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Economic Development with a purpose

Posted on December 20, 2013 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

The recent Government Medium-Term Economic Strategy, 2014-2020 ('A Strategy for Growth') is a welcome statement of key economic goals even if the Strategy lacks important detail and a more ambitious social perspective which learns from one of the greatest crisis that has emerged since the foundation of the Irish State.

The goals of full employment, manageable household debt, an end to large-scale involuntary emigration, well managed public finances and the elimination of poverty are laudable goals and ones for which everyone should strive. Much depends on international circumstances - beyond our control - as well as domestic policy choices - within our control to some degree. Recent tentative, but, positive, news on employment and GDP (in the second and third quarters of 2013) gives reason to hope that the worst may be over. However, as pointed out in our recent Quarterly Economic Observer, the outlook remains uncertain and optimism needs to be tempered with a realisation that risks are high in Irish banking, the Eurozone economy and in the legacy of debt and unempoyment left by the recent downturn in the Irish economy.The Strategy states the following:

'Provided potential revenue growth is reasonable, then modest expenditure increases, taxation reductions or a combination of both can be achieved over the medium-term, while at the same time progress towards a balanced budget in structural terms can be facilitated.' (page 21)

A strong underlying theme running through the Strategy document and all recent Government strategy documents since the onset of the crisis in 2008 is the need to make economic progress while retaining a low-tax position in terms of the amount of GDP (or GNP) which is raised in taxes (income, PRSI, VAT, Corporate, Capital, other charges).  Allied to this policy objective is the sense that the relatively better off (say those at 167% of the average wage in 2012) pay over twice the amount of income and social security payments as those on who less well off (say those on 67% of average wages).  The example cited is in Figure 2 on page 22 of the Medium-Term Strategy and refers to single taxpayers with no children and using standard tax rates, bands and credits. The policy and political implications of this analytical focus are very clear: taxes on the 'better off' are already high enough (or even too high) and the only way of ensuring further progress in managing public finances is through (i) raising taxes or social charges on average to below-average income taxpayers (something no political party would say they favour) or (ii) continue to shrink the size of the State and social spending more generally as a percentage of GDP (or GNP). In short, the option of taxing higher incomes, capital, corporate profits more than is currently the case is taken off the table as a policy option. Instead the discourse is framed around high taxes, incentives to work and invest and the need for constraining public spending further and further with private sources of funding for areas such as healthcare and higher education as the 'only realistic option' because 'we simply cannot afford' to pay these services since 'taxes are already too high' and acting as a barrier to economic recovery [the parentheses in the last sentence are not from the Medium-Term Strategy but rather from the daily discourse shaped and repeated on a weekly basis in the Irish media at large].

''... those at the top of the income distribution made the greatest contribution to the fiscal adjustment - most recently through the capping of the tax relief on funding pensions in excess of €60,000. In addition to the curtailment of tax reliefs which are generally availed of by higher earners, the tax system has become more progressive since 2009,' (page 22). The balance of recent ESRI evidence suggests that, as a % of income, households at the very top and the very bottom took the biggest hit with a gap of 3% points = 15.5 (highest income group) -12.5 (lowest income group). Considering the impact of service deterioration and programme curtailment as well as stealth charges arising from budgetary cuts in health and education the hit for the lowest income group is probably higher than 12.5% and might even be greater than that for the highest income group. Moreover, a given % impact (say 15%) has very a different meaning and impact depending on income level - a 15% cut for household with €100,000 p.a. = €15,000 is not the human equivalent of a cut of 15% for a household with €10,000 = €1,500. €1,500 for the latter might be the difference between a hot meal and no hot meal every day or between heating or not heating a house for an evening whereas a big cut of €15,000 might be the difference between a holiday abroad and no holiday or a second car and no second car.  This is not to suggest that those on relatively high incomes have not taken a very significant reduction in living standards in most cases (but not all as incomes of some professions has not been impacted and in a few cases income has greatly improved). Rather, the scale of human impact and suffering is likely to have been greatest for those already in poverty or at risk of poverty. Those who lost jobs, those whose businesses closed, lone parents and those who found themselves in high non-serviceable debt were among the real victims of the 2008 crash. And these were the people who unfairly paid the price of bailing out the large and anonymous bondholders as AJ Chopra of the IMF reminded us recently.

An excellent preliminary analysis by Social Justice Ireland 'Who really took the hits during Ireland's bailout' shows that, when account is taken of all changes including  shifts in employment, wages, social welfre and income tax the data reported by the CSO  in EU-SILC (2008-2011)  the 'percentage change in average real incomes by decile of disposable income per adult equivalent' was -18.4% for the bottom of income decile and -11.4% for the top decile. In brief, Ireland has become more unequal since 2008 and the situation may have deteriorated further in 2012 (for which data will be available next year) with the changes to Employment Regulation Orders (EROs) and Registered Employment Agreements (REAs) in 2012.

The Strategy stresses a commitment to 'maintain '100 per cent commitment to the 12.5 per cent corporation tax rate: it is settled policy and will not change'. This commitment does not sit alongside any '100 per cent commitment' to maintaining the standards of social care and living standards for all citizens (and residents who are not citizens but have human rights). Notwithstanding the commitment to improving 'living standards' in the period to 2020 there is no mention, in the document, about restoring the real value of the national minimum wage to the 2007 level. Neither is there any mention of raising wages to what might be considered a 'living wage' standard as a key policy lever in helping boost sluggish consumer demand in 2014-2015 and in tackling in-work poverty which to which about one in five workers are vulnerable. The commitment to 'eliminate' poverty is welcome even though no time scale is given and no specific policy actions are provided towards this end (and basis living income allied to a living wage would be crucial).. On page 15 there is a commitment to '... the building of a fairer Ireland by helping to reduce inequality and improve poverty outcomes across society, with a particular emphasis on child poverty in line with the commitment in the Programme for Government.' This is laudable, once again, but not convincing in the absence of specific timelines and targets backed by specific actions to address the challenges of poverty in work and outside work.

Whether we will have jobless growth or job-rich stagnation or job-rich growth will be shaped by many factors - demographic, technological, sectoral and policy related.  Full employment and decent living standards together with a good level of public service is possible and appropriate for a country that still lies in the top 3 EU Member States as measured by GDP per capita in 2012. Underpinning jobs, incomes and public services is enterprise - public, private and 'not-for-profit' (including the small but much neglected social or cooperative enterprises). In addition to what is measured in GDP and in the labour force is the vital economic services produced by a huge number of citizens and communities by way of caring, volunteering and service which is not remunerated but which adds to economic well-being and makes thart part of economic activity which is measurable possible. Enterprises create the wealth and income to make decent living standards and social services possible. But, enterprises also need to operate on local, regional and global markets where the cost of energy, the state of markets for goods and services and the skill/knowledge content of what is produced are changing rapidly. Above and beyond the immediate 6 years ahead (to 2020) we need a longer-term plan and vision based on a different set of social values to those that played a crucial role in the crash of 2008 (and indeed in the economic crisis of the 1980s in the Republic of Ireland). This means imagining different possible economic models and social policies. Some refer to this debate as an exercise in contrasting 'different models of capitalism' - Scandinavian, US-UK, German-French, Japanese etc. Other commentators might go further to propose radically alternative models based on a socialist cooperative organisation of society while still others might eschew large-scale global models altogether to embrace localised or ecological models based on sufficiency and local self-sufficiency. Whatever the future holds we need an honest debate on visions, values and choices.

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