This article appeared in the Irish Examiner Budget Supplement on October 11, 2017
Budget 2018 shows that it takes more than a deep recession and a troika bail-out to rid us of the spirit of Charlie McGreevy. Once again we are back in the era of Finance Ministers spending what they have. We can only be thankful for the EU fiscal rules that limit the damage the political system can do to our economy.
In the aftermath of the Irish economic collapse in 2008, many pointed fingers of blame at economists for failing to provide warnings about what was unfolding. There is some merit to this. Too many economists either weren’t paying attention or ignored the evidence and hoped for a soft landing. However, there were more than enough warnings issued if the government of the time had chosen to listen. Instead they pondered why all those moaners didn’t commit suicide or referred to those opposing the giveaway budgets during an economic boom as left-wing pinkos.
There were noble aspirations to learn our lessons. The Fiscal Advisory Council was, in the words of its first chairman, set up to institutionalise the memory of the crises. It hasn’t worked.
Less than a decade later and the government is again ignoring the warning voices, even though this time they are significantly louder and greater in number. In the weeks leading up to this budget the political debate has been about which of Fine Gael’s and Fianna Fail’s tax promises would be implemented. Now we know it is both. However, in trying to keep this fragile political arrangement in place, the net effect of the tax measures announced yesterday are negligible for most taxpayers.
The government is playing political games with significant economic risks, for the sake of a couple of euros a week in income tax. The economy is approaching full employment and growing strongly. This is before the additional stimulus of a necessary, large house construction programme emphasised in the budget. However, there are obvious and substantial risks to this economic recovery from Brexit and EU and US tax changes. The responsible approach is to be cautious. Tax cuts can wait.
The increase in new tax revenue of €830 million, from increases in commercial stamp duty, excise duty, and the new sugar tax and the very welcome vacant site tax rise, should not have been used for income tax reductions. These tax raising measures are sensible in themselves. The revenue generated would have gone to providing the buffer we may need if the risks to our economic recovery materialise and to offset the stimulus of the housing and infrastructure investment. We persist with pro-cyclical budgets. We learn little.
My UCC colleague, Vittorio Buffachi had an op-ed in the Irish Times yesterday supporting Jeremy Corbyn's proposal of a salary cap to address income inequality. Unlike the critics cited in Vittorio's article, I would not describe Jeremy Corbyn’s proposal as idiotic or lunatic, but neither is it an effective way of addressing the problem of income inequality.
Opposition to the proposal is characterised as a neoliberal response that places the market and incentives above all else. This may be true of some of the ideological opposition, but the most fundamental problem for me with the proposal is that it would be ineffective and inefficient. There are better ways to reduce inequality than implementing and monitoring a pay cap for high earners.
First it's necessary to address one of the arguments in the article, which is that “there is an assumption that inequality between wages is the best way to stimulate productivity, since the prospect of earning a high income is the only incentive behind economic activity”. I think this a bit back to front. Differences in productivity lead to differences in wages. There is little evidence that increases in wages stimulate productivity improvements, and what increases there may be are short-lived.
The assumption in labour markets is that businesses pay individuals more because those individuals can generate more income for the business. For example, we see what appear to be obscene salaries earned by professional footballers, but these are driven by the earning potential of clubs from having these players in their team. Oscar moving to a Chinese club is earning multiples of what he could earn in England. He has not become a better player – in fact he’s probably going to be less effective with poorer team mates – but he will be more productive (based on our narrow and limiting measure of productivity) because the club will generate revenue for more ticket sales, on-field success, and merchandising.
There are complications of course in measuring a worker’s productivity and the extent to which it is attributable to her, and/or the equipment she uses, and/or the combination of her abilities with co-workers. There are also the effects of bargaining power between businesses and workers that can mean workers are ‘underpaid’ where there is, for example, higher unemployment, or ‘overpaid’ where they have specific, highly demanded skills. When it comes to executives of course there is also the problem that their pay tends to set by colleagues on the board of directors, rather than market effects, and we get an insider problem.
Returning to the salary cap, I think it is likely to be ineffective partly because high-earners tend to have more than one source of income, and also have opportunities to structure income in different ways. A base salary is rarely the entire remuneration of executives. A salary cap will simply see an increase in more creative means of payment, such as share options, pension payments, and non-vouched expenses. Monitoring and implementing this becomes an ineffective use of resources. We’ve seen in Ireland how hard it is to monitor and implement salary caps in the health services, banks, the banks' regulator, and universities. The salary cap becomes little more than a symbolic gesture, though this is not to dismiss the importance of symbolic gestures at times.
However, if the real target is income inequality then more effective measures would include the introduction of a basic income for all citizens, which would ensue basic financial security and reduce inequality from the bottom-up rather than the top down. A salary cap would reduce income tax take from high-paid workers, leaving low paid workers in absolute terms either no better off or worse off from less government spending power.
Along with a universal basic income, a wealth tax (as suggested by Picketty) would be far more effective in addressing income inequality – as opposed to wage inequality which is only a subset of income inequality.
It is now generally accepted that, of all the EU members, Ireland has most to lose from a hard Brexit, not least because of the level of trade between Ireland and the UK. This explains the anxiety shown by Irish politicians, government agencies, and the Irish media on Brexit since the referendum shock las June. Despite all of that attention, there remains too much uncertainty about the Brexit process to estimate the precise effects.
History and geography has tied the Irish and UK economy together through trade, and while the share of trade between the countries has reduced since both joined the European Union, they share approximately €1 billion in trade every week. The impact of, at best, currency fluctuations and, at worst, the imposition of tariffs will be substantial and damaging. Brexit will be painful for the Irish economy, and the harder the Brexit the more pain we can expect.
It is unlikely that 2017 will bring about much more clarity on the likely outcome of Brexit. If Brexit is to happen then the preferred ‘soft Brexit’ option would leave the UK within the European Economic Area with access to the common market. The dreaded ‘hard Brexit’ would mean the UK negotiating a bilateral trade deal with the EU which is likely to see the introduction of trade barriers and tariffs.
The softer options are better for the UK and for Ireland, though they may involve UK contributions to the EU to access the single market and/or free movement of people between the UK and the EU. Both of these would not be politically palatable in the UK.
What we can expect in 2017 is for Prime Minster Theresa May to trigger Article 50 and begin the process of negotiating the difficult process of extricating her country from the EU. She has committed to doing this by the end of March. The British government clearly doesn’t have a plan for Brexit and is scrambling to find one. This explains the sometimes contradictory messages coming from the British government and meaningless statements such as the “red, white, and blue Brexit”. The Conservative government has committed to providing a strategy for Brexit to parliament in advance of invoking Article 50. It is unlikely that strategy will be comprehensive or enlightening, and the government will claim that a more detailed plan would hamper their negotiations.
In the meantime, EU leaders sit and wait for the British to get their act together. There is little incentive for Chancellor Merkel, President Hollande, and other leaders of larger EU members to adopt anything other than their best poker faces. The Brexit process is unprecedented and triggering Article 50 will set in train a series of negotiations whose outcome is unpredictable. In this context it makes sense to be non-committal and let the British come with their opening offer. Even after a formal application to leave is submitted, the European leaders are unlikely to prioritise Brexit negotiations. They have their own domestic concerns with elections scheduled in France, Germany, and the Netherlands in 2017.
Two critical factors that will need to be clarified early in the negotiations process are whether an Article 50 application to leave can be withdrawn and whether there can be a “transition period” beyond the two years allowed for in Article 50. It is difficult to overstate how substantial the Brexit process will be. For example, the UK has not negotiated a trade deal on its own in over 40 years. It is unlikely that any civil servants have experience of doing so. EU laws, rules, and regulations are embedded in British laws over the last 40 years and it will be arduous to unpick all of them.
There is a risk that 2017 could also see a UK election. It could be prompted by Prime Minister May seeking to strengthen her hand going into negotiations and trying to take advantage of ongoing Labour party troubles. On the other hand, perceived failures in negotiations might embolden Brexiteers to seek to replace her as Conservative leader. Signs that EU leaders are being tough on single market access and the movement of people could feed perceptions among hardliners that the unwelcome soft Brexit has to be opposed from the top of the government.
Ireland has more at stake than any other EU member from Brexit. However, our worries are not likely to be eased much in 2017 as British and EU leaders begin negotiations. The ultimate shape of Brexit will only emerge in 2018 and beyond, and in the meantime we can expect more uncertainty and posturing from British and EU leaders. The Irish need to persist in making our case, but it may be some time before the decision-makers turn their heads to listen.
President Bill Clinton coined the phrase ‘It’s the economy, stupid’. For President-Elect Trump it’s more a case of stupid economics. President-Elect Trump does not have an economic plan that can bring the US economy to the rates of growth of 4% or more than he promises. In fact, his lack of a coherent plan, and perhaps more importantly the lack of qualified, experienced people around him to develop and implement a coherent plan, threatens the US economy with a return to recession. This is bad news for the US and bad news for the global economy.
The US economy is recovering from the worst depression since the early 1930s, notably a depression that was also succeeded by a rise in populist demagogues. President-Elect Trump said his economic policy could be summed up in three words, jobs, jobs, and jobs. Based on the performance of the US economy since 2010 then he should simply keep doing what President Obama has been doing, since approximately 14 million more workers are in full-time employment in the US now compared to 2010. President Trump is unlikely to do that.
President-Elect Trump’s main economic ideas include a tax cut for top income earners (like himself), a cut in corporation tax to 15%, an infrastructure investment programme, a return to protectionist trade policies, and the removal of excessive regulation on business. All this will be achieved while reducing the budget deficit. These ideas, they are too vague to be considered policies, are not just wrong for the US now, they are inconsistent with each other.
There is no evidence to suggest that cuts in income tax for top earners will stimulate economic growth, these earners tend to invest their money rather than spend it. The funding for a large infrastructure investment cannot be achieved without an increase in the deficit and the level of borrowing. The US rate of unemployment is 4.9% - a dramatic decline from around 10% in late 2009 at the height of the recession. This means the US economy is about 1% away from the traditional level of full employment. An infrastructure stimulus at this time, in the absence of a dramatic rise in immigration to bolster the workforce, will result in a rise in wage costs in all sectors and significant rises in inflation.
This rise in prices will be exacerbated by an increase in the costs of goods and services due to import levies, or the substitution of cheaper foreign goods with more expensive domestically produced goods. There will be jobs lost in some sectors that rely on exports as US trade partners respond by levying their own duties on US goods and services. The result will be an economy propped-up by a state-funded infrastructure programme with lower manufacturing employment.
The reduction in corporation tax to 15% will worsen the deficit, and is unlikely to lead to the promised return of foreign-based operations of US multinationals. While it sounds vaguely reasonable, it ignores the manner in which multinationals avoid taxation. In Ireland we are especially worried about this proposal, as we fear it will undermine our taxation advantage. It doesn’t, and when we consider that large multinationals have effective taxation rates much lower than the nominal 12.5% it’s hard to see how it would. US multinationals will continue to benefit from differences in taxation regulations which are far more important for their tax avoidance schemes than tax rates, and so will retain overseas operations.
The Trump movement was based on worries about globalisation. This was one of many sleights of hand by the candidate. There are no economic policies that have only benefits, all involve trade-offs between costs and benefits. The period of more rapid globalisation has coincided with a decline in global income inequality. Average incomes in poorer countries are converging on those in richer countries. This is probably due to economic development in poorer countries arising from greater trade.
At the same time there has been substantial increases in income and wealth inequality within richer countries. And the US is one of the worst performers for income inequality. This is the problem that middle class voters in the US should be concerned about. The prescription for this is not a reduction in global trade but higher taxes on wealth and redistributive policies, not lower taxes as promised by President-Elect Trump. By blaming globalisation and immigration for a worsening economy, which is in reality improving, the Trump supporters were hoodwinked into focusing on the wrong problems and solutions.
President-Elect Trump’s success is worrying for the US and global economy. It became an article of faith among his supporters that because he is a successful businessman, though that is even questionable, he will make a successful President. This assumes that the abilities to run a successful business and the same as those to run a successful country. This is just nonsense. An economy is not a society, and a political leader needs to devote as much time to ensuring society functions as well as an economy does. For leaders, care, empathy, A business man (and they usually are men) can increase profits by treating workers poorly and he will lauded by his shareholders. A President that sacrifices social cohesion to and concern for all citizens to build an economy destroys a society.
During the recent election campaign I was asked to appear on the Right Hook, on Newstalk, a show hosted by George Hook, to discuss the future prospects for the Irish economy. I have contributed to his show many times over the last few years. I think the last time was in late summer 2015.
I informed the researcher on the show that I was quite annoyed and upset by George's comments on the refugee crisis and immigrant council report before Christmas and that I'd rather not appear on his show again. In particular his editorial on November 16 last (after the horrific attacks in Paris) were, to me, disturbing.
Variously he refers to the acceptability of long-term detention centres lasting decades, the barbarism of ISIL "stemming from the culture of Islam", that Irish intervention to save lives in the Mediterranean incentivises migrants to make that deadly journey, and that the images of Alayn Kurdi's body in the surf (and implicitly all of the other children dying in the surf) should not be used as a basis for policy. He says that hard cases make bad law. I disagree. Hard cases expose bad laws. The unnecessary death of these children (and adults) is absolutely the basis for new policies.
I do not know if George Hook is xenophobic and/or racist, or if he means what he says or is saying it for effect. It's irrelevant anyway for his arguments, and there's no reason not to give him the benefit of the doubt. However, it must be the case that what he says feeds into populist and xenophobic attitudes prevalent in Ireland. The reports of 225 cases of racist abuse reported by the Immigrant Council cannot be dismissed by putting in a spurious context of Ireland's four million population. George Hook must know that this level is under-reported, and even if it wasn't then it should be condemned outright, rather than referring to it as "not good".
The comments made by a broadcaster with a privileged public forum on which to speak that, for example, we should put Irish people first, that "this is still our country", and that "when we went abroad, we worked our butts off and we integrated" (implying migrants to Ireland do not) all feed into making migrants - especially Muslims - targets for attack. George Hook has himself been subject to terrible abuse online and by post. A tweet of mine is quoted in a journal.ie article objecting to this vile abuse. It would be worthwhile for George Hook to reflect on whether his arguments have hardened or coarsened the dialogue in Ireland, and heartened those who see Muslim migrants as fair game for taunts of "go back home". We have seen how attitudes in the US have polarised and coarsened following the rise of so-called shock-jocks and editorialising radio shows. We need to avoid such a development here.
I refused to contribute to his show because I did not want to appear in any way to give tacit agreement or to even appear indifferent to the editorial views on the show. The most obvious way for me to register my objections was to decline to contribute to a show with whose editorial stance I absolutely disagree.
It is a cliché in sports to say that teams should always focus on the process rather the results. Doing the right thing will generate the rewards. Failure is associated with focusing on the rewards without doing the hard work away from the spotlight. This general election campaign reminds of this important point. Over the course of the campaign the focus of attention has been on spending the fruits of the recovery. Parties have promised different splits between spending and tax cuts, and have disagreed on the size of the so-called fiscal space.
This is the wrong emphasis and voters should not be fooled into thinking this is the most important issue to be decided. The critical economic issue in this election is not how to spend the fiscal space, but how to create the fiscal space.
There has been a lot of confusion regarding the fiscal space. What it means in simple terms in the projected amount available to the government if the economy grows at the expected rate and after we satisfy new European spending rules. The emphasis should be on the big ‘if’ in the middle of that description. If the economy does not grow at the expected rate then the fiscal space shrinks; if the economy flat-lines then the fiscal space could fail to materialise at all.
It is forecast by the Department of Finance that the fiscal space available to the government over the next five years is €8.6bn, and it is probable that changes in the deficit rules agreed with the European Commission will add a further €1.5bn. This is not a maximum or a minimum, it is simply a prediction. The final amount of space can’t be known with any degree of certainty at this stage. In addition, in the global economy right now there are more than enough potential threats that should make us cautious on our own economic performance.
That’s why the key factor in the decision to be made on February 26 is which party’s plan is most likely to keep the recovery in place. This is the process. The fiscal space will then take care of itself.
The recovery, obviously not felt by everyone yet, was hard won. It is very difficult to overstate just how far the Irish economy has come from the depths of the recession. It is just over 5 years since Ireland entered the troika programme since it was unable to borrow at market rates. There can be no question but that the bailout was successful in that the economy survived and indeed has thrived since then with unemployment down, net migration down, and wages up. The effect of the cuts in public services that came as part of the correction in our public finances undoubtedly hit poorer people hardest. This must be the case since these are the people that rely on public services the most.
It is right that the recovery in the economy would generate the revenue to redress the damage done to public services during the recession. Voters should consider which plan is most credible for the restoration of these services, though of course it is important to attach a warning that with the prevalence in Ireland of coalition governments, election manifestos can be described less as promises and more as opening bargaining positions.
With regard to tax, it is relevant to note that Irish people do not pay high levels of income tax, compared to other OECD countries. The Irish income tax system is among the most progressive in the developed world, so that those on lower incomes pay much less in income tax than the average OECD low-income earner. Those on higher incomes (such as those earning in excess of 167% of the average wage) pay more than then OECD average. Proposals to weight spending out of whatever fiscal space materialises away from tax cuts is a sensible approach in this context.
We all have a difficult decision to make on February 26. The Irish economy is recovering but fragile. The recovery is not being felt by all of us. The decision is whether to keep with the same government in the hope the recovery will continue and will be shared more fairly, or whether a new approach is needed to spread the results of the recovery more quickly. The economy is a critical point right now, we need to think and choose carefully.
Back in 2011 the current government took office less than three months after Ireland entered a troika bailout. It was a sobering time for the Irish economy. We were unable to borrow at anywhere near market rates to fund ongoing public finance commitments. The rate of unemployment was 14.3% in February 2011 and rising. Ireland's debt/GDP was 111% in 2011 and 120% in 2012. There were over 444.000 people on the live register in February 2011. In short, the economy had been ruined by a combination of an inept government, inept regulation, international financial crisis, and domestic fiscal irresponsibility.
As we elect a new government, the situation has undoubtedly improved. Unemployment is 8.8% (a 42% decline in the rate from a high of 15.2%). The number of people on the live register is just under 322,000 (a decline of almost 30% from it's February 2011 level). The debt/GDP ratio was 98% in 2015. This has been, without question, a significant achievement.
There have been suggestions recently that the government cannot claim credit for the economic recovery, since they hid behind the troika in implementing the spending cuts, pay freezes, and increased charges. The implication of this is that really it doesn't matter who is in government, since the recovery would have happened anyway. I am not convinced. Several of the parties doing well in the current opinion polls suggested that we should have told the troika to keep their money and played hardball with other eurozone and EU countries on writing down our debt. This would have been economic suicide. The recovery is evidence that the right, difficult course of action was taken on the economy. We do not face decades of decline and isolation that such a default would have produced.
Of course it is the case that some have not benefited fully from the recovery. Unemployment is still at 8.8%, which means many (including lots of young people) are still out of work. Many more had to emigrate to find work. However, was it ever realistic that the problems, which took almost a decade to create and caused such a deep crash, could be resolved fully in 5 years?
The choice it seems now is between a government that has overseen a remarkable reversal in the fortunes of the economy and financial positions of a majority of our people, or the party that oversaw the crisis, a cabal of independents, or parties that opposed every single economic policy that produced the turnaround and proposed we adopt a Syriza-approach. The opposition to this government has intensified around the issue of water charges. Water charges are €160 per year for a household. The approach to the economy proposed by Sinn Fein and the Anti-Austerity Alliance would've cost households far more than €160 a year.
It isn't just for economic reasons I find myself supporting Labour. This government has proposed and successfully negotiated a referendum on marriage equality and it legislated for the X case. I do not believe these would have been done by a Fine Gael majority government. I want the next government to repeal the eight amendment and then to legislate on a woman's right to choose, and Labour are the only party with a record on this.
The most vocal criticism of Labour in this campaign is that they broke their promises from the 2011 election. How many of those criticizing Labour for broken promises actually voted for them in the last election. Labour took 19% of the vote and won 37 seats. Their government partners had more than double the number of seats (at 76). How a party is to implement all of its policies and promises while holding a third of the seats in government is hard to fathom? In any event, the most important promise was to fix the economy, something which is obviously in train.
There are still problems, such as homelessness and housing crises, the health system's perennial difficulties, and youth unemployment. There has to be a realization of just how broken our economy was at the start of this decade. I sense we have forgotten how close we came to going under.
(Disclaimer: I'm not a member of Labour or involved with their campaign. Like all public sector workers my pay was reduced during the recession, and I've seen continued cuts to resources for third-level institution.)
As with most referendum campaigns there are claims and counter-claims, but some arguments just don't stack up. I think this is the case with John Waters argument for voting no in the Seanad abolition referendum next week. He points to two changes associated with the abolition of the Seanad that he claims would lead to greater concentration of power in politicians and the judiciary. I am not a lawyer (nor is John Waters) but it is clear from the proposals that the changes are needed to ensure checks on government power rather than removing them.
John Waters says:
The proposed change to Article 35.4.1, for example, will significantly raise the threshold of difficulty to be encountered in seeking to impeach a judge. At present, a judge may be impeached on grounds of stated misbehaviour or incapacity on a simple majority of members present in both Dáil and Seanad. We know from some relatively recent cases that, even under these constitutional conditions, removing a judge poses significant challenges. If the Seanad is abolished, the impeachment bar will be raised even higher, requiring a majority of “not less than two-thirds of the total membership” of the Dáil, in effect changing the odds of removing a miscreant judge from evens to two-to-one against......
It is disingenous to argue that the proposed changes make it easier to impeach a judge. A simple majority is easier for a government to gain in both houses since it is likely (by definition) to have a majority in the Dail and the Taoiseach's nominees are likely to ensure a majority in the Seanad. The protection here is for the judiciary who could be impeached by a government who disagree with his or her judgements. A judge that makes decisions that are uncomfortable for a government should be protected from impeachment by a spiteful government with a simple majority. In the absence of a Seanad it is necessary for a greater hurdle than a simple majority of the remaining single house.
A second proposal questioned by John Waters is the referral of a bill to the President to request a referendum. He says:
At present, the Constitution provides that Bills may be referred to the people for a referendum if a majority of the Seanad and at least a third of Dáil members request the President to refer the Bill to the people on grounds of its national importance. The President has power to implement or disallow such a request. If the present amendment is passed, these provisions will be dispensed with.
This power has never been used so it's importance in terms of the overall debate is questionable. This may be why this proposal has not featured as a major issue of the debate. That aside it is unclear how this increases the concentration of power. As I argued earlier it is unlikely that the government would not have a majority in the Seanad. If they did not it is not difficult to imagine the opposition (majority in the Seanad) making the job of government very hard by referring all bills - even those they know the President would not refer to the people - simply to make governing next to impossible.
These proposals are required if the Seanad is abolished. These proposals do not intensify the concentration of power and are necessary to ensure appropriate checks and facilitate government is a single house Oireachtas.
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.