Colm’s columns

Colm Rapple
Irish Mail on Sunday, November 29, 2009

Before last year’s budget Finance Minister, Brian Lenihan was advised even if he raised income tax rates and imposed income levies, Irish workers would continue to be among the lowest taxed, not only in the EU but also among the 30 advanced economies that are members of the OECD.  He didn’t raise income tax rates but did introduce an income levy from January 1. That was increased from April and higher health levies introduced.

Those additional measures were designed to bring in an extra €3.6 billion in a full year. Even if the actual tax-take is falling a little short of that, it was a big tax imposition. These big figures are almost impossible to conceptualise but for comparative purposes, remember it is not far short of the €4 billion that Brian Lenihan is pledged to find in his current budgetary endeavours.

An easier way to conceptualise €3.6 billion, of course, is to think of it on a “per head of population” basis. Since there’s about 4.5 million of us, it amounts to €800 per head. That’s a measure of the extra taxes we are paying this year simply as a result of the tax changes introduced last April and it is a lot of money.

But we are still among the lowest taxed countries in the world. Figures produced by the OECD during the week provide ample evidence that Brian Lenihan is wrong when he claims that there is very little scope for increasing taxes. The fact is that we need higher taxes and there should be public support for any politician brave enough to say so and to outline how such taxes could be effectively and efficiently spent.

Good public and social services have to be paid for. We need to recognise that fact and decide whether or not we are willing to pay the price.

It may well be possible to provide the current level of State services at a lower cost by cutting out waste, reducing the remuneration of those who are clearly paid too much and increasing the productivity of those who are under performing, mainly as a result of bad management.

But if we aspire to the high levels of public service that we have the right to expect as citizens of a rich European country, then we will have to accept higher taxes. There is no good reason why we shouldn’t. We are still among the richest countries in the world and, as this week’s OECD figures clearly show, we are among the lowest taxed of the rich countries.

We paid 28.3% of national income (GDP) in tax in 2008 according to the OECD figures.  That compares with 35.7% in Britain, 36.4% in Germany, 43.1% in France, 43.2% in Italy and 48.3% in Denmark. The EU average is close to 40%.

Even the Slovak Republic was more highly taxed at 29.3% and Turkey, at 23.5% wasn’t too far behind us.

Allowing that the tax take will be higher this year as a result of the additional income and health levies, we are still clearly a very under taxed country by international standards.

Our social insurance contributions, PRSI, are particularly low.  The latest OECD figure relate to 2007 but our international ranking won’t have changed much since then and we are clearly out of step with our neighbours. As a proportion of national income we contribute less than half the EU average in social insurance – 4.7% as compared with 11.5%.

The figure for Britain is also relatively low at 6.6% but that’s still significantly higher than our figure. In Germany the proportion of national income going on social insurance is 13.2%. In France it’s 16.1%. In Spain it’s 12.1% and in Portugal it’s 11.7%.

Both employer and employee social insurance contributions are lower here than in any other EU country. Employer PRSI accounts for 3% of national income here as compared with an EU average of 6.7%, 10.9% in France, 6.3% in Germany, 7.6% in Portugal and 8.9% in Spain and Italy.

Employers can rightly claim that PRSI is effectively a tax on labour, a disincentive to hire workers and a cost on business that can adversely impact on competitiveness. All that is true but Irish employers currently enjoy a major competitive advantage in this regard. The so-called “tax wedge” which is a measure of the cost in PRSI and tax of employing workers is far lower in Ireland than in any other EU country for those on or about the average wage.

Indeed before last April’s budget it was the lowest of any OECD country according to figures prepared for Brian Lenihan. The extra levies are unlikely to have changed our rating in this regard.

A case can certainly be made for increasing PRSI contributions and extra revenue could be raised without dampening the prospects of economic recovery. Lifting the current €75,036 ceiling on employee contributions is the easiest change to make. It would only affect individuals earning more than €75,036 and would be similar to an extra income tax of 4% on all income above that level.

An increase in employer PRSI is also clearly justified but ideally it shouldn’t be imposed on payroll but rather on capital intensive firms that make sizeable profits per worker employed. The extra tax on highly profitable, mostly foreign owned firms, could be partially used to provide PRSI reduction for labour intensive businesses.

It would be a sensible move but maybe Brian Lenihan and his Government are ideologically wedded to the notion of a low-tax economy so beloved by the now defunct PDs.

Colm Rapple
Irish Mail on Sunday, November 22, 2009

There are now over 22 million people unemployed in the European Union. That’s almost one-in-ten workers and that underestimates the number of people affected by joblessness.  That’s an official Eurostat figure and it only includes people who are available for work and actively seeking it. It doesn’t include their families and dependants who suffer from the loss of income that unemployment brings.

Unemployment on this scale is not just an indicator of deprivation and potential poverty, it’s also a measure of economic incompetence and loss.  There is plenty of work that could be done, products that could be produced and services that could be provided. If our economies were properly managed, those 22 million people could create a lot of wealth and welfare.

Ireland is suffering more than most EU countries with 282,000 people out of work. That’s about 12% of the labour force and the number of jobless is expected to rise by over 40,000 before peaking sometime next year. Nobody knows for sure. Some are more optimistic and others less so. But all agree that unemployment will be slow to fall.

That’s the real economic crisis. Unemployment is not only a waste of a valuable resource, it also results in greater inequality, increased social tensions and a general loss in welfare. Economic output is expected to start rising again next year but the inevitable growth in employment is expected to significantly lag the growth in output.

So while average incomes will start to rise again next year, the gap between the haves and the have-nots is bound to widen. Profits will rise, those with jobs will tend to gain and those without jobs will at best stand-still.

It’s not surprising that the Organization for Economic Cooperation and Development, in its latest economic review published during the week, devoted its prime editorial comment to  a paper by Director, John Martin on “Preventing  the jobs crisis from casting a long shadow”.

As usual it was the think-tank’s economic forecasts that got most media attention and the news is good but the report stresses that recovery on its own is not going to provide a quick solution to the current jobs crisis. What’s true for the OECD as a whole is equally true for Ireland. Indeed our problems are even more severe.

The OECD figures puts our jobless rate at 12.2% against an EU average of 8.9%. Of the other EU countries only Spain at 18.1% is suffering a higher rate. The average across the 30 OECD member countries is 8.3%. But that is expected to rise to 10% by the end of next year, higher than at any time since World War II.

There will be 57 million people unemployed in the 30 so-called advanced countries of the world. In single file they’d stretch round the world at least once.

That’s the bad news and if you can imagine those 57 million jobless as individuals with talents, ambitions and families you can get a better idea of just how bad it is. The good news, on which it is more difficult to put a human face, is that the world is coming out of recession faster than expected.  Last June the OECD area as a whole was expected to achieve only an 0.7% growth next year. The forecast has now been raised to 1.9%, rising to 2.5% in 2011.

But that growth will be slow to translate into more jobs and the OECD, which is better known for its liberal capitalist tendencies than its social concerns, is clearly worried about the potential fall-out from the jobs crisis. It’s a worry that has yet to be given the priority it deserves in our own Government’s economic pronouncements.

The OECD’s John Martin describes the potential costs very succinctly. “High and persistent unemployment brings in its train major social and economic costs: poorer health, lower living standards and less life satisfaction for the unemployed and their families: increased crime and lower growth potential for society.”

He is critical of the low level of resources being put into measures to help people back into work. Even in the face of budgetary difficulties, such measures can be cost effective, he says, and various studies have clearly indicated the type of measure that works.

The report stresses the need to provide effective employment services to ensure that the most vulnerable of jobseekers don’t simply drift into long-term unemployment. It recommends a range of policy options including an increased emphasis on training  and a temporary reliance on public-sector job creation schemes.

It also warns against badly targeted job subsidisation schemes. The cost, it says, can be unduly high since many of the jobs subsidised are not at risk while efficient businesses, that hold the key to future growth, are put at a competitive disadvantage.

Hopefully the OECD’s research and experience in this area is informing whatever policies Tánaiste Mary Coughlan is bringing to cabinet. But so far there has been little indication that job protection and job creation is receiving the attention that it deserves. Fás seemed to be particularly badly prepared for the task it currently faces. We are cutting public sector jobs rather than looking for way in which the jobless could be usefully employed in providing needed services at little or no net cost to the Exchequer while Ms Coughlan’s job subsidisation scheme has yet to prove itself cost effective and productive.

These are issues every bit as important as cutting the budget deficit.

Colm Rapple
Irish Mail on Sunday, November 15, 2009

The bottom 21% of income tax payers, between them, earn less than 3% of the total income declared to the Revenue. They don’t pay much tax, only €3.4 million between them in 2006.   Indeed the bottom 30% of taxpayers account for only 6.3% of total income and between them they pay only 13 cent out of every €100 of income tax collected.

They don’t pay much tax because they don’t earn very much. Back in 2006 that 30% of taxpayers accounted for 690,000 out of the total of 2.2 million on the Revenue’s books.

The fact that so large a group of taxpayers earn so little and pay so little tax explains why the top 3.8% of taxpayers – or 4% as Finance Lenihan put it – account for 40% of the income tax raised. But he didn’t add that they also account for over 20% of the income declared to the Revenue and that’s after various deductions including capital allowances and, more importantly, pension contributions.

So while the bottom 30% share only 6.3% of total income, the top 4% get over a quarter of the total. It’s little wonder that they are asked to pay more tax. They could pay more.

We are all going to be asked to pay more. That’s clear from the budget arithmetic published during the week. The broad outline was already known but now we know the detail behind that declared need to trim €4 billion off the budget deficit next year.

It can be argued that the yawning gap between  revenue and spending could be tackled in a more gradualist manner than proposed by Mr Lenihan, but there is much validity in the claim that the sharper the shock, the quicker that the purse strings will be loosened,  consumer spending boosted and a domestic impetus given to an economy recovery that will initially have to be driven by export growth.

If that is accepted, the big question that remains is how to save that €4 billion. Mr Lenihan proposes to cut €750 million off capital spending. That should be relatively painless. If the cuts are carefully targeted with the emphasis on financing more labour rather than capital intensive projects and getting better value for money, the impact on employment could be kept relatively small.

The only other target that we are sure of is the €1.3 billion being looked for in the public sector pay bill. Talks are ongoing and a deal is possible around the concept of accepting pay cuts in the short-term to be reversed as increased productivity is achieved in the future.

That’s not too far removed from the suggestion made in this column some weeks ago that the bulk of public sector workers should agree to a shorter working week while maintaining the current basic pay rates. As little as two hours a week would provide savings of almost 6% on the pay bill, enough to meet Mr Lenihan’s target.

In future years many might view the shorter working week as a better option than a pay increase. The four day week might again emerge as an objective.

If the pay bill is cut, the capital budget trimmed and perhaps a net €450 million  generated from a carbon tax, Mr Lenihan will be left looking for about €2.5 billion.

He keeps stressing that the scope for raising taxes is very limited and he is not for turning. It used to be said that the three big areas of Government spending, were health, education and social welfare. Now the three are said to be pay (36%), social welfare (35%), and the rest (29%).

Trimming 6% off “the rest”, which is Government spending other than pay and social welfare, would save almost €1 billion. This broad category covers everything from paper clips,  to farm subsidies, to heat and light costs.

Mr Lenihan stressed at a press briefing during the week that since consumer prices have fallen by 6.6% over the past year, such savings should be possible. He didn’t specify where but it seemed that he wasn’t only talking about social welfare recipients.

Indeed the case for broad social welfare cuts is less sustainable. Consumer prices are down 6.6% on a year ago. But if you take out the cut in mortgage interest, the drop is only 2.2% and even that overstates the likely benefit that those on low incomes have enjoyed.

Fuel oil is down over 30% in price on last year but fuels most used by low income families have risen in price. Solid fuel, coal and turf, is up 6.2% while bottled gas is up 3.8%. Petrol and diesel are down in price but bus fares are up 12%. Food prices in general are down by 5.3% but basic foodstuffs, the former grocery order items, are down only 3.8%.

But there is no doubt that some social welfare payments go to people who don’t need them. Many with very good company pensions also get State pensions, for instance. But they can rightfully claim to have paid their social insurance contributions over the years and be entitled to those benefits irrespective of their means.  In any case if they are well off they are paying tax on the benefits.

So they’ll be left alone.

Child benefit is the obvious target. Minister Mary Hanifin seems to see three categories of recipient. One group are low income families, either on social welfare or Family Income Supplement who presumably will keep the full benefit. At the other end of the scale are high income families who the Revenue Commissioners are being asked to identify. There are all sorts of difficulties. For instance should a two income couple on a joint €100,000 be considered on a par with a single income family on €100,000? Should the age of the child be taken into account?

There is, however, no doubt that many recipients of child benefit who haven’t suffered job loss and are on reasonable, if reduced, incomes, could well afford to have their benefits reduced or eliminated. It shouldn’t be beyond the Minister ken to target the right people.