Response to Budget ‘15

NERI Seminar Series22 October 2014

BUDGET 2015 ANALYSIS AND CRITIQUE

NERI POST BUDGET SEMINAR 22/10/14

Michelle Murphy

Research and Policy Analyst, Social Justice Ireland

www.socialjustice.ie michelle.murphy@socialjustice.ie

www.socialjustice.ie 3

Budget 2015• Fourth regressive budget in a row• Widened rich-poor gap• No social recovery• Groups being left behind• Priorities are clear

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Missed opportunities• Taxation• Working Poor• Universal Pension• Social Housing• Social infrastructure

Challenges• Depressed household spending• Stagnation in Eurozone• Limited investment• High and structural long-term unemployment• Uneven recovery• High levels of national and personal debt• Deficiencies in public service provision

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THANK YOU

WWW.SOCIALJUSTICE.IE

Budget 2015

Budget Commentary NERI Post-Budget 2015 Event

October 22nd 2014 Cormac Staunton, Policy Analyst, TASC

@Cormac_Staunton@TascBlog

Lets talk about inequality…

Inequality in Ireland

A low tax country

“Austerity” focused on cuts to public spending, not significant tax increases

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 p

2014 p

2015 p

2016 p

0

10

20

30

40

50

60

70

Tax (blue) and Spending (red) as % GDP

Ireland’s Low-Tax Triangle

WHAT DID BUDGET 2015 DO TO TACKLE INEQUALITY?

Everyone is a taxpayer

Raised entry point for USC to €12,012

Cut USC from 2% to 1.5%. Cut USC from 4% to 3.5%.

Change entry point for 7% USC to €17,565

4th rate of USC at 8% from €70,800

Cut higher rate tax to 40%

Raised the entry point for higher rate tax to €33,800

The myth of the 52%

The myth of the 52%

Where do we go from here?

• Tax cuts to stimulate growth is a ‘high-risk’ strategy

• We need public investment and public services

• We need a re-balancing of the economy

• A more equal society will be better for all

Thank you

cstaunton@tasc.ie www.tasc.iewww.progressive-economy.ie@tascblog @cormac_staunton

WHAT BUDGET 2015 TELLS US ABOUT TOMORROW

Michael Taft

Research officer, UNITE

1: The New Phase of Austerity

• Contrary to declarations, austerity has not ended. It is entering into a new phase.

• The first phase of austerity has been nominal. It involved adjustments – expenditure reductions, tax increases – of over €30 billion.

• The second phase of austerity will be real. It will fall after inflation – or be cut in real terms. Public expenditure will not keep pace with inflation and therefore the value of social transfers, public services and investment will be eroded. We can measure this using the data produced by the Government in its budget papers.

Real Cuts in Public Expenditure

• Real primary spending per capita will fall by nearly 10 percent over the next four years – or €4 billion.

• Government consumption per capita will fall by over 8 percent – or €2.4 billion.

• Investment per capita will fall by over 15 percent – or nearly €400 million.

• Public finances will gain from reduced unemployment costs but much will be cancelled out by increased elderly-related expenditure.

Primary Expendi-ture Public Services Investment

-9.5

-8.2

-15.4

Real Increase in Public Expenditure per capita: 2014 - 2018 (%)

2. Squeezing the Public out of the Economy

• The strategy being pursued will essentially squeeze the public out of the economy. This specifically refers to:

• a) Government Consumption: public services provided by the state and purchases by the government of goods and services produced by market producers that are supplied to households (collective and individual consumption).

• b) Public Investment – as measured by Government gross capital fixed formation

• Both these categories have suffered a substantial fall in real terms per capita during the recession.

Real Government Consumption per capita

1995 1997 1999 2001 2003 2005 2007 2009 2011 20133,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

5,9275,681

Real Government Consumption per capita: 1995 - 2013 (€)

Real Public Investment per capita

1995 1997 1999 2001 2003 2005 2007 2009 2011 20130

500

1,000

1,500

2,000

2,500

833 827

Real Investment per Capita (€)

European Comparisons: 2013 (PPP per capita)

Netherlands

Sweden

Denmark

Finland

SOE

France

Belgium

Other EU-15

Germany

UK

Austria

Ireland

Spain

Italy

Greece

Portugal

9,358

8,790

8,714

8,170

7,827

7,319

7,165

6,897

6,827

6,641

6,297

5,964

5,625

5,316

4,839

4,598

Government Consumption

Sweden

Netherlands

Finland

Denmark

SOE

France

Austria

Other EU-15

UK

Belgium

Ireland

Italy

Germany

Spain

Greece

Portugal

1,517

1,380

1,300

1,272

1,189

1,164

1,063

959

926

793

769

726

687

594

545

501

Public Investment

Ireland Lags Well Behind EU Averages

• Government consumption: Ireland is 14 percent below the average of other EU-15 countries. Need to increase spending by €4.8 billion reach the average. The elderly demographic of other EU-15 countries requires higher spend. But so does our youth demographic.

• Compared with our peer group – other small open economies – we’d have to increase government consumption by €7 billion.

• Public Investment: Ireland is 20 percent below average. Need to increase spending by €800 million to reach average (€1.7 billion to reach SOE average).

• But Ireland is currently undergoing an investment crisis – total investment in the economy is 40 percent below the Eurozone average. Need higher public investment to crowd-in private investment

3. Wrong-Way Fiscal Policy

• Fiscal policy should be boosting investment in our economic and social infrastructure Yet, the Government will continue to cut spending in real terms per capita. Why?

• Balanced Budget: the Government intends to balance the budget by 2018. This is the third wave of irrational fiscal policy.

• 1st Wave: pro-cyclical policy prior to the crash.

• 2nd Wave: Pursuing austerity during falling output (also pro-cyclical).

• 3rd Wave: With continuing high unemployment by 2018 (8 percent – possibly higher if emigration falls) and continued social and economic infrastructural deficits – it makes no sense to pursue a balanced budget. Not necessary to reduce debt ratio in accordance with fiscal rules.

Role of Fiscal Rules

• If we maintain a deficit, we may run afoul of the Structural Balance rule. This featured in the Fiscal Treaty referendum: the budget balance when cyclical movements are removed.

• It cannot be directly measured or observed. It is closer to alchemy than a coherent macro-economic rule. The ESRI and Department of Finance are critical of the EU’s measurement – as it is more closely related to a large, closed economy like Germany than a small open one like Ireland.

• No one really believes in the structural balance – it was the price European Christian Democracy demanded in exchange for participating in bailout funding and placating its voter base.

• Alternative: ignore it (as long as other macro-economic measurements are on target); develop our own measurement; or boost potential GDP through investment: the ESRI has shown that the structural balance will fall with higher growth.

Tax Cuts Are Privileged over Spending

• Another main reason for continuing real public spending austerity is the privileging of tax reductions over economic and social investment. Why?

• Ideological: the assumption that a low-tax, low-spend, small-public realm economy is more growth-efficient

• Reductionist: boosting living standards is reduced to tax cuts that deliver cash in people’s pockets rather than seeing that public spending increases are more effective in boosting living standards: affordable childcare, higher subvention of public transport, subsidised prescription medicine, etc. These can more effectively reduce household costs.

• Strategic: tax cuts will reduce upward pressure on wages – the old social partnership formula via the backdoor (without any social or partnership). Main beneficiary – employers.

4. Growth Rates: A Statistical Recovery

• Coming off recession and years of stagnation, Government is ‘banking’ on high growth rates. Over the next two years they project growth rates between 8 and 9 percent. Is this a real description of the Irish economy?

• Hard to disagree with the ESRI’s Dr. John Fitzgerald:• ‘ . . . the standard EU harmonised national accounts

are not a satisfactory framework for understanding what is happening in the Irish economy.’

• Why are our national accounts failing to accurately describe the Irish economy?

Growth Rate Projections and Empty Calories

• Multi-nationals (MNCs) and GDP: Everyone knows GDP is not the best measurement. Not just because MNCs make profits here and then repatriate. MNCs profits are generated in other economies and ‘imported’ here to take advantage of low tax rate and tax haven-conduit facilities. GDP is distorted by MNC profit-shifting – before you start taking account profit-repatriation.

• Using GNP: Not satisfactory, either. The ESRI uncovered a real problem: re-domiciled MNC profits are artificially boosting GNP but have no impact on the real economy. This can count in billions - in 2012, it was €7.5 billion or 5 percent of GNP.

• The IFSC: IFSC can distort growth numbers . The Central Bank: • ‘Financial sector developments, which are for the most part unrelated to the

domestic economy, account for a significant portion of the rise in GNP . . .they would further support GNP growth unrelated to domestic consumption, investment or export activity.’

• Profit flows and retentions impact on the GNP but with little impact on real economy.

And More

• New Basis for Calculating Exports:

• ‘ . . . goods owned by an Irish entity that are manufactured in and shipped from a foreign country are now recorded as Irish exports.’

• This led to sharp rise in exports this year –Central Bank, ESRI and Government warned about credibility. Recent upswing in GDP is primarily export-driven, but ‘real’ is this?.

• New Basis for Calculating Investment: R&D now included in National Accounts. This led to revising investment upwards by 54 percent. The average revision upwards among EU-15 countries was 14 percent. Are we seeing accounting practices of MNCs impacting here? More research needed.

• Government consumption: Government points out a quirk:

• ‘Government consumption growth in the first half of 2014 (at 5.3 per cent) was particularly strong . . .largely a statistical effect due to longer hours worked under Haddington Road Agreement.’

• Our growth projections may come true – but much may be empty calories

Employment Also Affected by Statistical Revisions

• Following each census, the CSO revises their QNHS sample base to cohere census. This will lead to changes in the composition of employment and the numbers actually employed. The CSO warned against ‘interpreting trends’ during this period of revision, or ‘realignment’ of their sample base; repeatedly.

• One could ignore the CSO’s warning and pretend the revision made no difference to employment growth, but this requires us to believe that the laws of economic gravity have been suspended in Ireland.

• In 2012 employment fell by 11,000 – and this was after a loss of nearly 300,000 since the start of the crisis. However, in 2013 everything changed. Employment grew on a full-year basis by 43,000. This was quite a turnaround. But there were some problems.

Down, Up and Down Again

2012 Q1 Q2 Q3 Q4 2013 Q1 Q2 Q3 Q4 2014 Q1 Q2

-6,200

-1,200

-2,700

8,600

16,100

14,400

18,200

9,800

1,200

4,300

Employment Growth by Quarter 2012 - 2013 (Seasonally Adjusted)

Making (un)Sense of Employment Growth

• First, 2013 employment growth took place while economy remained in a domestic demand recession - employment is sensitive to domestic demand.

• Second, the usual pattern of an economy coming out of a recession is that employment growth lags. The first beneficiaries in rising business output are those in employment (increase in hours).

• Third, self-employment (own-account) grew by over 10 percent - by over three times the rate during the boom. Doesn’t make sense – not with domestic demand stagnation.

• When CSO’s revision ended employment growth was muted. In the first half of 2013, employment grew by 30,000 (domestic

recession) In the first of 2014, employment grew by 5,500 (domestic growth)

• All this suggests we approach employment numbers cautiously.

5. Conclusion • What we know:

Government consumption and public investment are being returned to levels of over a decade ago and even further

Government projections see a further fall in these categories and overall public expenditure up to 2018

We are well behind spending/investment levels in other EU-15 countriesAll in pursuit of a balanced budget in 2018 (and to avoid tax increases, and to

engage in macroeconomic alchemy)

• What we don’t know:

How substantial growth projections are (or how real our national accounts are)How many jobs were actually created last year

• We may experience growth over the medium-term (even substantial statistical growth) but may continue to experience real-world stagnation.

Response to Budget ‘15

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