Triangulating pay, taxes and the 'social wage'

Posted on April 18, 2015 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

[The following is an extract from a speech given recently at the Annual Delegate Conference of the Public Service Executive Union - PSEU]   It is urgent that evidence is brought to bear on important political and social debates. It is also important that those issues and questions that are neglected are given attention. The NERI is involved at a number of areas of research:

-       Day-to-day and year-to-year commentary, analysis and suggestions

-       Developing a longterm vision of where Irish society and economy could be heading and what sort of industrial, social and political-economy strategy is required to bring this about.

Where have we come from? Ireland is at a cross-roads. It can learn from the past and do things differently. Or, it can go back to the past and repeat many if all of the mistakes of the past. We should not be misled in thinking that the failures of the past were merely due to lack of regulation and appropriate institutional settings. Neither does the narrative ‘we all partied’ work.  The roots of the recent crisis – which is still not over – lie in a weakness at the heart of Irish economic policy and political culture. This weakness concerns the lack of a strong, native industrial and service base. Reliance on foreign direct investment – unavoidable as that is and welcome as it is in so far as it has helped transform economic conditions here in recent decades – is not a long-term sustainable policy. We are at risk from global competition: competition for skills, for investment and for returns. We live and move in a global world and this is specially true of a small open economy such as the Republic of Ireland.

But, just because we are subject to international pressures and European Union rules and constraints does not mean that we do not have scope for manoeuvre and scope for policy innovation.  The Irish government also has choices about how much tax should be raised and how much spending is increased. Yes, there are rules about fiscal policy and yes there are binding commitments to reduce the government deficit and debt. However, there is some flexibility to change spending and revenue in a way that balances the gap. Moreover, there is a close link between the government deficit and the corporate or household or international payments surpluses. Private debt is a huge problem for many households. At the same time, there is a lot of money being saved and kept in savings. Retail sales and consumption are recovering but only very slowly. Wage stagnation is still a feature of many areas of the economy including the public sector.

We need to see the bigger picture and understanding how a balanced, sustainable and just recovery can take place.

This will not happen through a policy of reducing further our limited revenue base in the form of income, consumption and profit taxes.  We need an adequate level of taxation to fund a 21st century public service that can fulfil its many roles of protecting the weak, investing in social infrastructure and providing a context for enterprise – public or private or not-for-profit as the case may be.

The Big Idea from some quarters is TAX CUTS.  We heard this before. Believe it or not tax cuts were on the agenda of the day in 2007 and every election back to 1977.  The idea behind tax cuts is ‘to put more money in the pockets of people’ and thereby help generate work, investment and business which pay back to the exchequer the cost of cutting taxes. I suggest that this is an ideology-driven  claim without supporting empirical evidence. While time does not permit to go into this matter here we may ask how it is that some of the countries with the highest rates of overall tax levels have some of the highest levels of economic productivity together with greater equality and positive social outcomes across a wide range of areas from health to education to human well-being.

The reality is that we have choices:

-       To invest more in childcare and eldercare and support for working families, or

-       To cut taxes further and leave Ireland in its current position of poor social wage, some social cash benefits and modest private wages – what appears on your pay slip every fortnight or month.

We have choices between:

-       Relying on tax incentives to boost or to maintain industrial and service capacity in Ireland, or

-       To develop a strong native enterprise base – export-orientated, linked to higher education and innovation sources and supply chains in a way that positions Ireland globally.

We have choices between:

-       Lax regulation, privitisation and outsourcing on the one hand, or

-       A mature European approach to a mix of public and private banking and credit, stronger voice for workers in running enterprises and appropriate protections and supports for individual workers and communities.

The immediate priority must be to:

-       Improve the ‘social wage’

-       Strengthen domestic demand through a balanced wage-led recovery to arrest the decline in wages as a share of total national income.

-       Prioritise those most vulnerable to economic crash and its fall-out.

Taxes are the price we pay for a civilised society. Some claim they are forms of expropriation. Some even use a clever and divisive strategy of pitting public sector workers against private sector workers claiming that private sector workers are over-taxed in order to pay privileged public sector workers and their pensions. We will hear this narrative rolled out in coming months. The truth is that costs in the Irish public sector are about line with those in other OECD countries going by Eurostat hourly labour costs and Government at a Glance indicators. True, Irish labour costs are higher than those in Bulgaria and Estonia. But, they are no higher than in most developed Western economies in Europe.  The supposed gap in pay and conditions between public and private sectors has been exploited to drive a further wage-cutting agenda across the whole economy. We should not be misled in these matters. An improved public sector labour market helps restore economic demand in Ireland as well as help drive up wages in the private sector. But, this needs to be considered and done in a careful, strategic and non-divisive way that I will leave to others to work on and comment on.

If it is true, and it is, that ‘ar scáth a chéile a mhaireann an pobal’ (the people live in each other’s shadow), then I suggest that, in the trade union movement, we need to debate and consider a coherent approach to economic and social progress. This includes efforts to improve pay and conditions in each sector or occupational group. However, it also concerns a vision of a society where poverty, homelessness, precarious work, low pay and inadequate health and education services are history.  

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