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| From: Irish Political Review: Articles |
| Date: November, 0001 |
| By: Editorial |
Budget 2023—Technocracy and Politics |
| Budget 2023—Technocracy and Politics In economic policy-making, the terms economics and political economy are usually taken to be interchangeable. But they have different meanings and, until a political economy approach is taken, the development of Budgetary policy, as is the case with Budget 2023, will continue to lean too heavily on technocratic methods and technocratic solutions, necessary and impressive as these can sometimes be. A rethink on the role played by the State in the economy has been needed since the 2008 Crash. One of the reasons why that has not happened is that economics, as an academic discipline, is inherently liberal and anti-statist, and the Department of Finance is staffed by economists. Professional economists invariably perceive Government intervention as a bad thing, a necessary evil sometimes, but always to be curtailed in favour of the real engine of economic prosperity—the private sector. Whatever about other economies, that has never made sense in Ireland, as even a cursory knowledge of Irish economic history over the last hundred years will testify. Oddly enough, a recent example of a proposal based on political economy being used in the context of the housing crisis came from a professional economist, Dr. Anthony Leddin, Head of the Kemmy Business School at the University of Limerick. In a paper delivered to the Dublin Economics Workshop in Wexford and reported in the Irish Times, Dr. Leddin showed that the strategy of getting private developers to build social housing and having the State pay huge rent supports on behalf of tenants was “completely unsustainableâ€. The average cost of a unit built by a private developer for a local authority was €297,800, he said, while the equivalent figure for a unit built by an approved housing body was €87,182: with the differential partly explained by the fact that local authorities provide 30 per cent grants to such bodies. “Dr Leddin said that the State had paid over €1.877 billion in HAP [Housing Assistance Payments] payments between 2016 and 2021 and a further €896 million in RAS [Rent Accommodation Scheme] payments during the same period. “The State has spent the best part of €3 billion on the current account without any new assets being createdâ€, he said†(Local authorities should get construction firms to tackle housing crisis, economist says, Barry Roche, 18 September). As an alternative, Dr. Leddin proposed the creation of 31 separate construction companies to build homes. “Each of these 31 State-owned construction companies would be linked to the country’s 31 local authorities. But independent of them, though, they would have a special relationship which would give them access to lands while planning permission times would also be reduced, he said. The project would also involve digital integration to ensure specialisation and economies of scale so there would be an overlap between them while they would be built on a break-even basis in that the rental income from them would cover all the costs associated with them, he said.†(ibid) The thinking behind the proposal is political rather than economic; its focus is on State intervention, bearing in mind the huge discrepancy between the prices charged by private developers to local authorities and the costs incurred by approved housing bodies. It would be more political again if there was a mechanism like Social Partnership, through which public support could be mobilised. The term political economy has been misapplied in the past to mean projects involving co-operation between political scientists and economists. That misses the point completely. Using a political economy approach means identifying a need, and organising resources to meet that need. It is about imposing political solutions on the economy while recognising realities and upholding the concept of the mixed economy. On the key issues of Housing and Health at least, there is little evidence of political economy in Budget 2023. Yet many of the tax and expenditure changes and the strategy for protecting the public finances rely on political as well as technocratic thinking. Before focussing on the details, it will be instructive to draw on one of the official documents accompanying the Budget—Economic and Fiscal Outlet. Competent Crisis Management The record of the present Government and its predecessor can be summed up as dramatic failure in addressing the structural issues in Housing and Health, and sometimes impressive success in coping with short term crises. The failures are what is driving support for Sinn Fein and causing a section of the workforce to contemplate emigration, although latterly the Government has started to make small inroads into public housing. The successes, on the other hand, should not be lost sight of. In addition to lingering wounds from the 2008 Crash—a recessionary event without international precedent until the Greek collapse of a few years later—the Irish State has had to contend with three major crises in the recent past: Brexit, the Pandemic, and the current onset of inflation alongside rising interest rates. Counting Budget 2023, the last four Budgets have been concentrated on emergency measures. Yet the net outcome through these years has been a minimum of economic damage largely achieved through Government intervention. The following statement from Economic and Fiscal Outlook cannot be denied. “Available evidence supports the conclusion that the Irish economy weathered the pandemic very well. The phasing-out of temporary budgetary supports during the spring of this year, for instance, did not result in any negative fall-out in the labour market—employment in the second quarter reached its highest level ever, while the unemployment rate fell to just over 4 per cent over the summer, an extraordinary rebound in such a short timeframe. Data also confirm no major uptick in the rate of corporate insolvency while, importantly, the domestic banking system emerged relatively unscathed from the pandemic. Overall, therefore, the macro-data suggest little evidence of any permanent (‘scarring’) damage to the productive capacity of the economy, with domestic economic activity in the second quarter of this year nearly 10 per cent higher than its level immediately before the pandemic†(Page 1). For many years, even during the false boom of the 2000s, the expansion of the workforce beyond two million remained an elusive objective, yet recent figures show it now stands at just over 2.55 million. Neither is the increase due exclusively to activity in the multi-national traded sector—which accounts for less than twenty per cent of employment (approximately 400,000 workers). Right across its different sectors, the economy of the Republic has rebounded well from the lockdowns because of sound political intervention. Energy Crisis Regarding the current cost of living crisis, however, the authors of Economic and Fiscal Outlook dispense with objective analysis, preferring to engage in war propaganda: “The weaponization of Russian natural gas supplies has triggered an exceptionally large energy price shock and undermined global economic prospects†(Page 1). As well as misrepresenting Russia’s actions, this distorts the underlying causes of the energy crisis. It was the West that chose to use economic Sanctions as a weapon of war. Having attempted to wreck the Russian economy, supporters of NATO (among whom the present Government must be numbered) are in no position to complain about Putin returning in kind what NATO initiated. The European energy crisis predates Russia’s invasion of Ukraine. In Budget 2022 a universal payment of €200 was authorised to offset increases in energy prices. Among the causes were an effect of the quantitative easing that Western Central Banks have supported since 2010, and global supply chain bottlenecks arising from the Pandemic, but incompetent efforts to reduce reliance on fossil fuels like oil and gas were also a factor. Underlying these problems is the manifest fraud represented by the liberalisation of energy markets introduced in the US, Britain and the European Union from the nineties onwards. In areas like air travel there have been real gains as a result of liberalisation, but not so in energy. The creation of pseudo markets for electricity and gas has worked to the advantage of the supply side of these industries, merely adding higher prices and unnecessary complexity to the lot of residential consumers. In Ireland a number of the smaller companies trading in energy without generating it have already left the market (Panda, Iberdrola, Glowpower and Bright Energy), and more such developments can be expected. We would be better off at this stage if the Electricity Supply Board (ESB) had been allowed to continue as the monopoly supplier; it was a public company with an effective internal culture, and a reputation for reliability in Ireland and abroad through its involvements with developing countries. The ESB was one of the few lasting successes of Treatyite Ireland. Headed for Recession? One of the questions exercising economists at the Department of Finance is whether the economy will tip over into recession in 2023. This will affect the Budget’s arithmetic and the authors of Economic and Fiscal Outlook are betting that the resilience of the traded sector will be enough to maintain a small rate of growth. Because of statistical difficulties in estimating the size of the economy, and hence of its rate of growth, a new metric, Modified Domestic Demand (MDD), is increasingly being cited. The MDD estimate for next year of 1.2 per cent is a significant drop from the figure for this year, 7.7 per cent. The factors identified as causing this drop are: higher interest rates which are expected to stay near a rate of 3 or 4 per cent over the longer-term (the current ECB rate is 1.5 per cent), inflation which is estimated to run at 7.1 per cent next year, deteriorating sentiment and the changing geopolitical environment. A cold winter in Continental Europe may upset these calculations and be the catalyst of an Irish recession. Threats to the Public Finances Apart from the high level of the National Debt inherited from the years following 2008, the Government finances are in relatively good order. For this year the difference between what the Government is spending and its income is estimated to be a surplus of €1 billion; for next year the same metric is expected to be a surplus of €6.2 billion. If the windfall corporate tax receipts are stripped out, these become deficits (€8 billion for this year and €3.8 billion for next year) but they are relatively small deficits, well within Euro Zone guidelines. By the end of 2023 the National Debt is expected to stand at €224 billion. Before the Pandemic it was €204 billion. The difference of €20 billion is the cost of protecting the economy during the lockdowns, a price worth paying in that the post-Pandemic rebound has been impressive. On the negative side, according to the Economic and Fiscal Outlook, facing into the future, the public finances are vulnerable on a number of fronts (p. 6). Firstly, rising interest rates will add to the interest repayments on the National Debt. These increases reflect what is almost certainly a permanent structural shift. Secondly, the large amounts of corporate tax currently pouring into the national accounts will decline at some stage. The health of the public finances is to a certain extent dependent on an unreliable revenue stream. Thirdly, by the end of this decade, changes in the population structure (the ageing population) will necessitate an additional €8 billion in public expenditure each year simply to maintain existing levels of service. Finally, the need to finance the transition to an eco-friendly economy will involve significant public outlays as well as lower public receipts in the years ahead. The Budget Measures The additional tranche of State funding that will flow into the economy through the remainder of this year and all of 2023—called the Budgetary package—amounts to €11 billion, a massive sum comprising two parts. The first part, €6.9 billion, among a wide range of improvements, will fund an extension of the income tax bands, the agreed pay increase for the public service, increases in the old age pension and social welfare payments, the extension of free GP care to six- and seven-year-olds, a trebling of the hourly subsidy under the National Childcare Scheme which is expected to reduce the cost to parents by approximately 25 per cent, free school books for all primary school children and much else. These increases are permanent additions to public expenditure. The second part, €4.1 billion, will cover once-off payments designed to mitigate the cost of living and other transient challenges. The list here includes: the Temporary Business Support Scheme (max. €10,000 per month), a household energy credit (€600 per household for the winter), a double-week cost of living payment plus the Christmas bonus for social welfare recipients, a Ukrainian Crisis Enterprise Scheme, and a €90 million fund for tourism and the arts to help support the Covid recovery. All of these measures are welcome and seem to be well thought through, politically as well as technocratically. Concrete Blocks Levy A Budgetary proposal to impose a levy on concrete blocks has generated controversy. When the Budget was announced in the Dail on September 27th, Finance Minister Pascal Donohoe indicated that a 10 per cent tax would be levied on certain construction products to offset the cost of re-building homes affected by the Mica scandal (houses built using below standard blocks containing mica began to crumble and now need to be completely re-constructed). The cost to the State of the reconstruction is estimated to be €2.7 billion. The levy was to be imposed next April and was estimated to raise €80 million annually. Following pressure from the construction industry, and from some public representatives concerned that the levy would simply be added to the cost of housing, the proposal has been modified. The rate has been reduced to 5 per cent which will bring in €32 million, and be deferred to September 2023. Responsibility for the scandal rests with construction industry, which lobbied for a relaxation of the regulations on concrete blocks—and with the Government who acceded to that request. Following the climbdown, there is frustration that the construction industry has been treated leniently and that the cost of the scandal will be borne by the taxpayer and home buyers. Windfall Corporate Tax Revenue The continuing bonanza of corporate tax receipts pose an obvious challenge to the public finances as referred to above. The windfall may eventually level out or dry up completely, creating a major hole in the Government’s balance sheet. Department of Finance officials estimate that the ultimate impact of the OECD’s efforts to impose a global norm on the taxation of corporate profits, the Base Erosion and Profit Shifting (BEPS) scheme, on the public finances “is that €2 billion could be lost relative to baseline†(Economic and Fiscal Outlook, p. 29). They envisage that the reform will not be implemented until 2024. As a defence against possible loss in this revenue stream, the Government is transferring €2 billion to a National Reserve Fund this year, with €4 billion being transferred next year. It is also worth noting that the multi-national companies that are mainly responsible for the windfall phenomenon tend to operate in industries that are less vulnerable to international recessionary pressures—pharmaceutical (e.g., Viagra), med-tech, and information and communications technology. That a sizeable portion of the Budgetary package is earmarked as one-off expenditure is another indication that some precautions have been taken against a future collapse in corporate tax revenue. * The technocratic approach favoured by many economists at the Department of Finance is clearly unequal to the tasks of health care reform and public housing provision. These areas require co-ordinated intervention along the lines of the Leddin proposal. Fear of Sinn Fein’s support, as demonstrated in opinion polls, has been driving the Coalition parties towards more interventionist policies. Theoretically, there is no reason why that process cannot be pushed further. There is no reason why Fianna Fail, the Greens, and even Fine Gael, cannot themselves lead a more pronounced shift away from economics towards political economy. Private sector bodies like the Construction Industry Federation have been using their lobbying power to rip off the State for decades, and public anger against them has grown—as can be seen in the controversy over the Concrete Block Levy. Adopting measures that bring part of the construction industry under State control is one sure way in which a cycle of wasteful public expenditure can be broken. CONTENTS Budget 2023—Technology And Politics! Editorial National Questions In The British And Ukrainian States. Editorial The Reluctant Annexationist. Pat Walsh Readers' Letters: Julian Assange. Pat Muldowney Dail Courts In The North. Sean Owens Es Ahora. Julianne Herlihy (Sean O'Faolain And Canon Formation, Part 8) Partition Problems. Wilson John Haire. Review of Birth Of The Borderby Cormac Moore The O'Connor Column: An Aspect Of Ukrainian Nationalism The Brian Murphy osb Archive. No. 2, Sean McGarry—Outline of his Life , Part 2 Democracy And The Bomb. Brendan Clifford New Book On The 1921 Treaty Delegation. Cathal Brugha (Treaty Descendants' Group Biteback: Illusions, Fancies And Hard Fact. Unpublished Letter to 'Irish Post', Donal Kennedy Does It Stack Up? Michael Stack (USA War In Ukraine; China) Ukraine: While Workers Defend The Country, Parliament Turns Against Them. Irish Trade Union Congress Labour Comment, edited by Pat Maloney: The Irish Bulletin: Frank Gallagher (1930) Eamon de Valera Organised Labour: Public Sector; Landmark Outcome; Organise, Organise! |