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Jobs, Wages, Homes

Posted on May 30, 2014 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

Following 6 years of declining or stagnant living standards many people are wondering what the future holds. The gathering crisis of accommodation and social housing has caught many by surprise. While there has been a welcome pick up in employment and a very modest fall in unemployment these changes are tentative and it remains to be seen how fast we can move towards single-digit unemployment figures. Under-employment, unemployment, precariousness and poor-quality work experience are widespread and they impact on young people in particular.

How will ‘Budget 2015’ to be announced on 14th October help to pull the Republic of Ireland out of the current economic and human slump? There is a high probability that this summer, like the summer of last year, will be marked by some of the following questions:

  • What size of ‘fiscal correction’ will be required in order the reduce further the gap between day-to-government day spending and revenue (in other words the total of new tax increases or spending cuts to be announced in October)
  • What will be the balance between further spending cuts and revenue increases - if any (2:1, 1:1 or some other ratio?)
  • Will there be any modifications or reforms to a regime of pension levies, USC, water charges and local property taxation?
  • How will the ‘hard pressed’ middle income households be assisted (through income tax cuts or other means)?
  • What should happen if economic growth later this year and next disappoints?

All of the above are important questions in their own right. However, we need to consider matters in perspective. In the all too simple world of public discourse and economic analysis such contextual indicators as economic growth (increases in GDP or GNP) and employment change are talked about as if there were given or pre-determined by international forces. If growth falls away, many ask, how much MORE fiscal austerity will be required? Simple formula-setting and rules of thumb are used so that a fall of 1% point in the projected growth in GDP is seen as automatically requiring an additional ‘effort’ of so much by way of spending cuts and revenue measures.  Governments from 2009 onwards were able to pin much of the responsibility on external factors for the specifics of specific austerity measures. Either the ‘markets’ expected it or the Troika demanded it or common sense required it (‘because the money isn’t there’). In reality matters were, and are, more complex. Ireland has passed through a severe economic downturn and, in spite of some positive indicators in the last year or two) remains in a very vulnerable and subdued state with high levels of unemployment, growing rates of poverty and historically low levels of investment.

The choices made by Government in ‘Budget 2015’ will be crucial in shaping the course of economic recovery (because hopefully it will be recovery and not another downturn) in 2015 and beyond. The point often missed by commentators and analysts is that decisions on public spending and taxation/charges impact on household disposable incomes and jobs in the domestic economy: it’s a two-way flow and not a one-way flow with a given level of GDP growth determining our fiscal choices.

Yes, there is a binding requirement under EU laws and multi-lateral agreements with the EU commission and other member states to aim for a government deficit of 3% of GDP (and this has been agreed for 2015. The question then arises: how best to reach this target without damaging recovery of employment, domestic consumption and domestic investment – all of which determine GDP (along with net exports).

The principle of ‘do no harm’ is still more relevant than ever. Too large an adjustment in Budget 2015 and further reductions in public spending and services along with new measures of revenue-raising which impact on low to average-income households risks slowing down recovery and, possibly, impeding fiscal targets. Put simply, a large and non-targeted fiscal adjustment could actually have little impact on the deficit or on the ratio of debt to GDP particularly if such an adjustment triggered a slowdown in domestic demand and income recovery.

Last year, at this time, the NERI in its Summer Quarterly Economic Observer proposed that a fiscal adjustment of no more than €1 billion would be needed in respect of 2015 in order to reach the magical figure of -3.0% of GDP (that is the ratio of General Government Balance or deficit to total GDP in 2015). Given a better than expected performance in employment compared to this time last year and given the large amount of ‘carry over’ expenditure cuts which will effect public finances in 2015 and in later years I see no reason to proceed with an adjustment of more than €1 billion. The question, should be, whether the adjustment needs to be this large. A strange development in recent weeks has been the not-so-subtle revision of the deficit target for 2015 up from -2.2% to -3.0% - based presumably on a full fiscal adjustment of € 2billion. this inspite of the 'fiscal easing' which was meant to reduce the size of correction both in 2014 and in 2015. The promised of easing has been dropped, it would seem. There was no specific mention of it in Budget 2014 last year.

It would be helpful if the relevant authorities were to provide an estimate of the extent of ‘carry over’ expenditure measures estimated for 2015. Armed with this information it would be possible to calculate as accurately as possible the amount of ‘new’ fiscal measures required in ‘Budget 2015’. True, there are many uncertainties as well as eagerly awaited data on tax returns and spending profiles over the coming 4 months which will help to inform policy makers about the size of the adjustment in October.  At this point in time, on the basis of the information to hand, it would be prudent to work on the basis of a smaller adjustment. There is some room for manoeuvre given the possible upward revisions to GDP in 2013 in data to be published later this month by the Central Statistics Office (these revisions based on new statistical classifications, if positive, would have a knock-on effect on the baseline GDP number for 2014 and the projected number in 2015 with the implication of a lower figure for the deficit as a percentage of GDP).

Whatever the sizes of the adjustment (and the possibility of no new adjustment cannot be excluded) it will be important to protect the incomes of the poorest households as well as front line public services in health and education which impact on everyone but especially those on low pay, low incomes and in vulnerable employment. This is why it is important to view the following three areas as vital to meeting social needs, fixing our public finances and helping economic recovery:

  1. Jobs
  2. Wages
  3. Homes

Jobs because the foundation of a recovery in receipts from income taxes, value-added taxes and other revenue headings is the creation of well-paying, sustainable jobs…

Wages because they account for almost one half of total economic income in any year (the rest being accounted for by profits retained in the domestic economy, rents, self-employed income and profit repatriation abroad etc)…..

Homes because there is a growing crisis in accommodation across the State and especially in particular urban areas….

Raising wages in such manner as to reduce in-work poverty and boost domestic demand (especially in the bottom half of the income distribution), creating new employment that pays and building or adapting new homes are, together, essential components of a domestic recovery. Recovery in domestic demand, together with some recovery in global and EU markets, will lift Ireland out of a debt trap characterised by high debt service costs, double-digit unemployment rates and a poverty drag on public finances. A delay in reducing unemployment triggers payments in the areas of social protection, medical cards and subdued tax returns. Up to now there has been a very myopic and one-sided emphasis on growing our way out of the current economic malaise through export competitiveness and through the adoption of fiscal brutality. Even if there is a growing awareness of the ‘limits of austerity’ in terms of public acceptance and fatigue there has been little consideration given to:

  • The role of wages, job creation and homes supply as key short and medium-term ‘fiscal consolidation measures’
  • The importance of a timely and sufficient-scale investment stimulus to generate employment, fix infrastructure deficits and boost government revenues
  • The importance of integrating short-term budgetary decisions into a long-term plan and strategic vision for Ireland.

In other words we need better and more accessible public services, fairer and more transparent taxation and joined-up public policies that help move Ireland towards different social and economic model.

Let the debate proceed and let it be informed by honesty and evidence.

Posted in: Government SpendingInvestmentJobsTaxationWages

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