To: New Left Government
From: Tom Healy
Date: March 2016
Re: Priorities to improve the economy and living conditions
The danger, now, is that many lessons of the crash of 2008 and what led up to it have not been learned and mistaken policies are being pursued. One clear example of this is the widespread endorsement of the idea that taxation is too high and tax cuts for this group or that group is a necessary and good thing to pursue (usually this comes with the proviso that tax cuts must be for our group or interest but not for others). True, political parties do not win elections on the basis of promising tax increases. However, if we are to be honest with ourselves, we have to ‘join up the dots’ to establish priorities in areas such as health, education, childcare, transport, energy and increased poverty including poverty among those in work struggling with rising bills and charges of one sort of another.
The debate in the lead-up to the next election needs to be informed by a vision of what sort of society we envisage and how we are going to get there. For the moment, a progressive political agenda needs to focus on four things:
– Pay and welfare
– Employment – quantity and quality
– Public services
– Homes
What counts in terms of people’s economic and living conditions is access to employment, income and services built in a dynamic and diverse enterprise economy.
1. Recession and recovery have offered little for wages. The latest trends show a downward overall trend in average weekly earnings from the beginning of 2009 to the third quarter of last year. There was a sudden and sharp increase in estimated average weekly earnings in the last quarter of 2014. This pushed the average weekly rate back up to where it was at the beginning of the recession. While there can be some flux in quarterly estimates and the final quarter estimate is ‘provisional’ it does appear that the pattern of falling wages has come to an end – provided that the economy continues to recover. When inflation is taken into account (using the consumer price index which includes the effect of falling mortgage interest costs in recent years) ‘real wages’ have moved more or less in tandem with nominal wages since the beginning of 2011 (reflecting low inflation). The thin blue line in Chart 1 shows the movement in the consumer price index. There was a re-emergence of very mild price deflation in the second half of last year – reflecting among other factors the impact falling oil prices.
The pattern of recovery in wages is very uneven across sectors and occupations (with some sectors and occupations faring worse than others. From peak real earnings (end of 2009) to the end of 2014 real average weekly earnings fell by just over 6% on average. Coupled with the impact of cuts in social welfare and increases in taxation the actual cut in livings standards for households mainly dependent on wage income was greater than 6% over that period.
A key problem in Ireland is the unbalanced structure of the economy and the effect of that on pay and welfare. There is over-reliance on foreign direct investment and, as a consequence, a low share of wages as a component of national income. Add to this a growing inequality in wages (before taxes and social welfare payments). This puts huge strain on public finances and, at the same time, leaves Ireland extremely exposed to international shocks. Changing this will take time. However, a start can be made by focusing on:
• The national minimum wage (currently €8.65 per hour).
• Low pay just above the minimum wage (typically under €12.20 per hour) as well as precarious work contracts and conditions.
• Social-welfare payments and eligibility where a tightening of conditions and a lowering of some payment rates took place during the recession need to be reversed, especially where poverty rose as a direct consequence of cuts to welfare.
• Reform of the welfare system and a movement to reduce and eventually abolish low pay goes hand in hand with the establishment of the principle and practice of a living income that allows all persons and households to live with dignity (something that is surely not unrealistic in a relatively prosperous country such as Ireland).
2. Creating ‘full employment’ means creating enough well paid jobs that can sustain individuals, families and communities. This will require a co-ordinated approach to strategic investment, banking, lending to firms, upskilling and a growth in new forms of economic activity based on co-operative ownership and public and community enterprise. Moving towards full employment will mean creating enough full-time and part-time jobs for everyone who wants to work and can work on a living income with proper conditions. Investment in sustainable sources of energy could give an important boost to employment creation as well as move Ireland’s towards a medium-term goal of lower dependency on imported oil and gas. The potential for revenues coming from oil and gas off the Irish coast should be re-assessed and, where warranted, the rate of corporation tax on such profits raised.
3. Much of Europe taxes more and spends more money on social services than ireland does. The European Commission Taxation Trends shows that taxes (including social insurance, VAT etc.) came to 28.7% of GDP in the Republic of Ireland in 2012. The corresponding figure, in France, was 45%. However, there is at least one very significant difference – culturally, politically and economically – between Ireland and France. It is that enterprises, in France, spend a much larger amount by way of employer social security. The Republic of Ireland has an exceptionally low rate of employer and employee social insurance contribution. Chart 2 shows the total amount of social insurance contributions as a percentage of GDP. France shows that social insurance contributions account for 17.1% of GDP in 2012, whereas, in the Republic of Ireland it was 4.4%.
The Republic of Ireland has the lowest overall rate of social insurance contribution of any EU Member State (Denmark is not included in the comparison due to the fact that is insurance system is organised in a very different way). ary of politicians, commentators and economists who come to our TV screens offering treats of ‘more money in your pocket’ through tax cuts. We might ask them to price these tax cuts in public service forgone, community health centres not opened, public transport not invested in, quality and affordable childcare not provided. And if they mutter something about inefficiencies in the public sector we may ask them to quantify (a) productivities gained since 2008 and (b) potential productivities to be extracted over the next 20 year.
Given Ireland’s growing population as well as a higher proportion of people over the age of 65 there is a need to create a more efficient, expanded and accountable public service. Government should invest in, and provide directly, early childhood education and care for children in the 2-4 age bracket. A key to funding a European level of public service will be an expanded and properly resourced social insurance fund. This will involve an adequate level of contribution from employers and employees. A start could be made by raising the employer rate of social insurance contribution by 3 percentage points on all wages above €100,000 a year.
4. Sometime in the 1980s, Ireland like the UK moved from a culture of residential houses or apartments being primarily ‘homes’ to a situation where an increased number of houses/apartments were seen as investment assets. Escalating prices in the 1995-2007 period brought large capital gains to a great many home owners just as collapsing house prices in 2008-2012 wiped some of those gains and placed recent borrowers in positions of ‘negative equity’ or extreme financial pressure (which is not necessarily the same as being in negative equity).
The impact of fiscal austerity in the 1980s was such as to greatly reduce the proportion of local authority housing as a proportion of housing stock or new housing units. The traditional ratio of public to private dwellings shifted once and for all in the late 1980s and has never recovered. The acute accommodation shortages and escalating rental prices of recent years is not unrelated to this. The total of local authority and housing association house-building construction in housing output went from 28% in 1985 to 6% in 2012.
An emergency programme of social housing provision needs to be introduced allied to controls on rent which are normal in many European countries at least until such time as the supply shortage has been rectified.
With a general election looming sometime between now and this time next year it is timely to consider what choices and policy options are appropriate. The Nevin Economic Research Institute of which I am director is not associated with any political party or platform. Our job is to undertake economic research informed by the evidence. The Memorandum is written in a personal capacity.
Memorandum
To: New Left Government
From: Michael Taft
Date: March 2016
Re.: Debt must be postponed so the economy can thrive
1. Sovereign debt remains high – greater than the size of the economy. However, official measurements underestimate the burden of this debt. When measured against our actual fiscal capacity (a measurement used by the Irish Fiscal Advisory Council to assess the actual size of the economy excluding the impact of multi-nationals accounting practices) our debt rises and the burden is greater. When measured against our gross national income (essentially our GNP plus small EU transfers), Irish debt rises higher again – nearly 40 percent above the already high levels that exist in the Eurozone. Even using this measurement flatters the Irish economy as GNP levels are artificially inflated by the profits of re-domiciled multi-nationals. There can be little question that sovereign debt represents a significant burden on the Irish economy.
2. This burden is manifested in the high levels of interest payments on the government debt. These annual payments are expected to reach €8bn by 2017 and remain at this level (even rising) in the years ahead. This is equivalent to the government’s education budget. While the low-interest regime offers the prospect of refinancing debt at lower costs, interest payments will still remain at elevated levels. This represents a significant drain on the productive economy as tax revenue is diverted into interest payments rather than investment in our economic and social infrastructure.
3. The current debate about government debt and interest payment is framed incorrectly. The issue is not whether the debt is ‘sustainable’, a term that is rarely defined in concrete terms save for mathematical calculations. Any number of metrics and formulae can be produced to show that almost any level of debt is sustainable. That the Eurozone finance ministers believe the Greek debt is sustainable is testament to the malleable definition of the word. The issue is not whether the debt is sustainable; rather, does the debt and the resulting interest payments constitute a clear and significant impediment to maximising economic growth and social equity. There are few who would argue that it doesn’t. This can be seen by a simple counter-factual question. If debt and interest payments were reduced by half, this would provide an extra €20bn to the Government over the life-time of a parliamentary term. Whether through public investment, expansion of public services or increased income supports this €20bn would add considerably to real as opposed to statistical growth – in 2014 it is estimated that the phenomenon of ‘contract manufacturing’ made up nearly half of GDP growth, something that had almost no impact on the domestic economy. It would have a significant impact on social equity, especially considering that over 1.4m people are officially described by the Central Statistics Office (CSO )as living in deprivation conditions.
4. Therefore, reducing the burden of debt and interest payments should be central to economic and social policy. This Memorandum proposes that the Government should endorse calls for a European Debt Conference – a meeting of all Eurozone countries (though this could be extended to EU Governments) to discuss various options to reduce the debt burden and agree a new approach which would involve debt restructuring. While burdensome debt levels are usually associated with the peripheral countries, the fact is that debt is a Eurozone issue. The IMF estimates that by the end of the decade nearly half of all Eurozone countries will have debt levels above or uncomfortably close to 100 percent of GDP. A Eurozone issue requires a Eurozone solution.
5. While there are a number of options to consider this Memorandum proposes that the Government adopt the framework outlined by three economic advisors to Syriza. In essence, they propose the
following:
a) The European Central Bank (ECB) acquires a significant part of the outstanding sovereign debt of the Eurozone countries – reducing national debt levels to 50 percent of GDP.
b) These bonds would be converted to zero coupon bonds with a 1 percent discount
c) The countries will buy back the debt when the ratio of those bonds falls to 20 percent of GDP.
d) The impact on Irish debt would be dramatic. Government debt would fall from 108 percent of GDP (2015 projection) to 50 percent. In nominal terms, debt would fall from €210bn to €97bn. This would have an immediate budgetary impact. It would have the potential of reducing interest payments by half, saving €3.7 to €4.2bn annually over the medium-term.
This framework, if adopted, would have a similar effect throughout the Eurozone. All countries would benefit (with the exception of Estonia, Latvia and Luxembourg; their debt is already below 50 percent). Over €4tn of Eurozone debt would be removed to the ECB. With the considerable interest payment reductions, the Eurozone would receive a similar boost. This has the potential to free the Eurozone from the low-growth, deflationary predicament we find ourselves.
6. The Government should take account of three factors if it decides to base its own proposals on this framework: First, this is not a nominal debt write-down or ‘haircut’ – Eurozone governments would buy back the debt taken by the ECB; but only when that amount reaches 20 percent of GDP. In Ireland, this means that (given a long-term nominal annual growth rate of 4.5 percent) the Government wouldn’t be buying back the debt until 2053 or nearly 40 years. However, inflation and GDP growth would bring about an effective write-down. Second, as it is the ECB that is buying the debt, there are no fiscal or budgetary transfers between Eurozone countries. In other words, no country would be liable for another country’s debt or repayments. Third, the ECB would borrow the money from the private sector to acquire sovereign debt. This would remove excess liquidity in the economy and, so, limit future inflationary pressures. The potential impact of this framework is best expressed by the authors:
“This model of an unconventional monetary intervention would give progressive governments in the Eurozone the necessary basis for developing social and welfare policies to the benefit of the working classes. It would . . . replace the neo-liberal agenda with a program of social and economic reconstruction, with the elites paying for the crisis. The perspective taken here favours social justice and coherence, having as its priority the social needs and the interests of the working majority”.
In all matters, regardless of the options adopted by a European Debt Conference, member-states would still be subject to the preventive arm of the Stability and Growth Pact. This means they will still be bound by rules to stabilise deficits at low levels.
7. This framework could attract the criticism that this constitutes monetary financing. It is difficult to disagree with that. However, while EU Treaties rule out direct monetary financing, the ECB has devised strategies that effectively finance governments without falling outside Treaty rules. The restructuring of the IBRC promissory notes and the ECB’s recent quantitative easing programme can be categorised as arms-length monetary financing. The above framework can be similarly categorised.
8. While it is beyond the scope of this Memorandum to prioritise the distribution of resources – approximately €20bn over a five-year parliamentary term – we would point out that both the Hermin and Hermes macro-economic models employed by the Nevin Economic Research Institute and the Economic and Social Research Institute both indicate that public expenditure increases, in particular public investment and employment, are more efficient in boosting economic growth than taxation reductions. Given our widely acknowledged deficits in our economic and social infrastructure, priority should be given here.
9. Finally, this Memorandum proposes that the Government engages in an open and honest dialogue with the people of Ireland. Our indicators of national income are distorted and give a misleading picture of the health of the economy. Our indigenous enterprise base is extremely weak by European standards while domestic investment is historically tied to property and finance rather than productive activity. Our long-term policy of incentivising foreign investment through low tax rates and an accommodative tax regime will undergo profound changes as the international environment is becoming more hostile to tax haven-conduits. The need for a new debt dispensation along the lines of the framework outlined above is a necessary step to provide us with the resources needed to undergo the necessary and profound restructuring of the Irish economy – a restructuring that will promote and vindicate the energy and creativity of the people of Ireland.
Michael Taft is research officer for Unite, the Union
