

What’s far more interesting is why so many people are voting for him.  No doubt, this will become an industry in the future with books, articles, PhDs, earnest documentaries and pop-analysis.  I won’t pretend to have the answer (in any event, there are many answers which provoke even more questions).  But I do know many of the people who are voting for him. 

I grew up with them, went to school with them, played baseball with them, drank many beers with them.  They are good people, caring people. I'm sure if you met them you would enjoy their company; just ordinary folk trying to meet their monthly bills.

But something has snapped.  The ties that traditionally bound Americans in a social contact have been cut.  These people grew up in the American dream and now they have woken in a place that they weren't prepared for and weren’t supposed to be in.  The most dismal statistic is that the life-expectancy of whole swathes of the white working class is now falling.  Poor health, poor wages, poor life-expectancy.  The inclusive ties of community have been replaced by bleak networks despondency and anger.

Of all that was depressing about Trump's rallies, to me the most depressing were the chants 'Build the wall!  Build the wall!'  Never mind that America became great because it tore down walls, creating a land of many cultures, languages, religions and national origins - a land for, and of, all people.  Woody Guthrie said it best:

“This land is your land, this land is my land”

Ok, there was always a bit of myth about this; the reality was more fraught, more tense with many injustices.  But the mythic parts are important, too - it says something to us about us.  And walls are not about us. 

People build walls when they are afraid, lack confidence, live in fear, when the social order of cooperation that is so natural to us breaks down.  Walls are the ultimate sign of weakness, yet this is the foundation for ‘Making America Great Again’.  Do Trump supporters recognise this weakness?  No, not now anyway.  That is the tragedy which they don't deserve.

I know Europeans flinch at Trump's language but I know the cadences, the syntax, the rhythms; it is a direct language.  So much of the oppressive apparatus in America today comes with a 'corporation-speak', a 'bureaucratic-speak'.  People know this language and are sick of it.  Trump’s speeches are not written by committee where each sentence is parsed for its impact on this or that focus group.  His speech is the speech of ordinary people. Ever read a written transcript of an ordinary conversation – it’s almost unreadable; so much is left to the unspoken word, the unfinished sentence, the wave of the hand, the angle of the head?  That’s how Trump speaks.  People understand.

But this is the allure and the danger of the demagogue.  He or she cannot be neatly categorised on classical ideological graphs.    They can act left-wing or right-wing.  They can speak a progressive or reactionary language.  The most effective are able to weave these seemingly opposed perspectives into a unitary anti-establishment movement.  They identify the elite, mobilise people against that elite and if they are successful, they end up becoming the elite.  This is almost the inevitability of a desperate populism led by a persuasive demagogue.

There’s a lot of superficial commentary on the potential voting patterns of the rust-belt or the white working class or the ‘ordinary middle class’ (which means something different in the US than in Europe).  The polling data suggests something much more nuanced and differentiated:  by region, by gender, by age, by educational achievement.  Three-minute news pieces require neat summations; in many cases they miss the point.

But there’s one point that cannot be missed.  Many of the people voting for Trump come from social constituencies that were once part of the greatest and most progressive coalition in the 20^th century:  the New Deal.  This was the new social contract that emerged out of the wreckage of the Great Depression and lasted for decades.  In the New Deal – which spread over a generation - equality spread as surely as electrification and water supplies, the welfare state was born, pro-labour legislation was implemented, financial interests were subordinated and the productive economy was privileged.  Houses and motorways were built, art was created for the public, music classes were funded for schools and civil rights legislation was passed despite fierce opposition.

But the Democratic Party today has moved far from that heritage.  Like social democracy and the Left throughout Europe, it proved incapable of fending off neo-liberalism, accommodated itself to capital (how so much different to President Franklin Roosevelt’s Second Bill of Rights), so intellectually debased itself it had no response to the financial crash.  Today, we are living with the results of the collapse of that great coalition and the Democratic Party’s inability to form a new one suited to modern times (though Senator Bernie Sanders gave us an insight into what that new coalition could look like).

How should progressive Americans respond today?  Elect Hilary Clinton.  Why?  Because Hilary Clinton can forge a progressive America?  I wish that were the case but I doubt it.  However, this is a defensive battle.  Imagine if Trump won the Presidency?  It’s not the successes that should worry us.  It’s what happens if he fails his supporters.  They have built the wall but they are still poor; they have kept out the ‘outsider’ but they still feel afraid.  What happens when disillusionment with Trump sets in, when they see through the rhetoric to find another, more fundamental betrayal? 

Don’t think they will automatically turn to a progressive and democratic alternative.  They might retreat into a long-term apathy.  Or worse, they might turn to even more reactionary forces which promise an even truer and more un-compromised politics.  If Trump were elected America might spiral into an even more vicious cycle.

That’s why Clinton must win.  I’ve come across the trope that, at root, there is no difference between Trump and Clinton.  This betrays a profound ignorance of the fundamental issues at stake.  There is a difference between someone who is Trump and someone who is not Trump.  The mature response is Senator Bernie Sanders’ response:  support Clinton, oppose Trump. 

And the mature strategy is Senator Bernie Sander’s strategy:  support Clinton, win the White House and immediately start transforming the Democratic Party from the bottom up.  This is a lesson we should learn in Europe.  How so much easier to set oneself apart to remain untainted.  The real work of democratic mobilisation is so much harder and much more long-term.  It is not the instant gratification that can be found in the supermarket aisle or the heated denunciations on social media.

And in America, this democratic mobilisation will need to include Trump supporters – those who are searching for a new social contract.  Because they vote Trump today doesn’t mean they have stopped searching.  But it will need to speak directly, honestly.  It will need to project a more authentic and liberating Americanism, rooted in a profoundly progressive history. 

We must rebuild that coalition, fit for the 21^st century.  We must start that work now.  And the first step is to elect Hilary Clinton today.  The next step starts tomorrow.

Bubbling Over with Corporate Tax Revenue

Of all the statements and comments from Budget 2017 my favourite comes from the Minister for Finance in his budget day speech:

‘We are a small and very open economy in a world that has more risks than usual. It makes sense to complete the task we set ourselves and get to a balanced budget. It makes sense to continue reducing our debt to much lower levels and to build our capacity to withstand shocks. It makes sense to avoid the mistakes of the past that could lead to overheating our economy. It is an uncertain world full of risk and now is not the time to move away from the prudent and sensible fiscal policy we have been following.’

It’s all there:  small open economy, more risks than usual, capacity to withstand shocks, avoid past mistakes, world full of risk and prudent fiscal policy.  So what is the Government doing?  It is eroding the tax base while at the same time relying on a potentially new tax revenue bubble.  So much for avoiding the mistakes of the past.

Since 2012 corporate tax revenue has increased by 92 percent; for all other taxes it is just 33 percent. Corporate tax revenue increases has made up over a quarter of total tax revenue increases.  And in 2015 ten companies accounted for over 40 percent of all corporate tax revenue.  Revenue estimates that of the €6.9 billion in corporate tax revenue, €2.8 billion came from these 10 companies.  And this proportion is growing.

Given that our national accounts can no longer be used for comparative purposes we will have to resort to other measurements.  So how’s this one – the amount of corporate tax revenue per employee.  

Looking at the other Northern and Central European economies, we find our corporate tax haul per employee is considerable – twice as much as the average.  That seems to describe the situation fairly.  Even using our national accounts, corporate tax revenue makes up 3.9 percent of GDP; for the other countries it is 2.5 percent. 

This is a highly dangerous place to be – so much of our tax revenue reliant on just a handful of companies.  These are probably all US multi-nationals. 

• What happens if the US Congress changes the tax laws such as allowing companies to repatriate their overseas profits at below current tax levels? 

• What happens if the EU Commission is eventually successful in implementing a Common Consolidate Corporate Tax Base which would reduce the amount of profits multi-nationals could shift into Ireland? 

• What happens if there is slump in the sectors that these companies operate in, reducing profits? 

• What happens if these companies change their tax strategies or start to relocate some of their tax-related functions to even more ‘hospitable’ countries?

These are the risks that the world is full of, as the Finance Minister might put it.  These are all contingencies that are pretty much outside our control.  It’s not a matter of refusing to take in this tax revenue but it is a matter of balancing the risks that accompanies this revenue.  Yet, the Government seems intent on ignoring the risks and repeating past mistakes – in particular, the mistake made prior to the crash:  eroding the tax base while relying on, in this instance, property-related tax revenue.

In Budget 2017 the Government cut USC (again) – a highly efficient tax which raises considerable revenue at low rates since it has a very broad base.  In the last three budgets the Government has cut personal taxation by €2.1 billion (or 10 percent of the personal tax take this year) with a commitment to cut a further €3 billion or more.  And this doesn’t count cuts in inheritance and property tax (the latter due to the postponement of revaluation to 2019).

This is not a good place to be. Far better to lay down a long-term fiscal plan which assumes a bubble – or at least an above average tax take from the corporate sector.  From that, we could build a more sustainable revenue base (broaden the base).  Anything above and beyond that could be used for once-off expenditure.  How about building houses?  Or equity participation in newly established or expanding indigenous firms?  Even spending on capital investment in the short-term with a plan to reduce reliance on this bubble money in the medium-term; there’s nothing to suggest that we have such a plan.

We could be sleep-walking into another crisis; maybe not as acute or dramatic as our last crash.  But if we ignore the signs we’ll happily head full-speed down the road naively believing there’s no obstacle around the bend.

Prudence, indeed.

Hangin' with the 1 Percent

The 1 percent serves as an excellent symbol of actually existing capitalism.  Examining the inequalities between households gives an insight into the level of solidarity within a country.  Wealth and power is manifested in other systemic ways – namely, the level of financialisation and bargaining power between capital and labour.  Still, a system that produces a 1 percent will be reinforced by that same 1 percent.  So let’s take a look at how the 1 percent is doing these days.

A standard measurement is by ratio.  Here we see the ratio of the income of the top 1 percent (see below for a statistical description) to the to the top cut-off point of the first decile.

Though Ireland is not the worst – that is reserved for the poorer Mediterranean countries and France (this might help explain the rise of the National Front) – we’re still in the top half of the table.  We’re slightly ahead of the mean-average of the EU-15, but much higher than our peer groups:  Northern and Central European economies (NCEE excluding the Mediterranean countries) and other small open economies (Other SOE).

Ireland had very high levels of inequality towards the end of the boom period.  The 1 percent took a hit with the crash given their greater reliance on property and speculative activity and this resulted in falling inequality:  not because low income groups saw their income rise.  It was just that their income fell slower than the 1 percent.  However, we will see below that not all higher income groups suffered.

But let’s first look at another measurement, the ratio between the 1 percent and the 5^th decile -  or that proverbial squeezed middle. 

We see a similar pattern as with the ratio to the bottom 10 percent – except that since 2012, the gap with the top 1 percent has widened faster.  And we see that in this measurement, Ireland has a high level of inequality.  In fact, the gap between the top 1 percent and the middle 5^th decile in Ireland is higher than any EU-15 country bar France.

It’s been quite a roller-coaster for the ol’ 1 percent in Ireland.  In 2006, they had the highest level of income in the EU-15 bar Luxembourg.  But by 2012, they had experienced a fall of 22 percent.  However, though they haven’t climbed back to their dizzying pre-crash levels, in the last two years their income has grown faster than any other EU-15 country with a growth rate of 13 percent compared to an EU-15 average of 3 percent.

Even after the big recession hit, the Irish 1 percent still rank high in the EU-15 tables.

But not everyone in the high-income category are the same.  Unfortunately, we don’t have a compositional breakdown of the top 1 percent so we will have to make do with the CSO’s data which provides the top 10 percent.

Let’s walk through this table. Between 2006 and 2012 we see that the weekly net income of the top 10 percent fell from €1,043 to €958.  However, employee income continued to increase (and remember, employees in this top 10 percent would include CEOs, senior executives and managers, higher professionals, etc.)   The hit was to those relying on self-employed income which fell by 65 percent.   We can assume that a large proportion of this was property-related income.  Reduced social transfers and higher tax would have also reduced overall net income.

However, since 2012 net income is rising.  Employee income continues to rise and the fall in self-employed income has been reversed; indeed, it doubled in the two years up to 2014.  Net income for the top income earners rose by 7.9 percent; for everyone else it rose by less than 4 percent.  The gap is widening.

Of course, we can’t automatically assume that the 1 percent had the same rise in income as the overall top 10 percent.  It might be higher, lower or the same.  But I’m pretty confident – and I’ll give good odds.

Prior to the crash Ireland was highly unequal with the top 1 percent doing better than almost any other 1 percent in Europe.  In the recession they took a hit but if the CSO data can be used as a proxy, then this was due mostly to the loss in self-employed income.  This decline has been reversed, inequality is growing again and the income of the Irish 1 percent is growing faster than anywhere else in the EU-15.

Yes, the 1 percent are doing alright.

* * *

NOTE: the tables present household income in ‘equivalised’ terms.  This accounts for the size of the household (adults, children).  In the Eurostat tables, the income level is based on the top cut-off point.  For instance, for the bottom 10 percent, the top cut-off point is that income point in which people rise to the next decile.  For the top 1 percent, this is the income at which they enter that top decile.

 

Just Build the Darned Things

The recent Saville Report, A Rent Forecasting Model for the Private Rented Sector in Ireland, should be a wake-up call to all policy makers.  Based on the relationship between private sector rents and the vacancy rate (the number of vacancies per 1000 rental units), Dr. John McCarthy estimates that rents will rise over 20 percent over the next two years. 

Yes, there is a current rent freeze.  But this doesn’t apply to new units coming into the market – and supply is growing, albeit at a slower rate than demand.  Nor does it apply when a unit becomes vacant – when the current tenant leaves.  And the freeze is only temporary and, unless extended, will be gone in less than two years.  Given that rents in Dublin rose by 10 percent in the las 12 months with rents rising faster outside Dublin (e.g. Cork rents grew by 15 percent), Dr. McCarthy’s prediction is reasonable. 

With a one-bedroom apartment averaging €1,300 in Dublin city, we could see this rising close to €1,600 by 2018.  This is not good – for tenants, for the economy or for the Exchequer; the Government’s Housing strategy is premised on placing the majority of those on social housing waiting lists in private accommodation.  Rising rent supplements for more people would seem to be in the offing. 

Though the Government is set to publish proposals regarding the private rented sector in a few weeks, the early signals are not promising.  First, the Government seems intent on confining direct housing provision for the ‘poor’ only – what’s called residual housing.  Second, in answering a parliamentary question regarding affordable and non-speculative social housing units such as limited equity associations and long-term fixed leasing, Minister Simon Coveney didn’t refer to the public sector.  Rather, he confined his response to Approved Housing Bodies which the National Economic and Social Council stated were incapable of dealing with the scale of the problem.

Third, the only budgetary measure regarding rent was to give a tax-break to landlords, many of whom have exploited market conditions to drive up rents to already unsustainable levels.

Let’s cut through this morass.  While the delivery vehicles and planning logistics can be quite complex, the basic approach is rather simple:  built units and rent them.  Here are three models that could be developed – in both the best and worst case scenarios.

Cost Rental

Cost rental accommodation is just what it says – rents based on costs, not market-pricing.  Take the cost of building/acquiring a unit with interest payments and amortisation, add in maintenance costs, property tax and a small percentage for a sinking fund – and charge rent at that level.  Subsequent increases would be confined to a rental-inflation index to create certainty and tenants would have the full range of rights regardless of the law.  This is the basic model pursued in other continental European cities.  The NESC (in the link above) devoted an entire paper to this model – which could cover not only low-average income earners but those on the waiting list as well, creating a ‘unitary’ model where the distinction between public and private is blurred.

Limited Equity Housing

Even more provocative is the hybrid limited-equity model.  In this instance, a person purchases 50 percent of the equity in the house and pays a monthly rent.  So for a two-bedroom house costing €205,000 (not counting site costs or infrastructure), the owner/tenant would pay half through a mortgage and pay an additional ‘rent’.  The owner/tenant would ‘own’ the house like any other owner but would only have to come up with smaller upfront costs.   However, the house or apartment would be non-speculative which means that when the owner/tenant leaves the premises they would only receive their original mortgage which would be inflation-indexed.  They could not sell their equity on the open market, nor could they release equity through another mortgage (unless the collateral was on some other asset); they could not automatically pass it on through inheritance or gifts or sub-let it out.  In other words, it would be non-speculative housing but one that could be owned for life.

Temporal Ownership Schemes

In this model, a tenant pays an upfront amount to the owner/landlord for the ‘right to own’ a property for a set number of years.  Lorcan Sirr has written about this model as it applies in Spain.  When the contract ends the property reverts back to the owner – which can be a public, private or cooperative landlord.  Temporal owners have all the rights and responsibilities of the property: they can sell the contract or leave it in a will – until the end of the ownership period.  The value to the tenant is certainty of tenure for the period.  The value to the landlord is that they have been paid for a certain period (no vacancies, no looking for new tenants, no missed monthly rents, etc.).  Further, tenants usually take care of property that they are going to reside in the long-term.

Here’s an example:  a tenant purchases a 10-year contract for a house/apartment.  They get a mortgage for €90,000 and pay it over to the owner/landlord.  The monthly mortgage payments would be €870 to €905 per month.  This would remain constant throughout the ten years. 

* * *

The best-case scenario would be if these models could be done ‘off-the-books’; that is, the cost of construction would not be a cost to the Exchequer.  This could be done, as in continental European countries, through public housing associations.  These would operate commercially at arms-length distance from the central and local government – though local governments could establish these associations by applying for Approved Housing Body status.  Even in this case, the state would still be involved through capital grants and, in the case of temporal ownership, provision of low-cost mortgages. 

In the worst-case scenario these models would be on the books.  However, this might go no further than the initial once-off capitalisation – the housing associations would still be commercial, albeit not-for-profit, entities.   It would also allow for non-market transfers between public agencies (e.g. derelict / vacant land owned by one agency transferred to a housing association). 

There is also the possibility of a state Rent Benefit which could be tied to income.  This could be paid to all tenants of cost-rental models – whether in the public, private or non-profit sectors.  This would ensure that the Rent Benefit doesn’t inflate the market as it would be paid in regard to rents that are controlled by costs and not subject to market pricing.

In all probability it would be a combination of both.  You would start up models, test their capacity and reform them to take them off-the-books.  This experimentation would, therefore, entail both tenure and financing models.  However, these models would not be a substitute to social housing building but a complement. 

The main thing is to start building – and renting, long-term leasing or selling at affordable prices.  Public agencies, not just local authorities, have the land.  We have the workers ready to build.  And we certainly have the need.

Now all we need is a bit of imagination. 

Note:   Today the Secure Rents Campaign will be launched by the campaigning organisation Uplift and a number of Ireland’s leading trade unions - Communication Workers Union, IMPACT, Mandate, SIPTU and Unite.  The Secure Rents Campaign is calling for urgent action in the face of the mounting rental crisis - namely increasing renter’s security of tenure and curtailing unfair rent increases via new regulatory measures.  This is a positive and welcomed development to help make the rental sector fit-for-purpose and deserves all our support.

Childcare Conundrums

The only potentially bright spot in an otherwise dismal budget was the proposals on childcare.   The National Women’s Council of Ireland also welcomed the proposals:

‘NWCI has welcomed the announcement of a comprehensive childcare package as part of Budget 2017 as a significant change of direction that has the potential to have a huge positive impact on women’s equality if further funding will be provided.’

Potential seems to be the word.   We should all hope that Minister Katherine Zappone’s proposals work.  Ireland has one of the highest childcare costs in Europe.  Costs of €1,000 per month or more are not only a burden on households; they are an impediment to people (usually women) from entering the workforce.  Anything that can reduce this burden and remove obstacles from work should be welcomed.

But there is a long ways from potential to actual.  While much of the debate on the Minister’s proposals has focused on caring in the home let’s look at the potential of both reducing household costs and improving the quality of the services. 

At the risk of oversimplification (you can read a little more detail here and here), the Single Affordable Childcare Scheme will amalgamate a number of schemes with two types of payments:

• A universal payment for all children between six months and three years – a minimum of €20 per week regardless of household

• A means-tested payment with a maximum payment of €259 payment per week, tapering off to a net income household threshold of €47,500

The payment will be paid directly to the childcare provider. 

Much of the commentary assumes that these payments constitute a reduction in the fees but this is not the case.  The Department of Children admits as much:

‘Childcare fees are determined by childcare providers. The Affordable Childcare Scheme will provide a subsidy towards the fee charged by the provider, but the sum that parents will have to pay will then depend on the childcare provider’s own fee policy.’

In other words, the subsidy will be paid to the provider.  As to the fees charged, that will be the decision of the provider.  The provider could reduce the fees by the entire amount of the subsidy, a partial amount or – at the extreme – not at all.

It would be wrong to put the providers in the hot seat on this one.  The problem lies in the loosely regulated market-model of childcare that we operate.  A market model means that each individual provider must balance expenditure and revenue to break even.  Any additional cost must be, by and large, passed on to the parents.  And loose labour market regulation means that staff is poorly paid in an occupation with few qualifications or career paths.  Everyone is trapped in this – providers, workers, parents and, most of all, children.

The Department is hopeful of a ‘pass-on’ to the parents and is hopeful that measures requiring that providers publish their fees will help parents to ‘shop and compare’ (should this have to happen in what should essentially be a public service?).  But there are many legitimate reasons why providers might be unable to pass on the subsidy in whole or substantial part.

During the recession many providers kept fees down knowing that parents couldn’t afford increases.  This meant years of pent-up spending pressures (e.g. maintenance, replacement, investment).  It also meant years of depressing wages which has resulted in poor living standards for the worker and high staff turnover for the provider which drives up costs.  Now that there is money in the system, the provider can engage in spending – on building, equipment, service provision and staff.

Let’s go through some numbers based on the Deloitte review of the costs of a childcare facility.  The review dates back to 2007 so we’ll treat this as indicative but given that the costs per child at that time were between €215 and €254 per week, the numbers remain relevant for this exercise. 

A model childcare facility has overall costs of €553,000.  Of this, staff costs make up 67 percent, given the labour-dense nature of this work.  Building costs (maintenance, repairs, rent, insurance, etc.) make up another 23 percent with direct costs (food, cleaning, materials, administration, banking) make up the rest – 10 percent.  In the model facility, there are 47 children though some would now be catered through the free pre-school years where available. 

So now the state will pay approximately €47,000 to the provider in respect of the attending children.  However, if staff receives a 10 percent pay increase – in many cases taking them off the minimum wage – this will eat up a substantial portion of the subsidy.  In the Deloitte study, it would take up 80 percent of the subsidy, leaving the provider in a position to reduce fares by €4 per week.  Any small increases in building or direct costs (to improve quality) will cancel out the subsidy leaving the parents paying the same fees.

This doesn’t count the cost of professionalising the service with degree-education for childcare workers. 

‘Crucially, there is no reward for obtaining a degree in early childhood education and care and, with the exception of the ECCE (Early Childhood Care and Education) scheme - which requires a minimum of a Level 6 qualification - there is no incentive for existing educators in the field to upskill to higher level qualifications.’

Not does it consider the issue of supply.  Increasing the number of childcare places through new establishments is a costly activity.  Though labour market regulations are lax, there are, fortunately, very high building, health and safety standards making start-up costs extremely high.  It is questionable whether the subsidies will have much impact in this area.

And what about moving to best practice ‘educare’ facilities that exist in Scandinavia and other European countries?  Have a read of this and see how far we have to go to reach the highest standards of care, education, accessibility and affordability. 

Providers with a high number of low-waged parents will fare better given the high levels of subsidy.  They will hopefully be able to provide for better paid and qualified staff, better service quality and reductions in fees.  But for this to become widespread across the sector would be extremely costly and potentially highly inflationary.   

‘Keeping childcare costs down will be a challenge when a range of subsidies are introduced next September, the Minister for Children and Youth Affairs, Katherine Zappone, said last night.’

We may be running in spending just to stand still in affordability.

None of this is the Minister’s fault.  She has inherited a market-model system which has been neglected for decades by successive governments.  Ideally, childcare would be categorised as a public service, produced at local level through local authorities combined with a network of highly regulated not-for-profit providers.  The state would absorb the costs but be in a position to control those costs – and set fees not based on cost-recoupment but on affordability.

But realistically this government is not going to go for this.  Nonetheless, it might be an interesting exercise for the Minister to draft up a childcare policy based on a public service – to establish a benchmark.  Having established a best-case scenario, then one could construct policies and strategies to move our fragmented market-based model towards that goal. 

Minister Zappone deserves support for taking up this issue in a reforming way.  Now it’s for all of us who want to see these reforms succeed to point out the fault-lines, traps and means to achieve the goal of a high-quality affordable childcare system.

It won’t be easy. And that’s an under-statement.

A Cynical and Ill-Informed Debate

Shane Coleman asks:

‘So who's representing those who earn €35,000-€75,000 - the squeezed middle?’

To be fair to Shane, he’s not the only person asking this question nor is he alone in posing this question in those income ranges.  But, oh my.

The debate over the ‘squeezed middle’ is one of the more ill-informed and cynical you’ll come across.  It is led in many cases by politicians and commentators who make assertions without substantiations, claims without facts; all of which leads to policy proposals that are at variance with equity and economic efficiency. In many cases the numbers are just made up to rationalise a pre-determined policy preference.   In short, it’s a terrible debate.

The problem starts with the definition of the ‘squeezed middle’.  This should be a relatively straight forward statistical issue.  If we are looking at ‘income earners’ (PAYE employees or the self-employed) we can go to the Revenue Commissioners database for a rather crude but revealing headcount.

We can see there are a lot of low earners.   54 percent earn less than €30,000.  From this we can estimate the median wage (the income level at which 50 percent earn above and 50 percent earn below) to be €27,550.  Welcome to the squeezed middle.  It’s a long ways off from €75,000.

There are a few problems with these Revenue numbers. 

First, ‘married couples with both spouses working’ are counted as one tax unit.  Therefore, in this category, an income unit of €30,000 could actually mean that each spouse in the household earns €15,000 (or any other variant). 

Second, these numbers include pensioners who have taxable income such as an occupational or personal pension, investment and property income.  Most pensioners would be at the lower end of the table.

Third, the table includes churn.  People who come into the tax net by taking up a job may do so only half-way through the year so the tax unit may refer to six months.  Similarly, with people exiting the workforce. 

We can try to adjust for some of this by disaggregating couples with two incomes.  When this is done, we find the median wage falls to €25,200.  We still have, though, the problem with pension income and churn.

A number of commentators prefer to focus on ‘full-time’ workers.  I’ve never been convinced of this approach as it excludes so many part-time or near-full time workers.  Nonetheless, let’s work this, adjusting for couples with two incomes and excluding all those earning below €15,000. Even doing this we will be including some part-time workers (e.g. someone on €20 per hour working 20 hours a week will be above this €15,000 threshold).

Even when excluding all income earners below €15,000 (about 27 percent of all income earners), we still find a significant number earning below €30,000 – over 45 percent.  From this we can estimate the median wage to be €32,050 with 50 percent earning below that amount.  The middle is still very low.

So what is the squeezed middle?  The OECD uses a formula to define the broad middle:  between one-third below to two-thirds above the average (median) wage.   

• Using the median wage for all income earners (the first table above) we find the squeezed middle to be between €18,500 and €46,000.

• Using the median wage for adjusted income earners above €15,000, the squeezed middle is between €21,500 and €53,500.

This puts the issue of helping the squeezed middle in a new perspective.  We would have to look at things like the minimum wage and living wage, strengthening and extending Joint Labour Committees for all low-paid sectors, increasing social protection programmes such as the Family Income Supplement – in addition to affordable childcare, affordable rents and lower public transportation costs.  Note that most of this doesn’t even get mentioned in the debate over the squeezed middle.

But there is a big, big caveat in all this.

There are a lot of people in society who are not included in the Revenue database because they not PAYE employees or self-employed:   most pensioners, carers (mostly women working in the home), the ill and disabled who can’t work, and those out of work.  They should count, too.  If they did, the squeezed middle would be a lot, lot less.

For instance, in 2014 the median household income was €40,336. It should be remembered that this includes all income from all people in the household, including social protection income (e.g. Child Benefit, rent supplement, etc.).  And the figure above includes employers’ social insurance (an accounting convention).  If you remove that the median household income is closer to €37,700.  50 percent of households earn below that amount.

No, the squeezed middle does not go up to €75,000 or anything like it.  If you earn €75,000 you are in the top 10 percent earning bracket.  If you earn €50,000 you are in the top 22 percent earning bracket.  This is not to say there are not issues in these above average households.  There may be a number of children, high debts from a Celtic Tiger mortgage, etc.  But we need to keep a perspective.  And to do that is by first getting a robust handle on what we are talking about.

IF we do that, we will have a better chance of getting the policy right.

Ah, For a Pro-Business Budget

I mentioned previously that the run-up to the budget is my favourite time.  We get all manner of sloganeering and mantras.  Take this one:  a pro-business budget.  This usually refers to more tax reliefs, more grant handouts and income tax-cuts to lessen upward wage demands.  Throw in scrapping the odd regulation (always referred to as ‘red tape’) and voila:  a pro-business budget.

This isn’t really a pro-business budget – just a string of fiscal gestures that allows the Government to claim it is doing something.  Yes, these are the demands of business organisations but as Sean Lemass pointed out:

‘Nobody nowadays regards the operation of an important industrial undertaking as being the exclusive private concern of its owners  . . . The social consequences of fluctuations in the level of business activity are matters of public debate.’

In short, business in Ireland is too important to be left exclusively to Irish business.  It is a social activity involving a range of stakeholders.  So what would a real pro-business budget look like, one that takes into account social consequences?  In the first instance, it would recognise three principles:

The fortunes of business are inextricably intertwined with the fortunes of society.  A prosperous, confident, creative society is likely to create a business sector in its image.  If you don’t think so, imagine the opposite:  high-levels of poverty, educational inequality, crumbling infrastructure, impoverished public services, etc.  What kind of business sector will that produce?

Second, business is not homogeneous.  Export-focused firms are not that interested in domestic demand – but they are keenly interested in the demand in other countries.  Businesses focused on the domestic sector, on the other hand, would have an interest in domestic income levels.

Thirdly, businesses need protection from each other.  For instance, the original rationale for Joint Labour Committees was not only to protect workers in low-paid sectors; it was also intended to end the situation whereby:

‘ . . . the good employer is undercut by the bad, and the bad employer is undercut by the worst.’

Thus grounded in these principles, here are some ideas for a pro-business budget.

Reduce income Inequality: concentration of income at the top of the income pyramid is bad for business.   Higher income groups have a higher propensity to save and their spending is more import-dense.  If the goal is to induce higher consumer spending, especially if Brexit unsettles confidence, then redistribute to lower income groups.  This would mean no tax cuts for high-income groups (they’re getting pay rises anyway – the CSO shows managers and professionals have seen incomes rise by 7 percent in the last four years compared to losses in other groups).  Instead, redirect resources towards raising social protection rates – which spend almost all their income.

Increase Investment: essentially, investment ‘buys assets’ that either generate future income or reduce future costs.  Investment into advanced broadband can generate new business opportunities; investment in water and waste reduces costs associated with leaks and maintenance; investment into renewables and green energy reduces import and environmental costs.  All these come with not only higher business activity (it takes people and materials to produce these assets), but crowds-in additional private investment.

Increase Government funded R&D: Ireland is a bottom-dweller in the EU-15 when it comes to support research and design.  We would have to increase R&D – in telecommunications, energy, environment, health, transport, etc. – by over 40 percent to reach the average of our peer group, other Northern and Central European economies.

Education, Education, Education: this is a key driver, not only in enterprise ability but in reducing inequality.  I charted Ireland’s performance on education expenditure here.  We would have to increase spending by €1.2 billion to reach other peer group average in Europe.

Reduce Living Costs: what is one of the biggest drains on the productive economy (besides debt)?  Requiring people to pay market prices for public goods.  For instance, health is a public good – yet so many have to purchase it on the private market.  Reducing the costs of childcare, the costs of rents (through public or voluntary cost-rental models), the cost of public transport by having a proper subvention regime – these would reduce unnecessary upward pressure on wages and free up money to spend  . . . in the private market.  Businesses get a win-win on this.

Expand Public Enterprise: business is business – whether it’s public, private, non-profit, capital-owned or labour-owned.  So bring together all the public companies and work out a strategy to expand:  new start-ups, joint ventures with private companies, expansion, and procurement strategies to facilitate the SME sector.

Face Reality: Apple is only the beginning.  The momentum in Europe is towards EU-wide initiatives to tackle multi-national avoidance through transparent country-by-country reporting laws, greater transparency in transfer-price fixing, the common corporate consolidated tax base and an EU-wide withdrawal tax.  We can either

• Hide our head in the sands and hope the world doesn’t notice us,

• Line up with the most right-wing forces in Europe (and the richest, tax-avoiding multinationals) to block these initiatives, or

• Face up to reality and begin devising a post-Apple foreign direct investment policy.  An evidence-based debate is necessary in order to achieve a new consensus.  And to achieve that consensus will require the input of all the stakeholders – employees, employers, civil society groups, etc.  The Government should announce that it will start this process the day after the budget.

There’s a lot more things we could start doing in Budget 2017 and most of this could not be achieved in one year.  But a pro-business budget is one that looks to the long-term, eschewing short-term gesture measures; one that comes with a realisable road-map.

Being ever the optimist, I can’t wait for October 11^th.

Tax, Lies and Statistical Tape

The run-up to the budget is my favourite time of the year.   Commentary on Irish taxation tends towards the deliciously deceiving, hilariously spurious or just plain weird.  And the Irish Taxation Institute’s ‘Perspectives on Ireland’s Personal Tax System’ doesn’t disappoint.  Let’s look at three arguments contained in that report.

Marginal Tax Rates

We constantly hear that ‘high Irish taxes are a disincentive to employment and undermine competitiveness’.  Usually, this refers to high marginal tax rates. 

The marginal tax rate is the tax you pay on the next euro you earn.  You’re on €30,000.  The next Euro you earn will be taxed at 29.5 percent (20 percent income tax, 5.5 percent USC and 4 percent PRSI).  How do marginal tax rates compare in the EU-15?

Let’s walk through this crowded table.  On low incomes, two-thirds of the average wage, almost all countries have a higher marginal tax rate than Ireland.  Think on this – if high marginal tax rates were a disincentive, than all those other countries should be plagued by unemployment and loss of competitiveness.  Oh, yeah, that characterises Germany alright – they have a marginal tax rate of 47.1 percent compared to our 31 percent.  They must be close to the bailout zone.

Ireland rises up the table at 100 percent of average wage but that ol’ uncompetitive Germany is still higher.  After that, Ireland starts falling down the table.   So we have a situation where our marginal tax rates are very low, relatively high and then middling while countries with strong economic and social performance rank higher than us.  The relationship between marginal tax rates and performance is not apparent.

And there’s this:  French and Swedish workers face much lower marginal tax rates at the average wage.  Yet they are high-taxed economies.  So how does that work?  The OECD shows that French employers pay a marginal PRSI rate of 37.9 percent while Swedish employers pay 31.4 percent; Irish employers pay 10.8 percent.  Most EU employers pay a far larger share of the total tax on labour.  If the Institute is suggesting we treble employers’ PRSI to facilitate an increase in the standard rate tax threshold, I’m all ears.

But marginal tax rates are not the full story.  One peculiar aspect of the Irish tax system is that while average income workers face high marginal tax rates, their total tax rate is the lowest in the EU-15.  Remember – the marginal tax rate looks at the tax you pay on the next Euro you earn.  The total tax rate is the actual amount of tax you pay as a percentage of your income.  Check this out.

Irish average income earners pay a relatively high marginal tax rate.  But when it comes to the actual amount of tax we pay, Ireland is at the bottom of the table – even below much poorer countries like Portugal and Greece.   We’d have to double the amount of tax on average earners to reach German levels.  The lesson you draw depends on perspective.  A proper way to look at this is to take all factors into account.

Let’s leave this section with a comment from Prof. Alan Barrett of the ESRI at Committee on Budget Oversight:

‘It is sometimes argued that high tax rates are a disincentive to work. At some point this is probably true but . . .  is there evidence to suggest that the current tax rates are leading to widespread withdrawals from the labour market. The most recent figures show that employment increased by 56,000 in the year ending quarter 2, 2016, or almost 3%. Evidence on this issue should be gathered in a more sophisticated manner but even this simple approach raises the question of whether tax is acting as a significant disincentive to work. It could be the case that child care is a greater disincentive. If this is true, then a greater effect on labour supply could be achieved through child care subsidies as opposed to income tax cuts, including USC cuts.’

Indeed.

Selecting Your Data

The Taxation Institute claims the Irish tax rate (the actual amount paid as a percentage of income) on higher income groups is high relative to other countries.  But they are fairly selective with the countries they compare Ireland with.

This shows Ireland at the upper end of the table.  But what of the countries they’re using as comparisons? 

• Yes, Ireland is ahead of Sweden but as mentioned above, the Swedish rate is subsidised by high rates on employers.

• Yes, Ireland is ahead of Switzerland but that country has a strong wealth tax; if Ireland transplanted that tax here it would raise over €2 billion. That would subsidise a lot of tax cuts and spending increases.

• Yes, Ireland is higher than the US but do we really want to compare ourselves with a highly-unequal, high poverty-rate country with a feeble social net and crumbling infrastructure?

• And, yes, Ireland is higher than Singapore. But Singapore?

Here’s another comparison – based on OECD data for the EU-15 countries (no data for Portugal and Greece).

This puts a different perspective on things.  Ireland is well below most other EU countries; especially poor ol’ Germany. 

The Institute also claims that:

‘By the time you get to €75,000 we are a high tax country by international comparison . . .’

In their table we rank fourth, using the same comparative countries as above.  However, when we turn to a comparison with other EU-15 countries (data not available for the Mediterranean countries) a different picture emerges.

We rank below a number of other countries and in the last two years, the tax rate has fallen.  Can this really be called ‘too high’?

Number Mongering

The Taxation Institute comes up with a peculiar series of measurements.  Here are some samples.

• A worker on €35,000 earns 1.4 times the amount of a person on €25,000 and pays 1.9 times the amount of tax.

• A worker on €75,000 earns 3 times the amount of a person on €25,000 and pays almost 8 times the amount of tax.

• A worker on €75,000 earns 2.1 times the amount of a person on €35,000 and pays over 4 times the amount of tax.

• A worker on €100,000 earns 5.6 times the amount of a person on €18,000 and pays almost 66 times the amount of tax.

And so on.  I have no idea what this means.  The Taxation Institute may be trying to tell us that Ireland’s taxation is too progressive and is undermining our competitiveness.  But some of their comparisons make no sense.  The person on €100,000 is compared to a worker earning below the minimum wage (note:  if the minimum wage was increased to the Living Wage, then instead of the person on €100,000 paying 66 times the amount of tax, this would be reduced to 14 times; maybe the Taxation Institute is making an indirect plea for a Living Wage).

How do we make sense of this statistical mush?  Let’s go to the Taxation Institute for help:

‘Progressivity is about proportionality not about absolute Euro amounts.’

Fair enough.  Let’s look at the ‘A worker on €35,000 earns 1.4 times the amount of a person on €25,000 and pays 1.9 times the amount of tax’ formulation.  This is true in absolute Euro amounts.  But what about proportionality? 

A worker earning €25,000 pays 13.5 percent in tax.  A worker earning €35,000 pays 18.7 percent in tax.  When the percentage of tax is expressed as a ratio, the higher earner pays 1.4 times much tax as the lower earner – the same ratio as their gross income.

And what about this:  a worker €75,000 earns 3 times the amount of a person on €25,000 but pays only 2.8 times the amount of tax, expressed as a percentage of income.  Does this mean our income tax system is actually regressive?  No, it means nothing at all, just like the Institute’s formulations.

This is mere number-mongering, devising measurements that purport to tell us something but actually tell us nothing.  There are all sorts of number-play we can come up with to fit any conclusion we want.  For instance:

If you take the Institutes tax/income ratio between those earning €25,000 and €35,000 (1.4), multiply it by the number of days we pay taxes (365), add the number of all Ministers (33) and add the number of Oireachtas members who approve tax measures (118) – you almost get the number 666.

 The Irish personal taxation system has been marked by the devil. QED.

* * *

Let’s quickly bottom-line all this.  There is an underlying assumption that tax cuts can buy higher living standards.  Can tax cuts make childcare affordable; reduce rents, spare us from congestion; eliminate A&E over-crowding; expand educational opportunities; care for elderly relations; clean up rubbish piles; equip the Gardai properly; lift people out of poverty and deprivation; reduce the costs of medicine – you get the picture.  The goods and services that provide security, opportunity and prosperity require investment, not tax cuts.

This is not to ignore problems in the actual tax code.  The entry level at the top tax rate is too low.  But raising it would be extremely expensive.  Increasing the threshold to €40,000 would cost €1.1 billion.  So why not introduce a 30 percent tax rate up to this level?  This would cut the cost in half and phasing it in over a number of years would limit the annual cost.  Or, just scrap income tax altogether and replace it with a USC style-tax; that would really reduce marginal tax rates (as suggested here).

But cutting taxes is not the priority.  Investment is – social, economic and infrastructural.  And if you are worried about our competitiveness, be assured.  Countries with higher personal and corporate tax, higher employers’ social insurance, and stronger labour regulations – they all are ranked much higher than Ireland in the business competitiveness stakes (as you can read here).

Ultimately, we need an informed and evidence-based debate on taxation.  But this is budget season.  So we’ll have to wait awhile.

 

All Power to the Locals

Whenever one compares Irish government finances with that of other small open economies or Nordic countries, showing that we spend far less on public services, social protection and investment someone invariably comes back with:   ‘we can’t trust our government to spend efficiently, or honestly, or at all’.  For those of us who believe in a strong social state, this is a challenge.  If people are to accept higher levels of taxation to pay for higher levels of public services, they have to have confidence in state institutions – or at least have confidence those institutions are accountable to them.  So how do the other countries do it?

There is no one answer but the following may be a contributing factor:  other European countries are far more decentralised than the Irish state. 

The Irish state is one of the most centralised in Europe, fiscally speaking.  The central government here spends the highest proportion of total government spending than almost any other EU country.  In the EU-15, central government accounts for 54 percent of all government spending; in Ireland it accounts for 95 percent. 

Another way of look at this is the amount that local government spending makes up.  Let’s compare ourselves with those high-spending Nordic countries.

We can see how decentralised these other high-spending countries are – with Danish local government making up nearly two-thirds of total government spending (interestingly, Denmark is the highest spending state in the EU; the other countries are not far behind).  By contrast, Irish local government is weak, very weak.

So what do these other countries spend their money on through local government?  There are four main areas.

On average, in the Nordic countries local governments are the main financial sources for health, education and recreation & leisure.  In Ireland, on the other hand, local government plays a much diminished and, in the case of health, a non-existent role.  Even in social protection, Nordic local governments play a prominent role.  It should be noted that the category of social protection is not just about cash transfers; it includes in-kind benefits – home-helps to elderly and disabled, transport services, assistance with funeral services for survivors, holiday camps for children, etc.

In short, the Nordic countries are characterised by highly decentralised systems where policies and financing are provided by governmental tiers that are arguably ‘closer to the people’.  In Ireland, what’s good for Donegal is decided in Dublin.

Could this decentralised structure imbue more confidence in higher spending regimes?  And what implications does it have for Ireland.  Well, if the answer to the first is potentially yes, the implications for Ireland are not good.  There are volumes of reports on local government reform going back to the 1940s but local government remains and manager-centred.  So what would a reformed local government look like?  It’s too big an issue to go into here but this is just a sampler:

• Why do we have four local authorities in Dublin, rather than a Greater Dublin Council? Councillors could be elected along Dail constituencies and would be full-time – part-time councillors don’t have the resources or the time to hold the managerial system to account.

• There would be an Assembly with full-time staff and support services with a number of centralised functions devolved to the council level.

• There would be a move from the manager-centred decision-making process to a, councillor-centred process – in other words, a more democratic and accountable process.

• Another lower, part-time tier could be established through local area councils (a Swords Council, a Blanchardstown Council, an Inner City Council) with powers devolved through the Assembly.

In the rest of the country, there would need to be an upscaling of city/county councils.  We used to have eight regional authorities; recent reforms have reduced to these three.  Formerly it was probably too many, now it’s too few.  These are largely toothless but they could be turned into larger full-time professional councils along the lines of a Greater Dublin Council.  The current structure could remain but reformed to bring about even more local democracy (a Tralee Council, Letterkenny, Drogheda, Athlone).

But all this is predicated on the willingness of the political culture to engage in a radical decentralisation and, given our historically centralised state, this would be a big task.  But it’s one that progressive should investigate.

[Note:  it could be argued that Ireland is too small to have a decentralised system.  Yet, Iceland and Luxembourg spend more money through local government than we do.]

If people felt that such institutions – being closer to home – were more accountable, then the prospect of developing a strong social state could gain momentum.  And there’s another reason.  The Left doesn’t look like taking national power anytime soon with its divisions, fragmentation and low-vote.  However, there are many areas in the country where the Left could form a majority and show that it is capable of governing.  This could set up alternative sources of power and prove useful preparation for hopefully, one day, national hegemony. 

It’s not as if others haven’t noticed how weak our local government is.  The Council of Europe produced a damning report on Ireland’s excessive centralisation, lack of funding transparency and limited local powers.

Isn’t it about time we noticed, too?

Gorging on the Seed Potatoes

Education, the skill-base of the labour force, human capital:  this is the key to growth in the future.  This is the key to increasing people’s life-chances.   Michael Noonan referred to accepting the EU’s ruling on Apple as ‘eating the seed potatoes’.  Well, under-resourcing education is tantamount to gorging.  We think we’re ‘saving money’ in the short-term but we are actually fleecing our collective future. 

Unfortunately, Ireland under-resources education; considerably so in comparison with other EU countries.  We can no longer use expenditure on education as a percentage of GDP as a guideline since our national accounts are no longer fit for purpose.  But we can measure educational expenditure per full-time equivalent student.  This is how Ireland compares using mean averages. 

Ireland lags in the primary education funding tables (no data for Italy and Luxembourg).  We’d have to increase spending by 11 percent to reach the EU-15 level and 16 percent to reach the average of our peer group – Northern and Central European economies (excluding the poorer Mediterranean countries).  If we wanted to reach the level of the top spender – Denmark – we’d have to increase spending by 47 percent. 

At the lower secondary level (no data for Luxembourg), the relatively low level of spending is repeated but not as extreme.  Ireland would have to increase spending by 5 percent to reach the EU-15 level and 11 percent to reach the average of other NCEEs.  To reach the top – Austria – we’d have to increase spending by 37 percent. 

At the upper and post-secondary levels (excluding third level), Ireland fares well.  Spending is above both the EU-15 average (7 percent) and the average of other NCEEs (4 percent).  So in this sector we are slightly above average.

However, when we turn to third level, Ireland takes a big dive.

It is at this level that shows Ireland a low education spender (no data for the UK and Luxembourg).  Ireland would have to increase spending by 15 percent and 26 percent to reach the average of EU-15 and NCEE countries respectively.  To reach the top – Sweden - we’d have to increase spending by a massive 68 percent.

In overall spending on education per student in public institutions, Ireland lags in the lower half of the table, trailing the averages of both the EU-15 and NCEE.  What does all this mean in Euros and cents?  The total expenditure data is taken from Eurostat which may categorise educational levels differently than the Government’s public service estimates (which in 2013 doesn’t distinguish between levels). 

In 2013 we would have to increase overall education spending by €1.2 billion to reach the average of Northern and Central European economies.  The biggest increases required are at primary and third level – over half a billion Euros in each sector.  And that’s just to reach the average.

That was in 2013.  Between then and 2016, overall spending increased by €286 million or about 1 percent annually; and during this period the number of students rose as well.  So it is probably the case that Ireland’s position hasn’t changed much.

Imagine the impact of such increases: more teachers, resources, targeted programmes - and an end to precariousness in the education sector.

There are two general observations:

First, expenditure levels don’t speak to the efficiency of the spending – the ol’ value-for-money thing.  A country may be spend a lot but their outcomes may not reflect that; other countries may spend less but achieve better outcomes.  This requires a more detailed examination.

Second, there are particular factors to be taken into account for Ireland which may point to the need for even more expenditure in the short-term over average European levels:  lower population density which requires more physical infrastructure; need for higher capital investment to accommodate rising youth population; and repairing the damage of the austerity years (Eurostat data shows a cut of nearly 15 percent, or €1.4 billion between 2008 and 2013).

There is another general point.  Education expenditure comes from ‘general taxation’, a phrase which is increasingly used in the debate.  The problem is that this phrase is rarely accompanied with an estimate of how much general taxation would have to rise to meet this expenditure, never mind what tax measures one would use. 

For instance, if the Government decided to increase educational expenditure to our peer group average over a five-year period, it would amount to €250 million each year (not counting the ‘particular factors’ mentioned above).   In 2017, this would take up 25 percent of the fiscal space.  Now let’s talk about all the other areas where spending increases are needed (economic investment, water & waste, social protection, health, and all the other areas – and, of course, social and affordable housing).

In short, if we want to have an education sector worthy of its name, on a par with other countries (at least in funding) we will have to pay for it.  But it would be a sound investment.

Call it – planting seed potatoes.

Apple Bites

There has been so much written about the Apple tax ruling.  Here I look at some of the longer-term implications.  But let’s first nail down some confusions and misunderstandings.

First, the ruling is not an attack on Ireland’s 12.5 percent tax rate.  As Peter Brennan of EPS Consulting stated:

‘The Government argues that there is an effort to force Ireland to increase the current rate of corporation tax. Not so . . .There is a huge difference between alleged corporate tax avoidance and the setting of Ireland’s headline rate of corporation tax . . . a ruling from the commission in 1997 clearly indicated that Ireland’s single rate of corporate tax was a general measure under EU state aid rules and was therefore legal and consistent with EU competition policy.’

Second, this is not a tax ruling as such.  According to Professor Edward Kleinbard:

‘The heart of the case is simply that Ireland gave Apple hidden subsidies in exchange for jobs. The only tax connection is that Ireland harnessed its tax system as the instrument to deliver these subsidies.  Imagine Dublin promised Apple €220,000 in cash annually for every job located in Ireland. At 6,000 or so jobs, this totals about €13bn over 10 years. This would clearly equate to an instance of state aid . . . The commission concluded that this is the deal Ireland agreed — but, instead of collecting tax at the Irish 12.5 per cent tax rate and writing cheques to Apple, Ireland forgave substantially all of Apple’s Irish statutory tax liability.’

Nor is it about large nations ganging up on small nations.   Before Apple, the largest EU ruling on illegal state aid delivered through the tax system was against France and the French EDF company.  This is about illegal state aids – something that has been part of the EU since the 1951European Coal and Steel Community treaty.

While there have been great memes on social media about what Ireland could do with the €13.5 billion, we shouldn’t get carried away.  While these are legitimate metaphors, Ireland is unlikely to receive this full amount.  As Professor James Stewart observes:

'However, the commission also note that the amount that may be recovered by Ireland will be much lower if as a result of information “revealed through the commission’s investigation” profits are reallocated to other jurisdictions . . .  In addition, the commission note the amount recovered by Ireland would also be reduced if larger sums were reallocated to the US parent to “finance research and development”.

How much could Ireland hope to get?  This is speculative at this stage.  People who have a much greater grasp of these esoteric international tax rules than me have stated the final figure could be as low as €2 billion but maybe €5 billion.  Or maybe more.  Or possibly less.  Nonetheless, this could be a boon for infrastructural investment.

Nor is it the case that the government is in full control over this ruling.  Apple has announced it will appeal and this process could take years.  So instead of a neat situation whereby Ireland would receive €13.5 billion if the Government accepted the ruling, the reality is that we are likely to receive much less and – even if the Government didn’t appeal – we will have to wait years on Apple’s appeal (and may end up with nothing if the appeal is upheld by the European courts).

The Government’s decision to appeal can be partly explained by the fear of two queues forming at their doorstep.  The first queue concerns the ruling itself.  As the EU Commission states:

‘The amount of unpaid taxes to be recovered by the Irish authorities would be reduced if other countries were to require Apple to pay more taxes on the profits recorded by Apple Sales International and Apple Operations Europe for this period.’

It is already beginning – with Spain, Austria, Italy and France beginning to investigate what is due to them from the Apple profits.  Just what any Government needs – negotiating with other countries, possibly going to court, all that snooping around our tax affairs. 

The second queue may form if the EU Commission is investigating other companies potentially benefiting from illegal state aid.  It is being widely reported that the EU Commission is investigating six more cases of Irish deals with multi-national companies.   And a Reuters investigation in 2013 showed that at least 74 percent of the 50 biggest U.S. technology companies, including Google and Facebook, use practices similar to Apple’s to reduce their tax bills (these are not all Irish based).  So Apple may only be the beginning.

If either or both these queues start forming, Ireland could be stuck in a reputational and diplomatic damage-zone for some years. 

The Dail debate last week was conducted in the dark.  TDs did not have access to the 150-page ruling (it will be published after the Government, Apple and the EU Commission agree on redactions for commercially-sensitive information – this could take months).  Therefore, it could not independently assess the ruling nor could it assess the likelihood of a successful Government appeal.  Fortune reports that:

‘Last year, the European Commission published a list of six tax rulings and 59 “measures similar in nature or effect” since 1991, which it had challenged on the basis of state aid rules. It was successful in almost all cases.’

The EU Commission has a high success rate in fighting off appeals in the European Court.  The Government may know its chances are slim and are undertaking the appeal in an attempt to buy time.

What is the long-term impact of the Apple ruling on Ireland’s low-tax FDI strategy?  Technically, it could be very little.   After all, the EU Commission ruling is not about tax policy; it’s about illegal state aid.  And the tax provisions through which those subsidies were delivered no longer exist.  In this respect, the Apple case is historical.  However, if the state were found to have made special deals with other companies this could give Ireland the image of operating an ad hoc legal and tax framework – one which business and just about everyone else would have little confidence in.  That could be quite damaging.

But the biggest challenge for Ireland is that the Apple and related decisions will accelerate moves towards greater European tax cooperation and coordination.  Though hardly mentioned in Ireland, only weeks before the Apple ruling the European Parliament overwhelming passed a resolution containing a number of progressive measures to fight multi-national tax avoidance and evasion (the full text of the resolution can be found here): 

• EU register of beneficial owners of companies, and a global register of all assets held by individuals, companies and entities,  such as trusts and foundations, to which tax authorities would have full access

• A tax havens blacklist with stronger sanctions against non-cooperative tax jurisdictions

• Action against abuse of “patent box” regimes and stricter definitions of what is allowed under transfer-pricing

• Tax good governance rules in EU trade agreements

• A common consolidated corporate tax base (CCCTB)

• An EU-wide withholding tax, to be collected by member states, to ensure that profits made in the EU are taxed at least once before leaving it

Measures like these are necessary to advance corporate accountability and tax justice throughout Europe.  However, Ireland continues to resist.   While this resolution found support across the political divide in the European Parliament (514 voted for, 68 against with 125 abstentions) among the Irish MEPs only Nessa Childers supported the measure; the rest opposed or abstained. 

One lesson we can draw from the Apple ruling is that the only agency that can break the tax-avoidance/evasion strategies of multi-national capital is a supra-national one; in this instance, the EU.  Would a single nation-state (never mind a small one) have been capable of making this ruling and making it stick?  Extremely doubtful.

There is a fear that a rational, democratic and accountable corporate tax regime in Europe will undermine Ireland’s ability to incentivise foreign direct investment (FDI).  It is legitimate to ask whether Apple would have sited thousands of jobs here without the ‘tax-deal’.  But such questions should not lead us into apologies for global tax avoidance, never mind our participation in it. 

In the first instance, the Dail should assert is role in this process even with the Government appealing.  The Public Accounts Committee or a special committee should hold hearings on the ruling itself, clarify the issues, assess the likelihood of a successful Government appeal and the potential for further cases down the line – in both Ireland throughout Europe.  This is supposed to be the era of ‘new politics’ with a heightened parliamentary role.  Well, let’s heighten it.

But these questions should also lead us into a more profound, evidence-based debate on our future in the international marketplace and the policies to incentivise foreign investment.  That debate should start from this simple premise - what is good for FDI is also good for the Irish people:  a modern infrastructure, investment in education, a culturally-diverse society, affordable housing costs, comprehensive public transport and accessible cities, strong public services (low-cost, high quality childcare) and social security (health and in-work income supports), transparent governance, recreation and leisure activities, economy-wide employee innovation and participation and so on.  And tax policy?  One that supports investment, investment and more investment.

We can do this.  Or we can continue to participate in a global race-to-the-bottom; and even worse.  We can - just as we did during the speculative-fuelled boom years prior to the crash - continue to close our eyes to the reality around us

And hope the world doesn’t notice us.

Starving Public Transport in Dublin

Workers at Dublin Bus are on strike.  They certainly have had a difficult time of it since the recession started:  no wage increase since 2008, have not been paid a 6 percent increase owed to them since that time, suffered job losses and service cuts, reductions in over-time pay and increased hours (e.g. a 13-hour working day), and now working under the threat of creeping privatisation – all this while Dublin Bus has experienced profits (surplus) in the last two years.  A good summary can be found here where Dan MacGuill – the Journal.ie Fact Checker - analyses a leaflet distributed by the NBRU.  Dan finds that all the claims made on behalf of the striking workers are pretty much true (and anyone who follows Dan’s column knows that this is a high benchmark).

Here I just want to focus on the levels of subvention to the Dublin Bus; that is, the amount of subsidy the Government pays for public transport.  Public transport is not a for-profit operation (any more than a hospital or a school).  It is a public service and this is recognised throughout Europe.  So how does the public transport subvention in Dublin compare to other European cities.

I discussed this last year at the time the National Transport Authority decided, with little evidence, to privatise up to 10 percent of Dublin bus routes.  Here is what the data tells– which is a bit patch-work (unfortunately, there is no unified database on public transport subsidies).  This comes from here and here and relates to 2009 / 2010.

This data measures the public subsidy as a percentage of total revenue to public transport (the other main source would be fares).  This is a bit dated so there is a reasonable chance that Ireland has fallen even further down the table.  Te Dublin Bus Annual Reports, as reported by Dan, shows that the public subvention has fallen to 20 percent of total revenue.  The nominal subvention fell from €86 million in 2008 to €58 million in 2015 – a cut of nearly a third.

• If the subvention were increased to the average of the other cities, Dublin Bus could be receiving over €200 million more per year from the state.

• If the subsidy increased to the London level, Dublin Bus could be receiving an additional €90 million.  

These are approximate figures and, so, should be treated indicatively (we don’t know what’s happened in other cities since 2010) but it shows how low public transport support is in Dublin.

It’s not just the impact on wages and services; it also affects fares.  According to the Irish Mirror, Dublin commuters are paying the highest bus fares among 16 EU countries while Dublin is the fourth most expensive EU city to buy a monthly ticket covering bus, train and tram travel.

An average EU subvention could transform bus services in the Dublin area –substantial expansion in services combined with fare reductions.  In addition, given that bus transport is highly labour intensive, an expansion of services would return a considerable amount of that subvention to the Exchequer through additional tax revenue.

To the extent that a portion of the subvention goes to providing wage increases, the state recoups a large portion of this.  It would recoup nearly 30 percent of pay increases to those on the standard rate and nearly 50 percent for those on the higher rate – and this doesn’t count the revenue from increased consumer spending.

Investment in public transport is key to a prosperous city – moderating consumer costs, increasing mobility, reducing congestion and environmental damage.  However, Minister Shane Ross’s response to this is curious to say the least.  He claims the Government won’t be a ‘soft touch’ to both employers and employees.  I’m not sure what this means but it would appear to miss the point entirely.  Public transport supports are incredibly low, services have been cut, fares are incredibly high and wages and working conditions in Dublin bus are on the floor.

What we need is a ministerial vision of public transport in Dublin, not ministerial sound-bites or tweets. It’s not a matter of pulling out a cheque-book as the Minister puts it – it’s about creating an accessible and sustainable city for all.

That, ultimately, is what the Dublin Bus workers are striking for.  If we want to succeed, they need to succeed.

What does Irish Business Really Really Need?

From this article – In Norway, Start-ups say Ja to Socialism - we can safely say there are at least a few Norwegian ‘entrepreneurs’ who are quite content to work in a high-tax system; indeed, they think it’s good for business.  Take Wiggo Dalmo:  he worked repairing mining equipment until he set up his own enterprise and in ten years he built up a $44 million business with 150 employees. He did this in one of the most heavily taxed, highest-waged economies in the world.   If he was Irish, he’d probably be on Morning Ireland giving out about taxes and wages.  But he’s Norwegian.  Wiggo said:

"The tax system is good—it's fair. What we're doing when we are paying taxes is buying a product. So the question isn't how you pay for the product; it's the quality of the product.’

For good measure he also added: 

‘I’m socialist to the bone.’

Maybe Wiggo and the others in this article are unique.  But maybe not.  Maybe a high-tax, high-spending, strong social security state is a bulwark for enterprise, not an impediment.  We can test this proposition by looking at the number of enterprise start-ups in the high-taxed small open economies of Europe (Other SOE):  Austria, Belgium, Denmark, Finland and Sweden.  These can be considered our peer group as these are economies with a small domestic market and, therefore, a strong reliance on exports.  Let’s canvas the background.

• Personal tax rates for employees are higher in Other SOE – Irish personal tax rates (including PRSI) would have to increase by 17 percent just to reach the average of the other countries.

• Unsurprisingly, the effective corporate tax rate in Other SOE is much higher than in Ireland – three times higher.

• Employers’ Social Insurance in Other SOE is also nearly three times higher than in Ireland

• Labour market flexibility (rules around hiring, firing, etc.) is much stricter than in Ireland

• And wages in the market economy are much higher than in Ireland – the average for Other SOE is €37.90 per hour compared to our €28.70

In the Irish orthodoxy, these European countries should be a disaster zone when it comes to enterprise – unlike pro-business Ireland.  But is this the case?

The following looks at the number of enterprise start-ups (births) per 1000 working age population.

We can see that, with the exception of Belgium, all of these other high-tax, high wage, ‘inflexible’ economies have far higher start-ups than Ireland.  For Ireland to reach the average of our peer group, we would have to increase business start-ups by over 45 percent. 

Another interesting stat:  of the business start-ups in Ireland, 17 percent started up with employees.  The remainder had no employees; essentially, they were self-employed or own-account workers.  The average percentage of start-ups with employees in the Other SOE was 27 percent.

In short, not only does Ireland lag our peer group in terms of business start-ups, Irish start-ups are not as employment-dense.

Of course, Ireland was in a bit of a rut between 2008 and 2012 (the last year we have data for).  This would depress enterprise growth.  So let’s look at 2006 – before the crash when Irish economic growth was strong.

Before the crash, Ireland was average.  However, a very high level of these enterprise start-ups was, unsurprisingly, in the construction sector - over a third of Irish start-ups (34 percent).  In the Other SOE, it was only 14 percent.  When we exclude construction start-ups, Ireland again fell behind the average number of start-ups of the other European countries.  This is further noteworthy since in Ireland many of the start-ups outside the construction sector (retail, hospitality) would have been based on the unsustainable demand of the property boom.  Even in a high-growth period, low-tax, low-wage Ireland under-performed.

Is there an automatic relationship between high taxes and wages, and enterprise start-ups?  No.  However, the article did make this provocative description of Norway: 

‘Every Norwegian worker gets free health insurance . . .  At age 67, workers get a (state) pension of up to 66 percent of their working income, and everyone gets free education, from nursery school through graduate school. (. . . this includes colleges outside the country. Want to send your kid to Harvard? The Norwegian government will pick up most of the tab.) Disability insurance and parental leave are also extremely generous. A new mother can take 46 weeks of maternity leave at full pay—the government, not the company, picks up the tab—or 56 weeks off at 80 percent of her normal wage. A father gets 10 weeks off at full pay.’

This can lead us to a provocative observation:  enterprise flourishes in societies marked by high levels of social cohesion, social protection, strong public services and wages.  In other words,equality and social cohesion are the necessary ingredients for enterprise development.

In my previous post, I looked at ‘the corporation’, how it was not ‘owned’ by the shareholders, how it could become a new commons – a social and collective space shared by all stakeholders.  Now we can go further:  a society that has a strong public realm and greater equality is more pro-enterprise.

So the next time you hear a business representative giving about taxes and spending and wages and the need for ‘flexibility’, you now know:  they are not representing the interests of business or their members; they are just regurgitating passé ideology.

Progressives should now enter this debate – enter stage-left.

If No One Owns the Corporation, Can We All Own It?

To ask ‘who owns the corporation’ is to invite a simple reply:  the shareholders.  After all, don’t shareholders vote at AGMs, doesn’t the law state that shareholders own the company.  Doesn’t the company have to act in the interest of the shareholder?  Seems straight-forward.  But it’s not.  In fact, it has been argued that no one owns the corporation.  If this is the case the implications could be significant. 

The Financial Times’ Peter Kay argues the ‘no-one-owns-the-corporation’ line:

‘If I own an object I can use it, or not use it, sell it, rent it, give it to others, throw it away and appeal to the police if a thief misappropriates it . . .  But shares give their holders no right of possession and no right of use. If shareholders go to the company premises, they will more likely than not be turned away. They have no more right than other customers to the services of the business they “own”.  The company’s actions are not their responsibility, and corporate assets cannot be used to satisfy their debts.  Shareholders do not have the right to manage the company in which they hold an interest, and even their right to appoint the people who do is largely theoretical. They are entitled only to such part of the income as the directors declare as dividends, and have no right to the proceeds of the sale of corporate assets — except in the event of the liquidation of the entire company, in which case they will get what is left; not much, as a rule.’

So who owns the company?

‘The answer is that no one does, any more than anyone owns the river Thames, the National Gallery, the streets of London, or the air we breathe. There are many different kinds of claims, contracts and obligations in modern economies, and only occasionally are these well described by the term ownership.’

There has been a decades-long debate over who actually ‘owns’ the corporation, in the sense of who actually ‘controls’ it:  managers or shareholders or a combination of both.   We can get a better handle on this if we recognise that the corporation is a legal fiction – a ‘legal person’ that enables the corporation to operate in the world (buy, sell, own, sue, go into debt, break the law, etc.).  As such, this legal person is not ‘owned’ in the popular sense of the word.  

Tom Powdrill quotes a Contexte summary of the revisions to the EU shareholders’ rights directives:

‘Shareholders do not own corporations:  The directive will explicitly acknowledge that shareholders do not own corporations - a first in EU law. Contrary to the popular understanding, public companies have legal personhood and are not owned by their investors. The position of shareholders is similar to that of bondholders, creditors and employees, all of whom have contractual relationships with companies, but do not own them.‘

Even if one insists on the ‘ownership’ paradigm, one has to admit that the character of ownership has changed – from individuals to institutions with ownership being measured in weeks (an average of 35 weeks as opposed to 1970 when the average share holding lasted seven years; and sometimes in seconds due to high-frequency trading.

In this sense we can understand a corporation as a ‘space’, a dense series of contractual relationships that includes management, shareholders, bondholders and creditors, employees, etc.; in other words, the totality of relationships with all the stakeholders.  This list can be extended to communities, the environment, nation-states, supra-national organisations (e.g. the EU), etc. 

And how are these contractual relationships determined?  In the apparent instance, they are politically-determined (legislation that gives certain rights to different stakeholders).  Ultimately, they are determined by the power-relationships between these different stakeholders.

So what?  It’s still the same ol’ corporation that we have known and loved since the introduction of limited liability.  I would say there are at least two reasons why this matters.  First, is the concentration of ownership, control and power.

The New Scientist published a comprehensive survey of global multi-national corporations.  In the first instance they found a core of 1,381 companies which collectively controlled the majority of world’s large blue chip and manufacturing firms (what’s called the ‘real economy’ – that is, the non-financial economy).  However, when they dug further they found what they called a ‘super-entity’ of 147 inter-locking companies controlled 40 percent of multi-national companies world-wide.  Most of these 147 super-companies were financial institutions. 

Second, the relationships within and between multi-nationals are more and more determined politically.  France’s decision to give more voting weight to shareholders who hold on to their shares longer (in the hope of incentivising long-term commitment); the OECD’s and the EU’s moves on tax transparency; the role of stakeholders in corporate governance legislation – all these can be interpreted as moves to make the corporation more accountable both to society and the productive economy.  All these are political decisions.

Ultimately, though, this all suggests a new, potentially more democratic perspective.  If the corporation is not so much owned but exists through a series of contractual relationships between stakeholders and participants, then we can see the totality of the corporation as a ‘social’ or ‘collective’ asset that operates within a complex market of economic calculation and the international division of labour.  Once we break with the concept of ‘ownership’ (though we will always us this in a popular sense) and understand it as one of ‘control’ – this begs the question:  who controls the controllers? 

This is a both a political and economic issue; it is a systemic one.  It is about power-relationships both within the corporation (the balance between capital and labour being a primary one) and the relation of the corporation with the rest of society, including the environment. 

So if no one owns the corporation, can we all own the corporation?  Yes; the corporation can become the new commons.  It is a democratic issue; neither simple nor unsolvable.

The Minister Floats an Idea

The Minister for Social Protection, Leo Varadkar, has been floating some ideas.  The latest one concerns increased unemployment benefits – along the lines of basic European practice (sort of).  His idea is that workers who become unemployed would receive €215 per week for the first three months; €200 for the second three months; after that, they would receive the current basic rate of €188 per week.

Though this is quite modest it is certainly heading in the right direction.  This is about the economics of social security and what is called in the literature ‘uncertainty avoidance’.  For people losing their jobs, they are liable to a sudden drop in their income which puts pressure on their living standards.  The economy suffers because of their reduced purchasing power.  And this skewers the labour market as many people grab the first job they can regardless of the skill match – thus leading to less than optimal results.

Other European countries get over these problems by providing pay-related unemployment benefit.  In its simplest terms, a worker receives a percentage of their previous wage for a set period of time – before falling back to a basic, usually means-tests, payment.   This protects living standards, maintains demand, and facilitates optimal job-hunting.  The pay-related benefit can be quite substantial.

Ireland is not the lowest (the UK is, but Council Tax Benefit makes up on average more than twice the level of unemployment benefit) but it is well behind all other EU countries in our peer group.   The Minister’s proposal would close some of the gap.

However, there is one big difference with the continental model.  The Minister’s proposal is still a flat-rate.  In other EU countries, the payment is linked to the previous wage; the higher the wage, the higher benefit.  For instance, in Austria, the weekly benefit of €259 is for someone previously on €36,000 (the Irish average wage).  However, for an Austrian previously on €50,000 pay, unemployment benefit would rise to €335.  This Minister’s proposal wouldn’t do that.

Also, the length of the payment is minimal compared to other countries where the pay-related benefit can last a year or longer. 

The Minister has claimed his proposal would cost approximately €35 million.  That is fairly minor cost.  We should aim for a fully-blown pay-related payment with a high replacement ratio (unemployment benefit as a percentage of the previous gross wage) that lasts a year.  There would be a threshold above which the payment would be frozen. And the payment would last a year.

Take the example of an employee who loses their job.  She was earning €30,000.  She will now receive 50 percent of her previous wage - €15,000.  She will receive this for a year.  If she is still unemployed after a year, her benefit will run out and she will switch to Jobseekers Allowance (a means-tested payment).

It is difficult to estimate the cost as we don’t have data on duration and previous income.  In any event it would be phased in over three years or so.  But a back-of-the-envelope job – based on trebling the increase in the Minister’s proposals and doubling the length of time - would suggest a cost of €200 million (though it could be less depending on the income range of new entrants on to benefit and how long they stay on benefit).

This could be paid for – as it is on the continent – by an enhanced employers’ social insurance (Irish employers’ social insurance is one of the lowest in the EU; it would have to more than double to reach the European average). A fractional 0.25 percent increase would pay for the enhanced benefit – hardly onerous.

But there is benefit for business as well –the increased benefit would result in higher consumer spending.  And the Government would benefit from the increased tax revenue – both income tax (unemployment benefit is taxable) and indirect taxes.

And for people the benefit is obvious:  when they suffer the loss of employment, at least their income will be maintained for a period while they get back on their feet. 

Let’s hope the Minister continues floating these kinds of ideas.  Here’s a few more he may wish to let glide:

• Pay-related sickness benefit
• Pay-related maternity and paternity benefit
• Pay-related validity pension and occupational injuries benefit
• And, ultimately, a pay-related old age pension

We may yet join the rest of Europe in providing a modern social protection system.

Comparing Spending on Public Services in the Post-GDP Era

One of the impacts of the CSO’s recent National Accounts data – the one that shows the economy growing by 26 percent – is that all our main economic measurements are practically useless.  It’s not that we didn’t have trouble before last week.  Using GDP was always fraught, given multi-national accounting practices.  But at least we could fall back on GNP or GNI or the Irish Fiscal Council’s hybrid-GDP measurements.  Now these are shot as well.  We are in a fog.

The former Governor of the Central Bank, Patrick Honohan, was spot on: 

‘The statistical distortions created by the impact on the Irish National Accounts of the global assets and activities of a handful of large multinational corporations have now become so large as to make a mockery of conventional uses of Irish GDP . . . GNP is now almost as unhelpful an aggregate economic measure for Ireland as GDP . . . Ratios to GDP are now almost meaningless for Ireland in most contexts.  They need to be supplemented by alternative purpose-constructed ratios for specific uses . . .’

So now the hunt is on for robust ‘purpose-constructed ratios for specific uses.’  This will entail a new debate, a flurry of number-mongering and endless disagreements.  Take, for example, our expenditure on public services.  Using CSO figures spending on public services fell from 13.7 percent of GDP in 2014 to 10.5 percent last year, even though spending on public services rose. 

And comparing ourselves to other European countries is equally meaningless.  GDP per capita in the EU-15 was €33,000 in 2015.  According to the Government projections, Irish GDP per capita was supposed to be €46,000 – already inflated by multi-national activity.  After the CSO release, GDP per capita has shot up to €55,000.  That’s 67 percent above the EU-15 average.   Unreal.

So how does our spending on public services compare with other European countries?  Here’s one suggestion for an ‘alternative purpose-constructed ratios’:  spending on public services per capita.  Of course, nothing ever being simple, we have to choose between nominal spending (actual Euros and cents) and real spending (factoring in actual purchasing power).  I’ll go with the latter – this counts what countries actually get for their spending excluding inflation and living costs.

This shows Ireland a low spender.  Only the poorer Mediterranean countries spend less on public services.  We fall 10 percent below the EU-15 average.

However, it doesn’t tell us much that we spend more per capita than, say, Greece or Portugal – two relatively poor countries in this table.  So when we compare ourselves to one peer group, Northern and Central European economies (NCEE: excludes the Mediterranean countries), we fall 18 percent behind.  And when we compare ourselves to another peer group, other small open economics (SOE:  Austria, Belgium, Denmark, Finland and Sweden), we fall 25 percent behind.

But there are a couple of things we should bear in mind:

First, given that we don’t have as high a proportion of elderly, we wouldn’t have to spend as much on health and other elderly-related services.  However, we have a much proportion of young people; therefore we have to spend more on education and other services.  To what extent these spending ratios cancel each other out would require more research.

Second, Irish spending on public services is subject to very low purchasing power (like consumer spending).  We have to spend €113 to match the EU-15’s average €100 just to purchase the same goods and services.  This inflation, though, is not confined to Ireland.  Denmark, Sweden and the UK have weaker purchasing power than us.

Another issue is that of reform.  The previous government claimed to reform public services but this was mostly made up of cutting employment, increasing hours and cutting wages.  ‘Doing more with less’ only means we have less.  A real reform process would include the producers and users – the public sector workers and the users of the public services.  It would further distinguish between process issues (are we doing things in the most efficient way) and structural issues.  For instance, does the role of the private sector in our public health system drive up costs?  Does it produce perverse incentives that increase costs per patient?

The bottom-line, however, is that we are an under-spender on public services. 

• To reach the EU-15 average, we’d have to spend an additional €3.6 billion
• To reach the average of Northern and Central European economies, we’d have to spend an additional €7.3 billion
• To reach the average of other small open economies, we’d have to spend an additional €11.2 billion

These are big sums.  Even after tackling inflation and reform issues, we will still be faced with big sums.

With the aid of purpose-constructed ratios for specific uses we now see the challenge we are facing.  How will the ‘new politics’ measure up?

TTIP - Threat to Democracy, Public Welfare and the Economy

The following appeared in the Irish Independent on Saturday, July 16th

Unite believes that the implications of the Transatlantic Trade and Investment Pact (TTIP) are so far-reaching that it must be put to a referendum.  Here are some reasons.

Traditional trade issues are only incidental to this so-called ‘trade deal’.  TTIP’s main thrust is to debase democracy by awarding global corporations legal privilege over citizens and elected Governments.  As a result, the ability of democratically elected governments to safeguard labour, consumer, environmental and health standards will be severely, if not fatally, undermined.

Our main concern is the Investor State Dispute Settlement (ISDS, now repackaged as the Investment Court System) which enables corporations to sue governments for compensation if they believe public policies interfere with profit maximisation.  They can bypass our legal system and take their case to secret, private courts from which there is no appeal.  This has been done under the umbrella of other agreements with similar ISDS provisions:

• Philip Morris Company sued Australia over its planned introduction of plain-packaging for cigarettes

• Veolia is suing Egypt for its decision to raise the minimum wage

• Canada has been sued by corporations over such decisions as subsidising renewable energy, placing a moratorium on fracking, banning toxic petrol additives and temporarily banning the export of toxic waste.

This is not about ‘trade’.  It is about global corporations coercing governments into subordinating public welfare to shareholder interests.  No wonder the negotiations have been conducted in secret and there is reportedly an agreement with the US that negotiation documents won’t be made public for 30 years. 

Instead of addressing this substantial democratic deficit, the Government has focused on TTIP’s alleged economic benefits.  However, the Government’s own report shows little economic gain but potentially significant losses.  For example, although TTIP will boost pharmaceutical exports this will have little impact on employment.   Pharmaceutical exports have nearly doubled since 2000 but sectoral employment has actually fallen. Many of TTIP’s purported benefits, like the recent GDP figures, will be only marginally attached to the domestic economy.

But the losses will be felt in the domestic economy.  Even the Government admits the beef sector will be badly affected.  The Irish Farmers Association has raised additional concerns about the pigmeat and poultry sectors, citing threats to standards governing genetic modified organisms, hormones, pesticides, animal health and product labelling,  Thanks to TTIP’s ‘regulatory convergence’, these standards are likely to be driven down to US levels of low regulation.  Given the importance of the food sector, the Irish economy could be badly hit.

But that’s not all.

Leaked TTIP negotiating documents indicate that a range of consumer protections are also in the firing line.   The EU’s precautionary principle was dropped (whereby products must be proven safe before they can be sold) in favour of the US ‘risk-based’ approach which puts the burden of proof on states and consumers to show products are unsafe.  Everything from US-sanctioned lead in lipstick to chlorinated chickens could hit our shelves after TTIP.

European public service unions have warned that health, education and other public services could be exposed to privatisation, race-to-the-bottom competition and secret-court action.  The ‘negative list’ approach means that all public services can be permanently opened up to TTIP unless the current government specifically excludes them.  This is a real threat in Ireland where global companies already have a foothold in our hospital and higher education sectors.

Business groups are waking up to these threats.  In Germany, 'KMU gegen TTIP’ (SMEs against TTIP) is supported by thousands of small companies and entrepreneurs – including many exporters.  They point to TTIP’s hidden additional costs and the disadvantage they would be placed at vis-à-vis global corporations.

Throughout Europe there is a rising sentiment against TTIP.  Over 3 million signed a petition – a European Citizens’ Initiative – opposing the deal. Over 1,800 cities and regions have declared themselves ‘TTIP free-zones’ including Barcelona, Cologne, Milan, Vienna, Amsterdam, Birmingham and County Clare.  Every month the list grows.

In Ireland there is an emerging, broad-based coalition opposed to TTIP – from farming, consumer and environmental activists to ICTU and the trade union movement.

TTIP poses such a fundamental threat to democracy, public welfare and our economy that Unite believes people should have the final say in a referendum.

The High Cost of Low Pay

There is a narrative among the Left that claims that capital has not wasted the recessionary opportunity, that capital has exploited the crisis to depress wages in order to boost profits.  We should, of course, be sceptical about such sweeping narratives.  We live in a complicated, complex world where exceptions and caveats invariably rule.  So let’s test this claim and see if it holds – at least in Ireland; at least on the issue of wages.

There are many ways to measure wages (Dr. Tom Healy of the Nevin Economic Research Institute looks at it this way).  I will use employee compensation as a percentage of Gross National Income (GNI). 

• Employee Compensation: this is made up of the direct wage (what the employer pays the employee) and the ‘social’ wage (what the employer pays into a social insurance or similar fund – out of which employees access public services at below-market costs such as health, and in-work benefits such as sick-pay, maternity benefit, etc.).

• Gross National Income: this is essentially GNP.  This is not an optimal benchmark as it excludes a significant amount of wealth that is generated in the economy.  However, it does have the advantage of excluding both multi-national profits that are generated in other countries but end up here for tax avoidance purposes, along with profits that are actually generated here but then repatriated.  Therefore, GNI is the bottom-line of bottom-lines.

So how do Irish workers fare?

We don’t fare well.  Up to the crash, when wages were rising, Ireland was still below the main European comparators – the EU-15, Northern and Central European economies (NCEE – this excludes the poorer Mediterranean countries), and other small open economies – (Other SOE, countries with a similar open, export-dependent structure:  Austria, Belgium, Denmark, Finland and Sweden).

When the crash hit, the graph shows Irish wages spiking but one has to be careful.  Between 2007 and 2009 wages rose – as a proportion of GNI (from 46 to 52 percent of GNI); yet, during this period total wages actually fell by 6 percent.  In fact total wages fell a further 8 percent up to 2012.  The reason for the spike is not rising wages but falling national income.

But as we came out of the recession, wages didn’t recover their pre-crash levels.   Between 2000 and 2007, Irish wage levels averaged 44.2 percent of GNI.  In 2017, the EU estimates this will have fallen to 39.6 percent. 

And it’s not like Ireland is a ‘poor’ countries.  When we measure GNI per capita we find that Irish levels are 10 percent higher than the EU-15, marginally ahead of Northern and Central European economies and at that same level as other small open economies.

Unite the Union recently published its The Truth About Irish Wages.  Using EU labour cost data it found that Irish wages are well below the European benchmarks.  But the real story is how low Irish wages in low-paid sectors are.

Irish compensation levels in these sectors are well below the average of other European countries – well below.  The Irish low-paid are ultra-low paid.

Some might argue that we need low wages so that our exports are/become/remain competitive.  However, other small open economies have much higher wage levels than we do and it doesn’t seem to affect their export levels.    Further, in our main export sectors – chemicals/pharmaceuticals and the information & communication sector – our wages are at average European levels.  These sectors haven’t been affected negatively.   The relationship between wages and competitiveness is not a crude reductionist equation.

We pay a real cost for our low wage levels.  First, is the low level of tax revenues.   Taxes on labour are higher than taxes on capital.  Therefore, when the latter is privileged, tax revenues are not optimised.

Second, our business sector suffers from low levels of consumer income.  This not only affects businesses that primarily sell into the domestic markets; it makes it difficult for domestic businesses to transition to export markets.  Moving into exports requires a considerable investment which higher sales revenue from domestic income can help finance.

Third, it affects workers’ living standards and especially those in sectors that are reliant on discretionary spend; less revenue coming into sectors like restaurants means less money that goes on pay. 

So, yes, those lefties and their sweeping narrative appear to be on to something.  Now we have to start debating how we write another narrative.

Growing wages to the European level – including both direct and social wages – is one of our main challenges.  We need a strategy to make a fundamental shift from an economy reliant on low wages and low-paid sectors.  This goes beyond just increasing wages.  It is about creating high-road employment and businesses that are focused on investment, R&D, re-skilling and innovation, rather than sweating labour.

The big question is:  do we have the capitalists to do that?  And if we don’t, what do we do then?

Waiting for the Brexit and Other Kinds of Barbarians

What are we waiting for, assembled in the forum?

            The barbarians are due here today.

 Why isn’t anything happening in the senate?

Why do the senators sit there without legislating?

            Because the barbarians are coming today.

            What laws can the senators make now?

            Once the barbarians are here, they’ll do the legislating.

So begins C.P. Cavafy’s perennially relevant poem Waiting for the Barbarians, where the threat of unseen forces is used as an excuse to do nothing; or reinforce the status quo (I reproduce the full poem at the end of this post).

I was reminded of this when reading through the debate on Sinn Fein’s private member bill to provide workers caught in precarious work contracts greater certainty of hours.  What this sensible bill proposed is already standard practice in many firms around the country.  However, low-road employers are opposed – those  who want to use business practices like rostering as means to discipline employees (‘if you’re not a submissive and compliant worker  your hours will be cut next week’).  

And Fine Gael is keen to direct traffic down that low-road.  According to the new Minister for Jobs, Enterprise and Innovation:

‘This Bill would destroy the largest employer in the State, the small business sector.’

Wow.  A common-sense measure to provide people with certainty in hours would destroy an entire sector?  And the clinching argument:

‘Consider employers who are afraid that they may lose business with Brexit on the horizon.’

Ah, Brexit – where have you been all our lives?  It’s a godsend to those who need an excuse to stymie attempts to raise people’s living standards, give people greater rights in the workplace, to provide some space whereby people can democratically determine where the gains in the recovery should be directed. 

Y’see, the ol’ ‘we need to maintain our competitiveness’ argument was wearing a bit thin.  A lot of people were feeling that the only reason for their social existence was to serve capital, financial institutions and employers.  And what party could stand over that and expect to win popular support?  It also didn’t help the argument when Unite the Union published The Truth About Irish Wages, which showed Irish workers received wages well below our peer group.

So Brexit came along at the right time.  Pay increase?  Oh, no -  Brexit.  Investment in education?  Sorry, Brexit means tightening our belts.  Social Protection increases to bring people out of deprivation?  Would love to, but, y’know . . . Brexit. 

It’s not just the banded hours.  Word on the street is that employers’ representatives are digging in their heels on the Low Pay Commission, using Brexit as the reason to minimise, freeze or even cut the minimum wage.

Brexit is the new Troika except now we won’t have faces and institutions to vent our anger at; it will be anonymous, immutable forces – serving the same role as the ‘bond markets’ did before we entered the bail-out programme.

How should we respond?  A good place to start would be the Nevin Economic Research Institute’s recommendations found in their newly published Quarterly Economic Observer.  These recommendations were not constructed with the impact of Brexit in mind, but they would be the most effective tools in the event of any negative impact of Brexit (and there will be one).  Where do we start?

• If we fear a slowdown in investment because businesses are waiting for the Brexit dust to settle, what better response than to increase public investment?  We should be doing that anyway to raise long-term supply-side potential; in the short-term, we could do with the demand-side benefit – more employment, more wages in the economy, etc.

• Invest in R&D.  We are a laggard compared to other EU countries – we need to boost our productivity, build ladders to higher value-added production; R&D wisely spent can do that.  And doing it through the public sector can ensure widespread spill-over effects (while private sector R&D is vital, too, it naturally only benefits the firm conducting it).

• Invest in education and invest in education again:  start with pre-primary and primary schooling to ensure that children don’t get left behind at an early age.  Educational investment will ensure that our young men and women will become the innovators, the modernisers and inventors of tomorrow (if the social and economic system allows them to apply their social and workplace knowledge – that’s a different issue, a democratic one). 

• And relieve labour supply-constraints:  for example, childcare.  This will facilitate participation in the labour market, reduce household costs and relieve upward pressure on wages which are only fuelling childcare costs and the whole vicious cycle goes into another turn.

This is a programme to overcome any short-term hits because of Brexit or other downside risks because it is focused on the long-term.

The government, in its wisdom, wants to pull out € billion out of the fiscal space and put it into a rainy day fund.  This is a poor use of scarce resources.   Investment is the ultimate rainy day fund.  Rather than take €3 billion out of the economy and let it sit in a deposit account gathering hardly any interest, use that money and invest – in broadband, housing, water and waste infrastructure, R&D, public transport, renewable energies (get the idea).  In the long-term these new assets will provide a greater cushion than any ‘resting-in-my-account’ rainy day fund.

We can conjure up all sorts of reasons to not do the right thing.  When the Brexit issue passes I’m sure our leaders and bosses will come up with new one (‘Today, the Minister for Inter-Galactic Security stated we had to freeze wages in order to anticipate the negative impact of a wayward asteroid’). 

What progressives should not do, however, is deny the downsides.  Rather, we should confront them realistically and put forward realistic proposals. 

NERI’s proposals are a good place to start.

You can read Cavafy's full poem below the fold.

Hopefully the Low Pay Commission Will Take Note

The Low Pay Commission (LPC) will soon be making its recommendation for the National Minimum Wage. Last year, they recommended a 50 cents increase in the hourly wage – nine years after the last time it was increased (in early 2011 the minimum wage was cut by €1 but this only lasted a few weeks as the new government quickly reversed it). What will the LPC recommend this year? We’ll know soon enough. But hopefully they will take note of what is happening in low-paid sectors. Because in the hospitality sector, for example, profits are going through the roof.

The hospitality sector, comprising accommodation and restaurants / food services, took a big hit in 2008, continuing to slide until 2010.  However, since then profits have risen considerably.  By 2014:

• Total profits in the sector had risen to 36 percent above their pre-crash (2007) level. In 2007, total hospitality profits were €517 million; by 2014 they exceeded €700 million.

• Profits per hour in the sector increased by over 43 percent. They rose from €2.50 per hour worked in 2007 to €3.60 in 2014.

Since the sector hit its trough in 2010, profits have increased by more than three-fold.  What accounts for this?

First, the Government rolled out a stimulus programme (at least in one sector they heeded what progressives had been advocating for years):  a reduction in VAT and a cut in the low-rate employers’ PRSI (the latter has been reversed).

Second, tourism expenditure increased by 50 percent between 2010 and 2014.

In this same period total household income increased by nearly 6 percent, potentially giving a disproportional boost to discretionary expenditure.

The National Accounts data only goes up to 2014.  The CSO produces a Services Index which tracks real (i.e. after inflation) gross value added. This brings us up to 2016 1^st quarter.   Gross value added is equal to ‘sales minus costs’.  Profits and wages are paid out of Gross Value Added.  What has been happening in the sector? 

• Between 2014 and the first quarter of this year, restaurants and food services has seen an increase of 19.2 percent in real gross value added.

• In the same short period accommodation increased by 22.3 percent.

This is a strong indication that profits are continuing to grow at a brisk pace.

There have been a lot of good things happening in the hospitality sector – except for wages.  CSO data only goes back to the first quarter of 2008 but it shows that wages and weekly income have stagnated despite the recovery in profits and enterprise activity.

• Between 2008 and 2016 the hourly wage has fallen marginally – from €12.51 to €12.48 per hour

• In that same period average weekly earnings have fallen from €334 to €321, as weekly working hours have fallen.

Profits are over 40 percent above their pre-crash levels; wages have fallen.  That tells a tale.  Here’s another story. 

Eurostat data differs from the above CSO number in that they include employers’ PRSI and other labour costs, using a different methodology (though the Irish data would have been supplied by the CSO).  We find that employee compensation (or labour costs) in the Irish hospitality sector rank 12^th out of the 14 EU countries. 

• Irish hospitality wages are 20 percent below the average of the EU-15 countries (Portugal not reporting).

• They are 26 percent below one of our peer groups – Northern and Central European economies (which excludes the poorer Mediterranean countries).

• And they are 36 percent below other small open economies (Austria, Belgium, Denmark, Finland and Sweden).

Compared to their fellow workers in other European countries, Irish workers in the hospitality sector are ultra-low paid.

And what are the employers’ response to all this?  The Restaurant Association of Ireland has not only called for a freeze on minimum wage increases for five years; they are boycotting the Joint Labour Committee which was re-established by the last government in order to allow collective bargaining across the entire sector.  In a similar vein, the Irish Hotel Federation is also boycotting the Joint Labour Committee.  In effect, the employers’ are thumbing their nose at the state’s collective bargaining machinery, amassing profits while depressing wages.  How’s that for responsible social actors?

Hopefully, the Low Pay Commission will take note of all this and respond accordingly.  The chefs, floor staff, cleaners, clerical staff, bartenders – these are the men and women that make our hospitality sector work. 

The least, the very least they should get is a living wage.

Two Sides of the Same Dismal Coin

Does the Brexit vote, with all its contradictions and incongruities, represent an anti-establishment vote? 

The Brexit campaign was a struggle between two wings of the Tory party (including its breakaway, UKIP).  Boris Johnson, Michael Gove and Nigel Farage on one side – representing small and nativist capital; David Cameron representing large and finance capital.  In essence, it was two establishments warring against each other as the chronically obstreperous alliance within the Tories broke down into a fight over ascendency and personalities.  These two ‘establishments’ set the choice and the parameters of the debate.

Ultimately, the Johnson/UKIP wing was successful as it proved adept at exploiting many people’s intolerable economic circumstances and profound experience of powerlessness, projecting these on to the EU (not to mention outright appeals to an ultra-nationalism and anti-immigrant prejudice described by London Mayor Sadiq Khan as ‘Project Hate’).  This was a remarkable feat given that the Johnson/Gove/Farage troika were the chief cheerleaders of home-grown British austerity and the neo-liberalism that dominates EU policy.  The proportion of the Brexit vote that was a legitimate vote against austerity and powerlessness was effectively co-opted by right-wing elitist forces.  So, yes, the Brexit vote can be interpreted as two-fingers to the establishment.  But only if it is remembered that those two fingers are attached to the hand of forces that Paul Mason rightly claims want to turn Britain into a ‘Thatcherite free-market wasteland’. 

So how do we read this?   As Thomas Fricke points out, the overwhelming majority of blue-collar workers supported the far-right Freedom Party in the recent Austria presidential campaign.  Does this constitute a vote for far-right values?  Or it is a vote for the only outlet left to express opposition against alienation, loss of power, loss of identity – a vote which represents the powerlessness that working people experience throughout Europe and not just Britain.

In any event, what was the argument for Remain?  To stay in an undemocratic and, at times, anti-democratic EU (witness the attack on elected Governments in Italy and Greece)?  An EU which demands adherence to irrational fiscal rules that impoverishes huge swathes of Europe?  An EU which has botched a common immigration policy?  An EU based on a flawed currency design overseen by a flawed central bank.  Distant, centralised and bureaucratic – as one leading German insider put it - a bloodless technocracy:  very difficult to mount an argument for that.

Cameron – and his wing of the Tory party – was even more compromised; having made a virtue for years of attacking the EU, detaching the UK at every opportunity; all in the name of maintaining ascendency over the nativist Troika, or at least an uneasy truce.  When this broke down, when battle commenced, arguing for Remain was a circle too big to be squared.  Labour and progressives were reduced to either highlighting the dangers of Brexit (‘it’s bad now, but it could get worse’ – hardly a positive message), or producing abstractions such as ‘remain and reform’, without detailing what those reforms might be or if they were even possible. In truth, progressives were never going to win a battle that was being fought out between the two wings of the Tory establishment.

Ultimately, the anti-establishment vote merely ended up reinforcing an establishment which is seeking more ‘freedom’ from EU restraints, to exploit labour (Jeremy Corbyn’s ‘bonfire of workers rights’), to degrade social and environmental rights.   The Brexit victory risks giving even more oxygen to forces that are not just intent on undermining the EU; they are intent on returning to borders and currencies and narrow nationalist ideologies.  These forces are the greatest threat to European cohesion and cooperation.  It was not the progressive parties who welcomed the Brexit result.  It was Marine Le Pen.  It was Geert Wilders.  It was Donal Trump. 

A friend of mine said she wished there was another vote she could cast – neither Remain nor Leave.  This sums up the progressive dilemma which struggled to find some traction, some positioning in the referendum – struggled because there wasn’t a progressive option.  In the Irish Republic we are a little more fortunate as it is highly unlikely we will be faced with this choice.  Support for the EU is very high.  A recent poll showed 90 percent support for remaining in the EU and even after years of recession, austerity and bail-out economics, and 87 percent believe the EU has done more good than harm.

Nonetheless, we shouldn’t be sanguine.  We are not an island afar off.  A Europe that descends towards disintegration and far-right ascendency, mainstream paralysis and progressive atrophy will wash over our shores and no amount of corporate tax appeasement will prove an adequate flood defence.  The EU orthodoxy has no prescription.  Its knee-jerk reaction to the Brexit result has been to call for greater integration.  This ignores the swelling of disenchantment across Europe over the direction of the EU. 

While the UK (and Greece) may be at the more extreme end, there is a plurality in each of the countries polled for greater national powers.  This is not some narrow nationalist demand; it is a legitimate demand for more democracy, more popular participation and control in decision-making which, in current circumstances, can only be achieved at national level. 

However, this is the conundrum:  monetary unions, without fiscal and political union, do not survive for very long.  A central bank needs a central government.  If the Euro is to survive, greater integration is needed.  Yet greater integration is becoming more and more politically problematic.  How can this circle be squared?  Can it?  What are the options?  Or do we get mired in a ‘business-as-usual’ mode, clasping a copy of the Five President’s report, oblivious to everything outside the bubble?

Only the European Left is capable of confronting this issue.  Despite the complicity of many progressive sections with austerity and the neo-liberalism of the EU, its ideological roots put it in opposition – or at least in contra-distinction - to current economic and social policies which result from the current institutional configuration.  Only the Left is capable of taking on the nationalism of the Far Right and the centrifugal forces that would return us to borders, through the promotion of an ever deepening democracy.

However, the European Left has to be honest itself.  It is divided, politically exposed, and intellectually inert.  If there is a way out of this, it will have to do two things:  first, end the division – between social democracy, the communist tradition, progressive greens and the popular anti-austerity movements.   Progressive unity is vital.

And this should lead to the second task – to engage in a revitalised discourse together, connecting with the working class and progressive  constituencies, to re-imagine Europe and our relationship with each other; all pointing to new European re-foundation.  In this way we can move beyond a leave/remain divide determined by conservative elites and towards a more authentic divide:  between more or less democracy.

It’s either that or expect the Brexit vote to be the first step down a road that will have an unhappy destination for all Europeans.   

Bin Charges: From Private Circus to Public Service

The bin charges debacle is spiralling into chaos.  We have areas where two or three or four bin companies operate and other areas where companies are threatening to leave; escalating charges becoming an intolerable burden on many low-income households; considerable price variations between counties; off-shored private companies pursuing wage suppression to increase profits; considerable illegal dumping; charges for recycling which dis-incentivises a social good; and on and on.  This is not a waste management policy; it is a circus.

The Minister is set to introduce a freeze on bin charges which would at least give us some breathing space.   The following sets out an alternative outline to waste management.  This is not a hard proposal; others will come up with better ideas.  However, it is clear that the current situation is not sustainable – from an environmental, economic, and social perspective.

1.    A Public Service

Waste collection should be a public service.  In the late 19^th century great strides in public health came from water, sewerage and waste collection services; all provided as a public good.  We should return to this principle.  This does not necessarily mean that waste collection would be provided directly by the local authority or some other public agency (but it could – see below).  However, rather than relying on market-forces to provide the service or set the charges, local authorities should re-assert active management and control of waste collection.

2.    Service Provision

Each local authority would have the choice to either:

(a)    Provide waste collection directly, or

(b)    Franchise out the waste collection to a single operator in a single area. 

The latter would, at least, end the competition ‘within the market’ and replace it with competition ‘for the market’.  Companies could bid for areas but they would have to comply with a strict protocol covering service quality and workplace relations.  However, under this system they would not set the rate or collect charges.  They would merely bid on the cost of providing the service.

As a complement, or an alternative route, a national public agency could be established which would act on an agency basis for local authorities.  This agency would advise local authorities on costs, help roll out a directly provided waste service (e.g. local authorities could be facilitated to combine to achieve economies of scale and efficiencies) or manage the franchising administration.

3.    Financing Service Provision

It is difficult to estimate how much households nationally spend on waste collection.  Prices are higher outside Dublin – in some cases considerable so.  In 2006 the Ombudsman showed average yearly charges ranging from €200 to €400 a year.  The CSO’s Household Budget Survey – from 2009/10 – shows a national average of approximately €200 per year per household.  This should be treated as a proxy as it includes sewerage and skip hire but these make up only a small expense relative to waste.  In any event, the distribution of costs would be approximately the same.

Unsurprisingly, the distribution of costs is highly regressive – given that waste charges are not related to income.  The lowest 10 percent income cohort pays more than five times the amount as the highest 10 percent – measured as a proportion of disposable income; and nearly three times the national average.

We could bring the entire cost be brought back into general taxation with free provision of service.  There are two potential problems with this.  First, is the opportunity cost:  with so many areas crying out for resources (housing, health, education, investment, social protection, a range of public services), the new expense of free waste collection would crowd out spending in other areas.  Second, is the lack of recycling incentives (though this is more contestable).

Nearly everyone is required to pay for a service – those in work and those reliant on social protection.  So the issue isn’t so much charge vs. free; rather it is regressive charge vs. progressive charge.  Therefore, a fractional levy on all income, including capital income (e.g. 0.3 percent) deducted at source should be sufficient to fund a public waste collection service.  Some may argue that those on social protection shouldn’t have to pay the levy – but they pay for highly regressive charges already.  A fractional levy would yield them considerable savings.    All households with a combined income of approximately €80,000 would be better off – that is, most households.

What about recycling?   It is often asserted that pay-by-weight incentivises recycling.  This is never quantified but currently Ireland is an EU leader in recycling.  We have the third highest recycling rate, behind Slovenia and Germany; and are well above the EU average.  And that’s with only 20 percent of households paying on a pay-by-weight basis.

If pay-be-weight is brought in, it could be done on the basis of charging for ‘excessive’ waste.  In other words, each household would get a ‘waste-free allowance’.    But incentivising recycling is more than just about ‘sticks’; there should be carrots as well.  For instance, in the Dublin North Inner City the bring centre closes at four and is not open at the weekend – hardly helpful for households in full-time work.  When visiting other European cities, one sees small recycling banks in a number of places; in Dublin there are relatively few.

And if one is concerned with the ‘polluter pays’ principle, the household is merely the final user in a chain of waste.  In Germany, supermarkets are required to have recycling banks on site, so that households can get rid of much of the packaging before leaving. 

The point in all this is that levies and pay-by-weight charges would be set by public authorities which would go to pay for the price of either directly provided or franchised services.  Appropriate waivers or additional allowances could be granted to households with special needs.  These wouldn’t be set by private companies but democratically accountable officials in a public market.

4.    Beyond Just Picking Up Waste

There are three further potential benefits from this system.

First, the entire sector would be subject to a Sectoral Employment Order (SEO) which would regulate pay and working conditions.  Since the privatisation of waste services, wages have been driven down by employers.  A SEO would ensure that competition for the market is not based on squeezing labour but is based on service quality. 

Second, if a national public agency was set up, they could take charge of managing landfills and waste chains.  The agency could maximise renewable energy sources from landfill gas and waste-to-energy projects – so that we get an environmental (and commercial) return.  If the agency established an R&D unit, this could research renewable projects, best-practice in waste management, recycling initiatives, etc.

Third, all private companies that bid for franchise contracts would be required to publish their annual financial statements – just like so many other businesses are required to.  This would provide commercial accountability.

* * *

This outlines one model.  There are other models.  If the Minister announces a charge-freeze, we have a year to work out a new model.  And there is a strong argument that any model that emerges from such discussions should be grounded in waste collection as a public service.

The Report

The Committee on Housing and Homelessness have produced their report.  It is a credible piece of work, especially given the short-time frame and the challenge of agreeing recommendations on an issue with numerous complexities.  This is not to endorse every recommendation or agree that the report has addressed every issue.  But for future purposes, the Committee has shown that, with motivation and a sense of urgency, parliament can respond in a timely fashion rather than the usual ‘bury-the-issue-in-committee-and-hope-it-goes-away’ approach that has marked past practice.

Much of the media coverage has, understandably, focused on the social housing target of 50,000 but there is a larger narrative which Eoin O’Broin, TD refers to:

‘There is little doubt that the final report represents a real step change in the direction of housing policy.  It recognises the failure of the market to meet the housing needs of huge sections of society. It advocates a significant level of state intervention –homes, finance & regulation- in the housing system. It is based on principles of social justice and fair access to housing.’

In this post I want to focus on two inter-related issues:  financing the social housing programme and the private rented sector. 

How Will We Fund It

The Committee’s social housing target will involve a substantial increase in state spending.  How do we pay for this?

The Committee has few concrete suggestions on this score though it calls for exploration of various ‘off-balance sheet’ financing vehicles (i.e. it won’t count on the Government’s books, it won’t add to the deficit or debt).  It further calls for engagement with the EU Commission in order to seek ‘flexibility’ in the application of the fiscal rules – that is, please don’t apply the rules as they are supposed to be supplied (I will forego the opportunity to point out that the majority of TDs on the Committee actually campaigned in the Fiscal Treaty referendum for those same rules).  If flexibility were achieved, funds from NAMA and the credit unions could be tapped.

The Irish Times reports:

‘The committee’s call for the Government to urgently seek “flexibility” from the commission on the fiscal rules so the State can pay for desperately needed housing underscores just how unsure the stakeholders are about whether and how the State can provide the housing for its people.  In this, Coppinger is not alone in suggesting a conversation is needed on whether EU fiscal rules should be broken “to house our people”. . . Whether . . . (the Committee’s proposals) can all be adopted given EU fiscal rules, or whether those rules need to be broken given the scale of the crisis, remains to be seen.’

That would be an interesting conversation.  However, these are not just EU Fiscal Rules.  These are Irish rules, written into the constitution as per a democratic vote by the Irish people.  To break the rule – by borrowing above what is allowed by the rules – would mean defying the constitution.  This would not survive a court challenge.  

Short of another referendum to repeal the Fiscal Treaty (hardly a likely option, especially in the short-term) the only option would be to negotiate a derogation; that is, ‘flexibility’.  There are strong reasons to believe the Government could be successful. 

• First, we have an emergency which is provided for in the fiscal rules, though a strict interpretation might limit the definition of emergency to natural disasters.

• Second, we have resources:  cash held by NAMA and the Strategic Investment Fund; Unite the Union has called for using the proceeds from the repayment of the bank bail-out to be used to ‘kick-start’ a major social housing drive.  Therefore, this expenditure would not add to the general debt (indeed, it would reduce it through the tax revenue generated by the increased activity). 

• Third, this expenditure would be a once-off (you can only spend savings once) and, so, would not impact on the structural deficit which is the defining measurement in the fiscal rules.

However, the Government’s tax cutting programme could undermine this flexibility.  If there truly is an emergency (and there is), then cutting taxes give all the wrong signals.  This also goes for cutting property tax (postponement of the re-valuation, cuts enacted by local authorities) and the list of 15 property-related tax breaks ‘floated’ in the Report, as identified by Ruth Coppinger, TD. Why should the EU Commission grant flexibility if at the same time we are undermining our own flexibility to finance the resolution of this emergency.

An end to the tax-cutting programme would seem to be a prerequisite to negotiating flexibility over the rules.

The Private Rented Sector

The Committee produced many positive proposals for the private rented sector: rent certainty (indexed to the Consumer Price Index), increases in rent supplement and Housing Assistance Payments, and a strengthening of tenants’ rights and protection from eviction.

However, there is a major gap in the Report:  the current high levels of rent.  The Committee showed that rents in Dublin city range between €1,400 and €1,600 per month while the largest annual increases occurred outside Dublin, with Cork coming in at over €1,000 per month.  This requires a policy of substantial rent reduction.

Some argue that increasing supply will resolve this issue but the market can work in strange ways, its wonders to behold.  For instance, the current rent levels could be constrained through indexed rent certainty.  But this will only benefit those who are already tenants (and still saddle them with ultra-high rents.  You would still have a market for new entrants where supply and demand could remain out of balance; therefore, new accommodation coming on stream would still face upward price pressure. 

Further, the constraints put on the rental market through the Committee’s sensible proposals may actually lead to insufficient supply because investors many not deem it profitable enough to enter or remain in the market.  The state can’t force people and institutions to participate in a market; it can only ‘incentivise’ them through tax-breaks which can be economically inefficient. 

This leads us to a simple proposition:  the market rental sector is too important to be left to the market.  The Committee goes some ways towards acknowledging this through discussion of cost-rental models:

‘In a cost rental model, a housing provider raises the finance to provide accommodation and charges rents that are sufficient to cover capital costs, as well as on-going maintenance and management costs.’

The Programme for Government is committed to rolling out this model, though the Committee also notes that there are no targets.

However, a cost-rental model could be undermined if the vehicle providing this model is profit-based – through public-private partnerships (PPPs).  The Committee used the Society of Chartered Surveyors Ireland deconstruction of the cost of a private house and found that profits make up 25 percent of the cost of building the house (including site development) while financing, or borrowing, makes up 13 percent of construction cost.  Nearly 40 percent is taken up with profits and borrowing.

If the cost-rental model were delivered through public housing associations as is done in many other European countries (and it is disappointing that the Committee didn’t investigate models used in Continental countries), the level of profit would fall dramatically; there would still be a need for a sinking fund.  Further, the cost of borrowing would fall. 

A more radical direction (radical for Ireland, mainstream for other countries) is to create a ‘unitary market’ in the rental sector.  This would ‘unite’ the social and the market-rental sectors into one system, with no distinction between those on the waiting list and those in work but are finding it difficult to access affordable rental accommodation.  I discuss this in detail here.  The advantage is that it not only reduces rental costs for a large swathe of the population, it has the potential of being ‘off-balance’ sheet for both social and affordable housing – just as it is in other European countries.

This would require a new type of housing development and a new way doing rental business.  In this regard, the Workers Party proposed Solidarity Housing model is one that could be developed as part of a public sector-led, unitary market.

Progressive Opportunity

The one thing that shouts out from the report is that the housing crisis cannot be solved by the private sector or market models.  This is fertile ground for progressives to not only pursue alternative public market models such as public housing associations but alternative home-ownership models such as limited equity cooperatives.

It is unfortunate that the Committee is not continuing (am I right in this?).  It could have developed many of the proposals in the report that are only sketched in outline and kept the debate alive through more submissions, interventions, hearings, international comparisons and alternative models.

Therefore, progressive parties and independents should take up this work – monitoring the Government’s compliance with the progressive aspects of the report and developing it further.

All in all, from a progressive perspective, the Committee’s report has been a decent day’s work.  Now, let’s claim it as our own.  This is the first step to extending and deepening the debate over housing.

The Decade Long Income Recession

When is an economy out of recession?  When it returns to and exceeds the level at which it entered the recession.  The economy exited the recession in 2014 – the year in which GDP and GNP exceeded the pre-crash levels.  Seven years of recession but now we’re on the way; at least until the next slump.

But this doesn’t tell the full story.  What about people’s incomes?  Here the news is not so good. People’s incomes are still in recession.  The CSO provides data on gross income and disposable income (after taxation) per capita.  This data only goes up to 2014.  I have stretched this out to 2017 based on ESRI estimates – so beyond 2014, these are just projections. 

In 2014 – the last year we have CSO data – incomes were well below their peak:  gross incomes were 11 percent below 2008 levels while disposable incomes were 15 percent below. 

Based on the ESRI projections, gross incomes will not recover pre-crash levels until 2017 while disposable incomes will not recover until 2018 – a full decade of incomes recession.

Some will argue that incomes rose too high, too fast in the years preceding the recession.  It certainly was the case that the entire economy including public finances and living costs were inflated by property boom.  But even in this, real wages in the services sector rose at about half the national rate and in real nominal terms experienced the same growth as other EU-15 and sometimes less.  In many instances, wage rises were going on rising childcare costs, health insurance, etc.  The headline figures don’t tell the full story.

Of course, the above is just the average.  It doesn’t tell us anything about the distribution of incomes – which groups have lost out, which groups have managed to protect and even increase their incomes.  We can get some insight into this – but only up to 2014.

While it was a bit of a roller-coaster in the early years of the recession, since 2011 the top 10 percent income group have steadily increased their share of total national income.  In 2014 – the year that average incomes started rising again – growth for the top 10 percent accelerated.  Currently, the Irish top 10 percent income group takes the fifth highest amount of national income in the EU-15.  We will have to wait on data to see if this is a trend with traction but so far the signs are not good.

The Irish political economy seems to have a problem in translating economic growth into incomes. While in 2017 gross incomes will only be marginally above 2008 levels (2.6 percent), real GDP levels will  be over 20 percent higher (over 15 percent for GNP).   As we proceed to the end of the decade, incomes should start to catch up. 

But the big question is how equally the growth in those incomes will be distributed.

Cue the new Government.

Rural Stagnation in the Marketplace

Some commentators have recently challenged the assertion that there is no recovery outside Dublin.  Dan O’Brien does up the numbers and show, with the exception of the West and recently the Mid-East, jobs growth has been robust outside Dublin.  Stephen Kinsella made a similar point in a recent Sunday Business Post article.   What they point out is correct.  However, I want to look under the hood and see in what sectors jobs are being created.

In this post I will focus on the market economy.  This is essentially the private sector which contains almost all traded sectors (that is, almost all sectors that trade internationally).  This excludes non-market sectors:  public administration, education, health, arts/leisure and the agricultural sector.  These are called non-market because of their high reliance on public sector activity or public subsidies.  There are few traded goods and services in this sector.

What is the breakdown between Dublin and outside Dublin when it comes to the market economy?  Let’s first look at the total economy – both market and non-market sectors.

Over the last four years there has been more job creation outside Dublin than in the capital city (though we have to remember that the CSO undertook an adjustment in their sampling base which saw agricultural employment adjusted upwards significantly, though it didn’t necessarily rise in the economy).  In the last year, however, Dublin has benefited from most of the job creation in the state – 57 percent of the jobs created were in Dublin.

When we turn to the market economy, however, a different story emerges.

Whether in the last four years or the last year, Dublin has generated approximately two-thirds of jobs in the market economy.

Outside Dublin, even though 70 percent of the total labour force resides there, only a third of jobs were generated.  That is a severe imbalance.

Let’s drill down one more time and examine the amount of job creation excluding construction.  This is not to suggest that construction isn’t an important sector; and after the hit this sector took in the recession there will be a rise as the recovery sets in.  But over-reliance on construction, as we know to our cost, is unhealthy.  At the height of the boom – 2007 – construction employment made up 13 percent of all market economy employment in Dublin; outside Dublin it made up over 21 percent.

When we exclude construction, Dublin has generated 80 percent of jobs in the market economy – leaving the rest of the country well behind.

Let’s put an actual number on this.  In the last year only 6,700 jobs were created outside Dublin in the market economy when we exclude construction.  Let’s run through the sectors this includes:

Mining * Manufacturing * Utilities * Wholesale & Retail * Transport & Storage * Hotels & Restaurants * Information & Communication * Financial Services * Professional, Technical & Scientific * Administrative and Support Services

In all these sectors only 6,700 jobs were created outside Dublin last year.  That’s not a great trend even if the heading upwards in the last year.  And this is outside Dublin – not an urban/rural divide.  Outside Dublin there are large urban areas such as Cork and Galway and substantial city/towns such as Drogheda and Wexford.  We don’t have the data available to breakdown how much job creation is occurring in strictly rural areas but it is reasonable to assume that it is proportionally lower than larger cities and towns. 

In other words, we may be seeing an actual decline in the rural areas leading to higher unemployment, emigration (internal and foreign) or withdrawal from the labour force.  This, combined with an ageing population and lower birth rates, could spell trouble for large swathes of the country.

None of this is surprising.  Market-led job creation will see a trend towards urbanisation as capital and labour are drawn to clusters (IFSC and digital companies) and areas of better infrastructure such as telecommunications.  If the Government is serious about a rural or regional strategy it will have to mobilise capital and enterprise activity through public sector mechanisms, which is not the same as the public sector. There is only so long an area or region can rely on non-market services and construction.   However, if the Government relies  on grants and tax incentives and ‘enterprise zones’, to grow rural economies they will be disappointed; the problem is that there is less and less capital to incentivise in these areas.

We will continue to see many areas outside Dublin lag the capital city and other major urban areas.  And this will be costly affair – both in terms of public resources; but most of all, the large scale squandering of national and regional assets. 

What is Wrong with Irish Business?

Here is one part of a presentation I made to the Nevin Economic Research Institute’s Labour Market Conference held earlier this month in the University of Limerick.  This may seem a bit abstract; it certainly doesn’t seem as urgent as other issues such as health or housing.  However, this has far-reaching implications for long-term economic growth, household prosperity, and business competitiveness.  

There is a narrative about Irish indigenous enterprise (which I shall simply refer to as Irish business) which has been championed by many, notably Dr. Conor McCabe, that Irish business and capital has historically focused on the finance and property sectors, content to service foreign-owned capital but which has, with some exceptions, avoided the high-value added sectors upon which we could build a strong Irish export base.  The following adds to this analysis by analysing what market sectors Irish business is active in. 

Market sectors exclude agriculture and ‘non-market’ service (e.g. public administration, health, education, recreation & leisure).  The following compares Ireland with the EU-15 and our peer group – other small open economies which, like us, have small domestic markets and are reliant on exports. 

Irish business is a poor performer when it comes to manufacturing.  Whereas one-in-five European workers in the indigenous sector are employed in manufacturing, it is only 10 percent here.  Unfortunately, the EU data is, so far, limited to the period between 2008 and 2012 so we are looking at many countries at the bottom of the business cycle, especially Ireland.   Still, Irish manufacturing is weak.

Why should this matter – if we can excel in other sectors?  Professor Ha-Joon Chang puts it this way: 

‘. . .  the manufacturing sector is still – and will always be – the main source of productivity growth and economic prosperity. It is a sector that is most open to the use of machines and chemical processes, which raises productivity. It is also where most research and development, which generates new technologies, is done.

Moreover . . . it raises productivity in other sectors, mainly because the services sector is using more advanced inputs produced in manufacturing– computers, fibre-optic cables, routers, GPS machines, more fuel-efficient cars, mechanised warehouses and so on.  Knowledge-intensive services sell mostly to manufacturing firms, so their success depends on manufacturing success. ‘

Manufacturing’s contribution to the Irish economy is, per employee, considerable.  Using Forfas data – which is based on exporting companies – direct expenditure in the manufacturing sector (total wages plus Irish materials and services purchased) came to €170,000 per employee.  In contrast, direct expenditure in the traded services sector was €93,000 per employee.  Manufacturing has an 83 percent higher impact in the economy per employee.

Unfortunately, the total size of the Irish manufacturing is small which limits this benefit. 

However, there are other sectors where Ireland performs strongly – and these, unfortunately, are sectors which are low-wage and low value-added.

Irish levels far exceed the proportion in other European countries. Indeed, over 17 percent – or more than one-in-six – in Ireland are employed in hotels and restaurants.  While it is understandable that this sector would be higher than our peer group (such as Finland) given greater tourist numbers, there is an over-concentration in Ireland.

For instance, Spain, Greece and Italy all have higher levels of tourism as measured by nightly accommodation occupancy per capita, than Ireland (between 11 and 21 percent higher), they have between 9 and 12 percent of their total market employment in working in the hospitality sector.  Compare that to Ireland’s 17 percent.

This concentration in employment is mirrored in business investment.  In the EU-15, investment in the combined hospitality and wholesale/retail sectors makes up 15 percent of total indigenous investment; in other SOE countries it makes 12 percent.  In Ireland it makes up 20 percent (in 2008, it made up 25 percent).

Here’s a little factoid to chew on:  in 2008, there was more Irish investment in the hospitality sector than in the manufacturing sector. 

 This raises important questions.  How can we generate economic wealth (e.g. value-added) if indigenous business is over-concentrated in the hospitality and retail sectors?  How are we going to generate well-paying jobs, given these sectors are low-paid?  How are we going to build a strong Irish export platform as distinct from the modern, foreign-sector? 

It also raises questions regarding the Living Wage.  It is easier to introduce a Living Wage in an economy where the traditional low-paid sectors make up a smaller proportion of the indigenous sector; where any price rises can be absorbed by consumers working in higher-paid sectors such as manufacturing.  It is harder when those low-paid sectors make up such a high proportion – approaching 50 percent – of total employment as it does in Ireland.

We hear a lot about Irish business – which is sometimes conflated with foreign-owned firms.  We hear claims that the indigenous needs better tax treatment (a corporate tax rate of 12.5 percent isn’t good enough?  Employers’ social insurance at half the level of other EU countries isn’t good enough? ).  We read stories about Irish entrepreneurs.

What we don’t get is a fact-based analysis of the state of Irish business –that it is concentrated in low-paid, low-value added and - in the case of wholesale/retail - non-traded, or non-export, sectors.

Hopefully, the incoming Minister is aware of this flaw.  Hopefully.

 

Bleak Business

The Programme for Government has provision for cutting inheritance tax.  This is bleak business.  Cutting inheritance tax will be a bonanza for high-income groups.  Welcome to the new politics, inseparable from the old politics.

The Government proposes to increase the tax-free threshold from the current €280,000 to €500,000.  The regressive impact can be seen from this simple example.  I inherit €500,000.  Currently, I would pay 33 percent on the amount exceeding the threshold; that is €220,000.  My tax bill would be €72,600.  That is an effective tax rate of 14.5 percent.  That’s not a bad deal (and arguably already too generous):  I inherit half-a-million Euros and keep 85 percent of it after tax.

Under the new proposals, I would pay nothing. 

There are many arguments for cutting inheritance tax but the most unimpressive is that it would somehow benefit low and middle income earners.  The fact is that most people don’t have even the current threshold to give away in an inheritance. 

The median net wealth (wealth after debts) for those aged over 64 years is €202,300.  This means that 50 percent of this older-age group has net wealth less than this amount.  That includes both financial and real (property) wealth.  It is reasonable to assume that a significant majority have net wealth holdings of less than the current threshold of €280,000.  Of course, not all disponers come from the older-age group but probably a majority does.

When we look at the national numbers we can get data on income distribution.  The following table shows the median net wealth by quintile – or tranches of 20 percent.

The top 20 percent income earners have a median net wealth of €207,000 (again, meaning half of this group have a wealth of less than this amount).  Throughout the state, half of all households have a net wealth holding of less than €103,000. [Note:  the lowest income group has a median net wealth holding higher than the 2^nd quintile; this can be explained by the fact the lowest group would contain older age groups reliant on state pensions but own their houses).

Based on this, it is reasonable to assume that raising the inheritance tax threshold will have no impact on a significant majority of households.

Even if a household has a much higher level of wealth than the average, raising the thresholds may have little impact.  I may pass on €500,000 on an inheritance but if I divide it equally between my two children, then they won’t be liable to tax under the current threshold.

Some argue that the gift/inheritance shouldn’t be taxed because it has already been taxed.  This is debateable for two reasons.  First, it is taxed in the hands of the recipient who, by definition, is only receiving it for the first time.  Second, income is subject to multiple taxes (or double/triple, etc. taxation).  I pay income tax on my wage.  But I also pay USC on my wage; and PRSI.  After tax, I continue to pay taxes – VAT, excise taxes, levies (ATM withdrawals, etc.).   And the after-tax income that I spend in the shops is also subject to taxation; corporate tax for the business and income taxes for the employees.  And so the cycle continues.

Still others have referred to the situation whereby a son/daughter inherits a house – but is forced to sell the ‘family home’ to pay the tax bill.  Is this just anecdotal?   I receive a house in an inheritance.  If I already own a home, I have inherited a second home (adding substantially to my wealth).  I can either rent out the house, earning income; or I can sell it.  Either way, I receive a substantial gain – even after the tax bill. 

If I rent, I can move into the house with full equity and increase my income through reduced rent payments.  The tax bill is a once-off, my rent reduction is permanent.  This is not to say there are not issues regarding inheritances and payments – I look at some of them below.  But gaining a house through inheritance is a gift of a substantial asset. 

The cut in inheritance tax is estimated to cost €75 million, not a trifling sum.  However, the real issue is that ever since estate duties were abolished and replaced by the Capital Acquisitions Tax, inheritance tax revenue has been subdued.

There is a strong argument for an increase in inheritance and gift taxes, especially give these tight fiscal times.  This argument gains force when we consider that this is a tax on unearned income.  We tax unearned income so that we don’t have to impose that amount on earned income – a PAYE wage or the income of the self-employed or a business.  Economic efficiency would see higher, not lower, taxation on unearned income.

There are three issues that could be considered in the context of a more progressive inheritance tax regime.  First, is the issue of inheriting a house; currently, there is an implication that a child who is living in the ‘family home’ can only inherit tax-free if the parent is not living in the house (in other words, the parents have two houses).  There are exceptions for those caring for a parent.  If there is a problem in this area it should be cleared – so that a child living in the house, with conditions, is not barred because they share the house with the parent.

Second, consideration should be given to extending the situations whereby the inheritance tax can be paid over 60 months. 

Third, prior to 1999, there are varying rates for inheritances – ranging from 20 percent to 40 percent.  This added a progressive element to the tax.  Reintroducing a low rate and top rate could also be considered.

But if we entering into an era of ‘new politics’ then the Government should bring forward evidence as to the distributional impact of cutting inheritance tax – who will gain and by how much?  Is this a transfer to high-income groups from the rest of us?

In any event it will be interesting to see how the Government squares this commitment to cut inheritance tax with a commitment in the Government programme to poverty-proofing new policies. 

I suspect it can’t be done.