Notes On The Front

A Good Start to the New Year

Ever since the crisis began, progressives have been on the back-foot, forced to react to the agenda driven by the orthodoxy.  However, 2012 has started on a more hopeful note.  There have been two initiatives that can provide the basis for a common-sense counter-agenda, not only capable of winning considerable support throughout society but – and this is always key – of winning. 

First, is the letter signed by 60 social activists, academics and artists in the Irish Times today.  They call on the Government to introduce an emergency budget to reverse current austerity policies and introduce measures to grow the economy through an investment programme that can create jobs while increasing taxation on high income groups and re-investing the revenue back into domestic demand. 

Not only is this call for an emergency budget grounded in the reality of the Irish economy (in 2012 we will still remain mired in recession with employment falling and debt rising), it is also lays out an achievable goal.  The emergency budget, similar to the Jobs Initiative last year, is something the Irish Government can do within the parameters of the EU-IMF bail-out deal, namely:

• Releasing money the Government already has (in cash and assets) for investment projects that can create jobs; this money doesn’t have to be borrowed or found out of new taxation or spending cut measures.

• Increasing taxation on high income groups (their income, capital and/or property) has a minimal impact on domestic demand but using the revenue to put back into public services and starting to reverse some of the social protection cuts – that, too, will increase employment and demand, and, so start to remove deflationary pressures in the economy.

Would this solve our economic problems?  No.  But it would start moving us in a different direction.  And if a little bit of investment and expansion starts helping, then a lot more would bring even greater benefit and start to fundamentally change the agenda.

The second initiative was launched on Wednesday – Anglo, Not Our Debt – by social organisations comprising trade union, community, faith-based, global justice, environmental and academic sectors.  They are calling on the Government to suspend payments of the Anglo-Irish/INBS promissory note and invite the ECB into negotiations with the intent of achieving a 100 percent write-down of the debt.

We all know that repayment of the Anglo debt will inflict a terrible burden on the economy and society for years to come.  It is estimated to cost over €80 billion over the next 20 years – paying off the debts of a dead bank.   

The call for suspension and renegotiation is forensic and well-targeted.  It is not about ‘burning the bondholders’ or repudiation or default, not that I have any problems in principle with any of these.  But what it does do is avoid the accusations that are constantly thrown back at those campaigning for debt justice.

• It doesn’t create a credit event, spreading contagion throughout the European financial system.  The promissory note payment is between public agencies.

• It does not collapse the merged Anglo/INBS bank; the promissory note is maintained on their asset sheets.

• It does not demand the Irish Government act in a unilateral manner – the act of suspension is an instrument to force a multi-lateral solution; one that is satisfactory to all parties.

It is a demand for something the Government can do, if it has the political will. It would strengthen their hand -if a party continues making a payment, what's the incenvtive for the other party to negotiate?  And if the Government did this they would have the support of everyone in the country. 

So here we have two achievable and realistic initiatives capable of winning widespread support, two initiatives that can actually be realised:

• An emergency budget to invest, create jobs and raise domestic demand

• Suspension of the Anglo-Irish promissory note in order to renegotiate this odious debt

Now let’s go out and make these a reality.

Does the EU-IMF Owe Ireland an Apology?

There’s nothing wrong with saying, hey I got it wrong.  We all get something wrong from time to time; never more so when the subject matter is economic and fiscal forecasting.  When people and institutions don’t admit they got it wrong, especially when they got it demonstrably wrong, when the policies they are advocating are not hitting their target - that’s when cynicism and resentment arises. 

So did the EU and the IMF get it wrong?  There’s little doubt.  The predictions and prognostications and statements of support are on the record – and they are way off target. 

The basis of the EU-IMF bail-out deal was the last Government’s National Recovery Plan (NRP), which was published only weeks before the bail-out deal was sealed.  According to the Minister for Finance at the time (December 2010):

‘The [bail-out] programme has adopted in its entirety the measures set out in the National Recovery Plan as a roadmap to return our economy to sustainable growth. The adjustment of €15 billion by 2014 has been accepted, as has the breakdown of €10 billion in spending reductions and €5 billion in revenue raising measures.’

When the bail-out deal was signed, the EU and the IMF couldn’t say enough good things about the National Recovery Plan.  They were positively ebullient and fully confident that this Plan would work.  It’s worth quoting in detail from the joint statement issued by EU Commissioner Ollie Rehn and IMF Managing Direct Dominique Strauss-Kahn:

"We strongly support the economic program announced today by Ireland . . .This program articulates a clear strategy for tackling today's problems and for harnessing the enormous growth potential of this open and dynamic economy. . . . It also offers a road map for sound public finances by setting strong, upfront actions in a multi-year framework . . . On the fiscal side, the program spells out both spending and revenue efforts over several years to repair the budget position . . . Carrying out this plan calls a sustained effort by the Government and the people of Ireland. But it also offers a sound basis for stable, job-creating growth.’

This is quite a statement of support and affirmation.  And it’s not like Ollie and Dominique were buying a pig-in-the-poke.  The National Recovery Plan came complete with projections up to 2014 – economic and fiscal – which no doubt the experts at the EU and the IMF had gone over, examining every cell in every Excel worksheet.  No doubt it passed their stress tests.  Hence, the effusiveness of the EU and IMF’s support.

So how is the Programme, based on the National Recovery Plan, faring?  Not well.  Let’s see how the projections are holding up, starting with the economic.

There’s going off-target and there’s going off-target.  And then there’s this.

• GDP growth projections in the years 2011-2015 have been cut by nearly a third – with independent forecasters suggesting that 2012 is going to be even worse than the latest Government projections.

• Consumer spending:  the EU-IMF-NRP estimated a modest increase but the latest projections are showing that it will be negative over the four years.  Ouch.

• Investment: From a 9 percent increase to a -4 percent increase – that’s really wide of the mark.

• Employment:  This is where it really goes off-target.  The EU-IMF-NRP projections show employment increasing by over 4 percent – or nearly 80,000 jobs by 2014.  The latest Government projections show employment actually falling, by nearly 2,000 jobs over the same period. 

Now let’s turn to the fiscal or budgetary projections.

• Annual Deficit:  the EU-IMF-NRP projections estimated the deficit to be -2.8 percent by 2014.  The latest Government projection puts the deficit at -5.0 percent.  This is partly explained by the extension of the target date for Maastricht compliance to 2015.  This extension was necessary because the current Government found a €4 billion hole in the budgetary projections produced for the EU-IMF bail-out deal only a few weeks after they came to office.  I wonder if they discussed that with the Troika officials.

• Debt:  the EU-IMF-NRP projections estimated the debt to be 100 percent of GDP by 2014.  The latest Government projections estimate it to be 115 percent – and that’s after the €3.6 billion mistake.

• Cumulative Deficit: Over the four years, the General Government Deficit was estimated to be, in total, €41 billion in the years 2011-2015 (this doesn’t include bank recapitalisations).  The latest Government projection is €50.2 billion. That’s over 20 percent off target only one year into the programme.

 No matter how you rationalise this, it doesn’t look good – for the EU, the IMF or the Department of Finance.  But as I said, everyone makes mistakes.  The point is we should own up to those mistakes. 

The officials from the EU and IMF are in town.  Now would be a good time to start an open and honest conversation about the Irish economy, rather than hiding behind meaningless rhetoric and pep talks.  It would be a great if an EU or IMF official walked up to the microphone and said:

‘Sorry, but we got it wrong.  We thought that the programme would work but it’s obviously not.  It’s not tackling today’s problems; it’s not bringing about job creating growth.  We need a new approach – a Plan B.  We need a different debate about growth and jobs and debt.  We need a new departure.  Anyone got some ideas?’

Now that kind of honesty and humility would go down a treat.  And if it takes a few months to work these new ideas into a coherent programme, that’s okay.  Because there’s one thing for sure – this economy is stuck in a rut.

It ain’t going anywhere.

Normal Business Resumed or the Great 'Have-Property-Prices-Hit-the-Floor' Game

There’s been a lot of discussion about whether 2012 will see property prices hit the ‘floor’.  The Government and NAMA are doing their bit to help to stimulate house purchases through budgetary measures and negative equity insurance schemes.  Unfortunately, there has been little debate about the optimal level of house property prices.  Few have been asking the question – would it be a good idea if property prices stopped falling this year.

A standard measurement of ‘house affordability’ is the ratio between median house prices and median household income.  The authoritative ‘Annual Demographia International Housing Affordability Survey’ suggests that affordability lies in the 3:1 range – median house prices should be three times or less the median household income.  Anything above that threshold leads us into ‘unaffordability’ territory.   

One of the problems is that we don’t have official data for these median components.  So we have to patch this together.  Conor McCabe has looked at the relationship between average house prices and average industrial wages and found that while the ratio hovered around the 4:1 mark between the mid-1980s and mid-1990s (that is, average house prices was four times the average industrial wage), by 2006 this ratio exceeded 11:1.  Therefore, the ratio before speculative boom can be considered the long-term sustainable ratio between house prices and wages.

I have done my own calculation, using the Department of Environment data. 

There are some minor differences with Conor’s calculations.  This data is based on manufacturing wages – but what they both show is the scale of the speculative boom (the shaded area is my own estimate of wages, as the Department of Environment stops after 2007 because the CSO changed their wage calculation methodology).  They further show that pre-speculative prices fluctuated around 4.

Ronan Lyons also looked at this issue and found that average house prices were about 3.6 times the average household income during the 1980s.  Ronan suggests that this could be considered the equilibrium level.  Back in July of last year he suggested that, using this 3.6 ratio, house prices needed to fall by about 25 percent.

So where does that leave us?  In 2011, house prices fell by approximately 16 percent which suggests that the ratio has fallen to something like 5.5.  Ok, this is well below the speculative heights but still well above that ratio of approximately 4 that pertained in the decade preceding the speculative boom.  To get to that level, we need house prices to fall by another 25 and 30 percent.

Taking Ronan’s equilibrium of ratio of 3.6 we find that, using the EU Survey of Income and Living Conditions, house prices in 2009 were 4.3 times that of gross household income.  This suggests a further fall of 16 percent is necessary – but we have to remember that gross household incomes are falling along with prices; so the fall in house prices would need to be more.

Ok, we have now been numbed by all these prices and ratios.  What’s the bottom line?  It should make us very worried that the Government and public agencies are pursuing policies to put a floor on prices.  Housing costs – home-ownership and rents – should be driven down to a level of reasonable economic return; otherwise, they become a drain on the productive economy.  If people have to spend more on housing themselves, they have less to spend in other sectors of the economy.  This becomes a cost – and as we know from experience, a terrible cost; not only in diverting scarce resources from non-housing consumption but the danger of diverting investment away from productive activity.

What does it say about an economic policy that reviving a property market is considered desirable?  Do we really believe that building and selling houses to each other is a pathway to recovery? Have we learned nothing?  We are facing into a medium-term period of falling or stagnating real wages (wages after inflation) coupled with higher taxation that will reduce real disposable income.  And we’re talking about reviving, or interrupting the fall in, property prices – especially when they are still well above their equilibrium? 

Complex housing policies are reduced to one thing – property prices.  We have rental accommodation issues (price, quality, tenants’ rights in a fragmented mom-and-pop sector); land prices and the Kenny Report; planning mechanisms for future land use; a potential regressive property tax; arrears and negative equity; rising homelessness; billions of Euros available for individuals, companies and banks to cover their speculative losses in past years; degraded housing stock; local authority waiting lists; ghost estates; NAMA; a dysfunctional private housing sector and a quickly disappearing public housing sector, etc. etc.

But never mind all that.  It’s all so very complicated.  Let’s just talk about house prices.  Let’s talk about ‘reviving the property sector’.  Let’s continue to conflate the fortunes of the economy with the fortunes of the property market.  We only need to focus on one index – and when it starts rising again, we’ll all feel so good about ourselves. 

And normal business will have been restored.

 

2012 - The Year of Anglo

A lot of people are going to find it difficult in 2012, what with the economy returning to recession and all.  But for one group, it will be business as usual:  Anglo-Irish creditors.  And that business will mean that they will be repaid in full. 

Indeed, it’s already started.  On Tuesday, a payment of €2.1 million was made to unsecured bondholders.  Okay, its small beer compared to the billions Anglo is going to cost Irish people each year for the next two decades or so.  Still, nice money for those who gambled on a seedy little bank back in the roller-coaster days (the bond was issued in January 2007).

But that is only the beginning.  Here is the schedule of repayments for Anglo and Irish Nationwide creditors in 2012, courtesy of Nama Wine Lake.

In 2012, Anglo/Irish Nationwide will be paying back €6.3 billion to its creditors – of which €2.6 billion is unsecured.

And then there’s next instalment in the never-ending Promissory Note story:  €3.1 billion paid by the Government to Anglo to help them pay off their creditors.

Now, no one believes this is rational or equitable or justified.  Even Government Ministers don’t believe it is.  So what does it say for our politics that we are forced to continue a repayment regime for non-existent banks that could end up costing the state over €80 billion over the next 20 years even though no one on this island believes this is rational or equitable or justified?  Not a lot.

So what can we do?  Do something different, do a different politics, do what is rational and equitable and justified.  Build the biggest possible coalition – labour and business, right and left-wings, young and old, PAYE and self-employed, Liverpool and Man United supporters – around one simple demand:

STOP MAKING THE PAYMENTS

Stop paying the unsecured bondholders, stop paying the promissory note.  Stop this economic madness.

There’s not much time left.  The next big payment is due on January 25^th; a €1.25 billion payment to unsecured bondholders.  The next big drawdown on public finances will take place at the end of March; the €3.1 billion promissory note.  The very first step is to start telling people – through the social media, through the mainstream media, in the pubs and shops, getting on the rooftop and shouting it to our neighbours.  The next step is to tell people that it doesn’t have to be.

It’s either that or we accept that 2012 will be the Year of Anglo.

Personally, I don’t want to live in that year.

* * *

NOTE:  I refuse to refer to the Irish Banking Resolution Corporation – the amalgamation of Anglo-Irish and Irish Nationwide.  Even the title ‘Resolution’ is an insult to our intelligence.  I refuse to participate in this offensive make-over. 

2012 - Out with the Old, In with the Old

10 years of austerity?  What is the ex-ESRI researcher Richard Tol talking about?  Wasn’t austerity to only last until 2015?  Is this what we have to look forward to?  In a word, you bet.

Tol’s reference to a decade of austerity is well-founded.  While the debate is focused on what’s going to be in the next budget, or next month’s Exchequer Statement, there is little in the way of analysis over the medium-term.    The target date of 2015 for Maastricht compliance is taken as some kind of ‘get out of jail’ year.  But there’s every reason to believe we are serving the equivalent of a life-sentence.  There are two aspects to this.

First, as Tol points out – even after 2015 we will have an enormous level of debt which will need to be reduced.  Bringing the deficit to the Maastricht benchmark does not complete the task.  The Government estimates that the debt/GDP ratio will be 115 percent by 2015 – courtesy of bank bailouts and austerity policies.  Our debt levels will be the second highest in the Eurozone – behind poor Greece but ahead of other peripheral countries such as Italy, Spain and Portugal.  The average debt level for other Eurozone countries will be between 75 and 80 percent. 

There are few GDP/debt projections beyond 2015.  Such estimates are, in any event, subject to considerable unknowns – known or otherwise.  However, NCB takes a stab at it; their estimates stretch out to 2030.    They project the debt/GDP ratio to still remain high even by 2018 – at 113 percent.  After that, they set up a number of scenarios based on average long-term GDP growth and interest rates.  I’ll just take one combination – using the Government’s projected GDP growth in 2015 (4.5 percent) and historical interest rates prior to the recession (between 4.5 and 5 percent). 

In this scenario, in 2030 our debt/GDP ratio would be between 73 and 80 percent – well above the Maastricht general debt target of 60 percent.  To put this in perspective, our debt level in 2007 was less than 25 percent. Even if we reach our deficit targets by 2015 (something that is highly, highly unlikely under current policies) the new mantra will be ‘we have to continue cutting and taxing to bring down our debt levels’.

Second, there’s this little matter of the proposed Fiscal Pact agreed at the Eurozone meeting in December and which may or may not be the subject of a referendum here.  This pact requires that countries reduce their ‘structural’ deficits to -0.5 percent deficit. The structural deficit is a contrived measurement that estimates what the deficit would be if the economy was running at full capacity.  I will have more to say about this nonsensical and irrational proposal but let’s run with it here.

What is the Government’s estimate of the structural deficit in 2015?  -3.7 percent.  So to reach this new and improved fiscal target the Government will have to reduce the deficit by an additional 3.2 percent of GDP – over and above what they are currently estimating.  What will this mean in spending cuts and tax increases?

If the Government continues with its austerity mind-set, it will attempt to reach this target through €6 to €7 billion in even more spending cuts and tax increases.  Of course, many of us would argue that launching this type of ultra-austerity programme would collapse a number of economic sectors and drive us into near permanent deflation, high unemployment and high debt (but when has the Government listened to our side of the house?).   

So there you have it.  We have years and years of further austerity to look forward to.   

Have a good ‘new’ year.

Taking a Break

That time of year to take a break.  Season's best to all readers.  Will be back first thing in the New Year.

Shut Up, Sit Down and Act Like Fianna Fail

It didn’t take long.  Patrick Nulty, TD voted against the budget on Tuesday night.  Suddenly, on Thursday morning an op-ed appears in the Irish Times attacking the young TD.  And not just ‘attacking’ – it is one of the most vicious attacks on an individual TD you’ll read on an issue of policy.  After all, Nulty is not a Michael Lowry or an Ivor Callely.  He took a political position, regardless of whether one agrees with it or not.  It is incredible that the Irish Times would give space to such a rant.

And an ill-informed, confused rant at that.  Here I just want to examine the economic issues that the author raises.   

Billy Linehan claims that ‘ideology is for yesterday’.  Now when you hear something like that you should ready yourself for an ideological onslaught.  And Linehan doesn’t disappoint.  What does he demand?

‘Why isn’t he (Pat Nulty) addressing the salaries above EU norms paid to doctors, nurses and teachers? Or the bizarre issues of increments in the public service or the featherbedding of staff salaries in the ESB and other semi-States?’

Notice how Linehan doesn’t demand that Pat address unemployment (projected to rise next year by the ESRI).  Or the growing levels of deprivation as measured by the CSO (affecting nearly one-in-four).  Or that workers are, on average, are trying to get by on €693 a week.

No, Linehan fixates on public sector pay – which he claims is above EU norms.  Maybe he should read the OECD’s Government at a Glance which shows public sector pay in the largest categories to be below the EU norm.  Clerical workers would need a 10 percent increase just to reach the average pay advance economies– and that’s before the pay cut in Budget 2010.

Or from the same source – that nurses pay is average by ‘EU norms’; and that’s before both the pension levy and the Budget 2010 pay cut.

Or that utility labour costs are below the EU-15 average; as are education labour costs.

It is surprising that someone described as a ‘management consultant’ would not be familiar with basic facts that so many managers are acquainted with.  Ignoring such basic facts is so ‘yesterday’.

But Linehan goes on.  Instead of asking hard questions and assessing whether policies are working, individual representatives should start:

‘ . . . telling the unpalatable truth to constituents – that we spend more than we earn as a nation – with the result that service restrictions and cutbacks are inevitable.’

Where has our management consultant been for the last three years?  That’s exactly what Government backbenchers have been saying since the crisis has begun.  ‘Spend more than we earn’ . . . ‘cutbacks are inevitable’.  What Linehan actually wants is for individual representatives not to face up to the unpalatable truth – that austerity policies are not working.  He doesn’t want individual representatives to reflect on this.

See a pattern?  As growth projections fall, the level of debt rises (notably after the April projections, when the public finances should have benefitted from the reduction in EU-IMF borrowing costs).  Linehan doesn’t want individual representatives to reflect on the relationship between falling growth and rising debt, between austerity and depressed growth; between rising debt and austerity.  Linehan doesn’t want individual representatives to reflect on any of that.  He just wants them to sit down and shut up.

Linehan claims that:

‘Fianna Fáil set up a national economic model which has failed. It cannot pay for itself. Is this the economic standard that Nutty supports?’

This is rather amusing for Linehan demands that individual representatives say the same thing as Fianna Fail backbenchers were required to repeat, to follow the same policies as the Fianna Fail government put forward (cut spending on public services and social protection, increase tax on low income earners, deflate the economy). 

At the end of the day, Linehan wants Labour backbenchers to act like Fianna Fail backbenchers.  And woes betide if they don’t – they will be accused of opportunism and puppy-beating.

Of course, in the broader politics, this is not just an attack on Pat Nulty or, by implication, Tommy Broughan.  This is a warning to any Labour backbencher who is even thinking of stepping out of line.  If you do, you will be subjected to a virulent attack in the pages of the Irish Times and other fora.

Dissent will not be tolerated, there is no vacancy for independent thought, whippings will continue until loyalty is resumed.  I know this because I read it in the paper.

We Will Crush Your Dreams . . . and Here's €1.88 for Your Trouble

Act two of the budget:  increased taxation on capital and property amounts to a quarter of the cuts in social protection alone (never mind education and health).  The takes took €15 million off those holding on to legacy property tax reliefs (out of a total of €435 million they gain in relief).  Lone parents are going to be hit for €112 million.  The scales are not very balanced.

This is a budget that will destroy up to 20,000 jobs.  This is a budget that raises over €600 million in regressive VAT rise.  And €160 million in a flat-rate household charge.  And large families could lose up to €50 per month and more in real income supports.  Strange, hard world.

We are, if the ESRI and the EU Commission projections hold, heading back into a domestic recession with falling consumer spending, falling employment, rising unemployment and falling wages and incomes.  And this budget, on the Government’s own estimate, will cut nearly €2 billion out of growth.  Curious, curious.

But . . . but . . . the Government has given relief for low-income earners under the Universal Social Charge.  The exemption threshold, currently €4,000, has been raised to €10,000.  Let’s do some numbers.

This is the latest income distribution I could find.

This is an extrapolation to identify the earners in the €4,000 to €10,000 cohort – those part-timers who will benefit from raising the USC threshold income.  Previously, they were hit with a two percent charge.  Now they won’t.  What shouldn’t have been done last year with the introduction of the USC has been reversed.  This is good. 

On average what does it mean?  €1.88 per week.   Small – but for people taking home this amount, nothing to sniff at.  The maximum benefit – for those earning €10,000 – will be €3.84 per week.  The problem is that, for a significant number of people, the remainder of the budget takes this relief away and turns many part-timers into net losers.

A big culprit is the reduced social protection payment for part-time workers.    This was done by reducing payment entitlement on a five- day week rather than the current six-day week where a person is working for part of a week.  While there are a number of conditions, the basic premise is that if your working week is reduced to two days, you would get four days of Jobseekers’ Benefit (that is the 6-day rule).  This has been reduced to a five-day rule.  The difference in take-home income is not insignificant:

• Previous:  Working two days, receiving four day JS Benefit:  €125.33 weekly
• New:  Working two day, receive three days JS Benefit: €112.80 weekly

For part-timers, their benefit will be cut by €12.53 per week – swallowing up the average €1.88 gain. In a similar fashion, the reduction in the earnings disregard for Lone Parents will operate to claw-back the USC gain.

We must remember that not everyone earning below €10,000 receives part-time social protection payment; nor does everyone receiving such payment earn below €10,000.  So there is only a partial overlap.  But there are over 132,000 part-time and casual workers on the Live Register – a substantial number receiving the benefit of the USC cut will find it immediately taken away by the social protection cut.  One clue:  the USC cut will cost the Government €47 million, but they will claw back €27 million in reduced social protection payments to part-timers.

However, this isn’t the only ‘claw-back’ people will face:  there is the VAT rise, the Household Charge and, as we saw with Child Benefit, our old friend inflation. For many, the USC cut will melt away before it even hits their pocket - like a snowflake hitting warm tarmac.

This is not to dismiss the USC cut.  However, the entire thrust of the budget is to put a disproportionate amount of the burden of the fiscal adjustments on the shoulders of the low-paid, social protection recipients and part-timers.  Some will gain, some will gain but not by nearly as much as the headline rate suggests, some will lost out slightly, some will lose out significantly.

And in the context of a jobs-destroying budget with a domestic economy heading south and unemployment heading north (and guess who bears the brunt of this), the USC cut can become almost tokenistic.  If Government back-benchers expect the part-time masses to welcome the budget on the basis of this cut, they will be disappointed.

To give back €2 a week (much less after all these claw-backs) may have been considered ‘politically’ smart when it was on the drawing board.  But it only serves to sugar-coat a bitter agenda; and a very thin coat at that.

 

In the Real World All Child Benefit Payments will be Cut

When we move from the numbers in the budget papers out into the real world we find that Child Benefit and child income support has been cut again – not only for larger families but for all families.  The instrument for this cut is that most effective stealth tax of all:  inflation. If I have €100 and inflation goes up by 5 percent – in ‘real’ terms, that €100 is reduced by €5.  I can now buy only €95 worth of goods and services.  Inflation cuts income as surely as Government spending cuts and tax increases cut income. 

So let’s go into the real world and see what will happen in real terms (that is, after inflation).  We have two recent projections on inflation (using the EU’s Harmonised Index of Consumer Prices).  The Government projects that inflation will rise by 1.2 percent while the ESRI projects 1.9 percent.  The ESRI figure is higher because they have included the impact of the prospective VAT rise on prices. 

Let’s first turn to the impact on families on the standard Child Benefit rate (families with two children) and Child Dependency Allowances – payment made to households on social protection income. 

For all households with two children there will be cuts in real child income support.  For those in work with two children, the Child Benefit cuts will range from €3 to €5 per month.

For those on social protection income, the cut will be worse – as they rely on both Child Benefit and Child Dependency Allowances.  These cover over 260,000 families. These real cuts will range from €6 to €10 per month.

When we turn to larger families, however, the situation is worse as there have been cuts in the headline rate along with the cuts produced by inflation.  The supplement for the third and fourth child has been cut by €19 and €17 respectively. This will affect nearly 25 percent of all families in receipt of Child Benefit – or over 136,000 families and some 60,000 families on social protection income.

Families with three children are facing substantial monthly cuts.  For those with working income, the cuts could range between €25 and €27 per month. For those on social protection income the cuts will increase to between €29 and €35 per month.

Families with four children will, of course, be hit even harder.  For those on working income, the cuts will range between €43 and €48 per month while those on social protection income will hit be hit by a substantial €50 to €58 in cuts per month.

There are two sides to this desultory coin.  First, people will be able to purchase less with their child income support; this will reduce living standards at a time when real wages and incomes (taking into account our old friend, inflation) will continue falling next year.

There will also be an impact on domestic businesses.  These households, with falling real incomes and real cuts in child income support will reduce their spending.  This means less turnover in businesses throughout the country.  This will impact on employment in those firms – either in terms of reduced wages, reduced working hours or reduced jobs.

To conclude, we should treat claims that Child Benefit and child income support have been spared sceptically.  This may be true for numbers on the budget papers.  But once families take that income support into the real world they will find that the value will be cut – and in some cases, substantially.

No wonder a lot of people will find their living standards cut in 2012 – a long slow bleed.

The Jobs Destruction Budget (Part 1)

Despite the Taoiseach’s 17 references to jobs in his national address last night, the budget presented this afternoon will cut out between 15,000 and 20,000 jobs from the economy next year.  In other words, there would be between 15,000 and 20,000 more people at work next year were it not for the budgetary measures announced this afternoon.  This is, by any definition, a jobs destruction budget.   

Let’s go through the four main elements that will lead to this job destruction.

First, capital spending cuts will on average, according to the Department of Finance, cut 7,500 direct jobs from the economy next year.  These jobs are directly employed on construction, maintenance and repair work.  In addition, there are ‘downstream’ jobs created as a result of the activity created by capital spending (sourcing and transporting materials, demand created by the employment, etc.).  Conservatively, this would mean an extra 1,000 to 1,500 jobs.  In this area along, between 8,500 and 9,000 jobs lost.

Second, the Government announced it would reduce public sector employment by a massive 6,000.  Taking this amount of jobs out of an economy where unemployment is expected to rise is simply irrational.  It will do little to cut the deficit but it will drive unemployment one-for-one basis, while substantially reducing consumer demand – thus, hitting businesses and private sector employment dependent on that demand.

These measures alone will cut out 15,000 jobs out of the economy.  But there’s more.

Third, a large part of spending on public services goes on procurement from the private sector.  While there is no data in the recent Government’s 4-year plan, the April Stability Programme Update estimated that expenditure on contracts from the private sector would be reduced by approximately €500 to €600 million next year.

It is not possible to assess the employment impact of this cutback. But there is little doubt that companies providing goods and services to the Government will be hit by the loss or reduction of contracts.  This in turn will impact on wages and employment in these companies.

Fourth, the social protection budget will have to be examined in detail but the full-year impact is substantial – over €800 million.  Most of this will reduce payments to current social protection recipients and, as such, will hit demand.  We can assume that the full year impact will reduce consumer demand well over €600 million.  This will lead to further pressure on domestic businesses and employment.

All in all, this will lead to job losses of well over 15,000.  This, at a time when the ESRI has projected the domestic economy will return to recession next year, with rising unemployment, falling real wages (after inflation) and a continuing decline in consumer spending.

Don’t mind the rhetoric, watch the action.  Employment will fall and this budget will be a major contributor. 

Can’t wait for part two tomorrow.

Enda Could Steal a few Lines (and Policies)

The Taoiseach is to speak to the nation - apparently on Sunday when we will all be huddled around televisions, radios and computers.  In the spirit of being helpful, the Taoiseach - and his speech writers - could do worse than read President Franklin Roosevelt's fireside addresses to the American people.  I reproduce an abridged version of Roosevelt's second address to the nation - only a few weeks after he became President (the full text can be read here).

* * *

President Roosevelt: 

'Two months ago we were facing serious problems. The country was dying by inches. It was dying because trade and commerce had declined to dangerously low levels; prices for basic commodities were such as to destroy the value of the assets of national institutions such as banks, savings banks, insurance companies, and others. These institutions, because of their great needs, were foreclosing mortgages, calling loans, refusing credit. Thus there was actually in process of destruction the property of millions of people who had borrowed money on that property in terms of dollars which had had an entirely different value from the level of March, 1933. That situation in that crisis did not call for any complicated consideration of economic panaceas or fancy plans. We were faced by a condition and not a theory.

There were just two alternatives: The first was to allow the foreclosures to continue, credit to be withheld and money to go into hiding, and thus forcing liquidation and bankruptcy of banks, railroads and insurance companies and a recapitalizing of all business and all property on a lower level. This alternative meant a continuation of what is loosely called "deflation", the net result of which would have been extraordinary hardship on all persons working for wages through an increase in unemployment and a further reduction of the wage scale.

It is easy to see that the result of this course would have not only economic effects of a very serious nature but social results that might bring incalculable harm. Even before I was inaugurated I came to the conclusion that such a policy was too much to ask the American people to bear. It involved not only a further loss of homes, farms, savings and wages but also a loss of spiritual values -- the loss of that sense of security for the present and the future so necessary to the peace and contentment of the individual and of his family. When you destroy these things you will find it difficult to establish confidence of any sort in the future.

It was clear that mere appeals for confidence and the mere lending of more money to shaky institutions could not stop this downward course. A prompt program applied as quickly as possible seemed to me not only justified but imperative to our national security.

The legislation which has been passed or in the process of enactment can properly be considered as part of a well-grounded plan.

First, we are giving opportunity of employment to one-quarter of a million of the unemployed, especially the young men who have dependents, to go into the forestry and flood prevention work. In creating this civilian conservation corps we are killing two birds with one stone. We are clearly enhancing the value of our natural resources and second, we are relieving an appreciable amount of actual distress. This great group of men have entered upon their work on a purely voluntary basis, we are conserving not only our natural resources but our human resources.

Second, I have requested the Congress and have secured action upon a proposal to put the great properties owned by our Government to work after long years of wasteful inaction, and with this a broad plan for the improvement of a vast area in the Tennessee Valley. It will add to the comfort and happiness of hundreds of thousands of people and the incident benefits will reach the entire nation.

Next, the Congress is about to pass legislation that will greatly ease the mortgage distress among the farmers and the home owners of the nation, by providing for the easing of the burden of debt now bearing so heavily upon millions of our people.

Our next step in seeking immediate relief is a grant of half a billion dollars to help the states, counties and municipalities in their duty to care for those who need direct and Immediate relief.

We are planning to ask the Congress for legislation to enable the Government to undertake public works, thus stimulating directly and indirectly the employment of many others in well-considered projects.

Well-considered measures will likewise be proposed which will attempt to give to the industrial workers of the country a more fair wage return, prevent cut-throat competition and unduly long hours for labor.

Today we have reason to believe that things are a little better than they were two months ago. Industry has picked up, railroads are carrying more freight, farm prices are better, but I am not going to indulge in issuing proclamations of overenthusiastic assurance. We cannot bally-ho ourselves back to prosperity. I am going to be honest at all times with the people of the country.

I do not want the people of this country to take the foolish course of letting this improvement come back on another speculative wave. I do not want the people to believe that because of unjustified optimism we can resume the ruinous practice of increasing our crop output and our factory output in the hope that a kind providence will find buyers at high prices. Such a course may bring us immediate and false prosperity but it will be the kind of prosperity that will lead us into another tailspin. It is wholly wrong to call the measure that we have taken Government control of farming, control of industry, and control of transportation. It is rather a partnership between Government and farming and industry and transportation, - a partnership in planning and partnership to see that the plans are carried out.

We are working toward a definite goal, which is to prevent the return of conditions which came very close to destroying what we call modern civilization. The actual accomplishment of our purpose cannot be attained in a day.

I know that the people of this country will understand this and will also understand the spirit in which we are undertaking this policy. I do not deny that we may make mistakes of procedure as we carry out the policy. I have no expectation of making a hit every time I come to bat. What I seek is the highest possible batting average, not only for myself but for the team. Theodore Roosevelt once said to me: "If I can be right 75 per cent of the time I shall come up to the fullest measure of my hopes."

To you, the people of this country, all of us, the Members of the Congress and the members of this Administration owe a profound debt of gratitude. Throughout the depression you have been patient. You have granted us wide powers, you have encouraged us with a wide-spread approval of our purposes. Every ounce of strength and every resource at our command we have devoted to the end of justifying your confidence. We are encouraged to believe that a wise and sensible beginning has been made. In the present spirit of mutual confidence and mutual encouragement we go forward.'

Holidaying with Leo

According to the CSO, there is a growing number of people experiencing deprivation (read here and here for a full discussion of this on Progressive-Economy). In fact, nearly one-in-four of the population suffer two or more instances of deprivation. But that doesn’t stop our man, Minister Leo Varadkar, from assuring all those folk that, hey, the budget is going to be easy and everyone will have enough money for a holiday next year.  Indeed, Leo has come up with some holiday tips for the really hard-pressed.

For the 20 percent of the population that can’t afford to replace worn-out furniture.

Leo advises: ‘It’s hard to get a good deal in Ireland on furniture.  I recommend you go antiquing in Barcelona.  Passeig de Gracia in the Eixample area is a good spot to start.  You can find some great bargains – I picked up a sweet 19th century miniature mahogany fall front bureau there recently.  And at €800 it was a steal.’

For the 19 percent of the population that can’t afford a morning, afternoon or evening out in the last fortnight.

Leo advises: ‘I’m not surprised.  Even with all this deflation prices are still high (though my colleague Minister Bruton is trying to slash hospitality wages, so things could improve).  In the meantime, I can’t think of a better place to go for coffee than this little place in Montmarte next to the Sacré-Cœur Basilica I came across once in my bohemian days.  They have a wide range of coffee beans that they actually ground at your table!  My favourite is a rich dark Sumatra (but I like to pump the caffeine – ha, ha).  I won’t recommend any of the dinner places because . . . well . . you’re poor and  . . . well . . . you know.’

For the 15 percent of the population that can’t afford to have family or friends for a drink or meal once a month:

Leo advises:  ‘You know me, I’m a straight talking guy.  If you can’t afford to have family or friends over you probably live in a dive and your friends (my friends, anyway) wouldn’t want to come over.  But they’ll be beating down the door of your crib if you rent a lovely villa.  After a hard week at work I like to retire to the Borgo Sette Tigli near Montepulciano in Tuscany.  These villas have a swimming pool, tennis, satellite TV, a laundry and its even wheelchair accessible!  I have a permanent account there.  You rent that and your friends (and even mine) will be queuing up to come over for some mussels and authentic Gnocchi.’ 

For the 11 percent who can’t afford heating all year around.

Leo advises: ‘ For god’s sake, man – don’t sit around the gaff freezing your tushy off.  Head over to Lisbon.  You can crash in the Costa da Prata north of Lisbon.  Warm swimming and tasty barbequed sardines.  The great thing about this spot is that tourists haven’t copped on to the place – and there’s nothing worse than going to a place only to find it over-run with foreigners.  Just mention me to Guilherme over at the São Gabriel and he’ll russle you up a great seafood medley.  Whenever I drop in, Guilherme and I stay up all hours drinking new Alentejo wines and talking about the horses.  And warm?  Get outta here.’

Yes, our Leo has a holiday destination tailored just for your deprivation experience.  Unable to afford new clothes?  You’ll find some real bargains in the markets in Garmisch-Partenkirchen in the German Alps. Unable to afford a roast once a week?  Not to worry, you can order Jamón Iberico de Montanera over the counter in San Sebastian (that’s free-range, acorn-fed ham – no need to scrimp on holidays). Unable to afford two pairs of strong shoes?  Hand-crafted leather sandals are all the rage in Genoa. 

So don't be shy.  Leo is waiting for you to get in touch. Just contact him at Fine Gael’s branch office in Saint-Tropez between the hours of 10:30 and 12:30.  Otherwise, wander down to the pier where you’re sure to find him.

Into the Double Dip with a Cup of Earl Grey

The domestic economy is headed into a double-dip recession according to the ESRI.  And that’s just the beginning of the bad news.  Government ministers and certain commentators will put it down to the Eurozone crisis (‘we’re doing a good job, hitting our targets, it’s those darned Greeks, and Italians and Germans’) but the fact is we are lumbering under a sustained level of deflation induced by failed austerity policies.  And entering into a period of uncertainty the Government is determined to hammer the economy again.  That it doesn’t know the economic impact of its own policies just shows that the whole thing is approximating the Mad Hatter's tea party.

First, the bad news.  GDP is expected to rise by less than 1 percent next year with GNP falling by -0.3 percent.

Back in the summer, the ESRI was projecting GDP growth of over 2 percent.  Now they estimate the overall economy will grow by less than 1 percent, with the domestic economy falling back into recession.

Second, the curious news.  The ESRI is projecting GDP to grow this year by 2.2 percent.  This compares to the Government’s own projection of 1 percent.  Looking at this from the outside, this would seem a reasonably positive outcome.  Even the domestic economy is projected to grow by 1.2 percent.  However, this hides the fact that the economy is contracting in Euros and cents.

So we have economic growth and the value of our economy falls.

• GDP grows by 2.2 percent but falls by €700 million
• GNP grows by 1.2 percent but falls by €2,700 million

The reason for these contradictory results is that the economy is lumbering under an immense amount of deflation and falling prices (asset prices, goods and services prices).  This has been engineered by the past Government through its deflationary budgetary policies.  We have volume growth but in terms of money per capita, we’re all getting poorer.

Third, and now for the really grim news.   There will be fewer people at work in the economy next year than this year.  As a result, unemployment will rise - and if emigration is not maintained, it will rise even higher.

Back in the summer, the ESR estimated that employment would grow by 12,000.  The Government only a few weeks ago conceded that employment would fall marginally, by -3,600.  Now the ESRI is predicting that there will be 22,000 fewer people at work next year.

This will lead to higher unemployment.  The ESRI is actually projecting an increase in unemployment next year – to 14.5 percent, whereas the Government is estimating it will fall to 14 percent.

As you can imagine, this will have a number of implications for the economy:  lower growth, more downward pressure on wages, falling living standards; and for public finances, lower tax revenue and higher unemployment costs.

But wait for it – there will be spin.  The poor outcome for next year will be blamed on ‘others’.  Oh, if only those ‘others’ could get their act together, our economy would prosper, at least avoid all this downside.

Yes, the Irish economy will take a hit from the downward momentum in the Eurozone which both the EU Commission and the OECD claim is looking into a double-dip.  But this can only explain part of our souring fortunes.

In the summer, the ESRI was optimistically projecting GDP growth of 2.3 percent; now they’re pessimistically projecting 0.9 percent.  Is this because of falling exports, owing to the Eurozone crisis?  Only partially.  The main reason for the lower growth projections is falling consumer demand which makes up two-thirds of the difference between the optimistic and the pessimistic growth forecasts. 

Falling consumer demand is being driven by falling employment levels as we saw above.  It’s also being driven by the fall in total wages in the economy – a fall of €1.6 billion between the optimistic and pessimistic projections.

This raises the issue of what the Government is actually thinking?  If we are entering into a period of declining exports, the last thing we need is a set of budgetary policies that consciously depresses domestic activity – employment, demand, and investment.  But that’s exactly what the Government is planning.  It may have little control over external demand (the amount of demand for our goods and services in the international marketplace) but it does have more control over domestic demand.  And, yet, the Government is intent on driving that downwards.

What makes this all so much more bizarre is that the Government doesn’t even know the impact of its policies.  The Minister for Finance has already said he doesn’t know the economic impact of increasing VAT.  Does he know the impact of cutting public sector employment?  Social protection payments? Cuts in investment?  Public service cuts?  Probably not on the evidence available to us.

This is highly risky and highly reckless.  In fact, if you think about it long enough it’ll wreck your head.

So take a break from it for a while.  Get yourself a nice cup of Earl Grey.  The Mad Hatter’s tea party is in full swing.

Flying Blind in a Storm Without Radar or Fuel

The Minister for Finance has said there was a need to have ‘an informed debate’ on the issue of the proposed VAT rises, and ‘not simply resort to rhetoric’.  No one would disagree except that only a day later the Minister admitted, in response to a query by Fianna Fail’s Michael McGrath that the Government did not take into account the impact on consumer demand of a VAT rise.  This is an incredible statement.

Already, the Minister stated that ‘the poor’ wouldn’t be much affected by a VAT rise.   However, ESRI researchers found the complete opposite.  The lowest 10 percent income group pays out 16 percent of their disposable income on VAT payment; the highest 10 percent pays out 6 percent.  The increase in VAT will hit the lowest income group approximately 3 times harder than the highest income groups. There is nothing new in this – it is commonly accepted that consumption taxes hit lower-income harder because they consume a higher amount of their income.

Now the Minister concedes that his ‘informed debate’ is missing a crucial element – the estimated impact on consumer demand.  If demand falls, GDP falls, employment comes under pressure, the Live Register increases, etc. 

In effect, the Minister is admitting that his Department doesn’t have a model (or didn’t think it was worthwhile) to estimate the impact of raising VAT on the economy. 

The ESRI has measured the impact of three different tax rises on consumer demand:  income tax, property tax and carbon tax.  If the rises are intended to raise €1 billion, this is their projected impact.

All tax measures reduce consumer spending.  Introducing property tax has the most negative effect – though, overall, it is less deflationary when other factors are accounted for (employment, business output, etc.).  The point is, however, that such tax increases can be measured.

Unfortunately, the ESRI didn’t measure the impact of a VAT rise.  So let’s turn to the IMF compilation of estimates of the impact of various measures on the economy.  There are some problems here – the IMF only measures the impact in the form of a temporary cut in taxes, to assess their ability to stimulate the economy.  In other words, what is the short-term impact of cutting income tax or consumption tax for a year.

Nonetheless, if a tax cut impacts more beneficially on the economy, we can reasonably assume – even as a working hypothesis – that the tax rise will impact more negatively.  So how does an income tax cut compare with a cut in consumption taxes? 

As seen, cutting consumption taxes has a more beneficial impact on the economy – in the short-term anyway – than income tax.  Therefore, it is reasonable to assume that the reverse is the case.

This should not be too surprising.  VAT is more regressive and reduces the spending power of those likely to spend all their income, whereas income tax reduces progressively the incomes at the higher end, where the impact on demand is more limited because they don’t spend all their income.

All this suggests that the impact on consumer demand from raising VAT will be more negative than what the ESRI estimated for income taxes.  In other words, raising VAT will be highly damaging to economic growth.  Now consider that many businesses will come under pressure, especially as the Government has already estimated that consumer spending will fall next year, flat-line in 2013 and not return to growth until 2014.  This is on top of substantial falls in consumer spending since 2008.

As I said, this is not wholly satisfactory but it is an attempt to inject some evidence into what the Minister has called for – an informed debate.

Of course, the Minister could correct this situation by simply requesting that the Department of Finance model the comparative impacts of tax rises.  Instead, when asked by a TD, the Minister for Finance has effectively replied:

‘I’m raising VAT but I have no idea what the impact will be on consumer demand or on the economy.’

We are flying blind in a storm without radar.  And the fuel gauge shows we are quickly running out of juice.

Our Own 1 Percent

The Dublin Council of Trades Unions’ March Against Austerity tomorrow (12 Noon from the Garden of Remembrance) is taking place against a rising European and global awareness of the power of the top 1 percent.  So what about our own home-grown 1 percent?  How much wealth do they own – wealth that translates into economic and political power?  The Credit Suisse’s Global Wealth Data Handbook 2011 (not yet available free on-line) can give us an insight – as they estimate the concentration of wealth holdings in the top percent deciles.

Irish concentration of wealth is one of the highest in the EU-15.  28 percent of all wealth – housing and financial wealth – is owned by the top 1 percent of adults.  That’s a lot wealth for a handful of people.

While Credit Suisse uses US $ in their tables, we can take their proportions to estimate how much this means in Euros and cents.  They estimate that financial wealth makes up 47 percent of all wealth.  Using CSO data, we therefore find the following:

• The Top 1 percent is made up of approximately 36,000 adults. 
• This group owns approximately €130.2 billion.

€130.2 billion.  Just take a moment to reflect on that.

[Pause for quiet reflection on the amount of wealth owned by 36,000 adults in Ireland]

On average, this means that every adult in the top 1 percent owns €3.8 million. 

[Another pause for quiet reflection on the amount owned by each of the wealthiest in Ireland].

My gut feeling is that the VAT increases, the cuts in social protection, the cuts in public hospital wards and classrooms, and the €100 Household Charge won’t do much to dent these people’s wealth holdings or income.

This just shows that for some – a very few – wealth is a life-style choice.

This is one of many reasons why you should come out tomorrow and join the march.

 After all, the 99 percent have rights too.

The €6 Billion Alternative

Government Ministers are floating all sorts of horror options (medical card fees, closing hospital  beds, cutting education grants and Child Benefit, etc. etc.) while at the same time insisting this is the only alternative to income tax increases. I’m not so sure.  So I thought it might be helpful to gather together the proposals put forward in four pre-budget submissions to see if there are other alternatives.  Does the Government have options to either savage spending cuts or income tax increases that would hit the living standards of low and average income earners?  Can the Government do something else besides degrade public services, hit social protection recipients and further depress consumer demand?  The answer is yes.

ICTU, TASC, Social Justice Ireland and Sinn Fein have put forward comprehensive, progressive and well-researched pre-budget submissions.  They all share the same principles:  end overall spending cuts, increase investment and tax high-income groups.  All four shows how this would work within the framework of the EU-IMF bail-out deal and how this would be superior in promoting growth.

Let’s focus on their taxation proposals, which are all backed up by data from the Department of Finance and Parliamentary Questions to the relevant Minister. 

Property and Capital Taxation

Wealth Tax:  both ICTU and Sinn Fein call for this tax.  Projected yield:  €500 - €800 million.

Property Tax:  TASC proposes a house property tax, with safeguards for low-income negative equity households.  ICTU also proposes a house property tax but it is far more modest with more reliefs for low-average income earners while SJI proposes a far site-value tax. Projected yield:  €800 million (from TASC).

Reform of CAT (inheritances, gifts):  three submissions propose various reforms to CAT – from reducing thresholds, increasing rates, limiting relief for business and agricultural disposals, etc.  Amounts to be raised also vary, though ICTU doesn’t put a final number on this.  Projected yield:  €165 - €194 million.

Capital Gains:  ICTU proposes raising the capital gains tax rate to 30 percent; Sinn Fein to 40 percent.   Projected yield:  €65 - €195 million.

Income Tax, PRSI and Universal Social Charge

Abolition of property tax reliefs:  three submissions support this common-sense proposal.  Projected yield:  €450 million.

Reduce interest relief for landlords:  again, another common sense proposal which three submissions mention.  There are differing variations of this reduction but they all would raise substantial amounts.  Projected yield: €350 - €400 million (though ICTU’s more dramatic proposed abolition could save up to €1 billion).

 Minimum Tax Rate:  ICTU proposes increasing the minimum tax rate for high incomes to 35 percent and reducing the threshold €100,000.  Projected yield:  €100 million.

Top Rate of Tax:  Sinn Fein proposes increasing the top rate of tax to 48 percent.  Projected yield:  €410 million.

Extend Universal Social Charge to Capital Income:  TASC proposes extending USC to capital income (capital gains and acquisitions).  Projected yield:  €200 million.

Adjust PRSI exemption for share options, shared based remuneration and capital gains. Proposed by Sinn Fein.  Projected yield:  €97 million.

Standardise discretionary tax reliefs, excluding donations to charity. Again, proposed by Sinn Fein, this would bring forward the long-term strategy of bringing all tax reliefs to the standard rate.  Projected yield:  €628 million.

Extend PRSI to capital income.  ICTU proposes that the PRSI 4 percent rate be extended to capital gains and acquisitions.  Projected yield:  €115 million.

Increase USC by 3 percentage points for incomes over €100,000.  Proposed by SJI, this would only affect PAYE taxpayers as the self-employed already pay 3 percent above the basic rate.  Projected Yield:  €50 million.

Pension Tax Reliefs

While TASC and Sinn Fein call for the standard-rating of pension contributions, ICTU opposes this but not in principle.  Instead, they call for such standard rating to be implemented only when an adequate universal state pension is introduced.  However, all four make proposals to limit pension tax relief.

Standard Rate Pension Contributions:  TASC, SJI and Sinn Fein call for this measure.  Projected yield:  €500 - €700 million.

Increase the rate of imputed withdrawal on Approved Retirement Funds:  both ICTU and TASC support this step.  Projected yield:  €25 million.

Reduce tax exemption for lump-sum pension payments to the level of the average industrial wage.  This proposal was put forward by TASC.  Projected yield:  €65 million.

Corporate / Business Reliefs

Corporate tax rate:  SJI and ICTU propose that a temporary 2.5 percent levy be put on corporate profits.  Projected yield:  €892 million.

Group Relief:  this is a relief available to holding companies that allow the losses of one company to be transferred to a profitable company, thus reducing their tax liability.  Sinn Fein claims this relief is abused and proposes its abolition.  Projected yield:  €450 million.

* * *

These are more tax reforms put forward by the four submissions:   tackle tax exiles by cutting the 183-day requirement should be cut to 90 days as in the UK (ICTU), tax on-line gambling (Sinn Fein),implement the  €200 car park tax originally introduced in Budget 2009 but never introduced (TASC), tax texting to bring in €40 million (SJI)

There are other measures which I could suggest:  subjecting the net capital gain from the sale of principal private residences to capital gains tax, with a small exemption threshold (Fine Gael suggested that a small rate on principle private residences would earn €250 million) and extending PRSI and USC to all gross capital income (which could raise over €500 million according to Department of Finance sources)

Leaving these aside, what is the total amount that could be raised through the measures outlined in the four submissions.

• Property and Capital:  €1.53 - €1.99 billion
• Income tax, PRSI and USC:  €2.4 - €2.45 billion
• Pension Relief:  €590 - €790 million
• Corporate Taxation:  €1.34 billion

• TOTAL:  €5.86 - €6.57 billion

So, approximately €6 billion and more could be raised in taxation measures that primarily impact on high income groups and the corporate sector.  And that doesn’t count all that could be raised. There may be some dispute about particular measures.  For instance, I would agree with ICTU’s comments on pension tax relief, though you could still go after reliefs for super pension-pots.  I’d be inclined to phase in TASC’s house property tax, tied to a tax on financial property, to limit the impact on demand in the short-term.  And I’m not quite sure about Sinn Fein’s proposal re: group relief, since in many cases this would merely bring forward tax revenue rather than permanently increase the tax take. 

But there are always differences over details. Further discussion could improve the proposals. And further investigation would no doubt reveal more tax measures to impact on high income groups. 

The main point here is that the authors of the four most comprehensive pre-budget submissions have uncovered a buffet of €6 billion and more in progressive tax measures.  Since these would be far less deflationary than the equivalent in spending cuts, it would reduce the deficit by a far greater amount – leaving more people at work and more money in the pockets of low and average income groups. 

€6 billion and more.

Now what was that about no alternative?

Chasing the Goose in a Dark Landscape

We’re into the great expectations-management game again.  It happens once a year, just prior to the budget.  ‘Proposals’ are leaked or rumoured.  The media – colluding in this annual exercise – chase around for stories.  TDs, commentators, and people potentially affected are lined up for comment.  No one is any wiser but it fills column inches and media minutes.  And then the budget happens and finally we know.   This ritual is getting tedious.

Take the rumoured Child Benefit cut.  No doubt, another cut would impact harshly on families.  No doubt, it will have little effect on the deficit (we’ve already cut over half-a-billion Euros from Child Benefit and supplements).  But given the Tanaiste's insistence during the election campaign that Child Benefit would not be touched, the issue has become politically sexy.  Will Labour renege?  Will they stand up to Fine Gael?  Will they protect universal payments?

The Child Benefit cuts leaks could be a matter of expectation management.  The rumour is put out with no intention of cutting them – and when they aren’t cut, Labour can say ‘we kept our election pledge’ and hope that people will applaud them.  Or they could be leaked to ensure that such a storm is created that the pro- cuts lobby in Government will have to back off.  Fine Gael could be leaking it to put pressure on the Social Protection Minister.  Or maybe it’s just a rumour with no foundation at all.  We won’t know.

Focusing on the detail makes for great copy.  It also diverts us from taking a broader, more fundamental perspective on what’s happening in the budget.  For instance, this headline should provoke more debate, more analysis, and more outrage since we know more about the budget measures that will impact on this:

‘Budget cuts designed to safeguard jobs: Kenny’

The story goes on:

‘Taoiseach Enda Kenny has insisted that any cuts in the looming Budget will be imposed to safeguard jobs . . . But he warned that difficult cuts will be imposed to avoid having to hike taxes and ensure the Government can fulfil its main objective of protecting jobs.’

This is an incredible statement.  All the more so since the Government has announced (not leaked, not rumoured) budget measures that will destroy jobs.  Let’s go through some of them.

• Capital Spending:  The Government has announced €750 million in capital spending cuts.  According to the Department of Finance, this will entail, on average, the direct loss of 7,500 jobs – with more jobs lost downstream (lost demand, lost procurement from other private sector companies, etc.). The Government has also announced a further €550 million capital spending cuts in 2013.  That’s another 5,500 jobs gone.  This will impact on the group that has suffered the most in this recession – construction and craft workers.  So much for ‘protecting jobs’.

• Cutting Public Sector Employment:  The Government has announced that it will cut employment in the public sector by 22,500 by 2015.  This will lead to a straight one-for-one rise in unemployment in the short-term and higher emigration in the medium-term.  The loss of demand from this reduced employment will impact on domestic businesses and their employees.  How cutting employment protects jobs is beyond me.

• Cutting Public Services:  While there are no firm numbers on this, the Government wants to cut €1.45 billion from current expenditure.  With €700 million being cut from Social Protection, the overwhelming remainder will come from public services.  Don’t forget:  nearly 1/3 of expenditure on public services goes on procurement contracts to the private sector.  If these contracts are cut, this will have a negative impact on those companies.  It is hard to see how private sector employment will not be hit.

• Cutting Social Protection:  Whatever the details – Child Benefit, rent/mortgage supplement, support grants such as Carers’ respite or the free schemes – cutting people’s income will result in a fall in demand which will impact negatively on domestic businesses.  With consumer spending and employment expected to fall next year, how much more will this depress economic activity and job numbers?

When you step back, you see that the Government is pursuing an agenda which will have a major depressing effect on employment – so much so that the Government recently projected that unemployment will still be close to 12 percent by 2015.  And what agenda is this?  It’s not an income tax-raising agenda.  Its’ a cuts agenda – one that is supposed to protect jobs.

The Taoiseach is talking demonstrable nonsense.  But you won’t get a debate about that.  We’ll chase around the details without ever looking at the larger landscape.

The dark, bleak, job-cutting landscape that the Government is busy painting. 

Bad Plan, False Arguments

This was originally written for Progressive-Economy

The Minister for Finance’s comments justifying VAT increases is deeply worrying for it evinces either considerable unfamiliarity with basic economic facts; or considerable indifference to such facts in pursuit of a particular agenda.  Here’s what he had to say on RTE (22 minutes in):

‘It (the VAT increase) will apply to everybody who purchases things but obviously rich people have a lot more disposable income than poor people and rich people will buy a lot more and will pay a lot more VAT.  There’s no VAT of any sort on food and poor people spend a very large proportion of their budget on food so it will not impact as much on the poor as on the well-off people.’

This is wrong.  Full stop.  It is well known that consumption taxes impact on lower income groups more as they consume most of their income.  Indeed, the Minister (or his advisors) would be well aware of a recent study published in the Economic and Social Review in the summer, ‘The Distributional Effects of Value Added Tax in Ireland’ by ESRI researchers Eimear Leahy, Sean Lyons and Richard Tol.  They studied the impact of VAT and VAT rises on income deciles – from the lowest 10 percent income to the top (this is a tabular estimate of Figure 10 in the report).

Unsurprisingly, the 21 percent VAT rate has a higher impact on the disposable income of the lowest income groups (16 percent), compared to the highest income groups (6.2 percent).  Again, unsurprisingly, average income groups also face a higher burden than high income groups. 

This is consistent with the findings from the study by the Combat Poverty Agency/ESRI, which showed that ten years ago total VAT and excise taxes made up more than 20 percent of the gross income of the lowest decile, compared to less than 10 percent of the highest income groups. 

So the 21 percent VAT rate hits the lowest income households by more than two-and-a-half times the highest income groups.  So much for the Minister’s claim.

But the ESRI researchers also measured the impact of increasing the VAT rate to 23 percent – as the Minister is proposing (again, a tabular estimate of Figure 10 in the report). 

Increasing VAT will impact harder on lower income groups – by 1 percent compared to less than 0.4 percent for higher income groups.  Again, so much for the Minister’s groundless claim that increasing VAT ‘will not impact as much on the poor as on the well-off people.’

Budget 2011 was bad enough.  The low-paid were disproportionately hit through the introduction of the Universal Charge and the reduction of personal tax credits (which amounted to a flat-rate increase in income tax).  

But the Minister’s planned VAT rate is even worse for it will not just hit people at work.  It will hit everyone, including those on social protection payments (pensioners, widows/ers, unemployed, lone parents, etc.).  And the lowest decile group is made up of people living in some of the worst forms of absolute deprivation.

All this has to be set in the wider context.  This year, social protection recipients of working age (that is, excluding pensioners) saw their real payments – after inflation – fall by -5.2 percent.  Whatever about the leaks regarding Budget 2012, we can reasonably assume that social protection payments will not increase.  With the Government’s projected inflation rate, real payments will fall by -1.2 percent.  That’s just a start.

Now add in the VAT increases and real incomes will fall further.  And that’ s before the myriad of cuts and freezes are applied to child payments, rent and mortgage supplements, etc.  It’s looking like another grim year for the poorest in society.

If I were Minister and wanted to protect the living standards of the highest income groups in the state, I would be doing exactly what Michael Noonan is doing – increasing VAT and introducing flat-rate taxes on households.  That’s the ticket. 

The question is – why would Labour Ministers let him do it?

They Cheer, Little Realising they are Cheering Their Own Failure

Why didn’t the Irish media report this comment by the Minister for Public Expenditure and Reform?

‘Today I am announcing further reductions in Public Service numbers.  I expect this reduction to reduce consumer spending by over €1.2 billion, to cut employment by nearly 25,000, and to remove about €2.3 billion out of the domestic economy.  Through all this pain I am hoping to reduce the deficit by 0.3 percent of GDP.  As the Government needs to reduce the deficit by 7 percent, we are hoping that this will make a small contribution.’

Ok, the Minister didn’t say that directly (he did say the first line).  But if he had used the ESRI measurements, he could and should have laid out the terrible economic carnage the plans to cut public sector employment will inflict on us.  If we had vigilant economic journalists they could and should have been queried the Minister about this at the press conference.  What impact will these measures have?  How much does the Government expect to ‘save’ when lost revenue and higher unemployment costs are factored in?   

But he didn’t.  And we don’t have that kind of vigilant economic journalism.  So we have a Government patting itself on the back for cutting jobs out of the economy.  We have a set of proposals that will do considerable damage to the economy and have little benefit in terms of deficit reduction.  You don’t have to go through the tables in the ESRI paper to measure all this; it’s just common sense.

You have anywhere between 20,000 and 30,000 people entering the labour market every year from schools and universities.  Then you have all those people on the dole queues trying to get a job.  The economy has to generate a lot of jobs each year just to stand still.  It has to generate even more jobs to start making a dent in the unemployment figures.

In this mix we have private sector employers struggling to generate jobs.  So what does the Government do?  It goes to the largest employer in the state (itself) and cuts the number of jobs even further.

So, now you have more people chasing fewer jobs in the economy.

When you factor in the lower employment levels - as the largest employer in the state is shedding more jobs – you have lower growth.  And all that money the Government purports to save by reducing the public sector payroll is eaten up by lost tax revenue, higher unemployment costs and a lower consumer economy.  At the end of the day, the reduction in the deficit is minimal. 

It reminds me of the scene where Homer pursues another one of his get-rich-quick schemes by buying bacon rashers, frying them, feeding the rashers to the dog and then selling the left-over grease to grease recyclers.

Grease Purchaser:   Four pounds of grease... that comes to... sixty-three cents.
Homer Simpson:   Woo-hoo!
Bart Simpson:   Dad, all that bacon cost twenty-seven dollars.
Homer Simpson:   Yeah, but your mom paid for that!
Bart Simpson:   But doesn't she get her money from you?
Homer Simpson:   And I get my money from grease! What's the problem?

When the Government finishes carving up of the public sector and finds the deficit hasn’t really fallen much at all, we will know what has happened.

The Government just pulled off another Homer.

Is the Government Hiding More Austerity?

This was originally written for Progressive-Economy.ie

The Government may be hiding up to €800 in austerity measures in their recent Medium-Term Fiscal Statement (MTFS).  I use the term ‘may’ because documents prepared by the Department of Finance can sometimes be frustrating exercises in ambiguity.  However, on any logical reading of the document, it appears there is under-the-counter austerity which the Government is not admitting to. Indeed, there may be €800 million more spending cuts than is necessary to achieve the Government’s new €3.8 billion fiscal consolidation target. 

The potential sleight-of-hand occurs in the category described variously as ‘Carry Forward’ or ‘Carry Over’ or ‘Additional Impact’.  This refers to the amount of money – from a tax measure or a spending cut - that only comes on stream in the following year.  Two examples will help clarify this:

• Taxation: in Budget 2011, cutting personal tax credits was projected to raise €585 million.  However, it will only raise €435 million in 2011; the remainder - €150 million – will not be realised until next year.  This is because tax is collected in arrears.  There’s nothing under-hand about this, it is part of the budgetary process.

• Current Spending:  similar to tax, there are some spending measures where the full ‘savings’ is not realised until the following year.  For instance, in Budget 2011 the 4 percent cut in Student Support Scheme grant rates was projected to ‘save’ €51 million in a full year, but only €22 million in 2011; the remainder, €29 million, will be realised in 2012.  Again, there is nothing unusual in this.

Accounting for this is pretty straight-forward and is done every year in the Summary of Budget measures.  The Government simply states the amount of tax revenue or spending cut it will achieve in the year in question, and put the carry-forward amount into the following year.  That gives us the total amount of ‘consolidation’ that takes place in any particular year.

This is where the Government may be hiding up to €1 billion in austerity measures.  Let’s first look at current spending, stepping carefully through this statistical forest.  Fianna Fail’s National Recovery Plan gives a fairly transparent accounting of the consolidation they planned.

In 2012, Fianna Fail planned to cut €1.3 billion.  However, there is the ‘Additional Impact’, or carry forward from Budget 2011 amounting to €400 million.  This gives a total of €1.7 billion in current spending cuts.  This €400 million carry forward estimate is confirmed in Budget 2011, where the carry forward of all spending cut measures is more precisely projected at €457 million. But the point is that while the total current expenditure cuts come to €1.7 billion, only €1.3 billion is ‘new’ for 2012.

Now let’s turn to the current Government’s MTFS.  Here the issue is not so straight-forward. 

In the row entitled ‘Current’, the Government intends to cut €1.45 billion.  That also seems straight-forward enough.  However, there is no mention of a carry forward or ‘additional impact’ that was referred to in the National Recovery Plan and projected in Budget 2011.

 So is the €1.45 billion in current spending cuts inclusive of the €400 million carry-forward from Budget 2011?  If so, then the Government only intends to cut €1,045 million this year.  However, if it does not include the carry forward, then the Government’s total current spending consolidation is actually €1.85 billion.

I suspect it is the latter, for the Government has used the carry-forward category for Tax measures as the table indicates.  That it doesn’t use it for current spending suggests they will cut €1.45 this year and pocket the extra €400 million from last year, hoping that no one notices.

When we come to taxation, the sleight-of-hand becomes more obvious.  As seen in the table above, the Government intends to raise €1 billion in 2012.  There is a carry forward of €600 million from Budget 2011.  This comes to a total of €1.6 billion tax consolidation for 2011.  It seems straight-forward, right?  Well, no.  And the Government partially admits to the statistical trickery. 

Footnote 5 in the final row beside the carry-forward of ‘0.6’ in the 2012 column reads:

‘The Universal Social Charge is also expected to deliver an additional €0.4 billion in revenues in 2012. While this is not part of the €3.8 billion consolidation package, it is captured in the budgetary projections.’

This is an incredible statement.  Translated, it reads: ‘the €400 million carry forward in the Universal Social Charge has been included in the budget for 2012.  But we’re not going to include it in this table.’

Why not?  It is a carry-forward, the same as any other tax.  You can see that in the Summary of 2011 Budget Measures where it was projected to be €435 million (Page B.6). 

Even the EU Commission, in its 2^nd quarterly review of the bail-out deal (Table on page 11 of the text), listed the total tax carry forward from 2011 at €1.1 billion.  It saw fit to include the USC.  But not the Government.

The reason why they did not include the USC in their table– and this is my speculation – is that it would raise the amount of total taxation consolidation to €2 billion, rather than €1.6 billion.  And the optics of this would be bad. So to make the taxation measures look less than what they actually are, they just consigned part of the carry forward tax revenue to a footnote.

Here is my reconstruction of the Government’s consolidation package inclusive of all carry forwards.

The austerity package for 2012 appears to be €800 million more than what the Government is admitting to. If so, there are €800 million more cuts in current and capital spending than are actually needed, even to reach the Government’s new consolidation target of €3,800 million.  €800 million less cuts is something to consider – more hospital services, more education services, and more capital investment (which means more jobs today and down the line).  Is Labour aware that the Fine Gael Minister for Finance is trying to cut €800 million more than is necessary even by his own benchmark?

 However, the Government may dispute all this.  If so, then it should clarify the situation.  They only have to answer two questions:

• Do the current spending cuts for 2012 include the spending cuts carry forward of €400 million from Budget 2011?

• How much is the total tax carry forward (including the USC) from 2011?

Answering these questions would settle the matter raised here.  However, if they choose to obfuscate and ignore then it will be a sign that the Government is not committed to an open and transparent budgetary process.

And when people ask, why does it feel worse than what we were told, the answer will be simple:  because they weren’t told the whole truth of the matter.

The Claim of €600 Million in Social Welfare Fraud is a Fraudulent Claim

This is getting tiresome.

‘Minister of State Fergus O'Dowd has said that the Government believes it can save €600m by tackling social welfare fraud.’

The claim that the level of social welfare fraud is €600 million is, itself, a fraudulent claim. The level of social welfare fraud is €26 million.  The level of fraud is not €600 million. 

It suits a certain agenda which wants to soften up public opinion for social welfare cuts to claim that hundreds of millions are being lost to frauds and cheats.  We have had television investigations, newspaper headlines, attention-seeking politicians all claiming massive fraud.  But out of a budget of nearly €20 billion, the Department of Social Protection has found only €25 million in fraudulent payments – or about 0.1 percent of the entire budget.  So where did this famous '€600 million’ in fraud come from?  And why is the real level of fraud so much lower?

Control Savings

First, the €600 million figure is not the actual amount of fraud in the social protection system. It is what is known as a ‘control saving’ according to the Deputy Secretary General and the Minister of the Department:

‘Control savings are not actual moneys recovered by the Department . . . ‘ (Deupty Secretary-General)

‘Control savings are not actual monies recovered by the Department . . ‘ (Minister)

What are control savings?

‘This figure is the value of the control activity in the Department and if this work did not take place there would, over time, be a similar increase in total social welfare expenditure.’

In other words, if there were no controls or inspections, there would be over time an estimated €600 million in over-payments.  This is like the Gardai estimating the number of murders that might take place over time if there were no police force.  Or the Revenue claiming the estimated level of tax fraud if there were no audits and checks.  To my knowledge (and I’m open to correction on this) the Social Protection Department is the only agency that uses this type of estimate publicly.

 However, even this estimate is highly constructed and potentially flawed:

‘Control savings are calculated by applying validated multipliers to the difference in the rate of payment before and after the control activity.  Multipliers used in assessing control savings estimate the total future savings to the Department of a revocation or reduction resulting from a control action. The multiplier used is based on the average amount of time the person who ceases to claim will remain off the books before returning. This time varies from scheme to scheme.’

The important point is that the ‘control saving’ is not an actual record of fraudulent payments.  It is based on assumptions and multipliers.  It is not based on one year – but can be spread out over two to three years.

And here, the Comptroller and Auditor General (C&AG) found a number of problems with the amounts claimed to have been ‘saved’ in the control savings.  For instance, an audit of Lone Parent cases found that nearly half of the cases claiming 'savings' were actually mistaken.  The C&AG also felt that over-payments estimates in pensions were themselves over-estimates.  The C&AG concluded:

‘ . . . the Department’s current practice of including all of these over-payments arising from control activity as (bankable) savings is questionable.’

All this suggests that the €600 million – even as a control saving – is not a reliable figure.

Second, the €600 million control saving does not refer specifically to fraud.  It refers to ‘over-payments’.  Over-payments occur when (a) there is a mistake by the applicant/recipient, (b) there is a mistake by the administration, or (c) if there is a fraud.  Fraud makes upon only a minority of over-payments (see below).

In conclusion, when you hear the figure of €600 million fraud being used by a commentator or politician, remember:  it does not refer to actual money the Department expects to find in any one year and only a minority of this highly constructed and, according to the C&AG, highly questionable figure has anything to do with fraud.  To talk of €600 million in fraud is highly fraudulent.

Actual Fraud Levels

So if the €600 million is not a reliable figure on fraud, what is?  The C&AG’s report provides the figures, which is used by the Oireachtas Library & Research Service.

The actual annual level of over-payments is far below the €600 million figure.  They rose from €50 million to €83 million between 2007 and 2010.  But this included all over-payments – including mistakes by recipients and administration.  The figures for fraud are substantially less:

• €21 million in 2007, rising to €26 million by 2010
• The percentage of overpayments due to fraud actually fell during this period – from 42 percent to 31 percent

What a contrast to the nonsense debate we have over the misunderstood, faulty and highly constructed figure of €600 million.  The actual level of fraud that has been identified and recovered is €26 million.

Surveys and Case Reviews

The Social Protection Department periodically conducts surveys of different social protection schemes to project the level of over-payments that might be in the system.  The Department has surveyed eight schemes since 2004.  The average level of over-payments in these surveys was 2.9 percent.  The C&AG calculated that in 2010, this ‘potential’ overpayment would be worth €383 million.  However, we should note two things which suggest this figure is on the high side:

First, the number of case reviews yielding savings has fallen over the last few years.  In 2008, the number of cases yielding savings was 19 percent.  This fell to 9 percent in 2010.   Therefore, surveys going back to 2004 should be treated cautiously. 

Second, the C&AG has identified with the process of case reviews:

‘However, in its present form, it is nonetheless a crude indicator, due to shortcomings in the savings calculation methodology and the fact that reviews of different type and intensity are aggregated.’

But it is important to remember that fraud makes up only 31 percent of actual over-payments.  So even if we accepted the €383 million as a ‘potential’ indicator, the fraud element of that potential is €119 million.  The schemes not represented in these surveys – notably widow’s pensions, jobseekers’ benefit for example – are not likely to yield as much over-payments as they are insurance schemes which don’t have the complexities as means-tested schemes that lead to high levels of mistakes and, so, overpayments.

Does the Government Actually Believe Its Own Claims?

There is a doubt as to whether the Government actually believes its own claims.  If I was Minister and believed there was serious dosh out there among the cheating community (more than the €26 million uncovered last year) I’d employ more inspectors.  More inspectors mean more inspections, more cases covered and exposed.  But there doesn’t appear to be much urgency on this matter.  According to the Deputy Secretary General of the Department:

‘There are over 400 social welfare inspectors, but not all of them are dedicated to fraud and control work. Since the level of unemployment increased, many of them have been involved in the processing of claims from new applicants . . . Over 200 staff are dedicated to carrying out control work. The special investigations unit operates at the high end has approximately 89 staff . . . We are not looking for additional inspectors as such . . .’

So 289 staff is involved.  If another 100 inspectors could help double the level of fraud, they wouldn’t be costing the state money – they would be making the state money.  So why aren’t the Department and the Government employing additional inspectors?  Could it be they suspect that the gains wouldn’t be as high as the headline figure of €600 million suggests? 

* * *

All this leads to a more mundane account of social protection fraud.  Figures produced under ‘control savings’ are constructed, spread out over years, and, according to the C&AG, ‘highly questionable’.  Departmental surveys show a reducing level of cases yielding savings which themselves are 'crude'.

But we do have a concrete number - the actual level of detected fraud.  And it is far, far lower than the numbers being thrown about in the public debate:  €26 million, or 0.1 percent of the entire Social Protection budget.

Unfortunately, this is not a ‘sexy’ figure.  It doesn’t make for screaming headlines and even louder commentators shouting for a crackdown on cheats and layabouts.  It doesn’t make for an anti-welfare agenda.

All it does is make for a more accurate debate.  That should be good enough.

Hanging Out in the EU Basement

If one were to look at the headline rate – GDP – you’d say, well, it’s not great in Ireland but we’re doing better than the Eurozone.  After all, the EU Commission is now projecting the Eurozone to grow by an anaemic 1.8 percent over the next two years while they estimate Irish GDP growth to increase by 3.4 percent.  So, yes, the next two years will be grim but there’s grim and then there’s grimmer.

However, when one looks below the headline rates, another picture emerges – of an Irish economy falling further behind Eurozone averages.  When we remove the froth of the multi-national driven export sector (an ‘enclave’ as the IMF described it), we see our economy for what it is: a sluggard.  Let’s run through the EU Commission’s projections for some of the key domestic indicators, covering the next two years:

Consumer spending:  Eurozone private consumption is expected to rise by 1.4 percent; Ireland, 0.6 percent

Government consumption (spending on public services):  Eurozone will be increasing spending on public services by 0.1 percent; Ireland will be cutting spending by -3.1 percent.  No surprise there.  But even the Eurozone average is distorted by the countries in the bail-out massively cutting back (Greece: -16.0 percent; Portugal:  -10 percent).

Investment:  One area where Ireland does slightly better – with investment expected to grow by 4.8 percent compared to a Eurozone average of 3.4 percent.  But there is a context here:  since 2007 Irish investment has fallen by (wait for it) -74 percent.  The Eurozone only fell by -11 percent.

Unemployment:  In 2013, unemployment is expected to be 10 percent in the Eurozone; in Ireland it is expected to be close to 14 percent.

Employment:  Eurozone average will only grow by 0.3 percent – pretty miserable given the levels of unemployment.  Ireland won’t even reach that: employment will flat-line over the next two years.

All in all, domestic demand is expected to fall by -0.5 percent in Ireland over the next two years.  In the Eurozone, domestic demand will increase by 1.5 percent.

Still, there will be those who will hang on to the GDP numbers – mostly Government Ministers and the cheerleaders for austerity.  But there’s another measurement that the EU helpfully provides:  Gross National Income – which is essentially GNP.  Where does Ireland stand in the Eurozone tables regarding domestic growth?

Ireland is well down the table.  Irish GNI/GNP is expected to ‘grow’ by 0.1 percent over the next two years. The average growth for other EU-15 countries is 1.4 percent.  But the average growth for those countries not in bail-out (excluding Ireland, Greece and Portugal), the average growth rate is projected to be 2.1 percent.  2.1 percent to 0.1 percent:  that is the comparative measurement that should alarm and depress us.

We don’t need the rhetoric of the Medium Term Fiscal Framework – the ‘emerging’ recovery, the ‘nascent’ recovery.  We don’t need Government spokespersons going on about ‘staying the course’.

What we need is an open and honest dialogue about our growth prospects – the upsides and the downsides.  And we need to put those growth prospects in a comparative context so that we may be able to debate why some countries and some policies are more successful than our own (or, at least, less damaging).

The sooner we get that dialogue started the better.  In the meantime, we’ll just be hanging out in the EU basement.

When Strong Employment Growth = Higher Unemployment Projections

So we have more austerity and less growth, more debt and less jobs, more spending cuts and less investment – welcome to the Government’s Medium-Term Fiscal Statement. 

You have to hand it to the authors of the 4-Year plan – they can really turn a phrase in the face of reality.  Try this one on:

‘The economy has returned to growth.  The Government's strategy is to return the public finances to a sound position and thereby create the essential conditions for strong and sustainable employment growth.   Considerable progress has already been made towards stabilizing the public finances.  This progress has required a wide range of difficult decisions from citizens to cut spending and raise revenue .  . . The Government is making sure to allow the economic recovery that has commenced a chance to strengthen.’

One could write scores of posts on this one simple statement.  I’ll do a few but for now what really caught my eye was ‘strong and sustainable employment’ growth.  Let’s see what the 4-Year plan means by ‘strong’.

Last year, in Budget 2011 (which was based on Fianna Fail’s National Recovery Plan and endorsed by the EU-IMF) the Government projected unemployment to be 9.8 percent in 2014, the last year in their projections.  When the Government came into office they revised growth downwards and, as a consequence, unemployment was revised upwards.  One can’t blame them for that – after all, the Fianna Fail/EU/IMF projections were overly (overly) optimistic.

What has the FG/Lab government projected since they came into office?  In April, they projected unemployment to be 10 percent in 2015.  Then they launched their Jobs Initiative, targeting low-wage sectors with cuts in employers’ PRSI and the reduced VAT rate. 

Six months later and the Government are now projecting unemployment to be 11.6 percent.  We have two revisions in which the Government has accepted that unemployment will be higher than projected last year.  Two questions:

• Does this mean that the Jobs Initiative has failed?  Of course, the Government could respond that without the Jobs Initiative unemployment could be higher.  Maybe.  But the Government has put forward no analysis, no data, no targets and no on-going evaluation regarding their Jobs Initiative measures. Easily asserted, easily denied.

• Is ever higher projected unemployment the result of returning public finances to a ‘sound position’?   It was supposed to result ‘strong and sustainable employment’ growth.

Or maybe these are just words to string together to make it sound like everything is going well when very little is going well.  Let’s test this ‘strong employment growth’. 

In April, the Government projected net employment to grow by 102,000 over the period 2012-2015.  Now they are projecting 62,000.  That’s a revision downwards of nearly 40,000.  Clearly, this level of growth will not be sufficient to accommodate new labour market entrants, never mind making any kind of substantial dent in the dole queues.

How does this ‘strong employment growth’ compare to unemployment projections throughout the EU?  The following are the September projections from the IMF:

With the Government’s projection, Ireland will rank third in the unemployment misery tables – behind only unfortunate Greece and chronically high-unemployment Spain.

The dictionary describes ‘strong’ as ‘mentally powerful or vigorous; especially able, competent; of great moral power, firmness, or courage’. 

With unemployment projections rising higher while job creation projections are falling – I leave it to you to determine whether the Government’s action matches its rhetoric.

The Economy WIll Recover - But Not in 2012

If I hear one more time that we have exited the recession I’m going to put my head through the computer screen.  We’ve come to expect this line from Cabinet Ministers.  But when commentators and media interviewers keep repeating this, per Ministerial press statements, well . . . it’s getting a bit much. And when you add in the insult of paying of Anglo bondholders (€700 million today, €1.25 billion in January), well . . . the economy sinks but bank creditors are 'recovering'.

Yes, this year GDP will be positive though the domestic economy as measured by the GNP will still be negative (probably).  And next year, both metrics will be positive (probably).  So does that mean the economy is out of a recession?  No, only parts of it.  All one has to do is take a quick peek below the headline rates to see an economy still in decline.

DKM’s Economy Watch brings together projections from official and private agencies, broken down by main economy indicators.  The following includes forecasts from 14 analysts.  All have been made in the last three months (except for the Government and the EU whose forecasts date back to May).  Let’s see what they are projecting for next year.

Consumer Spending

Consumer spending makes up over half of the economy so it is crucial to growth, employment and business activity.

No one, apart from NIB, is projecting that consumer spending will recover.  Four forecasters project that, at best, consumer spending will flat-line.  Nine forecasters believe it will continue falling next year.  The average looks set to be -0.4 percent. 

In short, over half of the economy – as measured by consumer spending – will still be in recession.

Government Spending on Public Services

Unsurprisingly, Government spending on public services is set to decline.  That’s because its policy to cut such expenditure.  This is highly deflationary as it reduces direct employment and contracts to the private sector.  The average forecast reduction is -2.7 percent.  Overall, Government spending on public services, at both central and local level makes up nearly 17 percent of GDP (this doesn’t include social transfers such as social protections payments) and for every Euro cut, the economy suffers a contraction of more than a Euro. More recession there.

Investment

While investment makes up only 12 percent of total GDP, it is vital component of economic growth because of its multiplier effects.  It is a key driver in output and employment which, in turn, drives up domestic demand and business activity. 

There are wide variations in projections – from IBEC’s optimistic 6.8 percent growth to the OECD’s pessimistic -3.3 percent decline.  The Government is hoping that investment will grow by 1 percent – but that estimate comes from May and may be revised downwards with the new 4-year plan. 

On average, it is looking like investment will come in at a slight decline – driven by a continuing fall in residential investment.

* * *

So where does that leave us?  Consumer spending, Government spending on public services and investment make up over 80 percent of the economy.  Forecasters are predicting that all three components will be in decline next year (this is the domestic-demand element of the economy).  How this can be called a recovery is beyond me.

The only reason the headline figures of GDP and GNP will be in positive (though GNP could still turn out negative) is because of the compensating growth of net exports – which make up less than 20 percent of the economy.  The forecasters are predicting that exports will grow – on average by 5.2 percent.  It is this category that will tip the headline into growth.  But the rest of the economy will be in recession.

If we really want to depress ourselves we can go to the OECD's projections for 2013.  They are projecting the domestic-demand recession will continue into 2013 - consumer spending and investment will rise minimally but cuts in Government spending on public services will keep domestic demand in negative figures.  This is truly grim.

Just to round off, there are a couple of more projections to examine.

• First, the forecasters are projecting on average an unemployment rate of 14.2 percent this year, falling to an average forecast of 13.9 percent.  It’s not that the dole queues are shortening because of any economic pick-up; we have to consider the role of emigration.

• Second, the level of employment Is expected to grow next year by a forecast average of 4,100.  This won’t cover the number of new labour market entrants (e.g. graduating students, etc.).  The Government is hoping there will be a job growth of 9,000 but seven out of the 12 forecasters believe it will be less.  The Central Bank is projecting employment growth to be less than 2,000.

So unemployment will fall back marginally while employment growth will be anaemic.  This hardly points to a ‘recovery’.

So the next time you hear someone going on about a recovery in 2012 – just keep in mind the image of a soufflé.  When it is pulled out of the oven it’s puffed-up and lovely.  But when you prick it with the smallest of pins it collapses and you discover there is not much substance to it.

That’s what 2012 will be like – grim economic reality served up as a soufflé. 

ICTU Has the Ideas, Now It Needs a Strategy

ICTU’s pre-budget submission, ‘Growth is the Key’ poses a direct challenge to the austerity programme being pursued by the Government – in both its critique but, more importantly, in the alternative programme it puts forward.  Let’s look at the main strands of ICTU’s alternative for it has the capability of uniting the various strands of the broad progressive movement.

There are two main elements which are inextricably inter-related:  the investment strategy and the budgetary strategy.

Investment:  The submission proposes a twin-track investment strategy.  The first track foresees a €6 billion investment programme over the next three years.   It proposes a menu of suggested programmes:  water & waste network, education, health, retro-fitting buildings, public transport, etc.  All of these would result in new and productive assets upon which the economy can generate employment and income – in the short and long-term.

The second part of this investment strategy is the State Holding Company.  Rather than selling off public assets and enterprise, ICTU proposes to marshal their commercial power to expand enterprise activity.  In essence, the shares of all public enterprises would be vested in the Holding Company which, in turn, could raise private funds on the market (through borrowings, as happens now) for future investment.  The benefit of this approach is that it would allow for the expansion of successful public enterprises while using private, not public funds, (meaning no extra state borrowing). 

This strategy has the capacity to boost growth, employment and tax revenue – and therefore constitutes an important element of fiscal consolidation.  But this is not a short-termist programme; investment creates assets which can be used down the years to generate further growth and income.  This is a positive stride forward.

Budgetary Adjustment:  While no one doubts the need to increase investment (though those supporting austerity never explains how this increase will occur within their deflationary framework), the biggest challenge ICTU poses is in the realm of budgetary strategy.  Simply put, it calls for the end of overall current spending cuts and the driving of fiscal consolidation through tax increases on high-income groups and their property and capital.  The implications of this approach are far-reaching.

First, it rightly poses spending cuts as a political choice, not a budgetary imperative.  If the Government cuts public services, social protection or investment it is because they chose to do so.  They could make better choices if they were so politically inclined.

Second, and following on from the first, it has implications for the trade union movement’s relationship with the Croke Park Agreement.  While it doesn’t negate the operation of the Agreement (seeking to raise productivity through agreement is a sound enough principle), it puts ICTU at odds with the Government over what to do with the efficiency savings that arise from Croke Park.  The Government wants to use the savings to reduce public sector employment in the (vain) hope that this will reduce the deficit.  ICTU has an alternative:

‘It is difficult to quantify the likely size of these savings [Croke Park, reduction in interest rates] in 2012 and 2013.  But any savings arising from public sector reform, reduction in regressive expenditure and reductions in unemployment costs arising from Congress’s investment programme, should be reinvested back into public services and social protection.’

In other words, reductions in one area should be used to increase expenditure in other areas – whether that’s reopening hospital wards, increasing Special Needs Assistants, hiring more teachers and Guards, in addition to restoring social welfare cuts.  That’s a direct challenge to the Government’s deflationary strategy and suggests that while ICTU will operate Croke Park, it will oppose the policy intention of the Government; namely, using Croke Park to cut overall levels of public spending.

In effect, ICTU is calling for at least a freeze in current spending at 2011 levels – still a difficult task; but it opposes the Government’s planned cuts of approximately €1.5 billion in current spending.

Third, to drive fiscal consolidation ICTU calls for a range of new taxation measures that largely impact on high-income groups:  wealth tax, solidarity levy on high-incomes, temporary corporate profits levy, elimination of property tax reliefs, extension of USC on to capital income, etc.  The advantage of this approach is that it would be less deflationary than spending cuts and, so, would actually reduce the deficit more than a budget made up primarily of spending cuts.

These are the three main elements:

• Investment
• An end to spending cuts
• Taxation on income groups

These are the core principles for a progressive counter-strategy to failed austerity policies – principles which would have considerable support among workers, social organisations and progressive politicians.

But announcing these principles is one thing.  The real test is what strategy ICTU will pursue to, in the first instance, convince public opinion and, then, to mobilise the broadest possible coalition to oppose austerity behind its concrete alternative.  Last year ICTU mobilised over 100,000 in Dublin but then let the initiative die.  Were it to return to that strategy – and there are strong arguments that it should – it will have to build a follow-on strategy; one that is inclusive of other social organisations.

This will be ICTU’s real test.  It has the right ideas, now lets’ start debating the best strategies that will derail austerity policies and mobilise a majority in society around the principles that ICTU has ably put forward in its pre-budget submission.

Quick Follow-Up on the Fiscal Council Story

Third time's a charm. Following on from two previous posts (here and here), tracking the stat-bending the Irish Fiscal Advisory Council was engaged in, we can now put that issue to rest.  The Fiscal Council has finally published a correction and with it has published a third version of their first report.  Now the crucial section reads:

'Even though domestic demand has fallen significantly (at least in part due to the austerity measures undertaken) and domestic demand has remained weak, the General Government deficit is improving. The underlying deficit has declined from 11.8 per cent of GDP in 2009, to a projected 10 per cent this year. Austerity measures are working to reduce the deficit.'

They finally got the numbers right - the underlying deficit numbers. So, the first version is cleaned up, while the second version has gone down the memory hole - as if it never existed.

Now that the Fiscal Council has got the numbers right, we can start having a debate over their main contention:  that the 'austerity measures are working to reduce the deficit'. 

In short, the Fiscal Council wants us to believe that austerity measures amounting to over 12 percent of GDP resulting in a deficit-reduction of 1.8 percent constitutes 'working'.

Discuss.

Making a Poor Start Worse

In my post on the Irish Fiscal Advisory Council’s first report, I pointed out a significant error.  In short, they claimed that the underlying deficit fell from 14.3 percent in 2009 to a projected 10 percent in 2011.  This, they claimed, proved that austerity was working.

Except that they got the numbers wrong.  The deficit only fell from 11.8 percent to a projected 10 percent.  Which begged the question – could spending cuts and tax increases of over €20 billion (over 12 percent of GDP) that resulted in a fall in the deficit of 1.8 percent really be described as successful?

I contacted the Council with this mistake.  On Tuesday they redressed this error –by re-issuing the report. But they only ended up compounding their initial mistake.  Instead of acknowledging the flaw in their argument, they engaged in a number spin designed to mislead readers.  This is not worthy of a panel of independent experts and undermines the credibility of the Council.

Let’s recap the argument.  In their report, Fiscal Assessment Report, they claimed:

‘Austerity measures are working to reduce the deficit.’

The argument they used to substantiate this was as follows:

‘. . .  the General Government deficit is improving. The underlying deficit has declined from 14.3 per cent of GDP in 2009, to 12 per cent in 2010 and to a projected 10 per cent this year.’

The problem was that the underlying deficit (the deficit excluding special, once-off bank payments) was 11.8 percent in 2009, not 14.3 percent.  If they had used the correct numbers the claim that ‘austerity measures are working’ would have been seriously weakened (indeed, they would have to admit that the deficit actually rose in 2010).  To compound this mistake, they claimed in a footnote that there were payments to Anglo-Irish in 2010 when there were actually none.

In their updated report , they still claim that ‘‘Austerity measures are working to reduce the deficit.’ But then they proceeded to deliberately obfuscate.  Here is their new argument: 

‘. . .  the General Government deficit is improving. The General Government deficit has declined from 14.3 per cent of GDP in 2009 to a projected 10 per cent in 2011.’

They have jettisoned the ‘underlying’ deficit measurement since it didn’t suit their argument.  Instead, they used the headline, or General Government deficit – even though that is distorted by the capital payment to Anglo-Irish in 2009.  It gives the appearance of considerable progress being made when actually very little progress has been made.

However, they then engage in a crude ‘cover your backside’ exercise by putting into a footnote the following:

‘In 2009, there was a €4bn capital injection to the banking sector, which if excluded, results in a deficit of 11.8% of GDP.’

So they admit the correct numbers but separate them between the main text and a footnote.  The main text was written to mislead – using numbers to vindicate their claim that austerity is working. The footnote was written to correct the mistake.  The reader is left perplexed – which is the intention.

What the Fiscal Council did was make the facts fit their pre-conceived argument.  What the Fiscal Council did not do is create an argument based on the facts. What the Fiscal Council did was start with a conclusion and then manipulate the presentation of uncomfortable facts. If a first-year economics student tried this on, they would be shown the door. 

In one sense, whether this proves austerity is working or not working is beside the point.  The issue is the treatment of data by the Fiscal Council.

On the website there is a page entitled ‘Transparency’.  It claims: 

‘The Irish Fiscal Advisory Council is committed to a policy of transparency.’ 

Yet, the Fiscal Council didn’t alert anyone that they had revised their first report, nor did they (as would be the norm) call the current edition of the Fiscal Assessment Report an ‘update’ or indicate in some way that this is a revision owing to mistakes in the previous draft.  Nor have they left any trail as to their ‘correction’; there is no indication that the draft has been changed.  This, in addition to their manipulation of the deficit data, does not bode well for claims to transparency.

The Fiscal Council was intended to be a positive innovation – a body that would provide an independent assessment of economic and fiscal policies based on a transparent treatment of fact.  Unless they rectify this mess of their own making then the public should treat all future publications and reports from this source with extreme scepticism.

* * *

NOTE: The Fiscal Council has removed the first draft from their website.  If you would like to compare for yourself the two drafts, please write to me at taftmichael@eircom.net  and I will send the first draft.

Watch Out for the Numbers - There's Even More Austerity in Store

With the Government to publish its four-year plan in the next few weeks, we should try to nail down some basic numbers.  No doubt the plan will present an avalanche of numbers and percentages and projections; so much so that the Government may well try to hide some discomforting statistics.  Does this sound cynical? 

Let me give one example of what the Government has already done – extended and deepened austerity measures without telling anyone.  When the Government took office they found a €4.2 billion hole in the projections presented by the Fianna Fail government in the last budget (these were the projections that the EU and IMF announced full confidence in). 

In just a few weeks, the new Government found tax revenue falling by €4.2 billion below Fianna Fail projections.  Why did this happen?  Because they projected growth to be lower (the lower the GDP, the lower tax revenue).  This put the entire austerity strategy at risk.

So how did the Government respond?  They first extended the target date to reach the Maastricht guidelines (that is, to reduce the deficit to 3 percent of GDP) to 2015 since there was no way they could do it by 2014.  They then inserted an additional €2 billion in austerity measures in 2015.

Did they tell anyone?  No.  Did they publish this when they presented the revised projections in the April Stability Programme Update?  Kinda, sort of.  They put it in a footnote on Table 10.  It didn’t even merit a single sentence in the text.  At one level this is understandable.  The revised projections were published at the same time as they announced the Jobs Initiative.  It wouldn’t have been very inspiring if the Finance Minister announced all manner of proposals to increase jobs and then said, ‘oh, and by the way, we’re going to hammer you for another €2 billion in austerity’.  Wrong signals and all that.

So we’re right to be alert.  Here I just want to focus on one issue – how much fiscal consolidation (tax increases and appending cuts) the Government is required to introduce in the next budget.

It is commonly asserted the Government must introduce €3.6 billion in fiscal consolidation measures.  However, this figure is not what it seems as it includes what are called ‘carry-overs’.  An example of this is the introduction of the Universal Social Charge in the last budget.  In 2011, the USC was introduced on a cost neutral basis (replacing the Income and Health levies).  However, on a full-year basis, it will raise €400 million.  This occurs because tax is collected in arrears.  Tax collected in January and February comes from the last month of the previous year.  Similarly with spending cuts – there are carry-overs from one year to the next.

The fiscal targets in the National Recovery Plan – which formed the basis of the EU-IMF deal and which was accepted by the new Government – listed the ‘new’ fiscal consolidation measures that had to be introduced for each year, along with their carry-overs: 

The actual amount of ‘new’ fiscal consolidation measures the Government is required to introduce is not €3.6 billion but actually €2.6 billion in the New Budgetary Adjustments in Budget 2012 column.  The remainder is made up of carry-overs.

But there’s another twist to this stat-fest.  The actual amount of carry-overs from Budget 2011 was projected to be higher than the table above taken from the National Recovery Plan/EU-IMF deal.  If these projections hold (and they will probably slip a bit), the actual amount of new fiscal consolidation the Government is required to bring will be less.

If we factor in the actual carry-overs from Budget 2011, the Government need only bring in €1.9 billion in ‘new’ fiscal consolidation measures – because the carry-overs are higher than anticipated under the National Recovery Plan/EU-IMF deal.

So where does all this get us? 

• We should focus on the amount ‘new’ fiscal consolidation measures the Government is required to bring in.
• The ‘new’ fiscal consolidation measures required are anywhere between €1.9 and €2.6 billion (depending on the actual amount of carry-overs)

As we know, the Government has stated that it has policy freedom to substitute tax increases and spending cuts as long as the value remains the same. Therefore, the Government could introduce a budget made up totally of tax increases.  And this raises the very real possibility that new tax increases on high-income groups and capital/property could easily reach the level of ‘new’ fiscal consolidation measures.

In other words, the Government does not need to cut overall spending.  If they do, that is a political choice.

Knowing this, we will be better able to assess the politics of the Government’s budget – and we will know where the Government intends to turn up the austerity heat.  Already, they are claiming that the fiscal consolidation targets are not important (even though they specifically commit themselves to those same targets).

Now they are shifting the goalposts – claiming that it is the overall deficit that is the actual target.

And, on this basis, they will have to increase the austerity measures.  Why?  For the very same reason that they slipped in an extra €2 billion without telling anyone; namely, that austerity is depressing growth which in turn drives down tax revenue and increases unemployment costs.

Missing and readjusting targets because of the impact austerity is becoming a bit of sport lately with Irish governments.

A sport that we are losing.

 

Privatisation is Being Driven by Fine Gael, Not the EU-IMF

The EU-IMF deal does not require the Government to privatise state assets. I’ll repeat that. The EU-IMF deal does not require the Government to privatise state assets. Those who claim otherwise have either not read the EU-IMF Memorandum of Understanding (MoU) and are just repeating what they heard from someone else. Or they are simply misleading people. It’s that simple.

Don’t believe me. Here is the MoU. Go to page 59 (paragraph 27). Here is what it says:

‘Building on the forthcoming report of the Review Group on State Assets & Liabilities the government will undertake an independent assessment of the electricity and gas sectors with a view to enhancing their efficiency. State authorities will consult with the Commission Services on the results of this assessment with a view to setting appropriate targets for the possible privatisation of state-owned assets.’

The MoU sets out a four-step process:

• First Step: Publish the report of the Review Group on State Assets & Liabilities. This has been done.
• Second Step: Undertake an Independent Assessment of the electricity and gas sectors (not done.
• Third Step: Consult with the EU Commission on the results of this assessment (not done.
• Fourth Step: Consider the possible privatisation of state-owned assets.

There are steps the Government must take before they even get to the stage of considering the ‘possible’ privatisation – steps they haven’t taken yet; namely, the independent assessment.

Now we can argue the toss all day but it is difficult to see how this section can be read as a ‘requirement to privatise’.

There’s another aspect to all this. What is the purpose of this process leading to the consideration of possible privatisation? To raise revenue to pay down debt? No. Absolutely not. The paragraph above appears under the heading ‘Raising the Growth Potential’. In this section,the MoU is concerned with

‘. . . removing structural impediments to competitiveness and employment creation.’

It is not about raising revenue. If it was, it would have been placed in the preceding section on ‘Safeguarding Public Finances.’

Indeed, if anything, the Government is not in compliance with the MoU – as they have not yet completed an independent assessment of the electricity and gas sectors, never mind published one.

So, if there is no requirement to privatise public enterprises, if consideration of ‘possible’ privatisation must be about ‘efficiency’ rather than revenue-raising, then how have we ended up with quarterly reviews that refer to privatisation? Ask Fine Gael – for it is they who are driving this agenda.

In the first quarterly review, the reference to the sale of state assets has changed from ‘possible privatisation’ to:

‘Programme for Government and the Review Group on State Assets and Liabilities: The Government is due to consider a potential programme of asset disposals based on the Programme for Government and the Review Group on State Assets and Liabilities. The Government will discuss its plans with the European Commission, the IMF and the ECB when it has finalised its response to the Review.’

In the second quarterly review, the references to the sale of state assets went further:

‘Government will consider options for an ambitious programme of asset disposals, based on the Programme for Government and the report of the Review Group on State Assets and Liabilities.'

In both these references the Government will consider the sale of state assets ‘based on the Programme for Government’. In the first quarterly review, it is a ‘potential’ programme; in the second, it is an 'ambitious’ programme. And who put these in? Michael Noonan and Patrick Honohan. It is part of the letter they wrote to the Troika. In the first quarterly review they state:

‘In the attached Memorandum of Economic and Financial Policies (MEFP), we set out our plans to further advance towards meeting the objectives laid out in our EU/IMF financial assistance programme.’

Not the EU-IMF plans – ‘our plans’, the Government's plans. That’s why the privatisation of state assets is based, not on EU-IMF requirements, but the Programme for Government. What does the Programme say?

‘We will target up to €2 billion in sales of non-strategic state assets drawing from the recommendations of the McCarthy Review Group on State Assets when available. Assets will only be sold when market conditions are right and when adequate regulatory structures have been established to protect consumer interests.’

It should be noted that there is no reference – either in the MoU or in the two subsequent reviews – to ‘non-strategic’ assets. The Government abandoned this concept that was in their own Programme.

Which party demanded that the ‘sales’ of non-strategic assets’ be inserted into the Programme for Government? Fine Gael. This is from their election manifesto:

‘We will sell non-strategic assets such as Bord Gais Energy, ESB Powergen, and ESB Customer Supply.’

Labour, on the other hand, was unequivocally opposed to privatisation:

'Labour is committed to concept of public enterprise, and is determined to ensure that semi-state companies play a full role in the recovery of the Irish economy. Labour is opposed to short-termist privatisation of key state assets, such as Coillte or the energy networks.'

No doubt, in the negotiations in the Programme for Government, Labour felt it had to give way on this issue. But make no mistake – it is a Fine Gael issue. So where does that leave us?

• First, privatisation of state assets is not required by the EU-IMF deal.
• Second, it was inserted in the quarterly reviews by the Government, namely the Minister for Finance.
• Third, this issue is being driven by Fine Gael, not the EU, or the IMF or the ECB – or even by Labour.

Labour backbenchers, in particular, should take note. They, along with the rest of us are being driven into a policy that is mandated by Fine Gael and no one else.

A Poor Start

The Irish Fiscal Advisory Council’s first report is out.  It is a poor start.  There is much to chew over but here I want to take up one contention – the one that says austerity is working.  For if this argument is the best it can come up with, then it will have its work cut out to establish credibility.

The report urges the Government to substantially increase its fiscal adjustment targets to ensure that it reduces the deficit to 1 percent of GDP by 2015 – going further than the -3 percent required by the Maastricht guidelines.  This would entail an additional €4 billion in spending cuts and/or tax increases (and the report indicates sympathy with the spending cut route).  Let’s leave aside the issue of whether this increased adjustment will actually achieve its target.  What caught my eye was this statement:

‘Austerity measures are working to reduce the deficit.’

What argument does it employ to substantiate this claim? 

‘Even though domestic demand has fallen significantly (at least in part due to the austerity measures undertaken) and domestic demand has remained weak, the General Government deficit is improving. The underlying deficit has declined from 14.3 per cent of GDP in 2009, to 12 per cent in 2010 and to a projected 10 per cent this year.’

It’s an interesting argument.  It’s also untrue. 

The report confuses the ‘underlying deficit’ with the ‘headline deficit’ in a way that significantly weakens its claim.  The difference between the two is simple:  the ‘underlying deficit’ excludes special payments to the banks (in this case, our old friend Anglo-Irish).  The ‘headline’ deficit includes the special payment.

The report is right to highlight the underlying deficit.  Special payments – sometimes called exceptional payment – are supposed to be once-off affairs (though with our banks it seems to be an annual affair). The underlying deficit removes these special payments and is more reflective of the basic relationship between income and expenditure.

The problem is the report mixes up the ‘underlying’ with the ‘headline’.  As the Department of Finance’s letter to Eurostat shows, in 2009:

• The headline deficit was 14.3 percent
• The underlying deficit was 11.8 percent

The report claims that the fall in the underlying deficit from 14.3 percent to 10 percent (the estimate for this year) – a fall of 4.3 percent – shows that austerity is working.  The problem is that the underlying deficit didn’t fall by 4.3 percent.  It fell by only 1.8 percent.

So, spending cuts and tax increases of €20 billion (equivalent to 12.8 percent of GDP) reduce the deficit by 1.8 percent:  is this proof that austerity is working?  Hardly.  It is a highly wasteful, inefficient and wholly ineffective policy resulting in spiralling unemployment, destruction of our productive capacity, rising arrears and falling confidence.

This begs a follow-up question.  If €20 billion cuts and tax increases only resulted in a deficit-reduction of 1.8 percent – then how credible is the report’s prediction that a further €16 billion in cuts and taxes will result in a deficit reduction of 9 percent by 2015?  It’s a big ask.

That the report mixed up the underlying and the headline deficit in 2009 would normally be no big deal.  We all make such mistakes.  However, basing such a far-reaching claim as ‘austerity is working’ on that mix-up – that’s a different matter.

And to make matters worse – the report claims in the footnote to this statement that there were promissory note and other payments to Anglo-Irish in 2010.  Actually, there were none.

It would be helpful if the Irish Fiscal Advisory Council clarified this matter.  And if it finds that the above criticism is correct – then hopefully it will find a better argument to substantiate the claim that austerity is working.

If they can’t, then they should admit that whatever about future predictions, the past provides no basis that austerity will work.

Investment Denial and the New Road Map

Colm McCarthy’s post on Irish Economy takes a sceptical look at ‘productive investment’, or more precisely, the Government’s claim that the New ERA proposals – can create up to 100,000 jobs.  This leads him to state that:

‘The spectre of politicians seeking to create 100,000 jobs through extra public spending is every economist’s nightmare.’

One could quip that not creating 100,000 jobs should be every economist’s nightmare.  However, let’s examine what exactly a public investment-led recovery programme is intended to do.  For the last thing we need in the debate is a series of assertions that sheds little light on means to kick-start recovery. 

Kill Anglo-Irish Debt: Vol. 1

Over the next 20 years Anglo-Irish (including Irish Nationwide) will cost the Irish taxpayers €90 billion. 

Just reflect on that for a moment.

Now repeat:  over the next 20 years Anglo-Irish will cost us €90 billion. 

It’s difficult to get one’s head around that amount but it is based on figures released last week by Michael Noonan in response to a parliamentary question from Pearse Doherty, TD.  Recently, Michael Burke, Tom McDonnell and I co-wrote a post on Progressive-Economy on the subject arguing that the Government should immediately enter into renegotiation with the Irish Central Bank and the ECB with a view to writing down that debt.

At that time, we estimated the cost at €65 billion – based on the Department of Finance’s note dated November 2011.  However, the Minister has released a revised schedule of payments.  And the cost has risen – substantially.  Here I reproduce Tom McDonnell’s calculation from Progressive-Economy.  The breakdown is as follows (difference in total due to rounding):

There are a couple of notes here:  first, the interest rate used after we exit the EU-IMF funding facility is 4.7 percent – the same rate that the Department of Finance used in their previous cost estimate.  Second, the 4^th column – Interest on the Cumulative Interest – pertains if the budget is in deficit.  Given that even if we were to hit the Maastricht borrowing guideline of -3 percent as a percentage of GDP by 2015 (or 2016 or 2017), it would be a long time before we reached surplus.

So €90 billion is a decent enough estimate.  Even if it turns out to be €85 billion, so what?  Would it matter to you if a 2.5 ton boulder fell on you rather than a 3 ton boulder?

I won’t bother going through all the proportions and comparisons (this makes up over 70 of GNP this year, etc.).  But there is a cost we should consider:  opportunity cost.

Opportunity cost is the cost of the next best alternative that is not chosen.  For instance, we decide to pay off Anglo-Irish debts rather than, say, installing a Next Generation Broadband; or a state-of-the-art water and waste system; or a pre-primary school system; or a heavily subsidised childcare network; or one-on-one tutorials for those with learning disabilities; or free comprehensive health care; or . . . or . . . or . . . etc. etc. etc. (when you are dealing with €90 billion you are dealing with a lot of ‘or’ and a lot of ‘etc.’. 

All these next best alternatives would boost growth, employment and living standards.  We can be sure that the value of the €90 billion put into economic and social investment would result in positive multiples measured in terms of GDP.  Paying off the Anglo-Irish debt will result in depressed growth as money is siphoned off a weakened economy and mostly flowing out of the country.

As Michael, Tom and myself proposed – it is time the Government announce that it intends to open negotiations with the Irish Central Bank and the ECB with a view to writing down this debt.  And until a satisfactory conclusion of that negotiation is reached, the Government should, in my opinion, suspend all payments owed under Anglo-Irish/Irish Nationwide.

And it should do this before November 2^nd.  For on that date we the people will be forced to pay over €700 million to unsecured and unknown bondholders.

Such a move by the Government would be overwhelmingly supported in all corners (for this is not a left/right issue or a trade union/employer issue – this is an issue of basic economic rationality). 

And it would certainly focus minds in any negotiation and help ensure that we come out with the best deal possible – namely, the wiping out of this odious, illegitimate and irrational debt.

Party Nation

Remember that statement – how during the boom years we all ‘partied’ as a nation? Remember those prescriptions – how we had to cut back our living standards, probably back to 2003; in order to restore competitiveness? Remember how we were told that we were living beyond our means and now we had to purge (and purge and purge). With the an all-important seminar on incomes and recovery being hosted by TASC in Cork on Thursday, let’s see just how much we partied, how we lived beyond our means, how much – as a nation – we indulged at the table of plenty.

We’ll use the CSO’s Survey on Income and Living Conditions from 2003, the first year of publication, to 2008, the last year of income growth. Let’s chart the growth in real direct household income (i.e. after inflation) by deciles. Direct income includes PAYE and self-employed earnings plus income from rent, interest, private pensions and dividends.

There are some surprising results. Income from work increased nationally by €55 per week. The top 10 percent experienced an increase of €475 per week – nearly nine times the national average. Of course, this should be expected – the more you have, the more you get.

At the poorer end, households saw their real weekly income rise – helped by increases in the national minimum wage and the wage floors in the Joint Labour Committee sectors (e.g. retail, hospitality, hairdressing, etc.).

What is surprising, though, are the middle deciles. These households – which make up over 40 percent of adults in the state – experienced real losses. Even in the relatively high 8th decile – the income growth was only 3 percent in real terms over five years.

This doesn’t seem to tally with our experience – middle income households experiencing a fall in working income. Didn’t all our incomes grow? Didn’t we all party? The answer to this is equally surprising.

Here is the growth in household social transfers between 2003 and 2008 in real terms. Social transfers include the gamut of social protection (welfare) programmes from unemployment and disability payments to family allowances, including Child Benefit, housing allowances and state old age pensions.

We tend to think of social welfare as something for the ‘poor’. However, as can be seen – the biggest gainers, in nominal terms, were those in the middle deciles. Even those in the 8th decile had a greater benefit from social transfers than they did from working income. Needless to say, the top 10 percent were the least beneficiaries of increased social transfers.

In short, living standards for those in the middle deciles were raised – not by work – but by social protection measures.

This leads us to some tentative conclusions:

• First, the attack on social welfare is not just an attack on the ‘poor’ (though it is that in spades). It is an attack on the living standards of the great majority of households in the state.

• Second, the agenda that pits working people against the unemployed and lone parents is an attempt to disguise the general attack on living standards. This is a divide and rule strategy – and after watching and listening to current affairs programmes, it is working a treat.

• Third, those in the lower categories are currently suffering two-fold: the attack on social welfare and the attack on wages through Minister Bruton’s attempt to carve gaping holes in the wage floors covered by Joint Labour Committees.

Of course, there is one group that is affected by neither the attacks on social transfers or wage floors: the top 10 percent. Funny that.

And all this should lead us to an alternative analysis and new strategies:  namely, that social protection is just that – protecting society.  We must construct strategies that unite the great majority of households and show that attacks on the social welfare system are really just veiled attacks on all of us. Yes to reform, yes to efficiency but also - yes to expansion.

In short, we should be arguing for a social welfare system that is truly concerned with the welfare of society. 

It is socially equitable and economically rational.

Duelling Stats

It is difficult enough to wade through the mountain of data to assess what is really happening in the Irish economy. It doesn’t help when we have ministers selectively celebrating selective stats. Take Minister Richard Bruton, for example; his PR machine is working overtime.

Last month, following the CSO release which showed merchandise (goods) exports rising and the merchandise trade surplus growing, Minister Bruton stated:

‘I am delighted that the recent good news on the export front is continuing. It is indeed heartening to know that despite the turbulent international markets into which we are exporting our exports are continuing to perform to an extremely high level. These trade figures show what our entrepreneurs can achieve when the conditions are right and only encourage me further to pursue this agenda so that we can continue to support export-led growth and recovery.’

Never mind that the numbers were largely a result of the strong performance by the chemical/pharmaceutical sector – a sector dominated by multi-nationals (not Irish entrepreneurs); it did show strong export gains.

Let’s fast forward to this month and the CSO release of merchandise export figures which showed these gains were reversed with a vengeance. Exports fell by 12 percent to its lowest level since March 2010 while the trade surplus shrank by 25 percent. This Minister was (not surprisingly) silent on this. My question is: if last month's figures showed the effectiveness of ‘our entrepreneurs’, what to the current figures show? Did they somehow become ineffective in a month?

Let’s take a second example. Last week the Minister greeted the service export figures for the second quarter of this year showing an 8 percent increase:

‘Today’s figures, the latest in a growing body of evidence of high levels of performance in manufacturing and exports, show that an export-led recovery is becoming a real possibility. It is particularly important that the knowledge-based sectors are performing so well. Our services exports are continuing to grow even faster than our Merchandise exports, which themselves are performing strongly – up 6% in the first half of this year.’

That service exports increased is not in doubt –it’s the Minister’s spin that is highly dubious. First, service exports increased by 11 percent in the second quarter of last year when Fianna Fail was in office - higher than the same period this year. At that time, when he was an opposition spokesperson, did the Minister greet the news in the same way as he did last week? We don’t have to trawl the Irish Times archives to answer that question.

Second, the growth in exports services is driven almost entirely by one sector – computer services, which make up over 40 percent of all service exports. Here is how that growth breaks down for the year up to the 2nd quarter 2011:

• Computer Services: an increase of 19 percent
• Rest of the Export Services Sector: an increase of 1 percent

A picture is emerging of an export platform dependent on two sectors – chemicals/pharmaceuticals and computer services. The remaining sectors are growing but at a slower rate. So what does all this tell us?

Not much, because it depends on which stat you want to hang on to in these choppy waters. So let’s cut to the chase.

As long as our export growth is rooted in the multi-national sector, it will massage our GDP figures but will have only a limited impact on the domestic economy. Let’s take the computer services as an example from the Forfas Client base (which doesn’t include all exporting companies – but most and is broadly indicative):

• Multi-nationals make up 98 percent of all computer service exports
• Multinational exports more than doubled over the period 2000-2009 – from €25.6 billion to €51.1 billion.
• Employment among multi-nationals actually fell during this period by 10 percent – from approximately 42,000 to 38,000.

This cautions us from putting too much employment and domestic-growth emphasis on export growth from the multi-national sector. For instance, in the multinational computer services sector there is one employee for every €1,300 million in sales; in the small indigenous sector, there is one employee for every €150,000 in sales.

Leave aside the issues of multi-national accounting practices and their impact on sales and export data – the qualitative gains (employment, domestic sourcing, payroll) will come from growing the indigenous sector. But there is no indication that the Minister has grasped this difference – at least, not in his statements where he hails the latest gain.

For at the end of the day, Ireland is not an exporting nation. It is a platform for foreign exporting companies (to get an historical sense of this, it is well worth your time to read Conor McCabe’s ‘Sins of the Father’). This platform is at times only tangential to the domestic economy.This is not to gainsay the benefits of multi-national operations in ths state - and the IDA's work in getting such companies to set up here; it only shows the limitations.

And to make matters worse, the platform is heading into some troubled times as the recent GDP figures showed. Exports grew by only 1 percent in the 2nd quarter of this year. If this slowdown continues, we won’t even have exports to massage GDP. And what will Minister Bruton say then?

Hopefully , at that point, we will finally have an open and honest debate about the real, long-term problems facing private sector growth, export markets, and employment. It’s long overdue.

Wiping Clean the Anglo/INBS Debt Slate

This was originally co-written for Progressive-Economy.ie with Michael Burke and Tom McDonnell

The Anglo-Irish and Irish Nationwide debt must become a major political issue. The Anglo/INBS debt-burden is an unjust and unwarranted charge which the Irish people ought have no responsibility for, a charge which will continue to drain the productive economy for years to come. In the following we discuss how we can expunge this debt based on (a) renegotiating the promissory note, (b) renegotiating a new repayment schedule (if any are needed), (c) writing down bondholder debt, and (d) political strategies to strengthen the Government’s negotiating position. The starting point should be a Government announcement this autumn that it does not intend to continue with the current promissory note payment schedule and will enter into renegotiation with the affected parties.

Blood, Stone, You

For households in work, if they manage to hang on to their jobs, it is going to be a difficult few years ahead if the projections for wage increases is anything to go by. This is something rarely referred to when Government or independent forecasters produce their numbers. In some ways this is understandable – there are so many other numbers to examine: GDP growth, unemployment, emigration, etc. But looking at wage increases can give us another perspective on future prospects – and those prospects don’t look terribly upbeat.

Back in April, the Government projected average wage increases per employee.

As seen, nominal wages are expected to rise by about half-a-percent next year and increasing until it exceeds 2 percent by 2015. Ok, not great says you but given that wages are expected to flat-line this year, it’s better than nothing.

However, when we take inflation into account (using the government projection of the EU’s Harmonised Index of Consumer Prices which excludes mortgage payments), we find a more worrying trend. Average real wages will be cut next year, flat-lining in 2013/14. Even by 2015, real wage increases will struggle to climb a ½ percent.

Of course, by the time the Government publishes its next set of projections – probably in October with its new four-year fiscal targets – these percentages will probably fall. All forecasters busily revising downwards their estimates from last spring and summer; the Government has indicated they will do the same. And usually lower GNP and employment figures translate into lower wage increases.

None of this takes account of taxation. The Government has given a commitment not to increase income tax which I’m going to assume means freezing rates, personal credits and the standard rate tax band. However, even this will degrade real incomes for freezing rates, credits and tax bands means the government increases its take through inflation.

Let’s take two single workers – one average industrial pay and the other on low-pay. Both will suffer a real pay cut of -1.1 percent each from a combination of projected pay cuts and inflation. So even by doing nothing (not inflation-indexing tax credits and standard rate tax band), workers will, on average, experience a real pay cut of about €5 to €6 a week.

If the Government proceed with any non-income tax increase (they’ve already signalled a Household Charge) then things will degrade that bit more. For those on low wages, they will experience another -½ percent fall in take-home pay.

In real life it won’t play out like these averages. Many will get pay increases – in particular, those in the multi-national sector. Others will find their wages falling by a greater amount. Most will probably see their pay frozen (e.g. the public sector). So the picture will be varied. But, on average, that’s what we’re facing into.

The situation is similar for social welfare recipients: if their rates are frozen, they will suffer a real income cut of nearly -1 percent. If the Government goes after rent supplement or other income supports, that cut will deepen.

With real wages flat-lining for some years to come, with tax increases, with households still deleveraging -– whether its mortgages, credit card debt or door-stopping loan sharks – the prospect of kicking growth into the economy via consumer demand is likely to disappoint. Which is why the Government is projecting the domestic-demand recession to continue into next year.

You might think it is difficult to get blood from a stone. But that’s what the Government will be attempting to do – even if they avoid the headline rate cuts in taxation or social welfare.

The only problem is that if they squeeze too much, the rocks will crumble.

Depleting the Economy and the Alternative

This was originally written for Progressive-Economy.ie

Philip Lane’s thoughtful article in the Sunday Business Post helps clarify the debate. For while he argues for further fiscal contraction, this should not distract us from the underlying point of difference between those who support (more) austerity, and those who support an expansionist approach. Disputes over fiscal policy can mask more fundamental differences in economic and political outlook. Let’s examine the root issue as Philip defines it, and see where those differences lie.

The More Things Don't Change, the More Things Don't

The ESRI has produced a report on deficit and debt levels up to 2015 which has moved many to claim if we just stay the austerity course we will emerge from the forest of fiscal dark into the valley of economic repose. If you haven’t yet, first read Michael Burke’s critique of the ESRI report. Here, I want to focus on a small little item (which is actually a big item): their assumptions on growth.

In one respect, the ESRI merely calculated, based on a number of assumptions, a lower level of debt interest payments and applied them to Government growth forecasts. On this, they projected the deficit by 2015. Whereas back in April the Government projected a -2.8 percent deficit (as a percentage of GDP), the ESRI is projecting a -1.7 percent deficit.

The problem with this approach is that the Government will inevitably revise downwards their growth projections going forward – and the ESRI is well aware of this. So as a static exercise, all the ESRI provides is a projection of how much we will save on the interest bill (assuming there is no more bank recapitalisations necessary, we spend our cash reserves, and the banks actually return €3 billion to the taxpayer): approximately €1.8 billion less by 2015. This is useful enough. But it doesn’t tell us much about where our public finances will be.

‘ . . .if growth were to prove less than assumed in the Department of Finance estimates, it would not be sufficient to stabilise the debt to GDP ratio before 2015.’

This is an all-important caveat which hasn’t got a lot of attention. So let’s look at Finance’s nominal growth projections, which the ESRI uses (I use nominal – the real GDP plus the GDP deflator – because that is measurement used in deficit and debt projections).

The ESRI assumes the Government’s projections from 2013 on, but use their own projections for this year and next – which are substantially below official estimates. In other words, their overall conclusions only work if the economy suddenly ‘jumps’ in 2013 – which is unlikely to happen.

The ESRI tried to compensate for this by assuming a 1 percent lower nominal growth rate. From this, they maintain the debt will still be ‘stabilised’ in 2014. This would seem to be a contradiction with their own assertion above which categorically states that growth rates below Finance estimates mean we won’t stabilise the debt.

In all likelihood growth will prove to be even more sluggish than the assumptions in the ESRI paper and Finance’s projections. The Central Bank, for instance, has revised growth downwards considerably as has the Ulster Bank. But the most dramatic revision downwards has come from the ESRI itself.

Only three months ago the ESRI was projecting nominal GDP to grow by 6.5 percent over this year and next. They have now cut that growth rate by half. It is nearly 30 percent below the official projections. The question is – by how much more will growth rates be revised downwards before the end of the year. And, crucially, what impact will that have on growth rates going forward.

These seemingly small percentage changes could have a significant impact on the deficit. Let’s take a partial look of where we might end up, using the NCB’s recent growth projections. I’m not suggesting that they have a privileged insight – just that they are one of the few independent forecasters brave enough to project up to 2014.

NCB projects that average real GDP growth will be 2 percent between 2011 and 2014 compared to the Government’s (and the ESRI’s assumption) of 2.5 percent. This small drop in growth rates would mean that by 2014, nominal GDP falls €4.5 billion below Government projections. On average, this would mean Government revenue will be €1.5 million below target.

In other words, the fall in tax revenue (and this is a static calculation assuming that the Government’s projected revenue as a percentage of GDP holds in a lower growth environment) will wipe out the benefit from the interest rate reduction. And this doesn’t factor in any further pressure on public spending through higher unemployment and associated costs. This will subject our reduced debt sustainability ratio to considerably more market scepticism.

And this is the problem. Austerity cuts growth which is the main driver in repairing public finances. Already, official and private forecasters are revising growth downwards even as they project continuing strong export growth. This is the impact of austerity on the domestic economy – an impact which many have under-estimated.

It really is the same ol’ story with a different book cover.

If an Economic Tree Falls, Does It Make a Sound?

Gene Kerrigan is a litle dubious about claims of Ireland’s ‘unexpected economic recovery’. The article by David Vines and Max Watson of Oxford University, which first appeared in the Financial Times, went viral Irish-style, reprinted in the Irish Times and Independent and featuring on numerous current affairs programmes. And why not? They claim the markets have it wrong – that the Irish economy is on the path of recovery and that our ‘resilience’ will see us through. Ok, there are some challenges ahead (and we have to keep up that ol’ austerity) but if we persevere, we’ll make it to the sunrise.

Gene is right to be dubious. Others should be, too. Gene suggests that the Vines/Watson piece ‘seemed a bit light on facts’. Yes, there is that. Let’s look at some of these light facts that suggest economic recovery is on the way.

First, Vines/Watson claim we are ‘swiftly restoring our competitiveness’ and, as proof, suggest that our current account surplus will soon be of the order of 3 to 4 percent of GDP. In other words, we will be exporting more than we are importing; selling more abroad than we are buying in from abroad. This is no bad thing, especially for a small open economy.

Our balance of payments has improved. In 2007 we had a deficit of approximately €10 billion. Last year it was €764 million in the black; not quite yet at 3 to 4 percent (more like ½ percent), but on the right track. Vines/Watson goes on to say:

‘Of course, recession has also played a role in turning external accounts around, but a steady uptrend in exports has been underway for some time.’

So which was it – recession or exports that turned the good ship balance-of-payments around? Mostly recession, actually. In 2007, our manufacturing goods trading balance was €19.8 billion; that is, we exported €19.8 billion more than we imported. By 2010, this balance shot up to €36.5 billion – quite an increase. What accounted for it?

We can see that the turnaround in all down, not to rising export earnings, but collapsing imports. Export value actually fell but goods imports collapsed by a phenomenal 28 percent.

Falling imports is about more than just household consumers too poor, too prudent or too nervous to spend. Most imports are bought in by businesses as inputs into their production or re-selling activities. Falling imports, especially of this magnitude, are a clear signal of an economy being gutted of business and household activity.

Second, Vines/Watson go on to discuss Ireland’s net public debt. They claim that it will top out at 110 percent – a high figure but not one that can't be overcome. Hopefully. But even topping out, we will still have the highest debt level in the Eurozone, bar Greece. It is hard to base an argument about ‘unexpected comebacks’ on the projection that we won't be as bad as the worst.

However, the following statement is simply bizarre:

‘It is increasingly clear, too, that Ireland does not need to borrow from markets until 2014: that is the sort of borrower that markets can relearn to love.’

Imagine that you have been denied a loan from every bank in the land and you’re getting by on your in-laws generosity. Are you really someone that every bank in the land can relearn to love?

Third, Vines/Watson says our banking system is looking set to recover after the mega-billions of public subsidies. Hopefully. But there are three things to remember, even if these massive public subsidies manage to keep our banks afloat.

First, with the two main banks in active asset stripping mode, we shouldn’t expect too much credit flooding into the economy. Second, the investment into Bank of Ireland, which kept that bank from majority public control, could be seen as growing market confidence as suggested by Vines/Watson. Or it could be seen as a punt by two investors who have a well-worked out risk portfolio. If the BoI investment doesn’t pay off, they haven’t lost much; but if it does they’ll cream it in. It may just represent a well calculated bet, rather than anything to do with ‘confidence’.

Third, the investment community is not exactly rushing into AIB and and BoI yet. In March of this year, just before the latest recapitalisation was announced, their shares were trading at approximately 30 cents; now they’re trading at less than 10 cents.

So a balance-of-payments turnaround based on collapsing imports, a high public debt that is, at least, not as high as Greece, and growing confidence in our banking system, even with already low shares trading even lower: maybe Vines/Watson will turn out right – though this chart produced by Michael Burke should give us pause.

Or maybe Gene is right to be dubious. For if we are getting out of the woods, why are all these trees still falling on us? And do they make a sound?

And why doesn’t anyone hear them?

Investing in Another, Better Future

What if we bought a modern telecommunications system, bringing Next Generation Broadband to every household and business in the country?

• What if we purchased a state-of-the-art waste and water system to secure an increasingly scarce resource?
• What if we provided one-on-one intensive tutorials for all those with literacy and numeracy problems that keep them from entering the workforce?
• What if we retrofitted every building with conservation deficiencies (some 800,000 or so) to reduce our reliance on fossil-fuel imports?
• What if we established a strategic investment bank to focus on specialist business and infrastructural investments?
• What if we established a public enterprise company that would oversee directly or through partnerships the exploitation of our natural resources in the public and environmental interest – especially the potentially rich ocean-floor deposits?
• What if we rolled out a national early childhood education and childcare network as a public service?

What if we implemented Fianna Fail’s Primary Care Strategy – 500 community medical centres throughout the country, one for every 10,000 people, providing free GP and related out-patient services (this strategy has been hanging around for a decade)?

You’d probably say – gee, that would be great. And you'd be right. These would increase our productivity, reduce inefficient spending (e.g. band-aiding 100-year water pipes), improve people's work-skills, health and education, create thousands of jobs, promote enterprise start-ups and expansions; most of all, it would prepare us for a highly competitive future marketplace.

But the next thing you would say – how in the world could we afford all that?  Well, we can. In fact, we can’t afford not to pursue these investments. Here's how (and this is only one outline - there can be others and better ones).