The obsession with short-term fiscal deficits locks us in to ‘getting back to normal’-low wages and inadequate, under-resourced vital services

Employment

As we enter the fourth month of lockdown and phase 2 of easing restrictions the discussion turns to the ‘sustainability’ of the pandemic emergency income supports. Depending on who you are talking to, sustainability might mean one of several things. It is important to remember however, that the narrow framing around the short-term fiscal sustainability of the payments (how much tax we raise versus how much we spend and then how much we have to borrow) limits the conversation to ‘getting back to normal’ and constrains policymakers in seizing the opportunity of the crisis to reshape the Irish economy to be more sustainable and resilient in other, more important ways. The obsession with fiscal deficits pushes us to cut back and discourages investing for the future. In the present environment, cuts to income will hamper long-term economic growth, our ability to provide essential services such as housing, childcare and healthcare as well as our ability to restructure to meet environmental sustainability goals in any meaningful way. Getting ‘back to normal’ is not an option.

In Irish political discourse, sustainability tends to refer (almost exclusively) to the shorter-term fiscal position of the Irish state. This framing and the principles that underpin it, are fundamentally at odds with investing meaningfully in the transition to a low carbon economy or with reforming our development model to be more resilient in the long-term with a focus on adequate service provision to support decent, productive and well-paid work. Concerns with short-term balanced budgets overemphasise the importance of signalling to international markets that debt levels are under control by cutting back spending, or what Paul Krugman coined the ‘confidence fairy’. There was a growing consensus, even before the crisis, that the importance this issue was given was a major error in Europe’s response after 2008. The disastrous demand effects of cuts to incomes and the importance of the consumption component of GDP were underestimated. This framing locks us in to getting back to an economy characterised by low wages and inadequate, under resourced services. This model, as it stands, is now positively out of date. 

Fortunately, as the NERI have relayed to government this week, the budgetary position is much stronger now than it was going in to the 2008 financial crisis. The structural position – removing the deficit that can be attributed to the business cycle – is strong, giving the Irish state room for spending. NERI have proposed that this headroom is used to continue to support payments in the short-term and move to restart economic activity when public health considerations warrant it. This will mean a short-term deficit between revenue raised and revenue spent (state borrowing). This should be viewed as an investment with long-term returns rather than a cost.

The ‘sustainability’ of the PUP, in this sense, should be considered against the longer-term implications of slower economic recovery for the public finances, with the lessons of 2008 in mind. Debt sustainability is measured against the size of your economy with the debt-to-GDP ratio. If GDP grows, debt is more manageable (some might be familiar with the term to ‘grow yourself out of debt’). Maintaining PUP will guard against a disastrous downward demand spiral, which prolonged the effects of the 2008 financial crisis right up to February 2020. Cutting back this payment too soon will worsen the economic impact of the virus. As such, measures to limit deficits and expenditure now will likely have a long lasting and negative effect on future budgets and limit the states capacity to address challenges like climate change, childcare, housing and healthcare. The ESRI suggest that the maintenance of household disposable income alongside a decline in spending have increased the household savings rate. These savings represent a key difference between our current situation and Ireland’s position following the global financial crisis. The marginal propensity to consume is higher for lower income households (they spend all/most of their income). These accumulated savings therefore, could be a key source of stimulus as lock-down eases, resulting in increased consumption and economic activity, supporting employment. In effect, PUP is an investment in protecting the spending power of Irish households and supporting employment and economic growth.

Investors will also be more confident to put their capital to productive use if they see future demand for their products, supporting economic activity. When markets see signals that future demand is depressed (if hundreds of thousands of people have their weekly income cut by 43 per cent, say) businesses will be more inclined to park their money or in this environment, even to close, accelerating a downward spiral in economic growth, as we saw after 2008.

The push for short-term balanced budgets is also at odds with any efforts to sustain living standards and minimise disruption for hundreds of thousands of Irish households who will continue to suffer from unemployment for the next number of years. These automatic stabilisers are also key to maintaining some kind of stability in the Irish housing market. Without cutbacks, we will see more households going into mortgage arrears, more renters missing monthly payments and major disruption as a result. There will be more evictions, more people applying for social housing and more homelessness. This also has implications for potential growth.

Predictably, the deficit hawks are out in force and are pushing the conversation towards when (not if) we start implementing austerity. In an Irish context this is not about identifying areas for revenue raising to bring us into line with some of our high-income European neighbours (employer’s social contributions, a net wealth tax, a minimum effective corporation tax etc.) so that we can fund vital services more sustainably (housing, health, childcare etc.). It’s about cuts to social welfare framed in a conversation on perverse incentives for the unemployed (disproportionately young workers) to go back to work (at below the living-wage) and ultimately to go back to the economy characterised by one of the highest shares of low paid workers of any high-income EU country. This is our low wage, low productivity model and it is by design. It’s a choice.

Last week, government announced a cut in the PUP for individuals that are currently unemployed due to Covid-19 and worked part-time hours before the crisis from €350 to €203 a week, or 43 per cent. The tacit recognition of the inadequacy of €203 a week to live on with the introduction of the €350 PUP in March is now being rolled back. The possibility of growing alienation related to prolonged unemployment and low wage and precarious employment should also inform these discussions on sustainability. As we have seen, unemployment due to this crisis has again impacted younger workers disproportionately and the announced cutbacks for ex-part-time workers will also disproportionately impact the living standards of younger generations, who are also more likely to be part-time. Some have had their lives disrupted for a second time before the age of 40 and most have been stuck in exploitative rental arrangements with insufficient wages (if they have been able to move out of their parent’s home at all). Younger generations were already marginalised by the previous development model, which was strong on GDP growth, but did not deliver higher living standards for this group. Young people need to believe that there is some kind of a future aside from unaffordable housing, unemployment and low wage, precarious work. 

The cuts are packaged as a response to tackle perverse incentives for people to get back to work brought about by the relatively high level of the PUP in the first place. There is no evidence of a shortage of applicants for low wage sectors reopening at present. Should these perverse incentives arise in future, the introduction of a living wage is a more suitable policy approach to tackle them, especially considering that the initial level at which the PUP was set, was an acknowledgement of the inadequacy of both unemployment supports and wages for hundreds of thousands of Irish employees. Supplementary welfare payments such as the Family Income Supplement, which are in effect subsidies for employers offering low paid work act as a perverse incentive to employers to offer subsistence wages. There would be less need for such supports if a living wage were introduced.

For some context here, it is important to know that it has never been as cheap to borrow to invest in a sustainable and resilient economy. It’s also worth noting at this point, that the same week announcements were made that ex part-time workers, now unemployed, will have their income supports dramatically cut, we found out that corporation tax receipts were €1.7 billion more than expected (a full 8.5 weeks of PUP payments covered). In 2019, the Irish government collected €1.4 billion more than they had expected in revenue (7 weeks of the cost of PUP) and a total of €23 billion in income tax alone. Eurozone fiscal rules are not a valid excuse anymore either. Even before the current crisis as Germany was effectively in recession a widespread consensus on the need to revisit them was developing to tackle stagnation at Eurozone level. Germany, having led the push for a contractionary fiscal strategy that characterised the Eurozone approach to the financial crisis, has now signalled a change in domestic strategy for Covid (a touch of Keynesianism and deficit spending), with a tacit acknowledgement of the mistakes of the past. Along with France, Germany have even come to an agreement for this to inform the collective EU response to Covid through the European Commission. In addition, though many have broken the fiscal rules, no country has ever been fined. Strict adherence to fiscal rules undermines the growth potential of the Irish economy and actually incentivises a low-road approach to development. Especially in an era of negative interest rates, these rules act against our collective interest. We have also seen, at the beginning of this crisis, how easily government can mobilise resources if it wants to. Thus, payments in the current context are prudent, if not essential from a macroeconomic perspective and along with a stimulus package are key to relaunching the economy on a more sustainable path.

The focus on Tourism in political discourse on Covid-19 so far is worrying and indicative. Tourism made up approximately 10 per cent of employment in 2019. This is the lowest paid, most precarious employment of any sector in Ireland, by far. By extension, relatively little income tax is collected from this sector. It also has the lowest turnover and the lowest value added of any sector, contributing least to the productive capacity of the Irish economy. Tourism is a key sector in the low-wage, low-productivity model as low pay in the sector puts downward pressure on wages in other parts of the economy. Two thirds of workers in this sector in 2019 were under 40. As we have seen, it is also completely vulnerable to external shocks outside of any Irish policymaker’s control. In fact, the OECD have just forecast that our reliance on tourism is likely to hamper us in recovery. So why would we actively go out of our way to go back to that and rely on it for such a large share of employment into the future? This industry is demand led and therefore government intervention, however well intentioned, is less effective (it will look after itself). The opportunity cost of government resources going to tourism at the expense of other, more productive sectors is not insignificant. Reducing VAT for this industry will not have the desired effect due to travel restrictions in place (international competition for tourism is less relevant in Covid). As visits from important countries for tourism, such as the US and UK are likely to be dramatically curtailed this year (at the very least), the best thing government can do for this industry is to maintain Covid payments so that more Irish people can take holidays and spend their money this year at home. 

What is the best way to design a resilient economy to guard against future shocks outside of our sphere of influence and support steady growth and increasing living standards? Industrial policy that focuses on the productive capacity of the economy through investment in education, research and development and targeting high-value markets in high-technology sectors. The ‘high-road’ approach to development (high skilled labour, high productivity, high wages) characterises most northern European countries. In 2020, this development should be informed by the need to transition to a low carbon economy. 
We believe this is an opportunity to start diverting the Irish economy toward a high-road productivity model with environmental sustainability front and centre. The stimulus package should be directed to this end.

Share this blog:

Ciarán Nugent


Ciarán Nugent is an Economist at the Nevin Economic Research Institute and is based in the Dublin office. He is currently working on a number of projects relating to the Just Transition and the Irish labour market. Ciarán has an MA in Economics from NUI Maynooth and a BA in International Politics. His research interests include income distribution, wages, precarious work, the cost of living and intergenerational inequality. He graduated with an MA in Economics and BA in International Politics from NUI Maynooth.

Ciarán also produces the NERI video and podcast series.

Contact: [email protected] or 00353 1 889 77 22.