Economy

By Orla O’ Connor. The National Women’s Council of Ireland (NWCI) has campaigned for a gender budgeting approach to be implemented by Government. This would mean that all budgetary measures were assessed for their impact on men and women. We would have got a very different budget had this been done. A recent ESRI and Equality Authority study highlighted the greater loss of income for women in comparison to men over the years of the economic crises. It provides hard evidence that women have suffered more under austerity.  Women in couples suffered a 14% loss in income levels compared to 9% for men, and this gap widened further for those on lower incomes. The tools are there for gender budgeting but Government has refused to apply them and this is the outcome. The NWCI has continually highlighted that those on the lowest incomes have shouldered greater losses and contributed a higher proportion of their income in direct and indirect taxes over the economic crisis. Rather than a squeezed middle, we have an increasingly hard-pressed majority with over 50% of all households relying on some form of social transfer to keep them way from the risk of poverty. Women and children have been hammered by these austerity measures, consistently bearing the brunt of reduced income and cuts to services. Budget 2015 provided the opportunity to begin to reverse these trends. The Government chose not to, and introduced a pre-election Budget aimed at voters on higher incomes. The cut in the top rate of tax to 40% was unnecessary, and there had been no popular demand for it. The changes introduced to income tax and the USC left workers with incomes of €33,800 to €70,000 effectively unchanged, but the greatest gain went to those with incomes of €70,000 or more. In addition any increases to incomes for the low paid in Budget 2015 are negated by the impact of  increased property and water taxes, on families. Small gains were made. The five-euro increase in child benefit is a partial recognition of the cost of living increases for families. The NWCI had called for an increase in the lead up to the Budget. However, this measure, worth approximately €70 million, does not offset cuts to the payment which amount to over €400 million since 2009. Changes to social welfare in Budget 2015 will have a particular impact on women. Women are more likely to be in low-paid, precarious work, and their income is more likely to have dropped during the recession.  The extension of the allowance for child dependants for the first months of employment represents a partial recognition of the poverty trap that exists in the transition between welfare and work for many women. However, it does not address the issue of those trapped in such precarious work. Incentives for employment in this Budget should have been designed to deliver quality jobs. The NWCI had called for an increase to the minimum wage. This would recognise increases in the cost of living and address low pay.  It would also have a direct impact on reducing the gender pay gap that stands at approximately 14.4% (according to the CSO in 2013 – the European Commision figure is somewhat lower. See graphic opposite). A Low Pay Commission was announced in the Budget. This has the potential to deliver reform and increased living standards for those on low pay. However, it must deliver real and quick change in determining a decent standard of pay for all that is relative in some way to those on high incomes. The increase in the living-alone allowance is significant for older women. The ending of the pension levy, however, does not address the ongoing inequality in private-pension tax relief for high income earners. It merely takes us further from badly needed pension reform. In addition, changes to the contributory pension bands, which have hit women the hardest, were not reversed. The ESRI and the Equality Authority have shown that Budgets are not gender neutral. Once again we are witnessing a Budget that has given priority to higher earners and predominantly male earners.  This shows how those in power have failed to learn from our past economic mistakes about the negative impact of economic and gender inequality on our society. • Orla O’Connor is Director of the National Women’s Council of Ireland.

By Sinéad Pentony. Budget 2015 was inequitable, with the balance of taxation measures disproportionately benefiting middle and high earners.  Rather than cutting taxes for higher earners it would have been fairer to begin reversing some of the cuts from previous budgets. Reversing cuts in social welfare and public services, especially in the areas of disability and mental health could have been prioritised. Budget 2015 signals the Government’s clear intention to pursue an economic policy based on a low-tax and low-spend model. This means continuing with low levels of taxation and spending compared to other European countries. Public expenditure and capital investment could have been used as a key driver of economic growth rather than tax cuts.  Budget 2015 was trumpeted as bringing an end to austerity. The reality may be that it is just making it less visible. There were few surprises in Budget 2015. The Government had publicly set out its plans in broad terms in the lead up to the budget.  The improving macro-economic context and the fact that this is the second last budget before the next general election clearly influenced the decision-making process. The Department of Finance forecasts a growth rate of 4.7% in 2014 and 3.9% in 2015. On the basis of these growth rates, and other positive news on exports, employment and unemployment, it is predicted that the deficit target of 3% will be reached with some comfort. The Government is aiming for a deficit of 2.7% of GDP, which allowed it to loosen the purse strings by just over €1bn. Our debt level is still extremely high and it can only become sustainable with strong growth and low interest levels. While both of these indicators are positive in the short term, the medium-term picture is much less clear. This means we should be strengthening public finances and ensuring the economy can grow sustainably into the medium term. Our public finances remain fragile. A decision to expand the economy through tax cuts is very short-sighted. There is much debate about the level of taxation, especially income taxes, in Ireland but considering the overall level of taxation, Ireland remains a low-tax country. This will be re-enforced by the taxation decisions in Budget 2015. The Nevin Economic Research Institute Quarterly Economic Facts (Autumn, 2014), shows that our overall tax take in 2013 was 35.9% compared to 45.7% for the EU as a whole (Chart 1). The main taxation and charges measures in Budget 2015 are summarised below: •    A cut in income tax from 41% to 40% and the standard-rate threshold increased by €1,000. This will reduce the tax take by €405 million (in a full year).  These changes are regressive and disproportionately benefit high earners. •    Changes in the USC include increasing the entry point to the Universal Social Charge to just above €12,000; reducing the 2% and 4% USC rates by 0.5%, to 1.5% and 3.5% respectively; introducing a new 8% rate for earners over €70,000; and an 11% rate of USC for self-employed income in excess of €100,000 to limit the benefits of these changes for the top 10% of earners.  These changes will reduce the tax take by €237 million in a full year and will benefit most earners. •    Water charges are being introduced on the basis of consumption which is regressive.  Budget 2015 will give tax relief (€40million), but this will only benefit those earning enough to have an income tax liability. •    Increases in excise on cigarettes and an extension in betting duty will increase revenue by €78 million. •    Budget 2015 introduced €80 million in new tax breaks for corporations.  The ‘Double Irish’ will be phased out in 6 years time and a ‘knowledge box’ will be introduced. Government expenditure is the other side of the budgetary equation. In 2013 our Government expenditure was 42.9% of GDP compared to an EU (28) average of 49% of GDP.  Budget 2015 expenditure measures include: •    An overall increase in expenditure of almost €640 million which is modest, but a welcome change from the last six years of cuts in spending. •    Increases in the current spending of €428 million which includes health, education, environment, community and local government. •    Partial reinstatement of the Christmas bonus for social welfare recipients and €5 increase in Child Benefit. •    Increase in capital spending of €210 million targeted at education, health, social housing and other areas. •    The biggest capital spending announcement was a package of measures worth €2.2 billion for social housing  for the next three years, which includes Public Private Partnerships and an off-balance sheet financial vehicle for investment to Approved Housing Bodies. •    Much of the other spending is aimed at dealing with increased demand for public services as a result of demographics – a growing and ageing population. This means there will be very little by way of investment in these essential public services. While increases in public expenditure and investment are welcome, the detailed Budget 2015 document shows a planned reduction in public investment (Gross Fixed Capital Formation) between 2014 and 2018. However, the Government plans to increase public investment ‘off the books’ through the Ireland Strategic Investment Fund, which will have almost €7 billion to invest over a number of years. While this will increase the overall level of public investment in infrastructure, Ireland will continue to lag behind EU levels of investment because the current level of investment is almost half the European average (see Chart 2). The opportunity to borrow money for investment at a time when interest rates have never been lower, and the rate of return would be significantly higher than the cost of borrowing, is being missed.  It is clear that the Government’s priority is to ‘balance the books’ by 2018 instead of front-loading investment to address the infrastructural deficits that may impede sustainable growth and competitiveness in the medium term. This approach to managing the public finances illustrates the absence of a vision for the economic and social development of the

The danger of the ‘Shoebox’ myth. By Ronan Lyons It is accepted by almost everybody that, in a city with Dublin’s geography, a home with a south or west aspect is preferable to one that faces north or east. Similarly, who could argue that having 60-square-metres to live in is better than 50? Everything else being equal, I think we’d all take those ten extra square metres any day. Unfortunately, everything is not equal. As anyone who has built a home or even just an extension will know, every extra square metre costs, in land, labour and materials. This is why homes across the world are smaller in city centres than on their fringes or rurally. People opt for location over size or other features like orientation. But what happens when that choice is taken away from them? This is the situation now facing Dublin’s residents since Dublin City Council (DCC) introduced new standards for developments in 2008. They exceed those that apply in the rest of the country, introduced by the Department of the environment (DoE) in 2007 and bringing Ireland into line with our european peers. And they are standards councillors are vigorously defending, typically appealing to an argument along the lines of “we don’t want people living in shoeboxes”. At its heart, the new standards are an inversion of logic. The one place where smaller sizes can be justified due to the benefits of location, such as access to jobs or a wide array of consumption services, is the one place where new units have to be at least one quarter bigger than anywhere else in the country. If 50-square-metres is good enough for the citizens of Cork, Copenhagen or Cologne, why in Dublin is it a shoebox? In addition to forcing new units to be a minimum of one quarter bigger than elsewhere in Ireland, all apartments must come with a basement car-parking space, a lift and a stairwell shared with no more than one other unit, and dual aspect. Where dual aspect is not possible, DCC will not consider any north-facing apartments. Each of these makes sense in a world where basement car parks, lifts and extra space are free. But as soon as you accept that each of these things costs money, what you are doing is effectively discriminating against lower-income households. Whereas those on higher incomes can choose between older or newer dwellings, the prohibitive cost of building new units means that rents of new builds will be far beyond the means of those on below-average incomes. To see how DCC’s guidelines are anti-poor, let’s walk through the maths of building a unit in Dublin city. If we wanted to build a two-bed unit in Dublin today, it would have to be at least 85 square metres. Given Irish local authorities’ disdain for tall buildings, this means that the cost of any given site has to be split across a smaller number of units than would other be the case. So where an acre costs €7.5m, instead of a 76-square-metre unit costing roughly €100,000 in land, the 85sqm unit costs over €110,000 each. The requirement for a basement car-parking space per unit – rather than for every four units, where central or close to urban rail, as is standard elsewhere – imposes a per unit cost of €20,000, rather than €5,000. Similarly, the requirement for a lift for every two units, rather than every ten, not only adds huge extra costs but also reduces the amount of space left for units. Together with the size requirements, the lift/stair requirements add nearly €50,000 to the construction costs of a two-bedroom unit. On top of this are added the costs of finance and development levies. All told, these supplemental regulations, above and beyond the DoE’s well thought-out standards applied in 2007, raise the development cost of a two bedroom unit from roughly €265,000 to €350,000. It is at this point that the developer’s profit is added in, typically a margin of 15%. (Thus an irony of these regulations is that, where viable, these new regulations mean greater per-unit profits in euro terms for developers!) Whereas 15% of €265,000 is €40,000, the same margin applied to the higher amount is over €50,000. So the final price, which includes VAT, of a two-bedroom unit in Dublin is currently €460,000, as opposed to €345,000 if the standards that apply elsewhere in Ireland applied in central Dublin. Translating this into the monthly rent required for a two-bed to be viable for an investor to buy (at a 6% yield) and thus for a developer to build in the first place, the rent for a Dublin two-bed would need to be €2,750 per month. Under DOE standards, the rent would need to be €2,050. Rents for two-beds in Dublin currently range from €1,150 in Dublin 9 to €1,650 in Dublin 4. What sort of income would you need to have to pay €2,750 a month on your rent? Accepted financial wisdom is that the highest fraction of your income to spend on housing that is sustainable is 35% of your disposable monthly income. A professional couple earning €120,000 gross per annum should not be spending more than €2,250 on housing costs per month. To afford a DCC-standard two-bedroom apartment, with its two balconies, its lift and basement car parking space, you would need to be earning €140,000 a year. Is it any wonder that nothing has been built in Dublin in the last few years? DCC’s regulations are effectively turning Dublin – or certainly its new developments – into an enclave for the wealthy. This is not to argue for a second that Dublin needs to allow shoddy construction and miserable accommodation. Far from it. There has been excellent value-creating regulation introduced in Ireland in recent years, including the focus on energy efficiency, while standards for things like green space and build quality all enhance quality of life and thus the value of a unit. The problem is that,

By Constantin Gurdgiev. Thomas Piketty’s ‘Capital in the Twenty First Century’ (Harvard University Press, 2014) has ignited both public and professional debates about the economics of income and wealth distribution not seen since the inter-war period a century ago, when applied Marxism collided with laissez-faire economics. To give the credit due to the author and his book, this attention is deserved. Like Marx’s ‘Das Kapital’, Piketty’s volume is sizeable enough to induce unwavering submission from the reader to its meticulously factual and theoretically all-encompassing virtues. Like Marx’s opus, ‘Capital in the Twenty First Century’ is impenetrable to anyone unequipped with an advanced degree in political economy and understanding of economic theory. They both aim to herald a Revolution, indeed essentially the same revolution: the dis-endowed against the endowed. Like Marxist debates of the 1930s, Piketty’s thesis comes at a time of major upheaval and crisis. And Piketty’s work is destined to stay with us for a long, long time. Its thesis of the coming age of chaos rising from the chain reactions of growing wealth inequality will be fuelling activists’ imaginations for decades. Yet, perhaps to the surprise of the majority of non-specialists, the book has within a month of its publication faded into the background in the world of economics. The reason for this is that the comprehensiveness of the book’s ambition – of creating a unified theory of future economic development – renders it an easy target for criticism, challenge and, ultimately, negation amongst economists. Before diving deeper into Piketty’s work, let me state three facts. Firstly, I admire Piketty for his audacity to challenge the orthodoxy of macroeconomics and tackle a broad-ranging set of targets. Ninety-nine point nine percent of economic literature explores the minutiae of empirical or theoretical cul-de-sacs in specific sub-divisions of sub-fields of economics. Piketty falls into the 0.1 percent of economists who pursue the big picture. Secondly, witnessing the vitriol with which Piketty’s book was greeted in economic policy circles, I have defended his work in the media and on my blog. Lastly, having read Piketty’s academic publications and working papers in the past, I found his book to be inferior to his academic publications. ‘Capital in the Twenty First Century’ is too long and stylistically un-engaging to be worth returning to in the future. The last fact means that you should read Piketty’s thesis and be aware of his core evidence, as well as the growing evidence of its shortcomings. The best means for acquiring this information is by reading Piketty’s articles and interviews, as well as taking in the debates surrounding his book. But you should not buy ‘Capital in the Twenty First Century’, unless you are determined to impress your friends with your economic scrupulousness, in which case you had better avail of Flann O’Brien’s gentlemanly service that can get the tome thumbed, marked and annotated for you with scientific-sounding marginalia. Piketty’s core thesis is based on what he defines as the “fundamental laws” of capitalism. Both of these laws stem directly from his view that economic inputs can be grouped into only two categories: capital (something that can be bought and sold, and thus accumulated without limit) and labour (something that cannot be sold, although it does collect wage returns, and cannot be accumulated without limit). Incidentally, outside undergraduate economics, this division remains valid only in the pre-1980s literature. Piketty’s First Law states that capital’s share of income is the ratio of income from capital (or return to capital times the quantum or stock of capital) divided by national income (for example, GDP). As anyone with a basic knowledge of economics would know, this is not a law, but an accounting identity. Furthermore, any student of economics would spot a glaring problem with the above definition: it applies to all forms of capital, including the ones that Piketty omits. This brings us to the first major problem with Piketty’s core thesis: capital itself is neither homogeneous, nor does it yield a deterministic and singular rate of return. Instead, capital takes various forms. There is financial capital – where the rate of return is measured in the form of equity returns, bond returns, financial portfolio returns and so on. There is intellectual capital that can be traded. This generates financial returns to holders/investors, but also yields productivity gains to its users, including workers. There is human capital – which (along with other inputs into production) generates returns to labour (wages and performance-related bonuses), but also returns to entrepreneurship, creativity of employees and so on. There is managerial and technological know-how that can be invested in and transferred or sold, albeit imperfectly, in so far as it often attaches to labour and skills. To measure the income share of all of these forms of capital, one simply needs to divide income from the specific form of capital by total income. It is the same for labour’s share – and for any other input share. This is neither Piketty’s own discovery, nor a law of Capitalism. The problem is that in many cases we cannot easily measure returns to the more complex forms of capital. And a further problem is that returns to one form of capital are linked to returns to other forms of capital. A good example here is urban land. Return to this form of capital is strongly determined by the returns to human capital that can be deployed on this land, as well as by know-how and technology that attaches to the economic activity that can take place on it. Piketty’s second fundamental law is a theoretical proposition derived from mainstream macroeconomic theory. The author claims that the ratio of the stock of capital to income will be equal to the ratio of the savings rate to the sum of the growth rates in technology and population. Together with the first law this implies that the income share of capital equals the ratio of the product of the return on capital and savings rate to the combined growth