Colm’s columns

Colm Rapple
Irish Mail on Sunday, 27th April 2008

Brian Cowen is expected to offer the trade unions a cut in PRSI rates as part of a package to encourage the acceptance of moderate pay increases in the current round of national agreement talks that got under way this week. The cuts would be structured in such a way that the greater gain would go to those earning less than €50,000 a year while very high earners, on more than about €100,000, would end up paying more.

The idea is attractive from Mr Cowen’s point of view because the cost of PRSI cuts could effectively be postponed. Unlike income tax cuts they needn’t show up in the budget arithmetic for some years.

That ability to make the cuts appear cost-free is also appealing to those many trade union leaders who, despite the hard-line rhetoric, would much prefer to have a national agreement than a return to the tough grind of local pay bargaining. Brian Cowen’s proposal has the added advantage of seeming to favour middle and lower income groups at the expense of the fat-cats.

The trouble is that cuts in PRSI rates are not cost free. They will be financed out of the Social Insurance Fund which, while currently in surplus, is expected to be running at a deficit by 2010. Any cuts in PRSI will have to be made up in some other way.

The proposals aren’t new. They were part of the Fianna Fáil pre-election manifesto confirmed in the programme for Government that was agreed with the Greens. So they are already on the agenda of budgetary measures to be introduced as the finances allow.

The promise is to cut the current 4% rate of PRSI to 2% and to abolish the ceiling which is set at €50,700 this year. Private sector workers actually pay 6% of their income up to that ceiling level. But that includes a 2% health levy. The PRSI element is actually 4%.

The health levy continues on all income and the idea is that the new 2% rate of PRSI would also apply to all income. The maximum saving would be gained by someone on €50,700 a year. The PRSI would be 2% of that rather than 4% – a saving of €1,014 a year. That would be the maximum saving. Those earning up to €101,400 would still be paying less than they are now but the higher the earnings, the smaller the gain and on incomes above €101,400, the impact of the abolished ceiling would more than offset the gain from the lower rate.

There is also a promise to cut the self-employed rate of PRSI – already charged on all income – from 3% to 2%.

It’s obviously not a self-financing change.

PRSI is more of an insurance premium than a tax. While collected by the Revenue Commissioners it is paid into the Social Insurance Fund and used to finance social insurance benefits. It used to need an annual top-up from general tax revenue but for many years now it has been running a surplus.

This year the surplus is expected to amount to about €550 million with contributions and investment income amounting to €8.4 billion and benefits costing €7.85 billion. By end year the accumulated surplus will amount to €4.1 billion.

Back in 2002, when the Government’s financial position tightened a little, the then Finance Minister, Charlie McCreevy, couldn’t resist the temptation. He raided the social insurance fund taking €635 million to help balance his general budget. It was a reasonable option since the alternative was undoubtedly a cut-back in State services. Mr McCreevy would never have countenanced any tax hikes.

It was a once-off raid on the fund justified by a short-term need. The current proposal, however, represents a first, and seemingly irrevocable move, towards the abolition of social insurance as we have known it for decades. And it’s completely at odds with the current exhortation to workers to save more for their retirement.

The Social Insurance Fund contains the savings of workers and most of it is earmarked to pay social welfare pensions. Any reduction in PRSI contributions obviously reduces the amount of money available to pay benefits and, while the fund is currently well in surplus, an actuarial report published last year, estimated that the outflow of funds would start exceeding the inflow by 2010 and that the current surplus would be totally exhausted by 2016.

A core projection is that contributions need to be 78% higher over the next 50 years to adequately fund benefits. The actual shortfall is lower in the early years but it rises with time. But that report lay unpublished in the Department of Social and Family Affairs prior to the election when it might have informed the debate on the Fianna Fáil tax and PRSI proposals. It’s doubtful, indeed, if it even entered into the deliberations on the programme for Government. It was officially signed off by the authors on June 8 last – four days before the programme was finalised.

It didn’t get much publicity at the time but it should be read now by any trade unionist thinking of accepting a reduction in PRSI contributions as a quid pro quo for moderate pay increases. While a cut in PRSI rates could be hidden in the short term
by using up the existing surplus in the Social Insurance Fund the money would eventually have to be recovered through higher taxes. The concept of social insurance would have been destroyed and workers would effectively have been supplementing their income by dipping into their pension fund.

Brian Cowen should think again.

Colm Rapple,
Irish Mail on Sunday 20th April 2008

There was a time when a four-day week seemed an achievable objective for all workers. It’s not all that long ago and by today’s standards we were relatively poor, in economic terms. The Celtic tiger had yet to be born but progress was seen in terms of something other than growth in national income.

Economic growth was seen as a means to an end rather than as an end in itself.

Alongside the hope of a shorter working week went the anticipation that the retirement age could be lowered. Most women had been required to retire at 60 and the expectation was that, in the interests of gender equality, the retirement age of men could be brought down to that level rather than the other way round.

In those days too, it was seen as an advantage if a family could survive on one income so that at least one spouse, admittedly usually the mother, could stay at home and look after the children. There was an expectation that one income should be enough to fund a reasonably good standard of living. And very often it did.

How times have changed.

We are now one of the richest countries in the world.  Yet we are told by the prestigious economic think-tank, the OECD, that we must work harder, retire later, deny child benefit to stay-at-home parents, force single parents out to work, abolish mortgage interest relief and impose more direct charges for the use of State provided infrastructure.

There are good economic arguments for all of those proposals.   They would all help to boost economic output and some, at least, would help to create a more equitable society. But some of those changes would impose a significant cost in terms of quality of life.

Unfortunately economists seldom take account of costs that can’t be measured in money terms, even though the more money people have the higher those intangible costs tend to become.

It’s about time we got down to seriously debating just how much quality of life we are willing to forego to pursue this supposedly self-evident “good” of economic growth. Even the Greens seem to have given up on offering an alternative view.

It’s not simply a matter of “either, or”, of course. Economic growth, that is an increase in that type of wealth that can be measured in money terms, can provide us with more choices. What is needed is a recognition that economic growth doesn’t necessarily leave us better off.

There are plenty of simple examples that give the lie to that conventional wisdom.  There comes a time, for instance, when increased leisure time is more valuable than the money that can be earned from working overtime. That’s an individual choice which not everyone, unfortunately, is allowed the flexibility to make. But there are plenty of more complicated choices that need to be made centrally by the politicians and the policy makers who control our economic and social fortunes.
Some of the proposals made by the OECD economists would undoubtedly provide both economic and social benefits. The case for a property tax has been made in this column in the past using much the same economic arguments presented in this latest OECD report. It makes a lot of economic sense and it would confer social benefits by  creating a fairer and more efficient housing market.

But although it has in the past been endorsed by the first Commission on Taxation and our own National Economic and Social Council, no political party has been willing to grasp the nettle. Of course, the public reaction to a property tax would initially be negative and it would take politicians with leadership skills and guts to convince the electorate of the  real benefits. We don’t seem to have any.

The proposals on child benefit have less to commend them. The idea is that child support should only be paid to those who actually use and pay for childcare facilities. So the stay-at-home spouse looking after his or her own children shouldn’t get child benefit according to the OECD. It should only be given to those actually in the paid labour force who are paying someone else to look after their children.

This idea is based, of course, on the economic fallacy that voluntary service has no economic value. No monetary value can be put on the childminding work of a stay-at-home spouse, so it is not included in the measurement of national income. This failing in the use of economic statistics has long been recognised.

Most first-year economic students will have learnt of the Economics Professor who caused a drop in national income by marrying his housekeeper.  Before the marriage the work she did was paid for and therefore included in national income. After the marriage it was not included, since no payment was now being made. But exactly the same work was being done.

Economists well recognise the shortcomings of economic statistics as a measure of human welfare but they generally ignore them.

The OECD report makes the assumption that we would be better off if stay-at-home childminders went out to work simply because their wages would then be included in national income while their childminding work isn’t. Of course, that might sometimes be the case but it’s not self-evident simply because the change results in an increase in national income as measured by the economic statistics.

This is, of course, only one of a wide range of policy proposals made in the report.  Many have been made before and all deserve to be discussed. If only we had a real political opposition.

Colm Rapple
Irish Mail on Sunday, 13th April 2008

Your euro will currently buy you 15% more Sterling or US dollars than it did a year ago. This time last year you got only 68p sterling for your euro. At one stage during the week you could get 80p, or at least you could if you were dealing in large sums. At the same time the official euro/dollar exchange rate has improved from $1.33 to $1.57.

So all other things being equal, British and US imports should be 15% cheaper.

Of course, the exchange rate isn’t the only determinant of prices but that massive appreciation in the value of the euro should, at the very least, have greatly eased the impact of other inflationary factors.

It hasn’t. Why? The most likely explanation is that much of the potential gain from the more favourable exchange rates has been purloined by importers, wholesalers and retailers.

With the latest official figures showing the annual rate of inflation back up to 5%, that’s an issue that should be exercising the minds of those calling for the trade unions to show restraint in the upcoming national pay talks. The best efforts of the Competition Authority, the National Consumer Agency, the Commission for Energy Regulation, and all those other Government sponsored attempts to promote competition, don’t seem to be having much impact.

Rip-off Ireland is very much alive and well. That realisation is not going to be lost on the trade unions as they prepare for a fresh round of pay talks. These latest inflation figures confirm what was patently obvious from the very beginning, that the pay increases under the current round were grossly inadequate.

The deal covers 27 months. There was an initial 3% increase covering the first six months, 2% for the next nine months, then a 2.5% increase followed by a final 2.5% increase six months later. That amounts to a total pay increase of 10% or 10.4% when the compounding effect, of each increase being applied to the last, is taken into account.

But consumer prices have risen by 13% over the past 27 months and the increase is likely to be higher over the 27 month period ending next September when most public servants get their final rise under the deal. The current calculation of 27 months includes some months during late 2005 and early 2006 during which prices did decline. That favourable trend will move out of the calculation by September.

The plain fact is that pay has not only failed to keep pace with inflation, but the workforce as a whole has enjoyed no share of the additional wealth produced over the past couple of years. Living standards have declined despite the fact that national income is estimated to have risen by 5.7% last year and by about 5.3% during 2006.

So the national cake is a lot bigger now than it was two years ago – over 10% bigger. Even allowing for the fact that it is taking more workers to produce the extra wealth, workers could have expected a real pay increase, over and above inflation, of about 3%. That’s just to give them a share of the extra wealth produced.

But is hasn’t happened that way, certainly not for the rank and file.

If it had then workers should be earning about 16 or 17% more at the end of the current agreement than they were at the beginning – 13% just to keep pace with inflation and 3% to provide a real improvement in living standards.

But all they’ve got under the pay deal is 10.4%. They need at least 6% just to catch up. To that you could add about 8% to cover inflation this year and next. That’s assuming that inflation will ease later in the year and that the new agreement will cover just two years. That would need to be topped up by perhaps another 2% to provide a real improvement in living standards.

That would only be a small share of the expected growth in national income. The IMF is forecasting growth of 1.8% this year and 3% in 2009.

So for openers the trade unions could conservatively be looking for pay increases of 16% over the next two years made up of 6% catch-up, 8% to cover inflation and 2% real increase.

If the negotiators ask for less they run the risk of alienating their troops and they can’t really afford to let that happen, given their promotion of the last deal and the fact that trade union membership is continuing to decline as a proportion of the labour force. Some 37.4% of the workforce were in trade unions in 2003. That had dropped to 31.5% last year according to figures published during the week.

Trade union membership is particularly low in the service industries but numbers have been falling in all sectors even in the public sector which, while traditionally conservative, may be less so this time around.

Following what were regarded as disappointing, or non-existent, benchmarking awards, the CPSU, which represents some 12,000 mainly low-paid public servants, passed a motion at its recent annual conference urging its leaders to seek a 27% increase in the pay talks. That demand doubtless reflected annoyance at the higher than average pay awards granted to higher paid civil servants and politicians in line with the similar trend in the private sector.

It’s not a realistic demand, of course, but it does indicate a degree of militancy that the trade union hierarchy will find hard to assuage. With little but pay on the table this time, a new agreement is going to be hard won.