Robbing future Peter to pay putative present Paul

This is an expanded version of an opinion piece published in the Irish Examiner on 11 May 2011

The last week has seen an enormous outpouring of national introspection in relation to how we will get Out of the mess.  At the heart of this has been the as ever controversial, polemical, and pungent Prof Morgan Kelly, whose proposal at the weekend that we ditch the bailout and simultaneously close the gap in the national finances in the course of one year has been at one and the same time reviled and welcomed. Kelly deserves enormous kudos for being a (almost) lone voice in the wilderness, calling the property bubble for what it was and in doing so dropping the scales from many of our eyes, and more latterly for holding up a stark mirror to the folly that has been the banking rescues.

It’s probably no exaggeration to say that millions of words have been written about the Irish banking collapse, and about the consequential economic disaster.

Curiously muted has been the discussion around jobs. At start of 2007 unemployment was just over 4%, while now it is now at 14.6% at last count.  While this is not by any means the worst in the European Union is a very very serious and rapid deterioration.

This tripling of unemployment has of course occurred against a background of massive emigration, and the headline unemployment rate masks startling discrepancies. Overall male unemployment is now just under 18%, while for men between the ages of 20 and 24 is nearly 33%. A very useful recent post on the Irish economy blog discusses the issue of male unemployment.

Nobel prizes and economics have been awarded for people who have worked on the issues of unemployment, unemployment solutions, and the issues of the effect of unemployment, particularly when young, on long-term work prospects.

It against this background that one cannot but welcome the focus that this government has now shown in trying to begin the process of reducing unemployment. Under the watch of Brian Cowan we saw not only the collapse of the Irish banking system, not only the collapse of the Irish fiscal system but also the collapse of the Irish employment system.  When Hercules had but one Augean stable to clear out this government has three, any one of which would   daunt the staunchest.

The initiatives themselves are worthy, but will hardly reduce the unemployment level by much. At most they can best be seen as an opportunity to ensure that certain categories of industries are favored, that certain types of jobseekers are favoured, and that the government is seen to be doing something. Being seen to do something as important, as it might well give people a degree of confidence, that somebody somewhere is trying…we have a small reduction in the   lower rate of value-added tax, which will almost certainly not on past experience translate to a reduction of prices for the Irish tourist product, prices tending to be sticky downwards; we have some additional expenditure on minor roads; we have a reduction in PRS I at the lower level but only for a time limited period; we have some incentivization for universities to seek additional  non—Exchequer  funds and to be then allowed to employ people;  and we have the introduction of common tourist Visa between Ireland and UK,  in hope of cashing in on large numbers of non EU residents visiting the Olympics  one assumes. The largest single amount of jobs noted will be training and internships, worthy but not self evidently sustainable in the long-term.   No mention is made of serious reform of FAS, there is no serious evidence given to a concentration on youth unemployment, other than the assumption that persons going back into training and education will be young, there is little evidence that the national obsession with the construction industry has finally been purged. Commenting on the jobs initiative the entrepreneur Jerry Kennelly of welcomed it, insofar as it went, but pointed out that the government really need to get serious with telling people who had worked in the construction industry that their jobs were irretrievably gone. He suggested that the need to be given much more significant incentives to reskill, or, and this is characteristic of the frank way in which she speaks, beautiful to emigrate. No politician is going to tell people to emigrate… that would smack far too much have Brian Lenihan senior and his statement about a small island.  Examining the jobs initiative one sees that the largest single amount of money being spent is in the reduction of the value-added tax.  The assumption appears to be that if prices fall more people will spend money and more people spend money domestic demand increasing will result in increased employment in the retail hospitality and other industries.  In addition, while I don’t believe necessarily that the minimum wage, which is in any real sense pretty paltry, is a serious disincentive to employment, it does also seems somewhat perverse that in an environment where we should be taking every opportunity to enhance the competitiveness of the nation we increase, at least relative to where it has been for the first couple of months, the cost of employing persons.

Before we get too carried away with congratulations however we need to be cognizant of the fact that this is a jobs initiative built upon an extremely unfortunate foundation. The proposal to levy not the premiums but the actual asset values of pension funds is entirely regrettable in my view. Irish pension underfunding is a massive problem not just for the public sector because of the private sector. At least in principle in the public sector all employees who are members of the defined benefit scheme can hope there would be tax revenue to pay their pensions. In the private sector people have to put aside funds, and while there are very generous tax breaks for doing so the long-term argument in favour of encouraging private sector pension provision is indisputable. Make no mistake; this is a levy, a tax, on thrift. For every multimillionaire who has put aside vast sums of money as tax shelters there are a dozen or more small to medium business owners who have put aside a modest amount of money to try and ensured they will not be reliant simply and solely understating their old age.  It is astonishing that the pensions board has not been up in arms about this, in particular the consumer and pension representatives.  What we have here is a retrospective tax on saved income, and if constitutional there is no reason why such a tax cannot be applied to bank deposits or other forms of wealth. Taxes on income from such savings are one thing but this is a new departure. And it’s an unwelcome one. If the government can levy on the wealth, the savings, of persons accumulated in pension funds why can they not so similarly lengthy on other forms of saving? Could the government, using the same justification is here, put in place a 0.6% levy on the level of deposits in Irish banks? The fig leaf that has been used here is that there has been very generous provision for tax relief and pensions investments over the years, and that it’s appropriate that this be retrieved.   2 problems arise with this: first will we see this logic applied to the recouping of what ought by the government’s logic be “excess” wealth accumulated through other areas where there has been overgenerous tax provision such as the bubble wealth accumulated by developers and speculators in land   or to the very large bonuses paid by failed banks to the executives who led them into failure, and secondly the government is already committed to the IMF deal which involves a reduction in the future of the tax incentives for investment into pensions.

One has to reluctantly conclude that having given a public, electoral, commitment to the idea of a jobs budget that then became a jobs initiative the government felt it had no choice but to continue to do something.  The Financial Times has suggested that some government election policies, this amongst them, are best left unfulfilled.

As I have said doing something is a good idea, the individual ideas are not themselves bad, it gives a strong signal that the government is at least thinking about the unemployment issue, and they have to start somewhere. However there are other places than the pensions funds of private savers that could have been used to fund the reduction in value-added tax, which is at the center of this initiative.

One obvious place would have been the largest single tax break (above the individual tax credits), which the state gives, namely the exemption of the principal private residence from capital gains tax. Important research on the cost of various tax incentives was undertaken by Dr. Michael Collins of TCD.  He finds that the total amount of tax foregone by the exemption of the principal family residence from capital gains tax was something of the order of €2.4 billion per annum, albeit based on 2006 Data.  The total sum estimated to be raised in a year from the pensions assets levy is some  €470 million.  Even allowing for the collapse in property values from their bubble prices it should be entirely possible to raise a goodly chunk of this by the exemption being removed.


2 thoughts on “Robbing future Peter to pay putative present Paul

  1. Pingback: Financial Repression? | Brian M. Lucey

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