The following is an article I wrote for the Cork Independent and which appeared in the edition of March 28.
Minister of Education, Ruarí Quinn, has been at the centre of a debate that is getting increasingly heated recently on the public funding of teacher salaries in private fee-paying schools. There are 55 private schools in Ireland and in 2011-12 they received €96million in public funding, almost 90% of it for teacher salaries. Five private schools in Cork received €9.5 million for teachers’ salaries.
The Joint Managerial Body, which represents fee-paying schools, has argued that since the state would be required to fund the teachers’ salaries in any case the existence of private school is actually saving the state money. This is because the state funds teachers at a higher teacher to pupil ratio than in public schools. The Department of Education’s own figures show that if all of the 55 schools were to enter the public system the state would have to find an additional €23 million annually for teachers’ salaries.
This argument though, that public funding of salaries in private schools saves the taxpayer, is a very odd one from an economic perspective. It is like arguing that one shouldn’t pay tax because by having a job one is saving the taxpayer from having to pay jobseekers benefit. What is actually happening is that because the state is funding salaries, private schools can use the fees from generally wealthier families to fund the extra facilities and student supports which public schools cannot fund from their own resources or from parents.
There is a concept in economics called fungibility. It’s a big word for a simple concept and means that money from different sources is interchangeable. The fee income in private schools can be spent on any of the costs of running the school, but since the salary cost is covered by the state, this frees up the fee income for other uses. Parents can see this and so realise that their fees are being spent directly on providing an educational advantage for their children. They are behaving very rationally based on the structure of our education system.
The saving of €23 million is also based on all of the 55 private schools switching to the public system. Whether this would really happen is questionable. Recent Department of Education reports suggest that fee paying schools have significant disposable income, particularly relative to public schools. While some smaller schools certainly may no longer be viable as fee paying, larger private schools are still likely to continue to see a demand for their services from those parents able to pay even after a rise in fees to cover the withdrawal of public subvention.
In any event, it may be the case that the government should welcome a switch for these schools from the private to the public system. €23 million may be a very small price to pay for an education system which has less inequity built into it. Of course we are unlikely to ever have a situation where educational disadvantage is eliminated, but there doesn’t seem to be any argument in favour of using public money to enable such inequity. If parents wish to pay for secondary school education that is their choice, but they should pay the full cost for that decision.
I contributed to a debate on RTE's Primetime on Tuesday night. My contribution was in relation to the Cypriot bailout.
This was followed by a debate on the reform of the Common Agricultural Policy (CAP) in which Moore McDowell challenged the continued payment of subsidies to farmers.
What was striking was the nature of the debate around subsidies. The farming lobby seem to think subsidies are needed to protect farmers' incomes. The obvious (and clinching in my view) objection is that other commercial sectors are not subsidised but must pay the deadweight loss from taxes needed to keep farmers in business.
There is a justification for subsidies to agriculture but not to protect incomes. Farming brings some positive externalities - these are benefits to others for which no compensation is paid. For example, farmers, in producing food, also contribute to environmental protection (in many cases), to tourism benefits and to rural communities. It's worth considering what the countrysides in Ireland and the rest of the EU would look like without its maintenance by farmers. When an American tourist comes to Ireland to be awestruck by the rolling green fields and forty shades of green, it has to be realised that this doesn't happen by accident.
And the farmer, whose income is derived from production, is not compensated for the provision of benefits to other sectors like tourism. Basic economics suggests that where there is a positive externality, the product which has that externality is under-produced relative to the socially optimal level.
It is very unlikely that the externality argument would justify the scale of current subsidies (a contributor to Primetime suggested that 70% of farm incomes comprised of subsidies) but this approach provides a useful way to think of the problem that moves it on from the 'one sector versus another' that has typified and polarised the debate so far.
There was initial shock at the announcement that the plan to bailout Cypriot banks would include a levy on depositors.
Initially that levy was to be 9.9% on deposits over €100,000 and 6.9% on deposits below 6.9%. The €100,000 figure seems to arise from the limit under which deposits are protected by guarantee.
It seems unfair that depositors, particularly those at a low level, would be subject to such a levy to bail out the banks. And there is no shortage of outrage and protest at this move. What is absent however is an alternative plan. If the contribution of the Cypriots to the cost of bailing out Cypriot banks is not to be raised by means of a bank deposit levy, then how is it to be raised?
It is important to look at the scale of the problem relative to Cypriot GDP. Deposits in Cypriot banks account for almost 400% of Cypriot GDP. The Cypriot banking system The assets in Cypriot banks are seven times the size of the economy. The losses made in the banks from the Greek economic collapse have reduced capital in the Cypriot banks to the extent that a bail out is needed.
The cost of the bailout is €16 billion. The Cypriots will contribute just under €6 billion to that. That is equal to about a third of their national income. So where will that money come from.
The agreement indicates that junior bondholders will be "bailed-in" (paragraph 4 in this Eurogroup statement) , which is technical-speak for reductions in the returns they can expect. It is expected that junior bondholders will take a significant hit:
A key question for the finance ministers was expected to be whether any revised formula for the tax on deposits could still deliver the 5.8 billion euros agreed to in the bailout deal. The plan, a so-called bail-in, also would wipe out 1.4 billion euros held by junior bondholders in Cypriot banks. Only senior bondholders, who have paid a premium to be first in line for repayment of their investments, would be fully protected.
Even if the bond holders, senior and junior, are to be completely burned there is still a shortfall that needs to be made up by the Cypriots.
With Cyprus, the euro zone once again sidestepped the question. Officials involved in the rescue talks say that “bailing in” senior bondholders wouldn’t have made sense given that, by the end of September, Laiki and Bank of Cyprus had only some €184 million of senior bonds between them—peanuts next to the €10 billion the two banks need in new capital.
The only apparent solution is for the Cypriot government to raise the revenue through taxes. This is obviously not feasible as the funds are required now and the amounts in question are too large to raise given the size of the economy. (It may be interesting to note that Ireland funded its contribution to its bailout from the National Pension Reserve Fund).
The Cypriot government also has the small political cover of the large volume of non-domestic deposits in these banks. They can blame the Russians who use Cypriot banks to stash their cash and earn high interest rates relative to elsewhere in the euro area. The levy will the cost of the services provided by the Cypriot banking system.
There is still some way to go on finalising a deal that is fairer for depositors. It is now reported that deposits below €20,000 may be exempt. That makes sense, as does a staged levy that grows in line with deposit size.
Of course, this analysis is based on the premise that the banks in question should be saved. It would be interesting to see the figures for the value of deposits less than €100,000, because an alternative for the current levy may be to allow the banks to fail. If this could be a managed failure where deposits below €100,000 are protected the signal sent to other countries would be that banks may be allowed to fold if they are not viable.
The risk of that scenario is that it is difficult to control a bank failure and it seems the Eurogroup of Ministers have no appetite for such a risk.
I'm an economist so many of these posts will be about economic issues. But since everyone is allowed a view on economics I am inclined to go beyond my profession to throw my tuppence ha'penny into other issues.