I will be on a holiday break until mid-August. Hoping everyone will be able to enjoy a break.
We should not under-estimate the impact of the Eurostat ruling. It completely removes the rationale for Irish Water and the water charges. After Eurostat, there is no policy, no direction, no strategy. Ministers will downplay the ruling with a ‘move-on-nothing-to-see-here’ rhetoric, punctuated by a ‘there-is-no-alternative’ but all this does is expose the inability to grasp how fundamentally the landscape has changed.
Eurostat was never going to rule in any other way than it did. The Government admitted this last April in the Spring Statement when it put all water expenditure back on the books in its projections up to 2020. The fundamental issue is not whether enough people paid the charges. It was the ‘market corporation’ rule: did Irish Water look like and act like a commercial company in a market economy? Eurostat said no – and this is all down to the Government’s headless-chicken response after the mass Right2Water protests last October and November.
The Government capped charges, froze them until 2018, and introduced an indirect subsidy through social transfers (the water conservation grant). The lack of ‘economically significant prices’ (i.e. charges that reflect the cost of producing water) and government control led Eurostat to rightly label the whole exercise as a mere reorganisation of non-market activities. Given all this, what company in the world could be considered a market entity?
The main rationale for the Government’s water policy was not charges; this could have been introduced as a stand-alone revenue-raising measure. Nor was it the creation of a single water authority; that could have been done as a public agency rather than a corporation. The over-riding issue was to take the estimated €5.5 billion of desperately needed investment over the next seven years ‘off-the-books’. Everything flows from this: to take investment off the books you need to create a corporation, you need to charge a ‘market-like’ rate for the service.
Remember those lectures from Government Ministers and commentators with that ‘common-people-just-don’t-understand’ attitude? Without the investment there would be water shortages while we would all be walking through sewage. And the only way to get this investment was through Irish Water and charges.
Eurostat has killed that narrative. Investment will be on –the-books. With that foundation removed, the edifice – and the rationale for that edifice (the corporation, the charges) – crumbles.
What now? Whatever they say in public Ministers must know its game over. The only way to pass the Eurostat test is introduce ‘economically significant prices’. This would mean reverting to prices based on usage with no cap determined by an independent regulator. Is that likely? No, not with the potential to bring another 100,000 to 200,000 on the streets. The people didn’t win many victories during the austerity days; they won the battle over uncertain charges, PPs numbers and cut-offs. No political party is going to challenge that.
How do progressives react to this? The safe ground would be to call for the scrapping of the charges and the reform of Irish Water. Fianna Fail is already calling for that. Progressives can and must go further. We can’t effectively challenge the current ‘steady-as-it-goes’ Government approach with a ‘steady-as-it-went’ that dominated past policy. We need creative and innovative thinking that can not only address the issues but present an exciting, inclusive alternative to water supply and all public provision.
We need to increase investment to €600 million annually to modernise our infrastructure.
Water investment has been a bit of a roller-coaster ride. We are now slightly ahead of 1995 levels after peaking in 2008. We need to do better.
The New Fiscal Framework published by the Right2Water Trade unions shows how. Based on Government projections and modest increases in capital and wealth taxation (along with increases in the social wage), public investment can be doubled by 2020 to between €6 and €7 billion a year by 2020 with leeway to go further.
Prior to the crash, water and sewage investment made up 11 percent of total investment. Based on the New Fiscal Framework projections, water and sewage investment would easily rise to the needed €600 million. There are two points here:
Increasing investment is not a fiscal or economic issues – it is a political issue.
From Dog-Day Irish Water to World Class Public Agency
Irish Water should now be transformed into a new national public agency sans all the charges, billing, collection, and off-the-books machinations, save for current business charges. A working title could be the National Water Authority (NWS). A single water agency it can engage in national strategic policy while capturing the benefits of economies-of-scale. It is also less capable of being privatised since it doesn’t operate on a market basis charging for water. But we can go further.
These two measures would generate revenue over the long-term and, so reduce water and waste supply costs. But we can go further still.
And finally, how about a new democratic dispensation? If public enterprises and agencies are truly ‘public’, meaning ‘ours’, why shouldn’t there be popular elections of consumer directors to complement the election of workers’ directors on their boards? I will develop this in a subsequent post, but a democratic innovation could be ESB customers electing 2/3 consumer directors; ditto for RTE. So why not elect consumer directors’ on the new NWA? This could start to recapture the ‘public’ in public enterprise and agencies.
Progressives should take up the opportunity that Eurostat has given us – to radically rethink in new and innovative ways of how we do public business. In this way we can recapture the excitement of nation and economy-building that took place when people came out to offer cups of tea and cheer the ESB workers as they brought electricity to towns and villages throughout the country – pole by pole.
Pipe by pipe investment, conservation and renewable energy, a player on the international stage, incorporating new democratic inputs – we can transform our water utility from a dog-day corporation to a reinvigorated public agency fit for people’s purpose in the 21st century.
At the end of the day, Eurostat has done us a favour.
You might think that the fight against poverty would involve considerable resources, a mix of various social and economic policies and a lot of political will. Sure, you could do it that way but it’s a lot of work. Why not just reduce poverty statistically? Hundreds of thousands can be taken out of poverty with the stroke of an excel sheet – and all without breaking a sweat.
Every once in a while a Government spokesperson or some commentator will point out that Ireland’s at-risk-of poverty rate has remamined steady during the recession and compares quite favourably with European averages.
And on a surface reading it looks true. Irish at-risk-of-poverty rates were falling prior to 2008 and continued falling over the course of the recession. Irish rates are below that of EU-15 rates.
Yet, CSO and Eurostat data show deprivation rates in Ireland to have nearly doubled since the recession started. So how can we square rising deprivation with falling at-risk-of-poverty?
Deprivation rates are a subjective measurement; that is, people are asked whether they have suffered any or all of a list of deprivation experiences. In this respect, it cannot be independently or objectively measured. This doesn’t make it any less reliable or instructive.
At-risk-of-poverty, however, is a relative measurement. It doesn’t survey the actual living conditions of people. It makes an assumption: people are at-risk-of-poverty if they have income which is 60 percent or less than the national median income (median income is that point at which 50 percent earn above and 50 percent earn below). In other words, it is relative to the median. And this is where the problem starts.
In normal times, when there is stable economic growth and stable income rises, the relative measurement is fairly straight-forward and uncontentious. However, we can get perverse readings during abnormal times of falling growth and incomes.
The median income has fallen by 17.1 percent since 2008. Therefore, the poverty threshold has fallen (since it is relative to the median income). Let’s see what perversity this creates.
So, you’re poor in 2008. Your income falls. But now you are not considered poor. Why? Because national incomes fell faster than your income.
Ireland was the only country in the EU-15 (bar poor Greece) to experience a fall in median incomes and, so, the poverty threshold. For single persons, median incomes in the EU-15 increased by 7 percent; in Ireland it fell by 17 percent.
So to say that Ireland has not experienced an increase of poverty since the crash is technically correct but amounts to a statistical three-card trick.
Fortunately, there is another at-risk-of-poverty measurement that can give us a better insight. This involves ‘anchoring’ thresholds to remove the perversity outlined above:
‘To allow for these sudden fluctuations in poverty thresholds and in order to avoid misleading results in periods of rapid and general economic deterioration, Eurostat calculates the at-risk-of-poverty indicator anchored in time. This indicator keeps the poverty threshold fixed in real terms over a longer period of time and therefore controls the effects of a moving poverty threshold.’
In the following, the relative poverty thresholds are anchored or frozen at 2008 levels – the year the crisis broke. It’s as though the median income and the poverty threshold only increased by the rate of inflation since 2008. What do we find?
The picture looks dramatically different. We find that 25 percent of the Irish population are below the poverty thresholds frozen at 2008 levels (with only an inflation increase). It is well above the EU-15 levels. Relative poverty has increased by 64 percent, against a rise of 17 percent for the EU-15. Ireland had the highest growth rate in poverty, apart from Greece.
The rise in anchored poverty rates and deprivation rates are now more in sync.
The growth in deprivation rates (using Eurostat’s measurement) and anchored relative poverty mirror each other.
Arguing that poverty has not increased over the recession is based on a statistical illusion. The reality on the ground – and the reality when we use more appropriate measurements – is that poverty has increased and increased substantially.
So when you hear a Government spokesperson going on about how we have ‘protected’ people from rising poverty, know that they are just avoiding the hard work of actually fighting poverty – relying instead on eliminating poverty through a statistical sleight-of-hand.
One more example of official detachment from the real world.
The Nordic model, or at least the public services and income supports associated with that model, has got some airing largely owing to supportive comments made by the TDs who launched the new Social Democrats. Good. There is much to learn from the Nordic model and its emphasis on social solidarity and universalism; an emphasis which produces higher equality, less poverty and deprivation and more prosperous economies and societies.
But there’s a catch: there is little appreciation of the resources the Nordic model devotes to public services and income supports. It is substantial, well above Irish levels (light years above) with very high levels of taxation and, in particular, the social wage (employers’ PRSI) and indirect taxation.
Let’s go through some of the main spending and tax features to see just how much of a challenge we would face in moving towards this model.
To say that the Nordic model spends a lot on public services is a massive under-statement. Remember, this only refers to public services; it doesn’t include social protection payments (e.g. pensions, child benefit, unemployment benefit, etc.).
Ireland trails badly in expenditure on public services. In 2014, Ireland spent €30.5 billion on public services (all Irish comparative data uses a hybrid-GDP, adjusting for multi-national accountancy practices). What kind of increases would be necessary to reach the levels of expenditure in other Nordic countries?
Finland: we’d have to increase spending by €11.5 billion, or 37 percent, to reach their level – and Finland is the low-spend of all the Nordic countries.
Iceland and Sweden: Ireland would to increase spending between €13.6 and €14.7 billion to reach their levels, or between 43 and 47 percent.
Denmark and Norway: to reach these stratospheric levels, spending would to increase between €17.8 and €20 billion.
On average, public service spending in Ireland would have to increase by 50 percent – or approximately €15 billion to reach Nordic levels. That is an ambitious agenda.
Public Sector Employment
Given these high levels of expenditure, it is not surprising these countries have high levels of public sector employment. Ireland has approximately 370,000 employees in the public sector (including public enterprises or Government corporations). This is 17.4 percent of the workforce. In the Nordic countries that figure is much much higher.
We’d have to double public sector employment to reach Norwegian and Danish levels – approximately 350,000 more public sector employees. To reach Swedish levels we’d have to increase employment by 50 percent, or 182,000. Compared to ‘low-spending’ Finland we’d have to increase employment by nearly a third, or 119,000.
Not only is spending on public services generous, Nordic levels of income support are similarly substantial. Here are the levels of unemployment benefit a worker on €35,000 would receive if they were suddenly jobless. They are enumerated in purchasing power parities.
Norway: Irish levels would have to rise to €400 per week, or more than double the current payments
Denmark, Sweden and Iceland: Irish levels would have to rise to between €310 and €340 per week, or 65 to 81 percent higher
Finland: Irish levels would have to rise to €282 per week, or 50 percent higher
These rates will be phased out over a year to 18 months and, so, fall to a lower level. But this is the system of pay-related benefit. Imagine if you were an average paid worker made unemployed. You’d get €188 from the dole. If you lived in a Nordic country you’d get, on average €322 per week for the first year. Your living standards wouldn’t crash, the economy would benefit from your continued demand (automatic stabiliser) and you wouldn’t have to rush out and grab the first job, regardless of whether it matched your skill or life-expectation.
Supports for Elderly
Here is another difference between Ireland and the Nordics. This is the Eurostat category for old age expenditure which includes pensions, in-kind supports (e.g. home help, subsidised equipment such as walking frames), recreation and leisure supports, and specialist medical care. It doesn’t include general hospital costs.
Spending in Sweden and Finland on each elderly person is nearly doubled that of Ireland, with Norway close behind. The Danes spend nearly 40 percent more. Iceland looks strange – at almost half that of Irish levels. But this is due to their pension system which is based on mandatory occupational pension provision – not social insurance. This means payments are not attributed to state expenditure. But don’t worry about elderly provision in Iceland – they have the lowest percentage of severe material deprivation among the elderly in all of Europe: only 0.2 percent. In Ireland, it is 3.6 percent.
Paying for These Services
My, oh, my. How do the Nordics pay for all this? They are, of course, very highly-taxed economies but not in the way that is discussed in the popular debate.
The biggest difference with Ireland is the social wage, or employers’ social insurance (PRSI). Nordic employers pay extremely high levels of PRSI to fund public services and income supports.
Swedish employers pay nearly four times the amount of PRSI as Irish employers. Finnish employers pay close to three times the Irish levels while Norwegian employers pay more than double. There is no data for Iceland and Denmark doesn’t have a social insurance system (see below). If Irish employers paid the same rate as other countries this is the revenue it would raise:
Swedish levels: Irish revenue would increase by €13.6 billion
Finnish levels: Irish revenue would increase by €8.9 billion
Norwegian levels: Irish revenue would increase by €5.4 billion. But Norway takes a huge chunk of revenue through a much higher level of corporate tax (it raises nearly four times the amount raised in Ireland – one of the benefits of having natural resources like oil under public control).
Let’s be clear: there is no Nordic model without very high levels of employers’ PRSI. In Ireland we would have to at least double employers’ PRSI and, more likely, increase it close to three times. Now that is an economic and political challenge (business organisations are going spare having to pay 50 cents an hour more for minimum wage workers – imagine their response to a doubling of their social insurance?).
Another significant difference is indirect tax – VAT and excise. Nordic countries raise significantly higher revenue through this channel than Ireland.
Ireland is close to Icelandic levels. However, we would have to raise between €3.2 and €4.4 billion in VAT and excise to reach Finnish, Norwegian and Swedish levels. To reach Danish levels we would have to raise an additional €6 billion, or 40 percent more. These levels of indirect tax are highly regressive. But the organisations of public services and income supports means they are redirected back into supporting low and average income earners.
And personal taxation? Actually, Irish levels of employee taxation (Income tax, USC, PRSI) are already close to Nordic levels. We found a similar situation with France.
Personal taxation on employees’ income would have to rise by €1.4 to €2.5 billion to reach Nordic levels (this was in 2012; the gap has most likely narrowed since then). This may seem like a lot but reduction in regressive tax expenditures and keeping indexation of tax thresholds below the rate of wage increases should see Irish personal tax rates rising to Nordic levels over the medium term without increasing rates.
[Note on Denmark: Denmark doesn’t have a social insurance system. Instead, it relies heavily on personal taxation. In Denmark, the effective rate of personal taxation on employee income is 37 percent compared to Ireland’s 24 percent. To reach Danish levels, personal taxation would have to rise by nearly 60 percent, or over €9 billion. They can achieve this through much higher wage levels but this is countered by high prices and high indirect taxes. It can work for Denmark. However, it is probably not a model for Ireland to follow.]
Some might respond that these comparisons aren’t fair; that the Nordic countries are wealthier – that is, they generate more income as measured by GDP. Well, actually, no.
Irish hybrid-GDP is well ahead of Finnish levels and approximately equal to the other Nordic countries (apart from Norway with its wealth of oil revenue). The reason we don’t have public service and social protection expenditure at the level of Nordic countries is not that we are poorer; it’s a policy choice.
So what have we got? To follow a Nordic strategy in Ireland would mean a substantial increase in expenditure on public services and public sector employment. It would also require substantially increased expenditure on social protection and income supports.
But to achieve this would require doubling or trebling employers’ social insurance rates and substantially increasing indirect taxes (if we don’t follow the high personal tax model of Denmark).
But these tax and spend issues are only one part of the Nordic model. Another important feature is the labour market; in particular, the strong level of labour rights and collective bargaining coverage. Workers’ rights and dense layers of employee participation are an essential ingredient to building a consensus over high levels of taxation and expenditure as well as a very high level of enterprise performance.
To pursue Northern dreams will require long-term and sophisticated strategies designed to win people over to a different vision about how we organise taxation, expenditure and the economy. It will also require taking on hostile corporate forces and right-wing political parties. It will require creative thinking, persuasive arguments and a determined political will.
Let’s hope this gets traction.
So you’re young, ready to take up work, make a bit of money and, most of all, make the social contribution that is expected of all members of the homo economicus species. There’s only one problem. You live in Ireland.
Following on from my previous blog on the weakness of our market economy to produce jobs – except in the construction sector – let’s look at employment growth by age. Overall employment is rising, even if it is patchy. But not for young people. For young people, the jobs recession continues apace.
Employment grew by 2.2 percent overall. But for young people – between 20 and 34 years – it fell by 1.5 percent. Among older groups – over 50s – employment grew by 5 percent.
When we drill down further, we find that those aged between 30 and 34 years saw employment fell by 3.1 percent.
This is part of a longer trend.
Since the crisis began, employment has fallen by 10 percent. However, for those aged 20-34, employment fell by a third. For other age groups, employment has recovered and increased – with employment among 50s and over increasing by 14 percent.
There has been some discussion about bringing Irish people back from abroad. It has been suggested that a main obstacle is our ‘high’ tax regime (sigh). As we see above, the problem remains what it has been some time ago – lack of jobs (though there will be some sectors that are undergoing growth).
Young people face more problems than just falling employment. Since 2008, nearly 475,000 people have emigrated. Unsurprisingly, the majority who left were young people. Over 300,000 men and women aged between 20 and 34 years have left the country – or 65 percent of all those emigrating.
For those who stayed behind it’s still tough out there in the labour market. The unemployment rate for those aged between 20 and 24 years the unemployment rate is 19.6 percent – twice the national average. No wonder Eurostat estimates that 40 percent of young people are at risk of poverty or social exclusion (for the age group 18 – 24 years).
And it gets tougher still. If you’re young and haven’t found a job, haven’t left the country and are on the Live Register, your unemployment assistance has been shredded. For those 24 years and under, the Jobseekers’ Allowance is €100 per week, well below the standard €188. If you’re 25 years old, your dole rises to €144, still well below the standard payment.
I’m always amused when Government Ministers come on to the public plinth to announce that the next budget will start to compensate people for the sacrifices they have made. But rarely are young people mentioned in this discourse. Why?
Because Ireland is no country for young people.
Who said the following?
‘ . . . if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth.’
‘The poor and the middle class (middle income) matter the most for growth.’
‘ . . enhanced power by the elite could result in a more limited provision of public goods that boost productivity and growth, and which disproportionately benefit the poor.
The Socialist Party of the World? The European Zapatista League? The People's Front of Judea (or the Judean People's Front or the Judean Popular People's Front)?
No, it was the International Monetary Fund, that crazy gang that gave us poverty, deprivation and economic deterioration to just about wherever they went (now playing in Greece).
The IMF has recently published Causes and Consequences of Income Inequality: A Global Perspective – a strongly argued study that concludes that increasing equality is one of the best things a country can do to promote sustainable growth (that, and investment). They propose a number of channels – fiscal redistributive policies, investment in education and health, and financial inclusion policies (e.g. basic bank accounts, etc.).
A particularly noteworthy finding is an estimate of the impact of redistribution on growth.
If the income share of the poorest 20 percent increases by one percentage point, GDP grows by 0.4 percentage points. However, if the income share of the highest income group, the top 20 percent, increases, GDP growth actually falls.
In other words, redistribution that leads to greater equality is good for the economy; redistribution that favours the highest income groups is bad (Britain after the Tory budget, take note). You want to grow the economy? Do a Robin Hood on it – take from the rich and give to the poor.
So what can we make of the Minister for Finance’s latest comments?
‘I use the Budget for economic management purposes and I’m going to cut personal taxes in this Budget . . . I’m going to cut the Universal Social Charge (USC) by at least 1 per cent and maybe a bit more.’
The ESRI estimated the impact of cutting the USC’s standard rate of 7 percent on income groups. This is what they found.
A cut equivalent to €500 million (cutting the USC standard rate from 7 to 5.35 percent) has almost no impact on the poorest 20 percent. There’s not much of an increase in the second quintile group (the 3rd and 4th deciles). However, the greatest gains go to the highest income groups – the 9th and 10th deciles.
In effect, what the Minister proposes to do is forgo promoting growth and provide resources to income groups which will depress growth.
Now let’s play fantasy Budget 2016 and pretend that Robin Hood is the Minister for Finance. Here’ s what he would say.
‘I use the Budget for economic management purposes and I’m going to promote economic growth through greater income equality . . . I’m going to increase social protection payments by at least 2 percent.’
Ah, now that’s more like it. The ESRI shows that a 2 percent increase in social protection payments , costing €330 million, gives the greatest boost to the lowest 20 percent income group and, unsurprisingly, the least to the highest income groups. This is a policy that would promote equality and, therefore, have a more positive impact on GDP.
And there’s another positive spin-off. The USC cut, which promotes greater inequality and, so, lower growth, costs more than the egalitarian, growth-promoting social protection increase - €170 million more. What could we do with that extra money? We could
All of these would put people back to work, help businesses to expand (or start up new businesses) and increase our productivity.
These are the benefits of a more egalitarian policy choice.
Small steps, yes. But steps in the right direction.
You’d think, listening to Ministers reeling off employment numbers and media reports of new job announcements, that Ireland was some lean, mean job creation machine. Well, in comparison with other EU-15 countries we are neither mean nor lean. Indeed, we fall well behind in key sectors.
Let’s leave aside the arguments over the 2013 employment numbers. I suggested that they were inflated due to a statistical re-alignment between the Quarter National Household Survey and the Census (you can read those arguments here and here). If people want to believe that job growth in 2013 (when domestic demand fell) was higher than in 2014 (when domestic demand rose by nearly 4 percent) – well, sure, go ahead. I prefer to take on board the CSO’s warning about interpreting job creation trends in 2013.
Robust comparisons can only start with the last quarter of 2013. That’s when the CSO finished its statistical re-alignment. Therefore, we have two year-on-year periods to compare. We should be cautious interpreting this data; it would be preferable to have a longer time-series. Therefore, any conclusions are tentative and subject to revision.
The following looks at the market, or business, economy. This is essentially the private sector, excluding the public sector dominated sectors (public administration, education and health) and the farming sector. Here are the year-on-year figures for 2014 to 2015 Quarter 1.
This doesn’t look so bad. Ireland’s employment growth is above the EU-15 average and ranks 4th in the table. However, something interesting happens when we exclude the construction sector which is non-traded and which in the past the Irish economy overly-relied on for job creation.
Ireland falls well down the job creation table when construction is excluded - below the EU-15 average.
In the last year, the Irish market economy generated 29,700 jobs. Of this, 19,500 jobs were in the construction sector – or 66 percent.
When we look at the previous quarter – the 4th quarter of 2014 – we find a similar pattern.
There are two noteworthy aspects of this. First, it could be argued that construction is due a substantial rise. Prior to the recession we saw construction employment grow well beyond the European average (in Ireland it made up 40 percent of all market economy jobs growth between 2000 and 2007). Then it collapsed. The rise we are witnessing is merely construction heading back to European norms.
However, construction employment is already at the European level. Construction employment in the EU-15 makes up 5.9 percent of the labour force; in Ireland, it is already at 5.7 percent – even after years of decimation.
But beyond the construction element, there is a wider question to be asked about our economy’s ability to generate jobs. In a previous post, it was observed that while the economy grew by over 4 percent, living standards fell further behind EU averages. Here, we find a similar pattern.
The Irish economy grew at four times the rate of the EU-15. Yet, it could only generate the same amount of jobs in the market economy when construction is excluded. When the first quarter data is published for this year, the comparison will be even worse.
Ireland’s lean mean job creation machine looks a bit more flabby, not so mean and content to let construction drive the market economy.
Let’s hope this doesn’t continue.
Given the release of the new Living Wage estimate for 2015 – €11.50 per hour - most people would agree that, in an ideal world, all work should pay at least a Living Wage. Certainly, many good things would flow from this: a substantial reduction in working poverty, higher consumer spending and investment and improved public finances (through higher tax revenue and reduced subsidies to low-pay employers). On every level, things would be better.
But that ideal world seems a distant place. Today, one-in-five in the workforce suffer multiple deprivation experiences – approximately 360,000. According to the Nevin Economic Research Institute (NERI), 25 percent of employees earn less than a Living Wage – one-in-four. These are grim statistics. But the ugly truth is that many of our domestic sectors are reliant on low-pay and poor working conditions to survive. If we tried to move to a Living Wage overnight, thousands of enterprises would collapse, resulting in higher unemployment and poverty.
So are we trapped in this unacceptable space, only capable of making incremental improvements within narrow parameters that lock us in a low-road economy? No. A Living Wage is possible. But we have to employ a number of strategies to achieve this.
Let’s start with a simple exercise and assume our goal is to raise the statutory floor – the national minimum wage – to the Living Wage within seven years. How much would the minimum wage have to increase every year to achieve this? We don’t know by how much the Living Wage will increase over the next seven years. So let’s make two assumptions.
If the Living Wage increased annually by 1 percent, an average annual increase of 4.5 percent in in the minimum wage would be necessary – or 46 cents per hour.
If the Living Wage increased annually by 2 percent, an average annual increase of 5.5 percent in in the minimum wage would be necessary – of 57 cents per hour.
At first, these might seem like big increases. However, between 2000 and 2007, the minimum wage increased annually by 6.5 percent – well above the increases necessary out to 2022 to bring the minimum wage in line with the Living Wage. Of course, in that period we had strong economic growth, strong wage growth, increasing consumer spending – much of which resulted from the speculative boom. But the climb up the mountain isn’t as steep as one might think.
But it's not just a matter of making upward adjustments in gross pay to achieve the Living Wage. There’s another way of looking at this issue – how can we limit increases in the Living Wage? After all, the increase in the 2015 Living Wage was only 5 cents, or less than a half a percent. If this were maintained out to 2022, the average annual increase in the minimum wage would only need to be 4 percent, or 40 cents per hour. This would be quite do-able.
However, the 5 cents increase in the Living Wage in 2015 is largely down to our deflationary environment. Prices are not rising. When normal economic service resumes, this situation will change.
So what other steps can we take? We can begin to socialise living costs. In other words, we can use the state to intervene in key markets to reduce living costs. If this were to occur, people would not need as high a Living Wage to obtain an adequate income and businesses would not need to increases wages as high.
Let’s take one example: rents. This makes up a substantial proportion of expenditure.
In Dublin, 42 percent of all expenditure for someone on a Living Wage goes on rents, rising by 9 percent in 2015. This proportion reduces outside Dublin but even in the cities (Cork, Limerick, Galway and Waterford) rents make up a third.
If rents – especially in Dublin – were reduced, this would have a major impact on the Living Wage. A back-of-the-excel-sheet calculation shows that if rents were to fall by just a €50 per month, this would reduce the Living Wage in Dublin by over 40 cents per hour. Put another way, workers in Dublin could see the Living Wage drop by over 40 cents per hour without any impact whatsoever on their living standards – if rents were slightly more affordable.
How could rents be made more affordable? Many will claim that if supply was increased, rents would fall. This is true – at least in supply-demand models. But a housing policy which rolled out public provision of affordable-rent accommodation for the low-paid would ensure that rents would fall while quality could be increased. This is what socialising living costs means – public intervention in markets to provide cost-based goods and services.
Public transport is another example: higher subventions into public transport could lower fares. A modest reduction of 20 percent in Dublin Bus fares would result in a fall of 20 cents per hour in the Dublin Living Wage.
There are other examples: costs for healthcare, education, energy and insurance are all amenable to public sector interventions with a view to socialising costs – reducing high living costs and, so, reducing the Living Wage. For families, affordable childcare would be the single biggest public intervention that could be made to reduce high costs.
In debates over living standards we tend to focus on increasing wages to ensure a minimum adequate income. This is, of course, necessary. But let us also focus on socialising high living costs with programmes that can deliver goods and services at cost-price or even below-market rates. This would not just benefit the low-paid but all income earners and those reliant on social protection. This would have a positive impact throughout the economy and society.
The cliché is often repeated: ‘politics is the art of the possible’. That’s not exactly true. A better formulation would be ‘politics is the art of changing what is possible’.
A Living Wage is necessary. And a Living Wage is, most definitely, possible.
Question: which Eurozone government has 61 percent public support for their position in the Greek bailout negotiations? Answers on a small postcard.
Last January Syriza won 36 percent of the vote, which allowed them to enter government as the senior coalition party. Yesterday, 61 percent of the Greek people supported Syriza’s rejection of the terms laid down by the 18 other Eurozone governments. There can be no doubting the Syriza Government’s mandate.
The next week will be crucial in hammering out a deal – if that is possible given the intransigence of the creditors to date. How can we, in Ireland, provide concrete assistance to the people of Greece?
We can look to the honourable behaviour of the Greek Finance Minister Yanis Varoufakis as a guide. This is not the time, however tempting, to use the referendum result for domestic political purposes. The Greek people need concrete support. We should be calling on the Irish Government to take up the following positions in the upcoming negotiations.
First, we should demand that the Irish Government now engage constructively in the negotiations with Greece: first, by calling on the ECB to comply with their own commercial mandate and provide the necessary liquidity to allow the Greek banks to open. In the short-term capital controls and withdrawal limits would have to remain, but re-opening the banks would take the pressure off businesses and households. Failure to do this is a coercive political act. Opening the banks should be the Irish Government’s first diplomatic stop.
Second, the key short-term issue is budgetary – allowing the Greek government to run a deficit. Given the humanitarian crisis and the collapsing of the productive economy, the demand for a primary surplus (i.e. more revenue than expenditure when interest payments are excluded) is not only penal and irrational; for creditors it is the surest way to guarantee that debts will never be repaid. Greek businesses need space to start growing and employing; fiscal policy should be assisting, not thwarting this.
Third, the Irish Government should support the establishment of a European Debt Conference. This does not commit any government to a particular position but it at least provides a space, outside the day-to-day politics of the Eurogroup and the EU, to consider medium-term solutions – not only for Greece and the peripheral regions – but for the entire Eurozone. My own preferred solution would run along these lines, but the Irish Government need not take up any position prior to such a conference being held.
And, fourth, the Irish Government should support the release of structural funds already committed to Greece to kick-start a badly need investment programme. This could also involve reframing the National Strategic Reference Framework to allow Greek businesses to access the funds allocated to them but denied because of inflexible rules.
These should form the core of any progressive campaign to re-align Irish Government policy:
The Greek government would still be under strict supervision and required to make progress on reforms: rehabilitating the tax collection system, ending corruption and patronage, and ending the dominance of oligarchical control over economic sectors. But this wouldn’t pose a problem for the Syriza government. These policies already form the core elements of the programme they were elected on. These reforms will take time and can only succeed when the economy and society are given the fiscal and political space to implement them. Hard to do much when your banks are closed.
Let’s not demand too much. The Irish government does not bring the biggest battalion to the Eurogroup. But it has a potentially influential voice given our experience of a bail-out. And given the importance of this issue (keeping the Eurozone intact) it is amazing there has not been a parliamentary debate over what position the Government should adopt in these negotiations. This should change immediately.
The Irish Government should be required to come into the Dail and explain and debate its negotiating position.
We have an opportunity to push the default button. When Syriza was elected in January, the Eurozone governments should have been relieved: for finally, there was a Greek government that was intent on tackling the issues of reform – corruption, the patronage, the oligarchical controls; reforms which the previous New Democracy and PASOK failed at (or didn’t even try). That didn’t end well.
There has now been, in effect, a second election in the form of a referendum. There is no doubting Syriza’s mandate. Nor is there doubting their continuing commitment to the reform and modernisation of the Greek economy.
Let’s start anew. There is still time. And the Irish government can play a pivotal role in that.
That is the least we should demand of our elected representatives the EU.
In 2014, GDP increased by 4.8 percent – as often said, the fastest growing economy in Europe. In 2014, employment increased by 40,000. In 2014, the recovery started.
In 2014, living standards fell even further behind the EU-15 average.
Eurostat measures living standards through actual individual consumption. Unlike private consumption, or consumer spending, actual individual consumption
‘ . . . encompasses consumer goods and services purchased directly by households, as well as services provided by non-profit institutions and the government for individual consumption (e.g., health and education services).’
It, therefore, measures consumption not only of goods and services, but public services provided by the government. As Eurostat states:
‘Although GDP per capita is an important and widely used indicator of countries’ level of economic welfare, (actual individual) consumption per capita may be more useful for comparing the relative welfare of consumers across various countries.’
In short, actual individual consumption can be treated a proxy for living standards. So what is the relative welfare of consumers (i.e. everyone) across Europe? The following captures the relationship of real (after inflation) living standards in purchasing power parities between EU-15 countries and the EU-15 average.
We can see that Ireland is in the bottom half of the table - 15 percent below the average. Our living standards are closer to Greece and Portugal than it is to the EU-15 average and the majority of countries.
Unsurprisingly, our living standards have been falling since we entered the recession. In 2008, Ireland stood at 95 – still below the EU-15 average and most other EU-15 countries. During Fianna Fail’s reign, it fell six points to 89. Under this government, it has fallen a further four points to 85.
Last year our living standards fell – from 87 to 85. This coincided with all the good new stats – GDP and GNP growth, employment, exports, etc. This may help explain that oft-asked question: if the economy is growing, why don’t I feel it?
It should be stressed that this is a relative measurement – relative to the EU-15 average. In real terms (after inflation), Irish actual individual consumption per capita increased, but only slightly, while growth in the EU-15 was far higher.
Note the contrast: Belgium and France saw substantial increases in living standards even though GDP growth in 2014 was 1.1 and 0.2 percent respectively. Irish living standards barely grew, even though it had a growth rate of four times that of the two countries.
There are a number of potential explanations for this:
First, the rise in living standards lag headline GDP growth. However, during this period we are led to believe that employment rose substantially; surely, this should have resulted in a larger impact than the above chart shows.
Second, much of our GDP growth is illusory. Considerable commentary and analysis certainly points to this.
Third, Ireland has difficulty translating growth into living standards. At this early stage in our recovery, it might be premature to make this conclusion but early returns are not promising.
There’s is a larger discussion this should provoke. Is there something wrong with the Irish economic and social model? Is the Irish model inefficient when it comes to translating economic growth into living standards? The following tracks this between 2000 and 2007.
As seen, in the seven years prior to the crash, Irish GDP increased by more than twice the rate of the EU-15. However, our living standards didn’t grow by nearly this rate. Put another way:
Again, we have to be cautious about the Irish numbers – this was during a period of speculative boom. Nonetheless, we should be asking if our inability to efficiently translate GDP growth into living standards is due to our low-tax, low-spend, low-service, low-investment model? That’s a big question which we should start debating now.
It should be emphasized: actual individual consumption is only a proxy for living standards. There is no one headline graph, no single killer stat that can fully capture the totality of living standards. The same holds for measurements like poverty or social exclusion. All statistics come with health warnings and caveats since any particular statistic may only capture part of the picture or do so only approximately. Instead, we have to bring together several pieces of data.
Nonetheless, actual individual consumption is a robust measurement. And it shows Irish living standards, or the relative welfare of consumers, are still falling relative to the EU-15 average.
And if we take this seriously, it might lead us to ask whether our economic and social model is fit for purpose.
Sometimes a proposal comes along that is so sensible and so modest that you wonder why it doesn’t feature high up the public agenda. Take the proposal made recently by Barnardos: at a very small cost the state could actually provide what it is constitutionally mandated to do:
‘Article 42.4: The State shall provide for free primary education . . . ‘
In its briefing, Providing Free Education for all Schoolchildren, Barnardos proposes that primary and secondary education be made free. They first outline the costs of education that are not covered under the current system, costs that are borne by families.
So how much would it cost to make education free? Here are Barnardos’ estimates.
Providing the resources to ensure free primary education would cost €103 million; for secondary education, €127 million. The total is €230 million.
Barnardos is proposing that in 2016, the centenary of that document that mentioned something about cherishing the children, the Government make primary education free. Free secondary education would be phased in over three years.
€100 million for free primary education; this may seem like a big number but it comes to 0.05 percent of GDP, hardly an onerous cost. Contrast this with the Government’s intention to pursue tax cuts. The ESRI projects that a €100 million would fund a cut of 0.33 percent in the standard USC rate (this is equivalent to €1 per week for an average income earner). A far better use of this money would be to provide free primary education.
While the free provision of essential services is always presented as a cost, we know that the €100 million to make primary education free is not the final cost to the Government. This money doesn’t just disappear down some fiscal black hole. If parents don’t have to pay €20 million for schoolbooks or over €60 million for voluntary contributions and classroom resources, that’s money available to spend in the consumer economy, pouring into the tills and cash registers of shops all around the country. You could call free education a mini business expansion scheme.
I’d like to throw in a suggestion of my own. Why don’t we extend the Back to School Clothing and Footwear Allowance to all children? The Allowance is worth €100 for each child aged between 4 and 11 years and €200 for each child aged between 12 and 22 years (children between 18 and 22 must be in full-time secondary education).
Currently, it is means-tested: you must be on a social protection payment, in receipt of Family Income Supplement or Back to Work Family Dividend or on an approved employment scheme. In broad terms, the income threshold for eligibility is €29,300 for households with one child (€21,300 for lone parents); €30,900 with two children (€22,900), and €1,550 for each additional child.
These thresholds are very low and tens of thousands of households just above the thresholds are not eligible, even though they face the same constraints on living standards.
The Back to School allowance could be folded into the Child Benefit system; the additional payment would be made to all age-eligible children in September. This would reduce administrative costs and benefit all households. This universality would build on the social solidarity of Child Benefit, consistent with the universality of free primary and secondary education. It would also start to acknowledge age-related costs; for instance, teenagers are more expensive than young children.
My own back-of-the-envelope cost estimate would be €70 million. This is the same cost as raising overall Child Benefit by €5 per month.
I emphasis, this is my own suggestion; Barnardos’ proposals focused on providing free primary and secondary education – proposals which should be prioritised.
It can only be hoped that someone in Government buildings is listening and reading and reasoning. It can also be hoped that a broad coalition of political, economic and social constituencies will take up Barnardos’ proposals and make them a central plank for Budget 2016 and beyond.
Free primary education? What a wonderful idea. Constitutionally mandated nearly 80 years ago and still waiting to be made a reality.
We shouldn’t have to wait much longer.
The Low Pay Commission will soon be recommending an increase in the minimum wage. How much should it recommend? Let’s start with the conclusion: the minimum wage should rise by €1 per hour. Now, let’s go through the arguments.
First, some background: the minimum wage (NMW) is €8.65 per hour. This rate was set back in 2007. In 2011 it was cut to €7.65 but only a few weeks later the current government restored the cut; this would have affected very workers as employers would have been prevented by law from cutting the pay of workers already employed.
Ireland is the only EU-15 country that has frozen the NMW since 2007 (with the exception of poor Greece where the Institutions demanded a cut).
The average increase (bar Greece) has been 16 percent in other EU-15 countries with a NMW. A number of other, poorer EU countries have actually doubled their NMW (Romania, Bulgaria and Latvia) – but these countries were starting off a low-base.
Over that period thee has been an alarming rise in deprivation among those at work.
Approximately 350,000 in work suffer from multiple deprivation experiences. This is not necessarily confined to low-paid employees; there will be self-employed in this category while many workers higher up the wage ladder may be suffering from deprivation due to debt issues or rising child costs. Nonetheless, it is reasonable to assume that a significant proportion are low-paid employees.
There’s one more background brush. There are claims that Ireland has an extra-ordinarily high NMW relative to other EU countries. These claims omit much and misunderstand more. The comparison with France is instructed. It starts by misreading the Eurostat numbers (which present the minimum wage in monthly amounts). It would appear that Ireland has a fractionally higher NMW than France. However, in France the working week is 35 hours. When this is adjusted for hourly pay, the situation is reversed. But that’s just a start.
In the misreading of the monthly wage, the Irish NMW is 0.3 percent higher than in France. However:
So, from starting out at being higher than in France, when full account is taken of the working week, living standards (a Euro in France goes further than in Ireland) and the social wage (that’s why in France workers have access to a greater range of public services and income supports; see here for a discussion of that) – when all this is factored in, the Irish NMW is well below French levels.
Such are the ways stats are misread and misrepresented.
So what should the Low Pay Commission recommend? Much of the answer depends on what you use as a benchmark. Inflation? Relationship with median wage? Historical trend? Each has their pros and cons.
But there is a strong argument that the minimum wage should be benchmarked against the average market wage (i.e. private sector). Using the average is partially convenience; we don’t have a dataset of the median wage (the wage at which 50 per cent earn above and 50 percent earn below) going back annually to when the NMW was introduced.
Using National Accounts data, what has been the historical relationship between NMW and the average market wage?
In 2000, when first introduced, the NMW was 39 percent of the average market wage. There’s an up-and-down movement up to 2007, reflecting spikes when the NMW was increased. However, since 2007 it’s been all downhill, reflecting the failure to increase the NMW. In 2015, it is estimated that the NMW has fallen to 34 percent of the NMW.
A €1 increase would bring the NMW back to the average relationship with the market wage.
Can businesses afford such an increase? For instance, IBEC warns that a 2 percent increase in the NMW would raise the wage bill of an average hospitality (hotel, restaurant) by approximately 2 percent – due to knock-on effects on wages above the NMW level. Sound scary? IBEC thinks so.
Yet, in the last year sales turnover in the hospitality sector increased by 10.6 percent. So even if wages increased by two percent, they would fall when benchmarked against turnover. This doesn’t tell the whole story and the CSO is promising a more comprehensive measurement of business activity which would include gross value-added; but increased turnover is a sign of recovery. So are increased wages.
There are two ways the impact of a NMW increase on enterprises can be minimised:
First, the ‘inability to pay’ clause in the NMW legislation: if employers can show that implementation of the NMW increase would force them to lay-off employees or terminate their employment, they can get a postponement for up to one year from the Labour Court. This is important as it means that only those companies where employment won’t be affected will be required to pay the increase immediately.
Second, the Low Pay Commission could spread this increase out over, say, two years – or approximately 50 cents per year. This would ease in the increase and provide certainty to enterprises over the two year period.
This certainty of expectations – for workers and businesses – can lead the Low Pay Commission to undertake a strategic, long-term approach to the minimum wage. I would propose that they:
The Living Wage should, in time, become the statutory floor. How long would this take and what increases would be necessary? Let’s assume the Living Wage increases at 2 percent per year, inflation-indexed.
These time-scales would require increases of approximately 50 cents per year – though I suspect it would be less since in the short-term inflation is unlikely to reach 2 percent.
This may seem like high increases but in both scenarios the increases would be less than the NMW experienced prior to the crash: in the period 2000 – 2007 the average increase was 6.5 percent.
So: a €1 increase in the NMW. This is just the first step in providing decent work. Other steps would include elimination of precarious work, providing part-time workers the right to extra hours in their workplace when they become available, and statutory Sunday premium and overtime pay, along with other rights. So it is only one step.
But what an important step – a clear signal that work will be rewarded, not by continued deprivation, but by an income one can live on adequately and fruitfully.
Let’s start walking.
If anyone is uncertain about the power relationship between employees and employers, I suggest they look to the Dunnes Stores dispute and the closure of Clerys. These encapsulate the massive imbalance of power in the workplace.
I won’t get into the details of these ongoing disputes. Any rational person hopes the workers succeed – in the case of Dunnes Stores, to win the right to negotiate collectively and reduce the level of precariousness; in the case of the Clerys workers, to be given their fair share of compensation – and dignity – after years of services to the company.
So here, let’s take a step back and look at the presentation of the relationship between employees and employers. This may seem, at first, abstract but it leads us to something fundamental.
It starts with costs.
Labels are powerful things. For instance, costs; this is usually not a good thing: ‘that was a costly venture’, ‘a costly holiday’, a ‘costly day out’. These are things we usually try to avoid, unless the ‘cost was worth it’.
‘Profit’, however, is usually something positive: that was a ‘profitable experience’, I ‘profited’ from that lecture, we are ‘back in profit’. Profit equals growth and prosperity. Further, it is considered a good thing because it’s opposite – loss – is not. Loss is bad for a household, a company, and a voluntary organisation. Continued loss may result in bankruptcy or closure or poverty.
So when we discuss labour and capital in the economy or in a business, we are already using labels that colour the debate: costs and profits. If costs are something to be avoided or reduced in order to maximise benefit, then we must depress the price of labour (i.e. wages and working conditions), and diminish the agencies that champions this ‘cost’ (e.g. trade unions, the collective bargaining power of workers, legislation that benefits workers).
Likewise, if profits are an unqualified good – we should support the agencies that maximise profits and gear our legal, labour and tax framework to that end.
Even before we begin discussing the relationship between wages and profits, the former is considered a cost, a burden while the latter is a sign of prosperity, growth.
The interesting thing about this highly ideological reading, is that it is not vindicated by basic economic accounting (here comes the abstract part).
An enterprise creates income by creating gross value-added. We can measure this by the following:
Gross value-added equals sales revenue minus the purchase of goods and services needed to produce the product the enterprise is selling (rent, accountancy services, machinery maintenance, etc.).
The important point here is that employees’ wages and working conditions is not a cost in the measurement for creating value.
Let’s take the example of an average warehousing firm from the CSO’s Annual Business Inquiry. In 2012, there were 1,120 firms in this sector employing 14,600 people. The average firm had:
The average firm in the warehousing sector created €1.2 million in gross value-added (Turnover minus purchases of goods and services).
So what happens to this value that is created? The EU Commission’s Klems database uses the appropriate terminology. The value, the income, is shared out between (a) labour compensation and (b) capital compensation. In the vocabulary, both are on equal footing. For instance, in the average warehousing firm:
Both labour and capital are needed to produce value. Both work (in their own ways) at producing this value and they do this collectively. Therefore, they are both ‘compensated’ for this work: mutual effort and shared compensation.
In this reading, labour is not a cost. We are not a cost. We are compensated for our work which is necessary to collectively produce value. It hints at a kind of equality, a partnership, if only because it is neutral in its categorisation.
This is a different reading from the dominant labour cost / profit divide with its value-laden luggage. If we are a cost – if labour is a cost – we are a burden, a nuisance, a frustration and an obstacle to maximising the good. For many businesses, labour must be corralled, constrained, controlled – and when labour is no longer needed, dispensed with.
There are many ways we can resist this reduction to a burden. We can engage with employers by joining a trade union with the collective power that gives (which sometimes is a lot and sometimes not so much). We can elect a progressive government that will re frame industrial relations and company law to create a more level pitch on which employers and employees engage. We can campaign for a social wage which will deliver social goods and services to our benefit, to be paid for primarily by employers.
But the over-riding theme that links the campaigns and struggles within and beyond the workplace is equality. Equality – whether articulated in the social, political or economic spheres – is profoundly subversive and liberating. If we are not a cost, it is because we are equal.
The vocabulary of equality is a profound challenge to the existing power structures. Political parties may claim adherence to equality; if so, they must be challenged as to how they would apply this to the workplace. Do employers and employees participate equally in the decisions over the production process in the enterprise; do they have equal access to information; do they; do they have an equal say in the apportionment of compensation; do they have an equal say and equal benefit in the disposal of assets? If not, what are these parties proposing.
We can take this further. Greater equality (participation) produces better results in the firm and the wider economy: increased productivity, greater protection of jobs, more equal share-out of income. We can see this in labour-managed firms where labour is in charge of capital - the exact opposite of the capitalist, profit-maximising firm. Equality, therefore, is an instrument of sustainable and shared growth.
Why is there such popular revulsion at the treatment of the Dunnes Stores and Clerys workers? Apart from the sheer economic barbarity, I get the sense that people feel the workers were not treated fairly, treated properly – that is, were not treated equally, however vague or imprecise that idea of equality may be.
The Left and trade unionists should re-appropriate the vocabulary of equality (it was always a foundation of our movement; it’s just that over time we forget the cadence). It is a powerful tool of transformation and can inform our approach to a myriad of issues. On this basis, we can raise the slogan:
We are not a cost. Our labour creates wealth. We are equal.
What would you say about a system for your car that was sold on the basis that it would alert you to an upcoming crash? A good idea, no? Except that the system only warns you after the crash. There you are, in a massive, multi-car pile-up, bleeding all over the M50 – and only then does the system kick in:
‘Warning, warning, you are an imminent danger of having been in a crash – warning, warning.’
You’d be right to sue.
That’s how the EU fiscal rules operate: it purports to provide an early warning system against economic crash but, in fact, it does no such thing. We should return it to the manufacturer, unopened, postage due.
Remember the Fiscal Treaty campaign? It was claimed by the proponents that we needed these rules because it would prevent things like the Great Recession and, in particular, the Irish crash of 2008. We needed these rules because we Irish are irresponsible – along with the other PIGS states. If only we had these rules we could have escaped the crash, the debt crisis and the recession – which was, of course, brought on by our fiscal irresponsibility. That was the narrative.
But the cold reality is that were these EU fiscal rules in active operation they would not have seen, predicted, never mind warned of the impending crisis. It would have been as useful as a diviners’ rod. How can we know this? Because the EU Commission, the fairground purveyor of these miracle rules, tells us so.
The rules focus on the structural deficit. This measures the deficit when all the cyclical components are stripped out – that is, all the boom and the bust parts of the economy. It purports to tell us what the deficit would look like if the economy were on an even keel.
If so, then the EU rules should have been blaring warning sounds with red lights and sirens in Ireland in the years before the crash. Everyone knew (if only in private) that during the period of 2000 – 2006 Irish public finances were dangerously over-reliant on revenue from the speculative boom. Everyone – except the EU Commission and their rules.
Let’s look at the estimate from the EU Commission itself. Remember: if the figure is in plus, that means we were fiscally responsible, our public finances were robust, and we were almost German-like when it came to prudent budgeting.
Oh, my: according the EU rules and methodology we had extremely sound public finances. In every year, we were in surplus with the exception of the two years surrounding the temporary global slump following 9/11. In reality, our public finances were going off the rails during this period – but the EU rules, instead, insisted that we were in fiscal clover.
It gets better.
The EU Commission rated Ireland’s public finances as one of the best in the Eurozone. Only Finland and Luxembourg had healthier public finances. The Irish structural deficit was, on average, in surplus. However, most other countries, including Germany, were going through some pretty ‘irresponsible’ and ‘profligate’ times. The Eurozone was in chronic deficit.
So when did the EU rules give Ireland any ‘warning’? After we started bleeding all over the M50. . In 2006, the structural deficit was in surplus. By 2008, the Irish structural deficit collapsed to-7.5 percent – after the crash started. Did the Government change policy in these two years? No. They were doing the same ol’, same ol’. It’s just that the early warning system didn’t work.
If you think this is some left-wing, trade union-y rant against reasonable rules designed to turn us into prudent European citizens, you might want to consider this. The Irish Fiscal Advisory Council was before the Joint Committee on Finance, Public Expenditure and Reform last Thursday. In response to a series of questions put by Richard Boyd-Barrett TD, the chair of the Fiscal Council – Professor John McHale – had this to say about the structural deficit:
‘In the run-up to the crisis, the measures of the structural deficit and associated measures of the output gap were extremely poor. In retrospect, we know that we were in an unsustainable situation with the economy operating well above its sustainable projection and the measures of the output gap did not pick that up at the time . . . they essentially gave us nonsense measures of the structural deficit.’
‘Extremely poor’. ‘Nonsense measures’. Both the tone and content of Professor McHale’s remarks show an appropriate level of disdain.
Why are the rules so poor? Two quick reasons (there are more). First, the structural deficit is a hypothetical measurement. It is not observable in the real world, unlike the nominal deficit which just counts how much revenue you take in and spending that goes out. Worse, the structural deficit is built on layers of other hypothetical measurements: output gap, potential GDP, total factor productivity, and the talk of the local pub: the non-accelerating inflation rate of unemployment. The potential for nonsense results increase as the layers of hypothetical measurements mount.
A second reason for the poor construction of the rules is that it doesn’t take into account private debt – which caused the Great Recession. In many economic models, private debt is not included because it is assumed that it cancels out. In a debt transaction, assets = liabilities (i.e. I owe you €100 and you are owed €100 by me – we cancel each other out). There is an underlying ideology to this – the efficient market hypothesis assumes that the price of assets/liabilities is equal to the value of assets/liabilities. Ask anyone in arrears: is the price of their mortgage equal to the value of their home? You see the problem.
Who in their right mind believes that this pottage is a robust way to regulated public finances? And who in their right mind would campaign to have this pottage inserted into our Constitution? Oh, I forgot: Fine Gael, Labour, Fianna Fail, etc.
But we are stuck with these rules – for the time being. Fortunately, more and more countries are finding ways out of them. Our own government negotiated a temporary derogation from these rules for next year; otherwise, it wouldn’t have up to €1.5 billion to cut taxes and increase expenditure (if the rules were strictly applied, we’d have nothing). By the end of the decade these rules will morph into something quite different – but whether that ‘different’ will be better than what we have now is another question.
A progressive government would do a number of things: it would push these rules out at every opportunity (there’s always space in the footnotes if one is creative); it would campaign throughout the Eurozone showing the ‘nonsense’ of these not-fit-for-purpose rules; and it would create alliances with other governments which are also coming under irrational pressure to abide by rules which do not suit their economies and societies.
One thing’s for sure: if we persist with these rules over the long-term we will have a warning system in our fiscal car that doesn’t work. And we will be paying for that warning system by starving our economy.
Not a great exchange.
With the public sector pay negotiations getting underway, it is timely to step back from the details and look at the broader landscape. For it is clear: if the wage structure in the overall economy mirrored the wage structure in the public sector, we would have a more prosperous economy and society; the recession wouldn’t have been so hard, the recovery wouldn’t have been so delayed, and the social deficits arising out of inequality would not be so endemic.
While there is much focus on the private-public wage differential, there is less attention paid to the distribution of wages from the bottom to the top – which is the key to long-term sustainable growth and better social outcomes. Let’s have a quick look at the former first.
The CSO has done exceptional and detailed work on comparing private and public sector pay. The lazy comparison is to compare the headline average private and public sector pay. However, this comes up against the like-for-like dilemma. For instance, there are no hospitality workers in the public sector; there are no Gardai in the private sector. Without a like-for-like comparison you get all sorts of numbers that don’t tell you much.
The CSO has compensated for that – comparing professions, age, duration of employment, size of enterprise, educational qualifications. When they do that, they come to some interesting conclusions.
Among this grouping – which makes up the overwhelming majority of public sector workers – the ‘premium’ (i.e. the additional amount public sector workers above private sector workers) is a little more than one percent higher. On a like-for-like basis, public sector workers earn fractionally more than private sector workers.
What is more interesting is the gender difference. Men in the public sector actually earn less than males in the private sector – two percent less. However, women in the public sector earn five percent more than their private sector counterparts on a like-for-like basis. And this is a good thing when one considers that women still face pay (and other types of) discrimination in the workplace. If there was less gender discrimination in the private sector, the overall public sector premium would probably turn negative.
Just one more word: This data comes from the CSO. Since 2010 there have been small wage movements. Between 2010 and 2014 (4th quarter):
While we would have to consider compositional effects, it is reasonable to assume that, as we write and read this, there is no longer a public sector premium.
Ok, having established that there is no difference in public and private sector pay, we can turn to the main point of this post; namely that the economy and society would be better off with the public sector wage structure. What does that mean? Again, the findings of the CSO’s report provide an interesting comparison. The fact is that at lower wage levels, public sector workers are higher paid; at higher wage levels, private sector workers are better paid.
As seen, when the comparison is made at the lowest 10 percent wage group, public sector workers are paid 11 percent more than their private sector counterparts. This grouping would include clerical and secretarial, general workers (local authority), new entrants, etc.
Conversely, higher paid public sector workers – senior managers, upper professionals – earn less than their private sector counterparts. At the higher end, they earn 9 percent less.
For women, the progressive trend is reinforced. At the low range, women in the public sector earn 15 percent more than their private sector counterparts; at the upper end, they earn 5 percent less.
The public sector wage structure – distributing income away from those on high earnings towards those on lower earning – would, if replicated across the economy, be a major boost to our economic and social fortunes.
Had the public wage structure been replicated across the economy when the crisis hit, it would have lessened the impact of the recession. In a recession, people withdraw their spending as they anticipate difficulties ahead – increased taxation, reduced income benefits (e.g. Child Benefit), greater assistance to their children and family members (e.g. children losing their jobs, falling into housing arrears, etc.). However, if earnings are distributed more equally, those groups with a high propensity to spend can mitigate this effect. One of the lessons of the recession – both here and throughout Europe and the US - is that highly unequal distribution of earnings can damage an economy’s ability to maintain spending when it is in decline.
So how does the public sector manage this? Because the process of wage formation is socialised. Workers, as a rule, have access to the right to bargain collectively, bargaining over all grades and occupations, supported by dense institutional layers of worker-employer relationships. All this is socially or, if you will, politically created.
This doesn’t mean that it works to the benefits of employees all the time. Irish public sector workers have taken a real hit in pay – three times. However, even when taking a hit, the socialised process can ensure that the hit is equitably distributed (e.g. those at the top took a higher pay reduction than those at the bottom). Cold comfort, maybe.
But in the private sector, where such socialised processes don’t exist throughout every sector or every firm, it can sometime be every man and woman for him/herself. Collective bargaining is limited with wage negotiations individualised and much more exposed to the power of the employer.
So how can we adjust? Take the best that the public sector has to offer and apply it to the private sector. Right to collective bargaining; statutory wage bargaining in sectors where labour is weak and fragmented – expanding and strengthening the current limited application of Joint Labour Committees; limits to exploitative work practices such as zero-hour and fixed term contracts. In other words, provide more rights and power to labour so that it can achieve more equitable outcomes.
While much commentary on the public sector pay negotiations will focus on how much is available, or whether the economy can afford it, or who will get what, let’s not forget the wider picture – that what is happening is the commencement of a more egalitarian and socialised process.
And this process, if it starts spreading throughout the economy, can only do us good – good for private sector workers, good for the economy, good for society.
For all our sakes, let’s hope the talks go well.
‘We all know there will be people who will never work. They're allergic to work. So we're not including those in the statistics. But everybody who wants a job will have a job in the next couple of years.’
There were a lot of criticisms of the Finance Minister’s comments, rightly describing them as a slur on people who cannot find a job. What I also find illuminating is the innovative approach to statistical representation.
Imagine saying ‘We all know people who are allergic to obeying the law. So we’re not including those in the statistics.’ Or ‘We all know people who are allergic to paying taxes. So we’re not including those in the statistics.’ See – we just eliminated crime and tax evasion. There’s no end of progress we can make on the outstanding issues of the day if we just employ the ‘Noonan Manoeuvre.’
But there are some statistics that the Minister is not including as well – statistics that his own government gathers and sends on to the EU. Like this one:
This comes from the Eurostat Vacancy Rate as reported by the Nevin Economic Research Institute. We’re not as bad as Greece where there are 74.3 unemployed for every job vacancy but we have a long ways to before we reach Belgium (5) never mind Germany (2.1).
To put that 20:1 ratio in perspective, imagine someone dropping five €10 notes from the roof of a building on to 100 people in the street. There’s a mad scramble and eventually five people walk away with the notes. But 95 people don’t. What do we say about those empty-handed 95? They’re allergic to €10 notes? The mind reels.
But the Minister’s capacity to not include statistics does not end there. Take this one.
There are, according to the last Quarterly National Household Survey, 2.153 million people in the labour force. There are 1.939 million in work. When you subtract those at work from the labour force you come up with 213,000. That’s the number of unemployed. The number of unemployed doesn’t determine the number of jobs in the market. There are still only so many jobs to go around for a larger number of people looking for them (there are niche exceptions where an employer has a vacancy but can’t find someone with the matching skills necessary – a phenomenon in the ICT sector and foreign language skills; maybe we should teach all the unemployed Dutch?).
Of course, there are ways to manipulate this equation which, also, rarely gets included.
Emigration is a great way to understate a significant negative statistical representation. Prior to the crisis, there was an annual average emigration rate of 29,000. Since the crisis, the average annual rate rose to 70,000.
Imagine if the emigration rate of the last seven years stayed at the pre-crisis level. There would be 287,000 more people here; potentially all unemployed. That would mean 500,000 unemployed, or an unemployment rate of over 20 percent. Of course, some of them may have returned to education or dropped out of the labour force, having tired of chasing after the €10 notes. But you get the point. Emigration has massively cut the unemployment rate.
But what about the statistical physiognomy of this ‘allergy’? Is there a strong allergic strain within the Irish workforce? If so, we should be able to identify it by looking at the long-term unemployed for this is where the most allergic would be located.
Prior to the crisis, Irish long-term unemployment averaged 1.4 percent – less than half the EU-15 average. But then it skyrocketed to over 9 percent by 2012 before falling off again (became employed? Emigrated? Dropped out of the labour force? Returned to education? Went on a labour scheme? Your guess).
The question here is what happened between 2008 and 2012 to cause this exponential rise and continuing above EU-15 average? Oh, yeah. That little matter of a recession. So let’s get this straight.
When there was work available, Ireland had one of the lowest long-term unemployment rates in the EU-15. When there wasn’t work available, that rate increased dramatically. Hmmm. So the illness is not congenital to Irish workers but rather is directly and causatively linked to the availability of work.
But let’s step into the real world for a moment. Every once in a while an employer comes on a current affairs programme and complains that they can’t get people to work for them. They blame the ‘allergic’ unemployed, social protection payments, government regulation, whatever.
Now labour markets are regional and even local and there may be a mismatch of skills in some areas. But there’s another issue. Many employers – especially in the low-paid sectors – offer only zero/low hour contracts. Someone is supposed to take up work without any guarantee of working hours or pay? Rely on uncertain social protection supports for part-time work? And given that many of these employers are demanding the minimum wage be cut or even abolished – well, you can see the problem. Maybe the Finance Minister will eventually say that he knows people who are allergic to precarious incomes and uncertain pay.
The Minister’s defenders will say he was only speaking the truth. Yes, there are some unemployed who are not motivated to return to work: people with low market skills, literacy and numeracy deficits, and the inertia of chronic joblessness. But the Minister wasn’t speaking to this. He employed an age-old rhetorical device. While I joked at the beginning – about taxpayers and drivers – these references wouldn’t have made any sense because these are majority categories. The point of the Minister’s reference, like all such references, is to target a minority. To get a sense of this let’s look at the comment again.
‘We all know there will be people who will never work. They're allergic to work.’
Now substitute’ people’ with a religious minority or a national minority. Get the effect?
That’s what the Minister was about – smearing a minority; in this case, the minority who are unemployed. And then he goes on to say they won’t be included in the statistics; that is, they don’t count, they don’t matter.
That is all very disturbing.
Government Ministers are fond of saying that they want to repay those who made the biggest sacrifices; hence: tax cuts. They have also stated that they want to target the ‘squeezed middle’ which they define as the income group between €35,000 and €75,000. This is an interesting figure. A household with two people working at the upper end of this ‘middle’ could earn nearly €150,000. This government wants to reward them because it is obvious that their current income level is a terrible sacrifice.
For me, those who have fallen into deprivation – now that’s a sacrifice. And there are a lot of people who have been sacrificing.
In 2013, there were over 800,000 reliant on social protection payments in these three categories, both recipients and beneficiaries. Deprivation has increased from 45 percent to 76 percent.
However, in the Government’s discourse of sacrifice, these people never feature. They have been effectively air-brushed from the social debate. The standard response of Ministers is that they have ‘protected’ basic social protection payments but they have done nothing of the sort. They have frozen these payments, which means that the value of the payment has fallen due to inflation. Since the Government took office:
So how much have the unemployed, lone parents and the disabled and sick lost out on since the cuts commenced in 2010? Let’s look at the nominal (i.e. the actual amount in Euros and cents) and the real cuts (factoring in inflation. We will take this out to 2016, using the Government’s projected growth in inflation, to get a sense of what would have to be spent to compensate people’s sacrifice.
These are substantial sums. To return basic social protection payments prior to the cuts would require increases of €16 and €24 per week for single people and couples respectively. If inflation is taken into account, the increases necessary would be €27 and €40 per week. And it should be remembered: these increases would only return the status quo in 2009; it would not represent a real increase at all.
No wonder deprivation has increased so substantially. Of course, this is for categories of recipients. Actual people may not have actually experienced this. For example, someone unemployed in 2010 may have found a job, emigrated, or retired since. However, many would have suffered these cuts – especially long-term recipients such as the disabled or sick, along with many lone parents.
There is little appreciation of the scale of social repair that is necessary after years of recession, stagnation and austerity.
And the cost would be significant. Based on this Parliamentary Question – which doesn’t include lone parents but includes carers - I estimated the cost (in very approximate terms) to be:
And this doesn’t count the cost of restoring the cuts to young people’s Jobseekers' Allowance which the Minister estimates to be €161 million – and that only brings the payment back to the current standard. Nor does it include the myriad of cuts to secondary benefits (earnings disregards, telephone allowance, etc.).
So we’re looking at a ballpark figure of around €1 billion and even this doesn’t include the cuts coming down the line to Lone Parents.
The problem, though, is that the disabled, the unemployed and lone parents don’t have a voice in the debate. They don’t feature in the opinion pages when commentators talk about ‘pay-back’. In the wider debate, increasing social protection is just money going down a black-hole – somehow making us ‘uncompetitive’ or recipients described as ‘interests groups’.
Campaigning for social equity can be a difficult endeavour in this climate and with this Government in charge. However, progressives – working to elect a Left-led government – can turn this discourse on its head by supplementing the argument for social equity with the argument that increasing social protection payments is a ‘job-creation’ and an ‘entrepreneur-promoting’ undertaking.
The Nevin Economic Research Institute estimates that increasing social protection payments by €1 billion could create over 8,000 jobs and increase consumer spending by over €1 billion (factoring in second round effects). The ESRI show slightly more modest but still positive numbers. Indeed, both institutes show that increasing social protection and cutting tax have similar economic results.
Social equity, job creation, and promotion of business fortune – that’s a strong platform. It certainly puts clear political water between progressives and the combined right-wing forces of the Government and Fianna Fail.
In short, fighting poverty is a fight that the economy and society can win.
The is the speech I delivered at the May Day Conference organised by the five trade unions affiliated to Right2Water
When the Left wins the next election and forms the first progressive government in the history of the state, it will be inheriting severe economic and social deficits:
And if these aren’t challenges enough, the range of interests that will line up against us will be daunting. Fine Gael and Fianna Fail will be the least of it.
IBEC, ISME and the SFA, Chambers Ireland and the American Chambers of Commerce, media outlets and commentators, Independent House, CEOs, EU institutions, the IMF and the OECD – a whole alphabet of hostile forces who will from the first day work to undermine us, destroy people’s confidence, and put up every obstacle possible. And that’s just for starters.
If you’re in any doubt, just ask Syriza.
The five trade unions affiliated to Right2Water are seeking to bring together all the ideological, historical and community strands that constitute progressive politics to help meet these challenges.
We have started this process in the principles we have produced here today. We will be adding to them. They are not in any order of priority – but they are all urgent. We invite everyone here to contribute to this process and to come together on June 13th to debate and decide.
The Low-Tax, Low-Spend, Low-Service, Low-Investment Economy
One of those urgent tasks is to break from the low-tax, low-spend, low-investment, low-service model the Government is foisting upon us. This is the trap celebrated in the Spring Statement – a set of budgetary rules that will permanently immobilise national governments and impoverish the European people. What can you make of this fiscal rule cookbook?
You-take-heaping-of-a-10-year-rolling-average-of-potential-GDP-which-cannot-be measured-in-the-real-world,-based-on-components-like-Total-Factor-Productivity-which also-cannot-be-measured,-stir-in-a -convergence-margin,-pour into-the-GDP-deflator-and-put-in-the-oven-and-bake-until-the-reference-ratio-minus-the-convergence-margin-divided-by-100-and-multiplied-by-the-%-GDP-price-deflator-determines-the-allowable-nominal-spending-growth-net-of-DRM-or-discretionary-revenue-meausres.
Take from the oven. And don’t forget to subtract one.
There is one word for this – mindless. This is Father Ted economics.
A progressive government will have to deal with these rules – now in our Constitution, approved by the majority of people even if under duress. We will need to push them out at every opportunity. At the same time, we must work with our comrades in Syriza, and Podemos when they form the next government in Spain, to unravel these rules.
For the June 13th conference the Right2Water unions will publish an alternative fiscal framework – to inform the discussion of how we can turn the rules to our advantage.
The Government is launching the second phase of austerity. In the first phase, Ministers announced actual cuts in public spending. In the second phase, public spending will be kept below the rate of inflation, thus cutting its value. This at a time of increased demographic pressures. We are facing into an indefinite period of what can be called ‘real austerity’.
A progressive government will reverse this. We do not fully appreciate how little we spend. We would have to spend an extra €10 to €12 billion a year more just to reach the average spending on public services, social protection and investment of other EU countries. The Government claims they will do more with less. The reality is that they will do less with less.
Why? Because the Government is locking-in a low-tax economy – one that will benefit the interests of capital over people. The Government is pulling off the same stunt that Fianna Fail did prior to the crash – driving down taxation to unsustainable levels. Except today we don’t have the windfalls of speculation, today we are bearing the cost. Therefore, the Government will drive down living standards and privatise and outsource public services to subsidise its tax cuts.
Progressives compete over tax cuts at their peril. Workers in Ireland are not highly-taxed by EU standards. However, our living standards are highly taxed, highly priced and highly inadequate. We are driven into the private sector to purchase goods and services that workers elsewhere receive for from the public sector for free or at below-market rates.
The Need for a Strong Social Wage
A recent RTE current affairs programme showed that in France a GP visit costs €7, childcare and early education is free and if you are made unemployed you get 80% of your last wage – light years from where we are. But the panelists complained that Irish people weren’t willing to pay the taxes needed to provide this standard of living.
What they didn’t know – or weren’t saying – was that Irish workers pay higher personal taxes than French workers. So how can they afford it? The social wage – or employers’ social insurance. A strong social wage allows workers to avail of services such as health care and prescription medicine for free or at heavily subsidised prices; it provides workers a range of benefits such as pay-related sick benefits, enhanced family income supports and pay-related pensions which means workers aren’t forced to rely on costly and uncertain private pensions. If Irish workers received European level of social wages, we’d have €8 billion more to spend on public services and income supports.
And with a strong social wage taking over expenditure in public services and social protection, the Exchequer would be freed up to invest in
Let’s be clear: without a strong social wage, either Irish workers will have to fund these services, income supports and investments or, more likely, they will continue to do without. A progressive government will not let this to happen. It will introduce a New Social Contract based on the expansion of the public economy funded by a strong social wage so that people can fully participate in collective and share provision.
The Sop to the Low-Paid
The Government is throwing a sop to the low-paid, promising to take hundreds of thousands out of the tax net. But the problem for the low-paid is not that they are taxed. The problem is that they are low-paid, working under the burden of zero and low-hour contracts, denied the basic right to bargain with their employers, leaving them with little if any power in the workplace. A few extra Euros in the pocket will not make up for this oppression and will, in fact, undermine the state’s ability to promote their living standards.
Progressives, therefore, will champion the Living Wage, not by relying on exhortations and the good-will of employers, but through concrete strategies to make the Living Wage a reality. We will strengthen and extend Joint Labour Committees so as to empower more and more workers through mandatory bargaining. We will introduce an authentic right to collective bargaining – not through some backdoor mechanism. We will walk through the front door because the house belongs to us as well.
We will make Ireland the best little country to work in.
Business in Ireland is too Important to be Left to Irish Business
But to make work pay, to provide increased life-opportunities – for workers, for the community and the economy – we will need to talk about wealth generation. The Left used to talk about production – how to organise it through the various models of ownership that are socially accountable. But somewhere on the way to the 21st century we ceded the issues of production and wealth generation to employers and the business pages. With honourable exceptions, we contented ourselves with debating how we redistribute the wealth created by employers. We became welfarists in the capitalist economy.
We must take this ground back. We must, again, talk about production. We need to campaign on our own definitions of competitiveness, flexibility, and entrepreneurship.
We need to organise a prosperous indigenous enterprise sector through the creation of new and expansion of existing public enterprises; a new framework for local government enterprises and new business models based on co-determination between public, private and civil society ownership; and a new contract for enterprise support based on investment and labour rights.
The campaigns over our oil and gas reserves, woodlands, clean seas, heritage sites, and community life point to another key aspect of our indigenous sector - ‘resource democracy’. If the people of Ireland have a right to the natural resources of Ireland then those resources must be entrusted to public and transparent control, providing the right of people to direct and benefit from sustainable developments.
And let us never ever forget the fundamental lesson of the crisis - that we cannot rely on private banking based on short-term shareholder interests to serve the needs of the productive economy. We need a public banking system for households and businesses – one with a mission statement that makes the bank partners in people’s living standards and enterprise success.
We must enter into the debate over wealth generation. Business in Ireland is too important to be left to Irish business.
And debt is too important to be left to creditors and bankers. A progressive government will promote a European Debt Conference in order to write down public debt – not just for the peripheral countries but throughout Europe. A progressive government will apply the same principle domestically. It is an obscenity that the same institutions that created the crisis are allowed to drive the resolution of that crisis – household debt. When prices are so systemically out of line with value, you side with the debtor and bring the price back to economic reality – through write-downs and restructuring overseen by a democratically accountable public agency that works in the public interest.
These are just some of the issues that the five Right2Water unions want to bring to a wider discussion. There are more to be brought forward by the organisations and individuals here and the unions themselves. We will establish a process to facilitate the proposals to be put forward at the June 13th conference.
Unity of Purpose
And, yes, we do admit – we have a vested interest in this process. We want to build the broadest possible coalition behind concrete principles that goes beyond simple oppositionism. We do not intend to write a manifesto or detailed policy proposals – that is for the activists in their respective parties, civil society groups and trade unions to do. But in agreeing a set of shared principles we hope to provide a platform that can inform a unity of purpose.
This unity invites everyone to contribute. It is not sectarian. It does not exclude. It does not privilege one ideological or historical strand over another. A democratic coalition is just that – democratic, respectful of each others’ perspective – especially when there is an honest disagreement over means and methods.
This is our goal. We hope this is everyone’s goal. We can today begin the work of putting together a narrative that will guide the first ever left-led government in the Republic.
It’s in our hands.
What was the point? Two documents with over 100 pages between them. Hours spent in the Dail. Many more hours of commentary in the media. And the whole thing boiled down to only one substantive policy statement: the Government will have between €1.2 and €1.5 billion available for tax cuts and spending increases, which they intend to disperse on a 50/50 split. That’s it. Would have taken a Minister a few seconds to stand up and say that. Instead, we got bells and whistles and the Spring Statement.
While we were led to believe the Government would outline their plans for the next five years, they did no such thing. Tables feature budgetary projections up to 2020 but after 2016 they are, in policy terms, meaningless. All they show is what would happen to revenue and expenditure if there were no policy change; in other words, no spending or tax changes. So we have to take the Government’s intentions in 2016 and extrapolate from that based on Ministerial nods and hinds. Let’s go through a few points.
We are now entering Phase Two of austerity. The first phase involved Ministers announcing actual cuts in government spending. The second phase will see public spending cut in real terms; that is, after inflation. Public spending will struggle to maintain pace with inflation. And this at a time when we have (a) a massive social repair job after the damage of years of recession and austerity; and (b) growing demographic pressures. And none of this considers trying to move to a modern European social state.
In 2016, we can see this pattern starting.
Primary spending (which excludes interest payments) will rise by approximately €400 million in net terms. This no doubt includes €200 million in reductions in unemployment-related payments. However, using the GDP deflator as a proxy for inflation, we see an actual cut in spending – because spending would have to double just to keep pace with inflation.
Austerity is dead. Long live austerity.
Playing the Fianna Fail Card
Prior to the crash, Fianna Fail slashed all manner of taxes. They got away with this because the coffers were filling up with revenue from the speculative boom. When boom turned to bust, the weakened revenue base was exposed and public finances collapsed.
By 2008 Irish personal taxation rate fell to unsustainable low levels, as benchmarked against the EU-15 average. Since then, the effective tax rate has increased – but this was an irrational policy as it occurred at the same time as falling real wages and cuts in income support (e.g. Child Benefit).
Now the Government is starting to cut taxes again – even though we are still below the EU-15 average (being slightly below that average is appropriate as we have don’t have to pay out as much in pensions). If they unleash – and watch out for the tax-cut auction that will be the next election – it could drive our revenue base back down to unsustainable levels.
The ghost of Fianna Fail past haunts Government policy.
Dude, Where’s My Tax Cut?
Do you feel any better off this year? You might if you are fortunate to get a job or a pay rise. But if you had to rely on the tax cuts in the last budget, probably not. Because when it comes to tax cuts, we run just to stand still.
The Government proposes to cut taxes by €600 to €750 million. We shouldn’t assume this will all be income taxes and USC. It would be surprising if there weren’t reductions – mainly through tax reliefs – to corporate, capital and farmers’ taxation. But let’s assume it all comes via income taxes.
The reduction is equivalent to three to four percent of the estimated tax yield. Assuming all income taxpayers get the same percentage reduction, it would – for a single person on an average income of €36,000 – mean a tax cut of between €5 and €6 per week, though this could change depending on how the Government targets the cuts.
Ok, better than nothing. But the Government estimates that inflation would wipe this out. You are running to stand still. And if your budget contains an item that is likely to rise above the rate of inflation, you will be well out of pocket. Last year, single bedroom rents rose by more than €13 per week. Your tax cut would subsidise half of that. This holds for childcare fees, medical insurance, public transport fees, prescription medicine, etc.
The Government will cut our taxes, delivering a few Euros a week in our pockets. But taxes on our living standards, never mind inflation, will cancel that out, leaving us little better off.
Driving Down Our Economy
Again, we don’t know what the medium-term will hold but we know that next year, investment will grow by a fractional €10 million. With inflation, this constitutes a real cut of 1 percent.
Irish public investment is in a crisis. We would have to increase public investment by over €2 billion just to reach the EU average – and that average itself has been depressed by European-wide austerity.
We have deficits in telecommunications (broadband), public transport, green energy, building conservation, water & waste, rural roads; so bad is it that our infrastructure is ranked 13th in the EU-15, ahead of only Italy and Greece.
Investment is the key to long-term sustainable growth. It increases the productive capacity of the economy, increases employment and incomes. Imagine if every business and house had access to state-of-the-art Next Generation Broadband, or new public transport solutions to traffic in Galway and Cork cities, or commercialising ocean energy, or not having to boil our water or have sewage dumped in the local river.
* * *
The Spring Statement is not a policy. It is not a platform for a modern European state. It conjures a future that condemns us to a low-tax, low-investment economy still pursuing austerity in real terms. This is, by any definition, a toxic combination.
If there is only one reason why this Government should not be re-elected, it is contained in the Spring Statement.
Fianna Fail has announced that it will bring in a new childcare tax credit f it gets elected. On that basis alone we can only hope they don’t get elected. And any other party that offers such a sop.
It seems that whenever there is a problem in our economy, some party or group of experts have a ready-made response: tax break. An under-performing enterprise sector? Tax break. A problem with housing? Tax break. Poor take-up of costly and uncertain private pensions? More and more tax breaks. It’s easy to understand. With tax breaks, policy-makers don’t even break out into a sweat. No detailed analysis, no innovative thinking, no attempt to build an infrastructure (which is truly hard work). Nope. Just close your eyes and throw the tax brteak at the economic dartboard. And if it misses? Throw another, throw more, convince yourself that you’re solving the problem.
Let’s cut to the chase: if tax credits are introduced it won’t do anything to make childcare affordable. It will probably increase the cost of childcare, thus wiping out some/most of the cash given to households through the taxation system. There is nothing to suggest it will increase quality of care. And it will have the least impact for the low-paid. Here are some of the arguments.
Childcare is costly - labour-dense and, thankfully, tightly regulated which can drive up costs. A model that is based on economic charging – which means revenue must at least equal expenditure – has to charge high fees. Deloitte’s Review of the Cost of a Full-Day Childcare Placement (which doesn’t seem to be on-line) estimated that the weekly cost per child is between €215 and €254 per week. And that was in 2007. Inflation index that up now and the costs will have increased. For a 45 week placement, the costs could reach €10,000 per year.
Let’s say a tax credit of €2,000 is provided. While that sounds high it would only mean a tax break of €400 (€2,000 at the 20 percent tax rate). This wouldn’t even pay for two weeks for a full-day childcare place.
If the tax credit was increased to €5,000 – a hefty amount – the cash amount would be €1,000. Again, sounds like a lot but would only amount to a few weeks cost. This could assist households that only use childcare part-time (e.g. after-school) but it is the households that need full-time childcare that face the greatest costs.
In short, the tax credit could be substantial but would still have little impact on households most in need.
Then there is inflation. Childcare providers are experiencing considerable cost pressures; most notably in the area of wages. Some are using JobBridge and the Community Employment Scheme to lower costs while others have been suppressing wages to near minimum wage level. Many community non-profit providers have experienced cuts in public grants and subsidies. There would probably be pressures related to delayed investment as well as providers would be trying to minimise costs during the recession and stagnation.
Which is why it would be understandable and economically rational (if not necessary) if providers increased their fees were households to receive a subsidy. In effect, the tax break would subsidise the provider, not the household.
We can see how this works when looking at the historical trajectory of childcare inflation. In the periods between 2000 and 2008, child income support increased dramatically (e.g. Child Benefit, Early Childcare Supplement). So did childcare costs.
Let’s assume that childcare costs increased by five percent over the two years after a credit was introduced. This would completely erode the benefit of a €2,000 credit and cut the €5,000 credit by half. Households would be running to standstill.
Finally, those most in need of affordable childcare wouldn’t benefit from a credit, not if it was based on the current model. The OECD and the EU have highlighted childcare costs as a barrier to labour market participation for lone parents; so did the Minister for Social Protection when she promised that ‘reforms’ of the lone parent allowance wouldn’t be introduced until we had a ‘Scandinavian’ model of childcare (sadly, the reforms were introduced, the new childcare model wasn’t).
A lone parent working full-time would have to earn more €12.20 per hour (or €24,750 per year) to obtain any benefit from a tax credit. That’s because they are exempt from income tax below that amount.
That’s the problem with tax credits. That’s why Government had to back off using tax credits to refund water bills – they don’t benefit low-paid or part-time workers. Of course, the Government could directly subsidise households, rather than using the tax system. This would be more effective but administratively more complex but it would have to be substantial and not induce additional inflation for it to have any impact.
‘Only through directly investing in services can the Government help to improve the quality of early care and education, at the same time as making it more affordable to parents . . . At present, the quality of early years services in Ireland is very variable. While there are many excellent services, there are also poor quality services. Any plan on ‘childcare’ needs to address both affordability and quality at the same time.
Tax breaks won’t do anything to improve the quality of early years services. And they won't even make childcare more affordable for families with the lowest incomes, who face the greatest challenge.’
At the end of the day, the problem is not the lack of household subsidy. The problem is the economic-charging model itself. How can other EU countries offer affordable childcare (costing €60 per week or less)? They use a public-service model, providing childcare through the public sector. This shares the cost of providing childcare throughout the economy – not imposing it on just those households who need it. This is the model we use for primary education and other public services.
A public service model can not only off childcare at below-market rates; it can provide higher wages, better working conditions, educational qualifications and scope for career advancement. In other words, it can create a professionalised sector.
I’ve written about the costs of this here. A public service model doesn’t mean the public sector alone has to deliver the childcare. A more sophisticated approach would be to create a network of childcare providers –non-profit, community-based, even private providers where appropriate - which would include direct public sector delivery where it is needed. In this network, fees, wages, investment (particularly, in education) would be tightly regulated. But the end result would be quality childcare at affordable fees.
This should be a key election issue, not only because high childcare costs are a barrier to participation in work and imposes such high costs on households; it is also a pivotal public sector issue. If progressives want to start convincing people that improving living standards requires investment and public service expansion, not tax cuts, then childcare is the issue that can do that.
We should let the children show us the way.
The decision by the National Transport Authority (NTA) to franchise out 10 percent of Dublin Bus and Bus Eireann routes for private tendering, which could cause industrial disruption, signals the start of the race-to-the-bottom in the public transport sector.
One of the more interesting aspects is that the NTA did not model their proposals, did not produce a business impact-assessment, did not undertake a cost-benefit analysis to justify the need for, or benefits from for franchising. Now just think on that for a moment. If a private sector company decided it was going to franchise or outsource 10 percent of its business, there would be cost-benefit analyses and business –impact assessments all over the place – upsides, downsides, alternatives. Any senior management attempting to railroad such a franchise initiative through without such analyses would be clearing out their desks by noon.
What the NTA did do was commission Ernst & Young (E&Y) to provide an analysis. And in keeping with that time-honoured tradition of providing the conclusion that the commissioning agency desires, E&Y did not disappoint (just as they didn’t disappoint Anglo-Irish Bank). So what was E&Y’s main argument? That franchising delivers efficiencies and cost reductions. What did they base this on? One academic study.
The OECD’s Privatisation and Regulation of Urban Transit Systems which E&Y relied on is certainly a comprehensive study, gathering evidence from a range of countries that purport to show the efficiency of privatisation of public transport systems. The problem with this approach is that you can find academic studies producing a number of conflicting and contradictory conclusions over the same proposition.
For instance, the OECD study claimed that in Sweden between 1987 and 1993, following privatisation, total bus transport costs fell by 13 percent. However, a more recent study found there is no evidence that the Swedish model of competitive tendering has reduced costs. Rather, the cost per passenger trip increased well above the rate of inflation while efficiency levels fell by over 30 percent. This study was available to E&Y; they decided not to present this information.
Or how about this: a wide ranging international study of bus services covered 73 cities with different types of bus operators in Europe, North America, Latin America Asia and the Middle East. It found no significant difference in efficiency between public or private operators:
'Statistical tests do not show any significance as regards relationship between efficiency and the type of operator….The efficient cities … are spread over different continents and public administration styles – Anglo-Saxon, Nordic and bureaucratic – and they are not concentrated in any specific type of operator.'
I could go on an on – but you get the point. Pull out an academic study that supports your preconceived position, claim this is what the ‘experts’ find, and ignore all other studies and experts who show something different – that approach hardly instils confidence.
Actually, E&Y gave the game away in a wonderful paragraph:
'The key advantages associated with a move . . . to competitive tendering stem from elementary economic theory in relation to the effects of competitive pressures and market discipline. In essence, by putting the contract out to tender, market forces are brought to bear to reveal the most economically efficient provider, thereby leading to lower costs and – all things equal - a reduced requirement for subvention.'
There are two things here: first, is ‘elementary economic theory’. There you have it – ‘my ancient neo-classical economics professor said competition is best, so let’s privatise public transport – and ,hey, why not primary education . . . ‘ Never mind that this elementary economic theory is highly disputed – especially in public services; if you repeat it enough times you don’t have to bother with evidence or facts.
No wonder E&Y didn’t include the new wave sweeping through Europe – re-municipalisation of transport systems and public services in general. Local /regional governments – Germany, France, UK to name some - that had previously privatised their public transport are taking them into public control because of poor service and high fares. These places tried elementary economic theory – it didn’t work out.
But it’s the ‘reduce subvention’ argument that is the stunner.
‘A comparative analysis of subvention levels across Europe indicated that levels of public transport subvention vary between 35 and 60 percent of revenue. When all State interventions are taken into account, the level of subvention to Dublin Bus is at the upper end of the range.’
This is an outrageous assertion. The fact is that Dublin has a rock-bottom level of public subsidy.
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.
So how does E&Y justify the assertion that the subsidy to Dublin Bus is at the upper-range of subsidies throughout Europe? They throw in everything and the kitchen sink: Department of Social Protection payment for Free Travel Scheme, tax relief for Taxsaver scheme, emergency funding, etc.). E&Y includes revenues that are not part of a subvention comparison; for instance, they didn’t include tax breaks and social protection payments in other cities. They are deliberately not comparing like-with-like in order to justify a reduction in the subvention to a public transport system that is already starving of support.
Ok, so the NTA and the E&Y didn’t model their proposals. Let’s try it ourselves – admittedly, a short-order back of the envelope job.
In Dublin Bus there are three main areas of expenditure: employee compensation (wages, pension contributions, PRSI), non-payroll expenditure (fuel, office, depot, etc.) and investment). Here’s how it breaks down.
Now let’s assume that it is not the NTA’s intention to see wages and working conditions worsen but they want to achieve a 15 percent reduction in costs. 67 percent of total costs come from employee compensation. Excluding this leaves the cost of materials and services. However some of the cost here is fixed. For instance, fuel makes up 40 percent of the cost of materials and services. There is little left over to achieve savings. A 15 percent savings would mean nearly wiping out all spending on non-fixed materials and services.
Of course, the NTA is only franchising out routes. But since they didn’t model the cost per route, we don’t know where the savings can be made. Will private operators increase productivity without hitting wages by running more buses per route, picking up more customers, driving faster? Will they benefit from hidden subsidies from Dublin Bus (for instance, will they pay the monitoring and compliance costs which are part of the franchising costs)? All these are basic questions which are not only not answered, they were not even asked.
Let’s cut to the chase: the savings will come from driving down wages and working conditions. CIE workers transferring to private sector operators have been assured they will keep their pay and conditions, in particular pensions (though this is disputed). However, what of employees who did not work for CIE? Will they have the same wages? Te same working conditions? Will they have a defined benefit scheme operated by their employer? Will they have the right to collective bargaining? The only way to make substantial savings through franchising is to embark on a race-to-the-bottom – both for workers and service quality.
This is no way to run a modern public transport system in a European capital.
There is still enough time to salvage this wreckage and put it right. At the very least, the NTA could conduct a detailed cost-benefit analysis at both company and route level; one way to do this is through a simulated franchising exercise – to see if there are savings and where those savings come from (if they come from wage, working condition and/or service depression – well, that tells a story).
Or they could go further and become a leading European public transport agency:
The NTA could transform itself into a dynamic and innovative agency pioneering public transport beyond the current frontier. This requires political and corporate vision. This would be a far greater contribution to the economy and society than producing tired, out-of-date and economically damaging privatisation plans.
And the first step: withdraw the franchising proposals and start over in a better and more productive place.
* * *
Note: Readers might be interested in this publication from the European Federation of Public Services Union which looks at public and private sector efficiency.
The Right has one big idea: cut taxes. They have another big idea: cut more taxes. And their biggest idea of all: cut as many taxes as possible: income tax, USC, corporation tax (all hail the 6% Knowledge Box). That’s it. The manifesto has been written.
If progressives are to capture the popular imagination then they need proposals that are transformative, popular, radical and achievable. Over the next few weeks I’ll be putting forward some ideas for discussion. Hopefully, this will provoke others to come up with more and better ones. So let’s start this debate with a proposal to abolish long-term unemployment.
Abolish long-term unemployment? Seem crazy? No, what is crazy is that people are left idle for years without work, miring households and communities in poverty and social exclusion.
As always in these grim statistics, Ireland is up there, only trailing the poorer Mediterranean countries. For males, it is even worse – 65 percent of unemployed males are long-term unemployed. In these stakes, Ireland ranks second in the EU-15, not far behind Greece.
The situation is worse when it comes to chronic long-term unemployment.
In Ireland, 43 percent of the unemployed have been jobless for two years or longer (93,000); those without jobs for four years or longer make up a quarter of the unemployed (54,000). These rates are significantly higher than the EU-15 average. Further, these rates have been driven by the recession. In 2006 (4th quarter), there were only 15,000 unemployed longer than two years and only 6,000 longer than four years.
This is a text book example of labour market failure. We need to go beyond the usual re-training / re-skilling / harassing people into low-paid work response. But we also have the opportunity to turn this problem into a wider solution – not only for the unemployed; it should also be about the regeneration of communities through democratic participation by civil society organisations in this fight against long-term unemployment.
Jobs for the long-term unemployed, social wealth for communities, economic stimulus for depressed areas: it’s not a question of whether we can do it. It’s a question of how.
Reforming the Gateway Programme
Let’s reform the Gateway programme to make it fit for purpose. The infrastructure is already in place.
The Gateway programme is a local authority labour activation scheme that provides short-term work and training opportunities for people unemployed longer than two years. 3,000 places have been allocated and the current number of active placements is 1,900.
There are two major problems with Gateway. First is the coercive element: those who are eligible for the scheme will be offered a placement on the scheme by the local social welfare office or Intreo centre. If people refuse the offer without good cause, they may have their social protection payment reduced or even removed altogether.
Secondly, job displacement: there is a real danger that long-term unemployed are doing work that should be done by full-time local authority workers.
Let’s transform this into a programme for job creation, social wealth and economic stimulus:
To the extent that local authorities expand their job opportunities, this should only be undertaken where there is a commitment to transition the work to a full-time local authority job, overseen by employers and trade unions.
Now we’re ready to begin the work of abolishing long-term unemployment.
What Kind of Work?
There will be criticism that this programme would largely be make-work. However, when looking at the employment currently offered by local authorities through Gateway, we can see that there is real work going on.
GIS mapping * HR – to assist in running with Gateway projects * CMAS communications * digitising records, town and country files * ergonomic assessments * sustainable energy projects * Using CRM for health and safety tracking * LCDC administration * marketing and promotional work for local enterprise (buy / source local campaigns) * records management and data entry * social media (website, Facebook, Twitter) * library supports
Basic horticultural work i.e. planting, weeding in parks, walking trails, derelict sites * Amenity improvement schemes – bench-making, carpentry * Biomass Scheme - plant, maintain and harvest areas of willow biomass * graveyard maintenance
Sports development (e.g. walking, basketball and soccer clubs) * local museum supports (research, reception, security, exhibit guide) * historical sites * arts programmes for key groups (e.g. arts and disability) * tourism supports
This is some of the work that is already being undertaken by participants in local authority projects – and they go beyond just ‘pick-up-litter’ schemes. They are providing a broad range of opportunities up and down the skill ladder, with the potential for people to learn. Now let’s extend this.
Under the current Gateway programme only local authorities can ‘hire’ or provide placements. This should be extended to non-profit groups, civil society organisations and community groups – allowing them to devise programmes that would employ people. The range of such groups could be considerable:
Geographical-based community groups * single-issue groups (unemployed, arts, drug rehab groups, disability support groups) * local Chambers of Commerce and Trade Union Councils and branches * environmental groups * Development and Area Partnerships * retirement and elderly groups * Youth Clubs * parish councils and church groups * rural support organisations * citizen information centres * literacy groups
The criteria for participation should be that civil society groups are non-profit and the programmes have projected outcomes that are measureable.
One can imagine these groups coming together – under the organisation of the local authority – in small towns, city suburbs, rural areas, and villages to create programmes that would add to the community wealth and the local economy. This is about community regeneration and repair, community participation and democracy – this is about communities and local populations reasserting some control over their areas.
How Much and How to Fund
Let’s assume an initial roll-out of 30,000 jobs (which could take up to two years, depending on Government priorities and the urgency with which they give this programme). A weekly 39-hour contract of work/training could be set at €9 per hour, or €18,250 annually. With the state fully funding this programme it would cost in gross terms €547 million. An additional 10 percent would be added for training costs and administration which would come to €55 million. To employ F30,000 would cost approximately €600 million.
But that’s gross. Using back-of-the-Excel-sheet’ estimates we can estimate the net cost to the state.
Combined, this would reduce the costs to below €300 million. But there’s more.
After factoring all this in how much would it cost? Much less than €300 million. When the Nevin Economic Research Institute and the ESRI analysed the impact of increasing public sector employment, they found the cost was fractional and could even reduce the deficit and/or debt; in other words, no cost at all. Hard to say how this scheme would impact but it would have similar fiscal benefits.
So how would we pay for this less-than-€300 million initial cost? Well, the tax cuts last year cost over €600 million. The Government has, so far, estimated that tax cuts in the next budget will cost at least another €600 million (this figure could rise when the Government publishes its Spring Statement).
We have to make choices.
There are challenges in all this – a large part being the slow nature of getting the idea into action. Resources would have to be provided to local authorities to employ the administration throughout their area. Civil society groups would have to be organised into the process. Cost estimates would have to factor in dead-weight costs (that is, the cost of employing someone on the programme who would have gotten a job anyway), though I suspect this would be lower given we are dealing with the long-term unemployed. Quality training and re-skilling would need to be fully integrated into the programme.
A particular challenge would be, at the end of the two-year contract, to create transitions from the programme to work in the economy. It would have a depressing effect if people fell back into unemployment. This would have to be co-ordinated with transitions to market economy (private sector) jobs, public sector jobs – a little easier if the moratorium were lifted, and the community sector – as public resources are increased.
Finally, we have to be realistic. Is there enough work out there – social benefit work for public agencies, non-profit and community groups? An initial roll-out of 30,000 jobs is a big ask – what about extending it to all long-term unemployed who want it?
This programme will not create a full employment economy. That can only come about when all the levers available to the Government – macro-economy, labour market, fiscal, investment, enterprise policy– are pulling in the right direction.
However, this is a programme to get people back into work, back into the social networks that will help them to explore new life-chance and job opportunities for themselves. This is an important way-station to the goal of full employment – for the long-term unemployed, for communities and the local economy.
And the great thing is that this is wholly feasible and is being done already on smaller scale. One thing’s for sure – it’s a great investment.
Below I provide very approximate impact in three locations: Gorey, Letterkenny and Limerick City. Estimates of long-term unemployed (above two-years) are extrapolated from the Census Area Profiles and the change between 2011 and 2014. I suspect these are under-estimates but there is no current data.
GOREY: there could be between 500 and 600 people unemployed for two years or longer. Under the initial roll-out of the above programme, between 150 and 175 could get a job. This could raise purchasing power in the town by between €1.2 and €1.3 million.
LETTERKENNY: with high joblessness there could be between 700 and 750 people unemployed for two years or longer. Under the initial roll-out of the above programme, between 200 and 250 could get a job. This could raise purchasing power in the town by between €1.5 and €1.9 million over the year.
LIMERICK CITY: a real unemployment blackspot, there could be close to 3,000 people unemployed for two years or longer. Under the initial roll-out of the above programme, up to 1,000 could get a job. This could raise purchasing power in the city by over €7 million.
When everything came crashing down there was considerable discussion of the ‘bonus culture’; primarily but not exclusively in the finance sector. Bonuses were tied to outputs that, while rewarding the individual (usually a senior management figure), played mayhem in the economy –as if the dispensing of loans for property speculation is a measure of commercial success.
Bonuses, in general, have been with us for a long time. It actually started among workers and was paid out as ‘piece-meal’ work – the more you shovelled, the more you harvested, the higher the pay This benefited only a few, especially as the total pot of remuneration rarely grew – it was just redistributed (but it did get workers to produce more for their employers). But as economies industrialised, bonuses became a phenomenon of management and those with special skills; and as the financial sector was deregulated, bonuses became associated with bankers – senior bankers.
Bonuses are justified on the basis of ‘rewarding performance’ or ‘attracting the talented’. That’s the justification – a hypothesis rarely tested. It can reward some aspects of work but it ignores others; they can attract some talent but demotivates other talent. Employees rely on the fixed income of their wage – either the direct or social wage; bonuses can have a distorting effect and can leave employees reliant on HR whim no matter how dressed up it might be with metrics that aspire to measure productivity.
Whatever the justification, there is one thing we can be sure of: bonuses benefit higher income employees; namely, managers and professionals. Very little trickles down to workers on the shop and office floor, production line or building site. The CSO used to measure bonuses by type of employee – not so anymore. But we can reasonably assume that the share-out is much the same today.
The CSO data shows managers and professionals received, on average three times the bonus of that white-collar workers received and six times the amount that blue-collar workers got – all these in the first quarter when bonuses are highest (reflecting year end results). It is important to note the inequality of bonus payments when measured against regular payments:
In some sectors, this inequality is even more pronounced. In Industry, managers & professionals received twice the weekly earnings as blue-collar workers; when it came to bonuses, they received more than eight times. A similar extreme can be identified in the financial sector.
In addition to bonuses are the benefits that employees get in kind. The CSO used to break this down between
This is data from 2008 (the last year they performed this breakdown) but it is not likely that the proportions have changed all that much.
In addition to increased bonuses, managers and professionals took far more in benefits-in-kind. This is why, when looking at ‘pay’ we should be careful to include all elements of the remuneration package, where the data is available.
So what’s going on now? Unfortunately, we don’t have this detailed breakdown anymore which is a shame because this detail can make for a more informed debate and policy-making (I understand that the CSO discontinued this detail as it was concluded that the supply of data was a burden on businesses).
However, we do have data on sectoral trends. Below we look at the sectors with the highest bonuses: Finance and Information & Communication.
In the total economy, bonuses have increased marginally since 2008. However, in both the financial sector and information & communication, bonuses have risen substantially, and are now well above the 2008 levels.
An earlier series from the CSO shows that bonuses in the financial sector were €4.61 per hour back in the 4th quarter of 2006. Last year they were €4.30. This would suggest that financial sector bonuses are back at their pre-crash levels. Recovery, indeed. The next release in the CSO series will tell a story: the first quarter of the year is when bonuses are at their peak, with the next biggest quarter being the 4th.
It is not possible to measure benefits-in-kind and other social benefits as there are no data. However, it would be reasonable to assume that as bonuses rise, so do these benefits – further fuelling income inequality.
In addition, in the high-bonus sectors, these bonuses are making up more and more of weekly earnings. In the financial sector, bonuses made up 5 percent of total earnings in the 4th quarter of 2012; in the 4th quarter of last year, this rose to 14 percent. In the Information & Communication, they rose from 7 to 11 percent. So this, too, impacts on inequality.
But this is a rich source of tax revenue for the Government. Given that most bonuses go to higher-income earners, most of this would be subject to a tax return of nearly 63 percent (the employees’ income tax/USC/PRSI along with employers’ PRSI).
In many areas the Irish recovery looks more like a ‘returning’ – to pre-crash patterns. At least for those fortunate to benefit from bonuses and benefits-in-kind (and if you’re a manager in the ‘Managers & Professionals’ category, you’re in a strong position to reward yourself). And you are really fortunate because the government is intent on giving you more tax relief.
This is pay-back on the double. Let the good times roll.
The first is zero/low hour contracts. Such contracts require employees to be available for work but do not guarantee hours of work. Therefore, workers cannot be assured of their income from one week to the next. And because hours and shifts change, workers cannot plan childcare, eldercare, family time or leisure.
The Dunnes Stores Workers are seeking what is called ‘banded hours’. This means people are rostered in such a manner that they are guaranteed a minimum and maximum number of working hours and, so, income.
While Dunnes Stores management might claim (if they ever went public to defend their position) they require roster flexibility, banded hours are widespread throughout the industry (e.g. Tesco, Marks & Spencer, Arnotts, Pennys, to name a few). This is from Jennifer who has worked for eight years with Tesco:
‘Unlike my Dunnes colleagues, I am much more fortunate in that I have the stability and security of a banded contract. This allows me the guarantee of 30-35 hours every week but also, it does not restrict me to 35 hours. In the event that extra hours become available, I am able to work up to and including 39 hours weekly.’
The fact is that flexibility is a diversion. Management uses the roster as an instrument of control, punishment and reward to create a compliant and submissive workforce. If you try to organise a union in the workplace or make a health and safety complaint – don’t expect too many hours next week.
It is also an instrument of payroll cleansing. This from a Dunne Stores worker:
‘I tell them I can’t work between 2pm and 5pm because of child care issues . . . but they keep putting me on the 2-6pm shift. They are trying to push me out after 9 years because I’m on an old contract with higher wages. They want to replace me with cheaper staff on new contracts.’
No wonder that in a survey of Dunnes Stores workers, 85 percent stated that insecurity of hours is used as a method of control.
It is, however, the second issue that cuts to the heart of the matter. Quite simply, Dunnes Stores management treat their employees as nothing more than a factor of production. What the Dunnes Stores workers are seeking is terribly simple and far-reaching:
‘You will acknowledge us.’
You will acknowledge us when we want to discuss our contracts, our pay, our working conditions. We are not mere instruments in the value-added creating process.
Again, management will divert the issue by claiming it is about a union demanding recognition. It is not. It is not about Mandate or any trade union. It is about what the workers want. Do you or don’t you want to be a member of a union? Do you or don’t you want to negotiate with your employer collectively? Do you or don’t you want to appoint a trade union as your negotiating agent? Do you or don’t you want to take industrial action? It all starts, proceeds apace and ends with the individual worker and what she or he wants.
The Dunnes Stores workers have made their decision. They have joined a trade union, sought to negotiate with management, were ignored, and have voted by an overwhelming majority to take this one-day action. Now they are paying a considerable price. Management is putting pressure on workers with threats of redundancies and layoffs (in a letter that wasn’t even signed) and especially key activists and workplace representatives whose working hours and income is under threat.
I could make arguments that by achieving their demands, we would all benefit economically – through higher growth because workers with income security can fully participate in the consumer economy; through lower state subsidies (Dunnes Stores management imposes costs on the Exchequer and all of us via higher social protection payments for, and lower tax revenue from, precarious workers). These are valid and quantifiable arguments.
But what the Dunnes Stores workers are offering us is something more fundamental – the opportunity to engage in that essential and liberating act of solidarity: offering, giving and receiving support to and from our neighbours. In trade unionism we rightly associate solidarity between workers – especially when our sisters and brothers are in dispute with their employers. However, the Dunnes Stores workers, in struggling for an industrial justice that should be commonplace throughout the economy, are also engaged in an unmeasurable act that makes all our lives worthwhile.
Allen Shick identifies this when discussing public sector workers:
‘ . . . (some management models claim) public employees are self-interested, opportunistic agents . . . in this view, employees can be made to perform only if they are actively monitored, given clear instructions as to what is expected of them, and strong incentives to do the job right. The notion that they might do more than is formally expected of them because they have internalised public service values may be alien to (these models) but it is familiar to generations of students who overcame education handicaps because of teachers who stayed after class to help them, the police officer who coached the community sports team and never asked for pay, the visiting nurse who dropped by shut-ins after her daily rounds were done, and in countless other ways. Of course, this was never the whole story of public employment, or even the larger part, but it was the stuff out of which . . . communities and states were built.’
Robert F. Kennedy put it another way when discussing the Gross National Product:
‘ . . . the Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children. Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.’
It is this solidarity – the stuff out of which communities are built; the joy, beauty, intelligence and courage that makes life worthwhile – that the Dunne Stores workers are offering to each and every one of us.
On Thursday let us reciprocate and reinforce this solidarity and, so, build a better community that can make all our lives worthwhile.
Victory to the Dunne Stores workers.
Victory to all of us.
This is a guest post by Michael Burke. Michael works as an economic consultant. He was previously senior international economist with Citibank in London. He blogs regularly at Socialist Economic Bulletin. You can follow Michael at @menburke
The publication of the ESRI’s latest Quarterly Economic Commentary follows the recent publication of the national accounts for 2014. But they were both strangely muted affairs given that the headlines were GDP growth of 4.8% in 2014 and GNP growth of 5.2%. The ESRI is forecasting 4.4% and 4.1% respectively for 2015- although it does not have a very good forecasting track record.
Not only are these the strongest actual and projected growth rates since the recession began but they are also the strongest growth rates in both the EU and in the OECD. So why the long face? Why are people still taking to the streets to protest water charges and the government parties getting no bounce in the opinion polls?
One factor is that despite all the talk of recovery, even on the distorted GDP measure of activity the patient is still convalescing. The economy has not returned to its pre-recession peak, as shown in Chart 1 below. GDP contracted by 12% from the end of 2007 to the end of 2009. In the 5 following years about 70% of that shortfall has been recovered. On that trend it will be 2016 before the economy is finally in recovery.
Chart 1. Real GDP
On most indicators including GDP the level of activity is now back to around the level last seen in 2010, which was hardly a vintage year. Following a deep recession, industrialised economies much more usually bounce back equally sharply. But this is a slow, painful and incomplete recovery from a deep recession.
Stagnation apart from exports
There is another factor in the subdued mood. GDP is a measure of activity. But it is not designed to be a measure of prosperity. It is widely accepted that recorded export activity is hugely distorted by the activities of multinational company operations in Ireland. Yet since the economy stopped contracting at the end of 2009 these highly distorted net exports (exports after imports are deducted) have risen by an annualised €16bn, almost exactly equal to the rise in GDP. Net exports, many of them purely fictitious, account for the entirety of the partial recovery.
Chart 2 below shows that the key components of domestic activity are either still falling or are stagnating after a sharp fall. Personal consumption is over €7bn below its peak on an annualised basis and is stagnating. Government spending is €5.6bn below its peak and continues to contract. Popular anger is actually inclined to grow the more there is talk of ‘recovery’.
But the most dramatic contraction is in fixed investment which is now €23.6bn below its peak at the beginning of 2007. The decline in investment led the recession and continues to act as the main brake on recovery. The fall in investment now far outstrips the total decline in GDP since the recession began.
Chart 2 Personal Consumption, Government Consumption and Investment
There might be grounds for increased optimism if the ESRI were plausibly making the case for higher consumption, government spendign and investment. But that is not the case. Private consumption and government consumption are projectedf to rise by just 2% and 0.5% respectively in 2015. Investment is forecast to rise by 12.5% following a double-digit increase in 2014. Even if the ESRI’s optimism is borne out, the fall in investment is now 60% from its peak. So it would take another 4 years of growth at that pace to begin a full recovery.
One area that is definitely improving is government finances. This reflects the very deep cuts made to date, off-set in part by the impact of those same multinationals parking profits in Ireland. But the effect is to produce ESRI forecasts of a general government deficit of 2.3% in 2015 and 0.3% in 2016.
There never was any justification for austerity measures as the crisis was caused by a private sector refusal to invest, not over-spending by the public sector. Any further austerity measures would amount to sadomasochism. Instead, the debate has already switched to the prospects for different forms of tax cuts.
There is certainly a need to improve the living standards of households. But tax cuts are the least effective means of achieving that as they only benefit income tax payers not the very low-paid or those not in work. They also disproportionately benefit high earners. There is a better way, or a number of them.
The ESRI makes no forecasts for long-term interest rates and, aside from the fall in debt interest payments, they barely feature in ESRI calculations. This is an important omission.
We are living in an exceptional era. The government can currently borrow for 10 years at an interest rate of just 0.8%. If the ESRI is correct it will also have borrowing head room of approximately €12bn over this year and next while still meeting the Maastricht Treaty criteria on deficits. If there is nothing that this government can invest in with an annual return of 0.8% or more (and so provide a surplus for the public sector), then it should go home. For example, the OECD estimates that the Irish government’s rate of return on its investment in tertiary education is 17.5% per annum.
To lift living standards, improve public services and raise investment a rational economic policy would allocate government resources in the proportion which they have contributed to the current crisis. This would see approximately 15% allocated to current government spending, about 20% to boosting household incomes and the remainder to public investment.
But we seem to be a long way from rational government. So there is no popping of champagne corks just yet. We are still living with the miserable vintage of 2010. It doesn’t have to be that way.
When we look at the headline numbers, it appears that Ireland is a low-spend economy – that is, Government spending is well below EU averages. This helps explain why we don’t have anything near the public services, income supports and investment that other EU countries enjoy. However, it is claimed that a significant part of the extra spend in other EU countries is due to their older demographic which necessitates higher public resources (pensions, healthcare, etc.). Strip this away, and we may find that Ireland is actually a high spending country.
Seamus Coffey has contributed to the debate by doing just that - stripping out spending on the elderly. When this is done Ireland comes in, not near the bottom, but near the top: the 5th highest public spending economy in the EU-15, even ahead of ‘high-spend, high-tax’ Sweden.
This is a politically loaded argument. If it can be established that we are, in fact, a high spending country this would justify a tax-cutting agenda. We have the money, so the argument would go, we just don’t spend it right.
So are we an average or even high spending economy by EU standards? No. Not even close. In fact we are starving ourselves of public resources. Let’s go through this argument because I’m sure we’ll hear more of this as the campaign to cut taxes continues.
First, with the help of the EU Ameco database, let’s look at primary expenditure (public spending excluding interest payments) with an adjustment for GDP per the Irish Fiscal Advisory Council (which has created a hybrid measurement between GDP and GNP). 2012 is the last year we have data for old age expenditure – and as we will see below, it is highly misleading to make any conclusions about spending levels for this year.
As seen, Irish public spending is low (there is no data for Belgium and Luxembourg’s GDP/GNP differential is even more distorted than Ireland’s). We’d have to increase spending by over €8 billion to reach the EU-15 average and €16 billion to reach the average of our peer group – other small open economies.
However, given that other EU countries have much higher elderly-related expenditure, what happens to this graph if we strip out that expenditure? We will turn to the more detailed Eurostat table. This expenditure includes more than just pensions. It also includes dedicated medical care (e.g. nursing homes), benefits-in-kind (e.g. home helps, transport facilities), carers’ allowances and, in the words of Eurostat, ‘miscellaneous services and goods provided to elderly persons to enable them to participate in leisure and cultural activities or to travel or to participate in community life’.
It would appear that there is some substance to the argument that Ireland is not a low-spending economy. We’re above the EU-15 average though still behind other small open economies – ranking 6th. If there are deficits in the public sector and income supports compared to other European countries, then whatever the issue it isn’t that we don’t spend enough.
However, the operative word here is ‘appear’. When we go below the surface, the picture changes dramatically.
Old Age Expenditure
A country can spend a lot of money on the elderly for two reasons: first, because there is a high proportion of elderly (demographic); second, because they choose to invest more in the living standards of the elderly (policy).
In terms of the demographic element the average proportion of elderly (65 years and older) of the whole population is 18.7 percent throughout the EU-12 countries we’re examining; in Ireland it is 12.1 percent. So we have a 35 percent lower cohort of elderly people according to EU Ameco.
Now, let’s take two countries with the same proportion of pensioners. But one country spends extra – on pensions, healthcare, community supports, etc. Their spending levels are different because they have different priorities (e.g. higher taxation to pay for higher spending), not because of their demographics. Therefore, subtracting elderly-related expenditure doesn’t take into account the policy differences. We can see this from the following table which shows old age expenditure per each elderly person in the EU-15 countries.
This should be treated as indicative as I have just taken amount spent as shown in Eurostat and divided it by the number of elderly (over 65 years) . But what we find is that Ireland is a low spending economy when it comes to our elderly living standards. We’d have to increase spending on the elderly by nearly 30 percent to reach the EU-15 average.
So if we are to exclude old age expenditure we must separate out the demographic element from the policy. There are various ways to do this but I will take a rather straight-forward approach. Let’s assume that Ireland had the same proportion of elderly as the EU-12 average. We then increase Irish spending on the elderly proportionately:
Now let’s go back to primary spending and add the difference (2.7 percentage points) to Ireland’s primary expenditure. This would show Ireland’s spending if we had the average number of elderly as the other EU countries.
When we separate out policy and demographic we find that Ireland falls back down the table, below the average of other EU-12 countries and even further behind our peer group. We’re now about €1.5 billion below the EU-12 average in 2012.
Let’s go further into this.
The Youth Demographic
True, we don’t have to spend as much on our elderly as other EU-15 countries – though as we saw above, the difference isn’t that much. But what about the other end of the age scale – the youth demographic? Ireland is fortunate to have a high youth population but this comes with a current cost in the form of social transfers (e.g. Child Benefit) and education.
Therefore Ireland has to spend nearly 31 percent more on education and family transfers (e.g. Child Benefit) than other EU-15 countries. This is as much a demographic-related expenditure as pensions but there are few who suggest looking at our overall expenditure excluding youth-related expenditure. But let’s be consistent here and adjust Irish expenditure accordingly.
We spend 8.5 percent of GDP on children (family-related expenditure, education, etc.). If we reduce this number by the demographic percentage difference with the other EU-12 countries – this would mean that Irish expenditure would fall to 6.0 percent.
This is, of course, highly stylised. While one could argue that cash transfers would fall accordingly, education costs might not fall as much as you would still need to maintain an infrastructure of school buildings, teachers, equipment, etc. A similar argument could be made for increasing the number of elderly. So this is not intended to be percentage point perfect; it only gives an indication.
The point here is that while we benefit in spending terms because of our lower elderly demographic – a large portion of this is wiped out because of our higher youth demographic. When you combine the two, the demographic difference with the rest of the EU makes up only a conservative two percent of GDP. In other words, not that much – and certainly not as much as merely stripping out headline numbers.
This is confirmed by the 2012 Ageing Report which looks at age-related expenditure: pensions, health care, long-term care and education (thanks to Tom Healy for alerting me to this report). When they factor in all these costs, Ireland doesn’t even come last in the EU-12 table. It does come in at 3.6 percentage points of GDP behind the mean average of the other EU-12 countries in 2010. But they project that this gap will almost halve by 2020 – given our rapidly rising elderly demographic and still strong youth demographic. This data appears to be more comprehensive – factoring in taxation measures as well as total expenditure. Any way you look at it, suggesting that age-related expenditure makes a big difference in comparative expenditure between Ireland the rest of the EU is to over-state the issue.
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But all that was in 2012; to borrow a film phrase – that was a long time ago in a fiscal galaxy far away. So what about now?
2015 – Resuming Low Spend Business
In normal times, one can make comparisons between countries using GDP figures. But in times of volatility – when a country’s GDP is collapsing – focusing on one year can give a highly misleading picture of public spending. Here’s an example.
What accounts for this difference? GDP fell. In this period of volatility, Irish public spending fell but GDP fell faster. That’s the kind of quirk that can be thrown up when comparing countries during periods of volatility. In short, to use 2012 as a benchmark for our spending status can be highly misleading.
How misleading? We’ll first look at the situation projections this year and then look at projections out to 2018.
Remember, there was a 2.7 percent (of GDP) demographic benefit for elderly spending but a 1.5 percent disadvantage on youth expenditure. Let’s be conservative and call it a 2 percent benefit (this is the figure the EU Ageing Report uses for Ireland coming into 2020). We will add this to the Irish figure as we did above to create equivalence with the other EU-12 countries, using the EU Ameco estimates for other countries and Irish government projections.
Ah, there we are – at the bottom of the table, even with the demographic benefit. Why the big difference with 2012? Ireland’s GDP volatility is smoothing itself out. What does this mean in Euros and cents?
Now imagine that we were just an ordinary European economy. We’d be spending an extra €12 billion. How much better would our current services be, how many new services could we roll out (e.g. affordable childcare), how much new investment, how much stronger would our income supports be if we spent €12 billion more? Its’ worth pondering.
Boldly Going Where No Low-Spend Economy has Gone Before
When we step back and take a longer look at what the Government has planned for us it only gets worse. The following looks at the EU as a whole (there’s little difference between the expenditure of the all EU countries and the EU-12 countries we examined above).
The EU projections come from the IMF (they are similar as the EU-12 we have been using above); for Ireland the projections come from the Government’s 2015 budget. Irish primary spending will continue to fall further behind the EU average. By 2018, we will have achieved truly ultra-low expenditure status with the lowest levels of expenditure of an EU country with the possible exception of Latvia and Lithuania.
There may be changes when the Government publishes its Spring Statement to accompany the 2015 Stability Programme Update. The Taoiseach mentioned that the Government would keep expenditure below the GDP growth rate. If we assume, on this basis, that the Government will increase public expenditure by two percent annually out to 2018, projected primary expenditure would be 35.0 percent, only marginally above the figure in the chart above.
What is the gap in Euros and cent? The following should be treated as a rough approximation.
Factoring in GDP adjustments and demographic benefit, the spending gap will widen out to 2018 based on the Government’s own projections. This year, we will be spending €12 billion less than other EU countries; by 2018 we will be spending €19 billion less. Even with a higher growth rate in primary expenditure – as referred to above based on the Taoiseach’s statement – the gap would still be over €16 billion.
Some will counter by saying the Government projections are based on a no-change policy – that is, these are the expenditure levels if there is no policy change. This, however, only suggests it could be even worse. If the Government continue its tax-cutting agenda, this could put further downward pressure on spending. This might be off-set if the EU gives Ireland some breathing space on spending and the deficit but this remains to be seen. All in all, wherever we end up with this Government, it won’t be in a good space.
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Ireland is a low-spending economy. Historically, this has always been the case. In 2000, Ireland was well below the EU average. Even in the boom years we never got near the spending levels of other EU countries. The crash made it look like we were catching up to the EU average but this was a statistical illusion created by GDP volatility. Coming out of the recession and stagnation the numbers are reflecting our true state – a chronic and substantial under-spender.
So let’s knock all claims to the contrary. Whether it is public services, social protection and income support, or investment we are starving ourselves. The question is not whether we are a low-spender – we are most definitely. The question is: will we let this happen.
It is difficult to make sense of the EU governments’ attitude towards Greece – not if we’re using rational measurements. There was a deal on the table – as reported by Paul Mason of Channel 4 news. The Greek government was happy enough with it, the EU Commission was happy enough with it, it didn’t cross all the t’s but it provided the necessary breathing space to allow a more sustainable and beneficial deal for both creditors and debtors to emerge. So what went wrong?
One of the problems with writing about the current crisis is that by the time this gets posted, events have moved on – such is the speed at which events, and rumours of events, are moving. So let’s just hit some highlights.
You’d think Greece has been lethargic in applying its austerity programme, resulting in comments like – ‘Why can’t Greece be more like the virtuous Irish?’ But as Kevin O’Rourke states, pointing to the comparative fall in the structural deficit between Ireland and Greece:
‘So, to summarise: the Greeks have done more “reform” than we have, have endured a lot more austerity, and live in a country where the costs of austerity are likely to be higher than here. Perhaps the Irish government might want to tone down its assertions of relative virtue, and display a bit of solidarity with Greece. Is a less deflationary and less creditor-friendly Eurozone not in Ireland’s long term interests, assuming that we remain a member of the single currency?’
What the new Greek Government wants is very reasonable: a few weeks to draw up an agreed programme. Claims that ‘we don’t know what they want’ (made consistently by our Finance Minister) are misleading and insulting. They are not asking for extra money, they are not seeking transfers from, or additional liabilities to, other members states. From the outset, Greek Ministers has been asking for what can be called a ‘bridging loan’ which would only last a relative few weeks – in order to negotiate a new programme. In other words, they are asking for time – a reasonable request for any new government.
And that is exactly what was almost agreed – or at least was on the table. Paul Mason quotes from a draft agreement was drawn up by EU Commissioner Pierre Moscovici
‘The above (the proposed agreement) forms a basis for an extension of the current loan agreement, which could take the form of a (four-month) intermediate programme, as a transitional stage to a new contract for growth for Greece, that will be deliberated and concluded during this period.’
This coming from the EU Commission which is not known for its debtor sympathies. Nonetheless, it was a constructive intervention – even if some officials from the EU Finance Ministers’ meetings tried to insist it didn’t exist.
This got nowhere even though Greece was willing to sign. So why the opposition to what could be seen as a face-saving compromise for all involved?
Quite simple - the Syriza government cannot be seen to ‘win’. Never mind debt write-downs (which Syriza is not looking for – Alexis Tsipras has made it clear they will honour all contracts, all obligations); the ‘win’ here refers to breathing space and the political momentum that such space might encourage throughout Europe.
The breathing space would give time to construct an alternative to austerity. The breathing space would provide momentum, not only in Greece, but in other countries (and not just the periphery) to those forces who have been arguing for an alternative to the current deflationary regime. The breathing space would create the danger that the initiative could be wrested away from the controlled-rooms of Minister meetings and taken up by popular forces. The breathing space could be a very dangerous space – dangerous to the current elite.
What might happen if the new Greek Government constructed a programme whereby relaxation of arbitrary budget surplus rules (which would cost nothing to anyone but would allow for a humanitarian and investment programme), coupled with an authentic reform that tackled the corruption and tax evasion imposed on Greek society by the oligarchs? A programme that met all EU fiscal targets but did so in a different way than what is being demanded by EU member-states? This wouldn’t put some folk and some ideologies in a good light.
This helps explain why only a matter of hours after they were elected, the new Greek government was subjected to a torrent of demands to continue the Troika, extend the current bailout deal, maintain the current course – no deviation, no relaxation. Even now, the bottom line from the Eurogroup is that Greece must apply for a bail-out extension – even though this is unnecessary and gratuitous given the EU Commission’s intervention.
Syriza raised hopes and expectations throughout Europe in the aftermath of their historic victory. They continued those with the new Prime Ministers’ first address to the Greek parliament. They swept through Europe in the person of the Finance Minister Yanis Varoufakis and his support team.
That had to be shut down – and shutdown quickly. If Europeans got similar ideas, all manner of problems could arise for domestic governments who have a more grim agenda in mind. The last thing the Syriza government should be allowed is to carry on all this hope and expectation-raising. Normal business must be resumed and seen to be resumed. Immediately.
This explains the Irish Government’s attitude of ‘no breathing space’. This might give time for progressive voices here – in concert with other European groupings – to critique and propose alternatives to a deflationary programme of squeezing public spending, cutting taxes and obsessing over a balanced budget while labouring under incredible debt levels. Give the Greeks breathing space and we might get ideas about getting one of our own– and that can’t be allowed.
The Irish Government’s position is unconscionable and unreasonable. Their opposition to the Greek Government’s reasonable request should be highlighted at every opportunity, opposed at every turn; and not only for the sake of the Greek people.
For, like the Syriza Government, the next Irish Government – hopefully the first progressive government elected in this state – will be demanding the same thing: breathing space. Let’s hope it is not too late – for Ireland, for Greece and for Europe.
It is often stated that everyone has made sacrifices during this crisis. Whatever about ‘everyone’, there are certain groups that clearly have ‘made sacrifices’; or, rather, have been sacrificed. And one of these groups is young people.
We have seen emigration rates rise substantially, high levels of unemployment, substantial cuts in social protection payments and even insults (the infamous ‘unemployment as a life-style choice’). Let’s look at another grim metric – Eurostat’s severe material deprivation rate.
As stated before, this benchmark is particularly dire. Severe material deprivation is defined as enforced inability to pay for at least four of the following items:
To pay their rent, mortgage or utility bills * to keep their home adequately warm * to face unexpected expenses * to eat meat or proteins regularly * to go on holiday * a television set * washing machine * a car * telephone
Eurostat looks at the plight of young people throughout Europe, aged 15 and 29 years. For 2012 this is the percentage of young people suffering severe material deprivation.
Unsurprisingly, Greece leads the league. But there’s Ireland right there at the top. More than 13 percent – or more than one-in-eight young people live in severe material deprivation conditions. This is more than double the average of other non-Mediterranean countries (a particular comparison given that our Ministers continually claim that we are not Greece or Italy, etc.).
The growth in severe material deprivation among young people over the course of the crisis has been alarming to say the least.
The numbers accelerated after 2010 with the cumulative effects of the crisis and the cuts in social protection payments.
In percentage terms, the rise in severe material deprivation among young people here has been the highest in the EU-15 – even higher than Greece (though Greece started out at a very high rate prior to the crisis). In Ireland, the rise has been 133 percent; for other EU-15 countries it has been 45 percent.
Another interesting stat is the distinction between young people living with parents and those not living with parents. In this measurement, Eurostat uses 16 to 29 years. We find that:
There are two points to note in all this.
First, our high levels of emigration have kept Irish severe material deprivation levels lower than what they would have been otherwise. The following adds up the number of young people (15 -29) emigrating in the years 2010 – 2012 as a percentage of the population of young people in 2012.
In 2012, there were approximately 900,000 young people aged 15 – 29. In the three years 2010 – 2012, 165,000 emigrated – or 18 percent. This far exceeds any other EU-15 country. This is intended as a snapshot (more detailed analysis would look at net migration, etc.). The point here is to imagine if our emigration rate was half of what it actually was, with 80,000 staying here. It is reasonable to assume that deprivation rates and unemployment would be even higher. And this doesn’t count the high levels of Irish emigration in 2013 and 2014.
The second point is that severe deprivation levels are likely to have increased in 2013. While Eurostat hasn’t posted the Irish numbers yet, the CSO – using a different deprivation measure – shows deprivation to have increased among the general population, children and students. So watch out for that deprivation bar to extend further.
While none of the above is too surprising given what we know about general deprivation rates, it should still shock us. Becoming numb to high levels of deprivation merely feeds into the ‘new normal’ that is being prepared for us - a new normal where high levels of poverty, debt, emigration and low-pay are somehow an unfortunate but unavoidable part of the post-recession landscape.
We shouldn’t’ accept this – even if some Minister comes along claiming that, like unemployment, youth deprivation is a ‘life-style’ choice.
How do EU countries manage to provide better public services and income supports than us? And are the Irish willing to pay for European-style public services (the implication being we are not). These were the two questions posed by the Claire Byrne Live show which compared life in France with our lives here. It was both provocative and frustrating; frustrating because it did not answer the first question. Had it done so, we would have realised the second question is irrelevant.
Provocatively, we learned that in France:
In other words, the French social model is far, far advanced compared to ours.
How do they do they achieve this? Do they tax their citizens more? The programme provided a couple of statistics in a video introduction that should have alerted the discussion. They compared a French two-earner household with an Irish one – both on €80,000. The Irish household paid higher personal taxes (income tax, USC, PRSI).
The second stat showed French government spending at 57 percent of GDP; Irish government spending is well below that at 40 percent. So, if Irish personal taxes are higher, but spending is much lower – well, somewhere in there is the answer. Let’s see if we can find it with the help of Eurostat and the EU’s Ameco database.
When it comes to personal taxation on employees and household consumption tax (VAT and Excise), Ireland and France are pretty close with both trailing the EU average. So the reason can’t be found here.
What about corporation tax? The effective French corporate tax rate in 2012 was 32.1 percent; the second highest in the EU. The Irish rate is a lowly 8.5 percent. But, in actual fact, this can’t explain the disparity in expenditure on public services and income support. While the Irish rate is nearly four times less than the French one, we receive more corporate tax revenue than France. Corporate tax revenue in Ireland makes up 2.3 percent of GDP; in France, it makes up 2.2 percent. How can this be?
Simple. Companies transfer billions of Euros in profits generated in other countries and ‘book’ them here (i.e. pretend that they are ‘Irish’ profits). This increases the volume of profits taxed in the country and, therefore, the same amount of revenue in corporate tax can be raised.
All this to say, the level of corporate tax revenue cannot explain the disparity between France and Ireland.
So what does? Employers’ social insurance or the ‘social wage’. Employers’ social insurance is part of an employee’s compensation package. It is that part of the employees’ wage that is paid into a social insurance fund from which we obtain services for free or at below-market rates – just like France’s free early childhood care/education and GP visits for €7.
The employees’ social insurance gap between Ireland and France is substantial.
Ireland’s social wage, or employers’ PRSI, is the lowest in the entire EU (save for Denmark which doesn’t have a social insurance system). It would have to quadruple to reach the French level which is the second highest in the EU.
Let’s put Euros and cents on this. In 2012, Irish employers’ PRSI raised €5 billion. If it were at French levels, it would have raised €21 billion. That’s €16 billion more than what Irish employers pay now. Imagine the public services and social protection income supports you could provide with an additional €16 billion.
Of course, France is an outlier when it comes to employers’ social insurance – it is well above the EU average. And because they have an older age demographic, their expenditure has to be higher than ours. Nonetheless, if Irish employers’ PRSI were increased to just the EU average, it would raise an additional €8 billion – still a hefty sum for investment in our social infrastructure.
There is little appreciation of the role of employers’ social insurance in European taxation structures. In many countries, employers’ PRSI raises more than personal taxation on employees: Estonia, France, Czech Republic, Lithuania, Italy, Slovakia, Cyprus, Spain and Sweden. In France, employers’ social insurance raises €266 billion; personal taxation on employees raises €175 billion. In other words, employers’ social insurance raises 51 percent more than employees’ taxes.
In Ireland, the situation is radically reversed. Employers’ PRSI raises €5 billion; personal taxes on employees raise €15 billion; employers’ PRSI raises 65 percent less than employees’ taxes.
So to answer the questions posed by the Claire Byrne Live programme: in other EU countries, higher levels of public services and social protection income support are funded by much, much higher levels of employers’ social insurance, or social wages.
As to whether Irish people should be willing to pay more for public services – my response is: why? Irish workers are already paying – through labour and consumption taxes – at average EU levels. But they are not getting EU level of public services and social protection support. Why?
Because Irish employers are not making an equivalent contribution that their European counterparts are making. In addition to benefitting from ultra-low corporate tax rates, they benefit from ultra-low social insurance. Workers are already paying their fair share; employers are not. There are two things that follow from this:
It’s that simple.
With the Dail to debate a private members motion from Catherine Murphy, TD calling for support for a European Debt Conference, it is worth looking over Ireland’s debt numbers; especially as we will get a flood of claims from some quarters that our debt level is fine, its’ sustainable, we don’t need debt relief, etc. etc. etc.
The starting point in such debates is the question: is Irish debt sustainable. This can, however, descend into a black hole of formulae. Simply put, just about any debt can be considered ‘sustainable’ if the debtor is willing to starve the kids and live under the railway bridge. ‘Sustainable? Sure, but there will be sacrifices’ (which, in Ireland are never inventoried). If you believe this is an exaggeration, consider the EU elite’s attitude towards Greek debt levels.
Let’s go through some bald numbers.
Irish debt is among the highest in the 19 Eurozone countries. Officially, it is at 110 percent of GDP; when measured against our fiscal capacity as suggested by the Fiscal Council, it rises to 122 percent. We’re placed fourth though look out for Cyprus and Belgium in the next few years.
When we turn to what some call an ‘illegitimate’ debt – that private banking debt that we all ended up paying for – Ireland remains league leader.
While banking debt makes up a quarter of our GDP, in the Eurozone the total debt is less than 2 percent. And for Ireland, this doesn’t count the nearly €20 billion taken from the National Pension Reserve Fund for recapitalisation – since this is categorised ‘investment’ and not debt. Were it not for the official banking debt, our overall levels would be close to the average Eurozone level.
Of course, this data only goes so far. There are a number of other factors that determine sustainability – the level of foreign borrowings, exports, current account surplus, high-tech employment and activity. A high-income country can sustain a high debt level that a low-income country couldn’t. But at the gross level, we can see that Ireland is a highly indebted country and, within that, carrying the highest level of illegitimate private banking debt.
Next is the issue of interest payments. Interest payments measure the budgetary impact of the debt level on the economy.
Officially, we are in the top five but, in terms of fiscal capacity, we are third – even ahead of Greece which has benefitted from previous Troika agreements. In 2014, some €7.4 billion was paid out in interest payments from Ireland. Or put another way, if our interest payments level were at average Eurozone levels, we’d be paying €2.4 billion less in 2014.
So where does this leave Ireland, apart from being a highly indebted country paying out high levels of interest?
First, some commentators have pointed to the ‘rapidly’ falling levels of debt. For instance, in 2013 the debt level from 123 percent to 110 percent last year, a significant fall. So what’s the problem? The problem is that this was largely a statistical and once-off exercise. 90 percent of this fall was due to a reclassification of IBRC debt and the raiding of our cash balances (cash in hand). Without this, the debt would have exceeded 120 percent in 2013 and would still be above 100 percent by 2018.
Second, the Government is planning to balance the budget by 2018. This will entail a primary surplus of nearly €9 billion. This is the amount by which revenue exceeds expenditure. Almost all of this will go on interest payments, with a small amount leftover to start paying down debt. In these stakes, Ireland is once more at the higher end of the league.
We are up there with Italy, Greece and Cyprus in running up excess revenue in order to meet interest payments and reduce debt.
So let’s bottom-line this. We are highly indebted with high levels of interest payments. The Government intends to run substantial surpluses to meet those interest payments. At the same time, we are facing into a slew of problems – not least of which is a chronic investment crisis and a massive repair job to a social infrastructure which was pretty anaemic prior to the recession, never mind now. A growing elderly demographic, household debt, continuing high levels of emigration and a deprivation rate of 30 percent: and we intend to run up a surplus of nearly €9 billion in a few years; money that from an economic and social perspective is meaningless.
Or put another way - what could we didn't run up that surplus, if we had some deal on debt and/or interest payments? I suspect everyone could come up with a few good ideas.
So, yes, our debt is sustainable if we want to tolerate this situation. We can starve the kids and live under the railway bridge. This can be our ‘new normal’ where everything is just fine, just a little ‘tight’.
Or we can join with progressive forces (and at least one government but hopefully more by the middle of next year) throughout Europe in calling for a Debt Conference to see if we can all find a way out of what is a Eurozone crisis – but a crisis which impacts more on a handful of countries. Of which we are one.