The government doesn’t have the cash, so why are we talking pay

The government is trying to hold the line on public sector pay. It is currently politically convenient for Fianna Fáil to support the government on opposing full restoration of public sector pay in a shorter timeframe than the terms of the Lansdowne and Haddington Road agreements allow. This political convenience may change, of course.

Behind the scenes, and out of the glare of the media, things are lining up for a series of talks between the government and some unions.

The government doesn’t have the cash to meet union demands. To restore public sector pay to pre-bust levels would eat the entirety of 2017’s - and a bit of 2018’s - fiscal space. The fiscal space is a forecast. You figure out the likely fiscal space by extrapolating annual government revenue and expenditure figures into the future and checking what’s left over for additional tax cuts and spending increases.

Forecasts are reliant on the assumptions they make. Many of the assumptions underpinning Budget 2017 are already looking ropey. For example, it assumes an exchange rate between the euro and sterling of 0.85. That’s now drifting towards 0.90. In the event of a hard Brexit, that goes higher, not lower, making the forecasts more and more incorrect.

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When losers from globalisation outnumber the winners, expect changes

We live in a world characterised by the wholesale rejection of elites. Exercising the power given them as citizens, voters are striking back at the systems which they see as rewarding insiders and punishing outsiders.

The median is the object in the exact middle of a distribution. For example, in the list of numbers from 1 to 9, the median is 5. The median is a better measure than the average for our purposes.

The median-income household across the developed world is not without resources, nor is it without education. The median household is increasingly without opportunity, or even the hope of opportunity for its children. The median household sees crumbling infrastructure, outsourced jobs, stagnant wages, and the evaporation of what used to be called the middle class.

The median household understands just how damaged its prospects have been by 40 years of policies aimed at increasing the openness of trade, creating winners at both ends of the income distribution in every country that tries it, and losers in the middle.

Let’s define globalisation as that moment in time when the rate of increase of trade is greater than the rate of increase of economic output per person. Imagine there are only two countries, called ‘home’ and ‘foreign’. Increasing trade makes the people who own the production facilities that make the things being traded much better off – they are the winners – but it also allows them to outsource their operations to cheaper countries, making workers in the ‘home’ country poorer and the workers in the ‘foreign’ country richer. The ‘home’ country workers are the losers, the ‘foreign’ country workers are the winners.

When the uncompensated losers from globalisation outnumber the winners, and those people have a vote, expect to see some changes made. The ‘losers from globalisation’ debate is far from settled but as Harvard’s Dani Rodrik and Oxford’s Kevin O’Rourke have repeatedly shown, the losers from globalisation have never been properly compensated. If it is true that the losers are almost never compensated, it is also true that these losses are somehow compounding. My losses become my children’s losses.

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Profile Mark Carney: The Guv’nor

Factfile

Age: 51

Appearance: urbane, besuited and calm

Newsworthiness: the British media turns on the only steady hand in the post-Brexit confusion

Oh, the irony. After the Brexit result of June 23, as the leadership of both the Conservative and Labour parties imploded, the person who stepped up to save the system was a Canadian. An immigrant! Taking a British job! In fact, the first immigrant to hold the governorship of the Bank of England in its 322-year history. As the system flailed and sterling’s value collapsed, Mark Carney calmly allocated £250 billion to steady the markets, and promised more should it be required.

In a series of speeches over the next ten days, Carney laid out the fundamental issues with respect to Brexit — uncertainty, economic damage, the loss of Britain’s position as a global power — and provided leadership when none was forthcoming from a political class which, to its eternal shame, did not do its job. He said: “At times of great uncertainty, households, businesses and investors ask basic economic questions. Will inflation remain under control? Will the financial system do its job? Will I keep mine?”

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The fatal flaw of the populist approach

The world is awash with populists. From Ireland’s independents to President Duterte of the Philippines, from Germany’s anti-immigrant AfD party to Norbert Hofer of the far-right Freedom Party of Austria, from Ukip and Jeremy Corbyn in Britain to Donald Trump in the US, populists are on the rise. And we’re not talking just a few random demagogues here, though personality does go a long way. (Trump-related Pulp Fiction pun intended, by the way.)

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Anti-Social Partnership: Ireland's fractious industrial relationship

We have entered the most fractious period in industrial relations in decades. In the private sector, as unemployment falls to more reasonable levels, and sales of all kinds of goods and services pick up, employees are having conversations about pay increases again, fuelled by the rising cost of living, particularly for younger workers who are renting and saving for a deposit for a home, or raising children, or both.

These conversations about wage increases are happening mostly at the individual level, because union density in the private sector is at a historic low. Nonetheless, employers should grant many of these wage increases if the profitability of their business allows it.

Unlike many economists, I don’t see wage growth as a bad thing or something that erodes ‘competitiveness’. I see wage growth as contributing first to increased living standards and increased demand for goods and services — most people will be increasing their consumption; and second, to helping pay down debt. A nice little bump in inflation would be good for highly indebted households as a by-product.

In the public sector, the situation is quite different. The employer’s ‘profitability’ is not assured, as the government has yet to balance its books, let alone generate a surplus of revenue (your taxes) over expenditure (on hospitals, the police force, universities, pensions, etc). It is not clear the state can afford increases in public sector pay when services and capital expenditure are so desperately needed in housing, health and education.

I say all of this as a public sector worker with three children. The state’s finances are too exposed to any kind of macroeconomic shock, either related to Brexit, in Europe, or further afield, to allow any increase in government expenditure beyond the minimal increases required by the minority government to keep the show on the road.

Importantly, the services the state as an employer provides have been damaged by years of austerity. Faced with a choice of (a) more doctors or (b) more money for existing doctors, most people who are not doctors would choose option (a). That is what Minister for Public Expenditure and Reform Paschal Donohoe chose in Budget 2017 as well, increasing funding for teachers, gardaí and other public sector workers.

Public sector pay was reduced as an emergency measure to help stabilise the public finances. Other terms and conditions like the increment structure, security of tenure and very generous pension entitlements were not changed for those already in the system.

The pay bill was managed through wage repression and reductions in the size of the workforce from around 330,000 in 2008 to around 300,000 today. It is not an exaggeration to say public sector workers helped secure the country’s stability at a crucial moment in its history.

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The pieces of legislation enacted to reduce public sector pay and increase productivity are called the Financial Emergency Measures in the Public Interest Acts (Fempi).

I suspect many of the commentators having a go at Donohoe and his advisers haven’t actually read the Fempi legislation. The Acts are pieces of emergency legislation. The emergency is not supposed to last forever. Each piece of legislation requires the minister of the day to review it each year and provide a written explanation for why it has to continue for another year to the Dáil. Donohoe did so this year.

Each cut in public sector pay, and each increase in workload as a result of productivity measures, has happened with the explicit consent of public sector unions. They obviously weren’t happy about it, but they and their members agreed to be bound by the terms of a series of agreements on pay and conditions.

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Agreements between public sector unions and the government helped smooth this transition for the public sector pay bill, and the measures were as progressive as possible, given the obvious over all regressive nature of the pay cuts. The Haddington Road Agreement, for example, provided for salary reductions for public servants earning more than €65,000, and for pauses or freezes in the payment of increments for all public servants. Similarly the Lansdowne Road Agreement allowed for pay increases for those earning under €65,000 (and for all teachers) and reductions in the Pension-Related Deduction for all public servants. The new Public Sector Pay Commission is charged with advising the government on how to unwind Fempi entirely without breaking the bank. The fiscal space this year was about €1.3 billion in the end. To increase public sector pay to 2008 levels for everyone would cost about that much again.

Simply put, the bill for restoration is too large for one year, so the question facing the Public Sector Pay Commission, set up to advise the minister, is what the time path to pay restoration would look like, hopefully melded with a reform programme and a path for future pay increases as well.

It’s important to note that right now, we aren’t talking about pay increases. We are talking about pay restoration. Fempi states explicitly that every public sector worker is entitled to pay restoration once the emergency has passed, which it has. The only question really is: when will these restorations come, and what conditions will be attached to their restoration?

Unions have moved sequentially in recent weeks to increase pressure on the minority government to accelerate the restoration. As I argued a few weeks ago in this column, semi-state workers in Dublin Bus, through their unions, will get to pass their pay increases directly onto their customers, as will private sector workers in Luas.

Gardaí and primary and secondary teachers and university lecturers are another matter.

Their pay restoration, by definition, comes at the expense of service expansion somewhere else.

We need to explicitly acknowledge this simple fact: the pot of money is finite, and the national budget still in deficit, if only just. In the situation we find ourselves in, in 2016, increasing the public sector pay bill by restoring pay taken away by Fempi means either increasing public debt, increasing taxes, or decreasing services.

Michael Noonan indicated during his budget speech that the only direction public debt is going is down. Taxes are not going up. The only people to get whacked with higher taxes in Budget 2017 were the smokers.

Those who enjoy sugar and particularly sugary drinks are up next. Everyone else’s taxes either stayed the same or fell.

Services will take the hit, but it’s more accurate to say increases in services will take the hit.

It’s easy to caricature the outcome as ‘fewer extra doctors in favour of more money for existing doctors’, but in reality we’ll see less of a planned increase in service provision to pay for public sector wages.

This is important: the public won’t see what’s lost, because the service increase was never there to begin with. The would-be service user will never know what they’ve been deprived of.

Economic activity means there will be a bit more in the kitty next year, but we can’t really expect over a billion of an increase in one category of spending when the entire allocated fiscal space for current spending for 2018 is only €790 million.

I would like the public sector unions currently throwing shapes in the media to be asked, repeatedly, what services would they like to see reduced (or not increased) to fund their pay restoration. None of them have thought about this, or if they have, the argument is that the money will be found from somewhere, which is not an argument but an article of faith.

The only people who have to think about this exact question are the well-paid mandarins of Merrion Street and their boss Paschal Donohoe. In fairness, those arguing to break an agreement early that they signed up to will have to do the running on what service increases they feel should be lost to fund it.

This strikes at the heart of why we have entered the most fractious period in industrial relations in decades: the coalition government of Fine Gael, the Independent Alliance, Katherine Zappone and Fianna Fáil (let’s have no talk that they aren’t in government) does not want to annoy anyone.

If the government allows one set of public sector workers to benefit at the cost of others, then that is unjust. But to fund increases in teachers’, doctors’ and lecturers’ pay when we have a homeless crisis is a worse injustice.

Budget 2017: What's in it for us?

Budgets are all about context. They can’t be understood without a sense of the political situation the government of the day finds itself in, or without a good sense of the state of the international economy. Be assured the government has a good sense of both, if not a sure sense of how to deal with either.

Ministers are far from the disconnected, remote beings bombing around in the back of Mercs they are often caricatured as. It’s closer to the truth to say being a minister makes you hyper-connected. They hear many, many things. Everyone wants a word with them. Everyone has a request or three. Officials fill their heads with analysis of all kinds, and of course, they all read the papers to find out what people are saying about them.

The political situation means the government must solve a constrained optimisation problem, where the constraints are the availability of funds from taxation, the fiscal rules, the needs of three coalition parties, and the expectations of the public. The optimum those crafting the budget needed to reach is the stability required to rule, rather than the maximum welfare of citizens.

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Budget 2017: Will Noonan raid the sweet shop at last?

It’s not a fiscal space - it’s a sweetie space

Sweeties for all. The good times have returned, total domestic demand is forecast to grow by 3.5 per cent in 2017, and everyone seems to have forgotten that the country needs to to borrow to keep the lights on, that only three or four years ago we were in a troika bailout programme, and that the structure of our society has changed markedly since the early 2000s, when sweetie-giving became the order of the fiscal day.

Ireland is almost unique in the developed world in the way it does its fiscal planning. The process is: figure out roughly how much tax you’ll have by budget day, listen to lobbyists, float possible policies suggested by lobbyists through the media, and then do a big announcement in the Dáil, but only after handing the entire budget over to the media, thus making the Oireachtas completely redundant, except as an audience for your big speech and a rubberstamp to the Finance Bill a month or so later. No scrutiny beforehand is allowed.

This process is completely bonkers. It results in policy madness like decentralisation in the 2000s and the abolition of water rates in the late 1970s, and it has to be thrown in the deepest part of the sea, preferably after being set on fire for quite some time beforehand. It is the core of the process which has bankrupted our state three times since independence. It has got to go.

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A witty history of crisis in the Square Mile

Catastrophes need causality. We even call earthquakes acts of God. There’s something about us that needs to find the whys and the hows of the bad things that happen to us. This is common sense, as we’d like to avoid another catastrophe, if we can.

When it comes to financial catastrophes, it turns out we can’t avoid them, and we can’t quite figure out what causes them. Crash Bang Wallop is the latest in a series of books looking at the recent financial crisis through the lens of history. In this case, the subject under review is the history of the Square Mile of the City of London.

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Guess who’s paying for the pay increase?

Dublin Bus workers have secured a 36 per cent increase in the amount recommended by the Labour Court. The lesson? Striking works — if your job matters.

We have semi-state workers, already the third highest paid bus drivers in the EU, both before and after tax, getting an 11.25 per cent increase over three years. This is far in excess of private sector wage claims, and will result in increasing wage demands in the near future by both public and private sector employees.

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Households can give Dublin Bus no more

Tom Waits is always right. The large print giveth, and the small print taketh away. Let’s look at the small print of the Dublin Bus pay dispute by going through the company’s annual accounts from 2008 to 2015.

(You can learn a lot from annual accounts, including how they are presented. Every year since 2008, Dublin Bus has really, really wanted you to know that some of their bus drivers are women, for example. There are pictures of female bus drivers everywhere. But I digress.)

First, the large print: Dublin Bus workers are striking in search of higher wage increases than the 8.25 per cent offered to them over several years by Dublin Bus in previous pay talks. They want 15 per cent to 21 per cent wage increases over several years. The strikes are expected to replicate the recent Luas driver disputes, in that they seek maximum disruption for maximum negotiating leverage. This behaviour pisses off customers, of course, but that is the nature of strike actions everywhere, all the time.

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Why are we all taking a bath on our insurance?

Why are non-life insurance premiums rising so much faster than the cost of other services? Premiums have risen 60 per cent since autumn 2014, reducing the disposable incomes of many households in the state, at a time when rental costs have never been higher, and the cost of education and health services has risen markedly, too. The sheer scale of the price increases has provoked a public outcry. Oireachtas hearings are ongoing, and an investigation into the pricing behaviour of our insurance companies is now taking place.

But we don’t know why prices have risen so fast. The answer lies in how insurance companies make money, the structure of the Irish market, and regulation.

Naturally, it will be important to understand this pressing policy problem in the context of a bathtub.

A bathtub has three elements. A flow of water in, an amount of water in the tub, and a hole to let water out. An inflow, a stock of water and an outflow.

(We’re not getting into any Celtic Tiger jacuzzis and candles nonsense here folks. Let’s keep the metaphor simple).

You pay insurers to take the risk of crashing your car off you when you drive it. Insurance companies manage your individual risk by creating a pool of premium-payers. This is the inflow. When one person does crash, the pool reduces by the amount the insurance company pays out. That’s the outflow.

The ‘float’ insurance companies need to (A) make good on all their claims, (B) run their businesses, (C) satisfy regulatory requirements set by the Central Bank and (D) actually make money for their shareholders, is the stuff in the tub, the stock of water.

Premiums are calculated by actuaries, but sometimes in practice they are guided simply by rules of thumb. The ideal, actuarially-calculated risk-adjusted price of a premium can be much higher for a customer than the premium they actually pay. Insurance companies can get more customers if they charge lower premiums, and because having loads of small premiums makes the amount of water in the tub that bit bigger, the insurance company can make a lot of money doing this in a short space of time by charging a fee-for-service, but if too many of their customers need payouts, the company can become insolvent — meaning there’s no more water in the tub — very quickly indeed. With premiums not being risk-adjusted properly, the chances of taking bad risks is obviously higher too. So the insurance company, or the bathtub, both will run dry.

The long and the short of it? Premiums should have been higher in the past, but weren’t, because of poor business decisions by fee-hungry insurance companies trying to eat up market share which then went wallop.

A good indicator is to see how Irish transport insurance costs compare to those in the rest of the eurozone and to Britain. Irish transport insurance cost around 20 per cent less than in either the eurozone or Britain from 2012 to 2014, and now is about 20 per cent more expensive, three quarters of the way through 2016, compared to Britain and 30 per cent more expensive compared to the eurozone.

This has happened several times in Ireland. Each time the costs of the bailout are passed onto other insurance consumers and the taxpayer. Quinn Insurance cost us €1 billion. FBD made losses of €100 million. Setanta’s failure will cost someone, probably us, €90 million or so.

Each time one of these companies fails, a levy gets attached to new premiums, driving up the cost for each individual. The minimum ‘float’ of water in the tub is subject to changes by regulators, who since the 2007 crisis have demanded increased minimum levels to cover potential outflows as well as much stricter record-keeping and other compliance costs.

The need to keep more and more water in the tub, plus paying for the people within the business to deal with the regulators, plus taking on more lawyers and accountants to fight claims has forced the cost of doing business up.

Each time a new regulation comes in, the premium must rise to compensate for it. Payouts for claims have risen. Since February 2014 the Circuit Court has been able to award more damages at higher rates, meaning the outflow from the tub is higher.

Since the crisis, costs for accountancy have fallen 9 per cent as measured by the CSO’s producer price index. Legal costs have risen 6 per cent. We are feeling the effects of not introducing Alan Shatter’s legal services reform bill in its entirety. I am sure history will judge watering the Legal Services Reform Bill down as one of the largest own-goals of the troika period.

Each time a new, higher claim goes through the courts system, the insurer has to pay out more, both to the claimant and to our learned friends in the pin-striped suits.

Add to this the problem that many of the long-term investments large insurance firms make in the bond and equity markets are not delivering much of a return anymore thanks to the low growth, low inflation, low interest world we live in, and the only option left to them is to jack up prices.

What is interesting is how different the increase in transport insurance is from the increase in home or health insurance. Since 2015, health insurance costs are up around 6 per cent, house insurance costs are up around 11 per cent, and transport insurance costs are up 30 per cent. The sharp point of escalation in transport costs relative to the health or house insurance is July 2015. On a graph it looks like someone taking a sharp turn in a car. This tells you something very different is going on with transport insurance relative to the other two major non-life insurance categories. (Life insurance is effectively a separate business, so it’s not wise to consider it here.)

Looking at the books of the insurance companies for 2014 and 2015, none of them look to be hurting — their bathtubs are full.

Insurance companies in Ireland are in a strong position as, with fewer of them, there is less choice for the consumer. That little bit more market power, combined with increased regulatory and legal costs, and a return to prices they should have been charging were they not being so stupid in the past, means consumers can expect to pay more for their car insurance into the future.

Whether this small group of insurers is colluding to increase the prices we pay is a matter for those investigating it. The consequences for individual motorists are reduced disposable incomes, and increased risks of getting hit by uninsured people. The government will try very hard to stay as far away from this matter as it can. But it may not be possible.

Forget Apple – with investment funds, you ain’t seen nothing yet

Gabriel Fagan looks like the quintessential central bank economist. Grey-haired, serious, sober and well-informed. He’s the kind of guy you trust. You’d leave your money with him.

Fagan, the chief economist of the Irish Central Bank, appeared before the Oireachtas committee on budget oversight last week, and left parliamentarians’ jaws on tables when he mentioned a figure of €300 billion the Central Bank wasn’t quite sure about.

The bank is examining more than €300 billion in assets here owned by investment funds. What kinds of assets? Property.

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Apple: Is there a whole barrel of Apples?

Contrast the Irish government’s reaction to the Brexit announcement with its reaction to the ruling by the European Commission that Ireland helped Apple pay almost no tax on profits it made selling its devices and services across Europe.

The morning of the Brexit result, the Taoiseach appeared before the media with a plan, a set of actions drawn up by his officials, and a sense that the government had at least thought through some of its options with respect to this enormous problem.

The Irish reaction was far, far more professional than our cousins in Perfidious Albion, where the political system essentially imploded for a month. The Taoiseach was clear, concise, and it seemed like the civil servants – the people who actually do the doing when it comes to policymaking – had thought things through.

You might think there is a world of difference between the popular referendum to leave the European Union and a fairly abstract tax ruling, but you would be wrong.

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