Ministers are fond of telling us that we are 80 percent through the dark austerity forest. Soon, maybe within a couple of years, we will enter into the light where all will be well and normal fiscal policy can be resumed. Just one more push and austerity will be no more. Should we put a lot of faith in this? I would recommend caution – extreme caution.
The Government has published a long-term scenario – stretching out to 2019. This builds on the projections up to 2016 in the recent Stability Programme Update. The Government is at pains to state that this is an illustration:
‘Again it must be stressed that this is purely an illustrative scenario.’
They even underlined it. Yet, it is consistent with the Government’s SPU projections and it is certainly consistent with reports of a new plan being developed by the Minister for Finance.
‘The State’s anticipated exit from the bailout this year will not mean a relaxing of austerity targets as Mr Noonan hopes Government will approve a fresh regime with firm timelines similar to the EU-IMF-ECB programme.’
Minister Richard Bruton was also giving a warning
‘Mr Bruton rejected the accusation that the public had expected the end of the bailout term would signal an easing of austerity by saying no “crock of gold” was available to the Government.’
Mr Bruton suggested that this situation would continue for some time.
So it is worthwhile to look at the Government’s ‘purely illustrative scenario’ as there is a very good chance it will morph into the ‘only scenario’ (TINA will become TIOOS – There is Only One Scenario). Let’s look at primary public expenditure – that is, public expenditure excluding interest. This identifies how much money will be spent on public services, social protection and investment. I have used ‘real’ expenditure – that is, expenditure after inflation using the GDP deflator (the economy wide inflation indicator).
As seen, primary expenditure is expected to fall by nearly 9 percent over the next two years. From 2015 on, primary spending still continues to fall – by 2.6 percent in real terms up to 2019 despite the Government pencilling in GDP growth of approximately 12 percent during this same period.
But it gets worse. In many areas public spending will rise automatically due to demographic pressures. For instance, the number of pensioners will increase so that even if pension payments remain frozen, expenditure will rise. We should also allow for a rise in demand on health services with this aging demographic. And in education, we will have to spend more just to accommodate the continuing rise in our student numbers.
In other words, we will have to spend more on pensions, health and education just to stand still. When this is factored in, there will need to be additional cuts in other expenditure – in other public services, social protection programmes and investment projects.
We are heading into a period of semi-permanent austerity. Why, if by 2015 we have reached the Maastricht target and when employment and economic growth will continue to reduce deficit and debt levels? The Government gives two clues. First:
‘Ireland is on track to correct its excessive deficit by 2015. Thereafter, the public finances in Ireland will no longer be subject to the corrective arm of the Stability and Growth Pact (i.e. the Maastricht guidelines) but subject to the requirements of the preventive arm and the Treaty on Stability, Co-ordination and Governance (the ‘fiscal compact’).’
Ah, the Fiscal Treaty; remember those debates – how Government ministers insisted that compliance with the pact would not necessitate further austerity? We climb one hill only to find there are more hills to climb.
Second, the Government seems determined to drive the budget balance down to zero and then into surplus. In other words, we will be taking in more money than we are spending by 2019. Now there’s nothing wrong with a balanced budget at the appropriate time. But the Government’s scenario estimates (and to be clear, this is not a projection) that unemployment will be 11 percent. How could anyone imagine any scenario where you run a budget surplus with double-digit unemployment?
Is a balanced budget necessary to reduce debt per the fiscal treaty? No – this is an issue we will revisit in a subsequent post.
This is the future that some Government Ministers are planning. After destroying our social and economic infrastructure with irrational austerity policies, what is next? Continuing austerity amidst the ruins.
That’s the current scenario – unless we work for something different; different than what has happened in the past, and different than what is being planned for us in the future.
Unemployment falling to 13.7 percent. Employment increasing by 20,000. THe CSO’s new Quarterly National Houshould Survey should be good news. So why isn’t it? When we dig a little under the numbers, what do the numbers tell us about the kind of economy that is emerging? Why should we be concerned?
First, let’s run the headline numbers.
On the face of it, these are positive numbers: employment up by 20,000 over last year – returning to the level of employment in 2011 while unemployment has fallen by well over 1 percent. But now, let’s look at some numbers below this headline.
(a) The Rise of the Precarious Work
Probably the most disturbing aspect of the CSO release is the rise in precarious work. This can be seen in the rise in under-employment.
The economy is still shedding full-time jobs. In the last year, the numbers working full-time fell by 6,000. The difference was largely made up by an increase of 17,000 in precarious work (a 12 percent increase) – people working part-time but wanting more work.
Some might argue that when the economy is on the floor, the first work available will be part-time and that this will turn into full-time work once recovery sets in. Let’s hope so but there are grounds for questioning whether this is part of a normal post-recession pattern or a more qualitative change in the nature of work.
Precarious work is part of an employer strategy to minimise costs. Courtesy of the Government’s policy to cut employers’ PRSI on low-paid work, employers are offering part-time jobs to cut their PRSI bill. They may have full-time work available but they are breaking them up. This ultimately costs the State through part-time unemployment supplement, lost tax revenue, higher Family Income Supplement costs. But it also costs employees: over one million people suffer multiple deprivation experiences in the state. Of this, approximately half live in households where there is at least one income from work. No doubt, this is concentrated in the low-paid precarious sectors.
It is also a policy to discipline employees. If you are depending on getting extra hours you don’t want to go around trying to organise your work-mates into a union, or complaining about working conditions, etc. The employee must keep quiet, suffer anything the employer throws at them, all in the hope that they will more hours on the next roster assignment. The Government could end this by implementing the EU Directive on Part-time work – which would give part-time employees the right to any extra hours in a firm when it becomes available – but so far they haven’t indicated any willingness to do so.
So there is a very real possibility that we may be entering into a period where precarious work becomes the norm and not just a feature of a weak labour market.
(b) The Weakness of the Market Employment
Over the last year agricultural, fishing and forestry employment increased by 16,000. This is a good performance for this sector. But are we getting a true picture? The CSO has recently starting re-adjusting their samples to align them with the 2011 census. This will be phased in over the year. In the meantime they provide a caution about interpreting trends in this sector. In the survey for the last quarter they state:
‘In the case of the Agriculture, forestry and fishing sector it can be noted that estimates of employment in this sector have shown to be sensitive to sample changes over time. Given the introduction of the sample based on the 2011Census of Population . . . particular caution is warranted in the interpretation of the trend in this sector at this time.’
So we have to be careful about this 16,000 job improvement. We may find that previous estimates of employment in this sector in the past were under-stated and, so, the total level of employment in the economy.
So how can we look at this. The following breaks down employment in three sectors: agricultural/fishing/forestry, the market economy and the non-market economy. The non-market economy includes public administration, education, health and other sectors (recreation leisure) – these are dominated by public sector employment.
Nearly 2,000 jobs were lost in the market economy, an improvement on the 2011-2012 figure which showed a loss of 8,000. We have, though, still to bottom out in this sector which employs 63 percent of the labour force and is the driver of value-added and exports.
Just to note, the increase in non-market employment is not related to the public sector which has been losing jobs. There was, however, an increase of 8,000 in the health & social work sector – driven by the private sector.
(c) Increase Due to Rise in Self-Employed
The employment rise in the last year has been almost entirely due to an increase in self-employment.
As seen, while employment rose by 20,000 in the last year, this was due to the rise in self-employment – which made up 16,000 (there was another small increase in assisting relatives of 2,700).
Of course, this increase in self-employment is to be welcomed (better than a decline). But the question here is how long-term this work will be and to what extent the numbers have been impacted by the CSO’s sampling adjustments. Many, believing they won’t find work, will try their hand at own-work. This can be tenuous and low-income with an eventual high-failure rate. One insight is that the number of self-employed who, in turn employ people, actually fell over the last year by over 3,000. This was made up by a bigger increase in the numbers of self-employed without employees.
Meanwhile, PAYE employment has stagnated over last year – recording an increase of only 4,000; still, better than a decline. However, when we strip out the numbers on Government schemes (Community Employment, Jobsbridge, etc.) the number of non-scheme employment rose by only increased by 1,700.
* * *
So what do we have? We have some good headline news but much of this melts away when examining the details.
Full-time employment is still falling
Employment in the market economy is falling
Precarious work is on the increase – substantially so
The number of employees remains much the same as last year – especially when those on Government schemes are taken into account.
The main growth has been in the self-employed sector – but not in that part of the sector which employs people; that’s still falling
Some of the increase might be due to statistical factors unrelated to what is actually happening the economy.
Then there’s the question of emigration. With the labour force actually falling by over 9,000 (despite new entrants from education), much of the decline in the unemployed numbers will no doubt be due to people searching for work elsewhere.
This is not a good news story. At best, it’s mixed. And to the extent that it presages permanent changes in the labour market – namely, the rise in precarious employment – it is depressing.
A BILLIONAIRE has bought a luxury home close to Thomastown. He is heavily involved in the mobile phone business and it’s not Denis O’Brien.
Frank Sixt is one of the most successful money managers in the world and he is the new owner of Coolmore House, the former home of Niall Mellon whose property and insurance empire was a victim of the recession and who spent a fortune doing up the house. It is once again undergoing major refurbishment with a crane in situ. Security has been increased.
Mr Sixt, who is in his early 60s, has homes in Bermuda and Hong Kong, among other places. He has an extraordinary CV and went to university at 13 years of age.
He won a major music award in Quebec, Canada at 12 and has composed symphonies and wrote two musical scores for the movie “Bethune”.
He is a director of Cycad Investments Ltd and of Cycad Farm Ltd both with addresses at Coolmore House, Thomastown.
In February last year, Anne Marie Sixt, his wife, took over as secretary of the company, Omni Pro Corporate Consultants, Wexford Road Business Park, Carlow. She gave her address as Peak Road, Peak, Hong Kong, China.
The other directors of the company are Robert Finnegan, Dunmore Lodge, Dunmore East who is the CEO of the mobile phone company, 3 Ireland and Mr and Mrs Sixt’s son, Edward.
Mr Sixt, who designed Skype, is group finance director and executive director of Hutchison Whampoa Limited.
He is also Chairman and a non-executive Director of TOM Group Limited (an investment holding company); an Executive Director of Cheung Kong Infrastructure Holdings Limited and Power Assets Holdings Limited (formerly Hongkong Electric Holdings Limited); a non-executive Director of Cheung Kong (Holdings) Limited, Hutchison Telecommunications Hong Kong Holdings Limited and Hutchison Port Holdings Management Pte. Limited as the trustee-manager of Hutchison Port Holdings Trust and a Director of Hutchison Telecommunications (Australia) Limited. Mr.
Sixt is also a Director of the Li Ka Shing (Canada) Foundation.
If, as we are told, everything is on the budgetary table, why is there no place for an increase in the corporate tax rate? By Michael Taft.
We are constantly assured (warned) that ‘everything is on the table’. All manner of tax increases and spending cuts are being considered, and none are ruled out in principle. So, goes the script. There is one issue, however, that is not on the table. It is not even in the room. It is not even in the house or lurking around the grounds. And that issue is the corporate tax rate. Why?If we increased the corporate tax rate, this would undermine our ability to attract foreign direct investment. This, in turn, would result in fewer jobs being created and put current jobs at risk; further, it would lower exports which would skewer our balance of payments. All that value-added and economic activity would be jeopardised.
Before we confront this argument, let’s first look at how successful multinationals (MNCs) are in racking up profits in Ireland (also, this analysis from Michael Burke is worth a read). From this, we might get a sense of how sensitive they would be to an increase in the corporate tax rate. For, in truth, they are really really racking up the profits.
Ireland is not just a league-leader, it is off the chart. MNCs here make more than four times the profit per employees than the average of the other EU-15 countries reporting (no data for Belgium or Greece). No wonder more and more multinationals are making Ireland their home. It should be noted that this Eurostat data does not include the financial sector, so the massive profits being made in the IFSC are not included. Nor does the above include taxation – we’ll come to this later.
Not only are MNC profits high in Ireland, they are resilient. 2009 was the year that saw global profitability fall. But not in Ireland. Whereas in 2009 profits fell in the other EU-13 countries by an average of 17%, in Ireland they fell by less than 1%.
This is just the overview – let’s look at some key MNC sectors in Ireland. In the Manufacturing and Information & Communication sectors, Irish MNC profits are through the roof.
In the Manufacturing sector, MNC profitability in Ireland is nearly ten times that of MNCs in other countries. In Information & Communication, the ratio is more than three-to-one.
In other sectors, MNCs in Ireland also exceed the EU average but not to the same degree.
In each of these sectors – particularly retail and transport – MNC profits in Ireland significantly exceed the average of other countries.
Only in two sectors – the Professional & Scientific and Accommodation – is MNC profit in Ireland lower than the average of other EU countries. These two sectors, however, are relatively small, making up less than 2% of the turnover of all MNCs in Ireland.
Another insight is MNC by home country. US multinationals have a strong presence in Ireland – making up nearly two-thirds of all MNC turnover in Ireland. American MNCs take €240,000 in profit per employee here in Ireland; in the other EU countries, they take only €31,800. More interesting, despite the global recession, American MNCs increased their profit per employee in 2009 by over 8% in Ireland. In other EU countries, American MNCs suffered a loss of nearly 21%.
Another, albeit smaller category, is MNCs owned by ‘offshore financial centres’ (OFCs). One would assume that these would be primarily involved in the financial sector. But the data here refers to the non-financial business sector. These OFCs are still relatively small (making up only 3% of all MNC turnover in Ireland). But they are growing In the dark days of 2009, OFCs saw their turnover nearly double over 2008, with the number of OFCs operating in Ireland also doubling. And no wonder: they take nearly €61,000 in profits per employed in Ireland while in other countries this figure is nearly half – €34,300.
Of course, there is an Alice-in-Wonderland character to all these numbers. Profits, turnover, value-added – these are all distorted by transfer pricing. MNCs do not actually produce these levels of profit in Ireland – not all of them; they ‘report’ a considerable level of profit here, taking advantage of transfer-pricing in order to exploit our ultra-low corporate tax rates and the facility to engage in global tax avoidance (which is why a US Senate Committee described Ireland as a tax haven – see page 30).
But we should also take note: all of the above reports profits before tax. If we had an after-tax figure, we’d find the gap between MNCs in Ireland and the other EU countries grow even wider. For instance, Germany comes second when it comes to MNC profit per employee, at €42,600. On that they pay a headline corporate tax rate of 30%. In Ireland, with MNCs taking €110,600 per employee, the headline rate is 12.5%. Yes, the effective tax rate (after reliefs and allowances) will be lower – but it will be lower for both countries.
Profits are rising in Ireland. They increased by 4% in 2010 and 7% in 2011. According to the CSO, this is largely accruing to multinationals.
So here is a question: if all things are on the budgetary table, why is there no place for an increase in the corporate tax rate? This would not undermine pre-tax profits, and even if it were raised by a mere 2.5%, it would still be lower – much lower – than almost any other European country.
And here is another question: where in Europe, indeed the world, can MNCs make as much profit as in Ireland even if the corporate tax rate were increased?
So, why is the issue of the corporate tax rate taboo? That’s an easy question to answer: because it has been elevated to almost metaphysical status. In the Dail the Taoiseach stated piously:
“The key elements of the Jobs Initiative included: reaffirming, as the Minister for Finance repeated yesterday, that our 12.5% corporate tax rate remains sacrosanct…”
To declare something sacrosanct is not an invitation to debate. It is a threat. For to challenge the sacrosanct is to engage in heresy, blasphemy, apostasy.
So suck it up. Cut homecare help, bash low-paid workers (public and private), slash social protection, close down services, tax average income earners even more. But don’t anyone dare mention the holy of holies – the corporate tax rate.