Thursday, February 26, 2009

Tanaiste Coughlan Has Something Important To Say

I listened in gobsmacked amazement to Mary Coughlan's interview with Cathal MacCoille on the Morning Ireland radio show on 25 February. In an interview lasting 16 and a half minutes, Coughlan told MacCoille, on sixteen occasions, that 'it is very important to say' something and then went on to utter some utterly inarticulate, facile piece of nonsense. She also told him, on two occasions, that she was working 'stridently' on some issue or other. She sure makes a lot of meaningless noise alright.

If it were not so serious it would be funny. But this woman, who can hardly string two meaningful sentences together, is our Deputy Prime Minister and the Minister for Enterprise, Trade and Employment. No wonder we are in the state we are in.

Wednesday, February 04, 2009

Economic Consequences of Pension Tax

This is a tax, not a levy

I am disappointed, but not surprised, at the uncritical acceptance by almost all media and most commentators of the Government "spin" in relation to the so-called pension levy, which is, in fact, an additional tax on public sector workers. This failure of analysis has led to widespread serious misinterpretation of the benefits - and underestimation of the damage - that the tax will impose on the economy.
This is a tax increasing measure dressed up as an expenditure reduction measure and, while it will have the effect of reducing the net cost of the public sector payroll to the government, it will not have the same effect on the wider economy for several reasons.

Payroll costs not reduced

Payroll costs, and therefore government expenditure on payroll, have not been reduced, so let us dispense with that pretence. After March, the salary of a public servant will be the same as it was before March. That is an objective fact. There are only three ways to cut payroll costs: cut numbers, cut pay rates or cut allowances and overtime; none has been done to any effect.

No real government savings

Private individuals (forget that they are public sector workers for the moment) will pay the tax, so the government, as such, has not created a new source of income from, say, innovation, efficiency improvements, creation of intellectual capital, development of new services, etc. So, overall, the government has not generated any savings or income that it can pass on to the consumer or to industry

Transfer pricing

Many (if not all) public sector organisations engage in some form of transfer pricing, whereby they provide services to other public and private sector organisations. These transfer pricing mechanisms usually consist of charges for direct payroll and non-payroll costs; employers' PRSI and pension costs, and administrative overheads. Since payroll, PRSI or pension costs have not reduced, there will be no savings between institutions.

This is fine when transfer pricing stays within the public sector, where it is just churn, however inefficient. However, utilities and local authorities, in particular, pass on significant costs to the
private sector. Examples of these services include the provision of ESB supply and services; connection of sewerage, water and other services for developers; public transportation costs; inspection and certification services, and commercial rates. Since the costs of these services include payroll-related costs, which have not reduced, and there are no balancing savings to put directly against them, the costs of the services to the private sector will not decrease because of this tax.

Reduction in personal spending will seriously affect economy

This is a very significant new tax imposition on one section of the community. Therefore, public servants will, naturally, have to look at their own spending and reduce it drastically. Add in new education fees; pay freezes; property taxes; health insurance costs, and the ill-considered VAT increase, and it is not inconceivable that public sector workers will suffer a reduction of some 20% to 30%, or more, in disposable (cash) income over the next two to three years. This will have a catastrophic effect on economic activity in the state and will lead to a deflationary nosedive, perhaps one of the worst ever seen in the history of the state.

No provision for future pension liabilities

The tax, ostensibly related to future pension entitlements, will not be put to that purpose, but will be used instead to relieve the current economic and fiscal situation. The lie and devious sleight-of-hand is clearly laid bare; despite this, it appears to be too obscure for many commentators to see.

Predictions for the future

The consequences of the Government's actions are startling and demonstrate an ineptitude and lack of foresight that is hard to fathom. Because of their actions, I predict that some or all of the
following will occur:

In the Public Sector

  1. Collapse of morale leading to reduced productivity; stifling of innovation and increased absences.
  2. Collapse of partnership leading to overall loss of goodwill; far more workplace disputes; local industrial unrest; resistance to change; lack of flexibility; withdrawal from all non-negotiated local arrangements; legalistic interpretation of existing agreements, and lack of cooperation with management.
  3. Disruption to services caused by direct action and industrial unrest; works to rule or contract; refusals to fill in or substitute for absent front-line workers; creation of backlogs that will not be dealt with except by prescribed procedures; overtime bans and refusals to work, even when overtime is available and clearly necessary.
While the above consequences might seem to be discreditable, it is simply not realistic to cut someone's pay so deeply - and so ostensibly inequitably - and expect them to perform to the same standard as they did before. This is simply human nature in evidence.

In the Personal Private Sector

As the public sector represents a sizeable portion of the workforce and, therefore, of personal spenders, the increased taxes will have several consequences that can be directly attributed to their reining in of their spending. These will include:

  1. A massive further collapse in consumer confidence that will now spread like a virus to those in so-called secure public sector employment (although many were already feeling the pinch anyway, especially the large number on short-term contracts, renewable from year to year).
  2. Huge reduction in car sales, with a knock-on effect on jobs in the motor industry, and leading to continuing catastrophic declines (already seen) in VAT and VRT.
  3. Immediate deferral or cancellation of home improvement and maintenance works (e.g. home insulation, energy saving, environmental initiatives – all pet projects of the Green Party), which will affect the smallest builder in the country, with consequent impacts on jobs. There will not be a trowel scraped, a brush dipped, a nail hammered or a brick laid by the autumn.
  4. Virtual standstill in domestic property transactions, leading to an almost complete collapse in stamp duty, and knock-on effects on the legal profession; auctioneers and estate agents; building contractors; architects; surveyors, etc.
  5. Huge defaults on mortgage repayments for rental properties, as owners fail to let them and cannot afford to keep and maintain them, leading to a further worsening of bank positions and the destruction of the housing market for the next five to seven years.
  6. Dramatic reduction in discretionary spending on meals, holidays, alcohol and entertainment, leading to widespread closures and job losses in the hotel, tourism and entertainment sectors.
  7. For the first time, perhaps, in the history of the state, the emergence of large numbers of personal bankruptcies, as people fail to meet their debts and liabilities.
  8. Continuing queues heading north to shop in the cheaper Sterling area, leading to further closures and job losses in the retail sector in the Republic. The border towns of the Republic will return to being the "ghost towns" they were in the last recession.
In the Wider Economy

  1. A multiplier effect as cash and confidence evaporate from the economy, spreading from private sector worker to public sector worker, and from there back to those few workers left in the private sector, creating a massive spiral of deflation and mass unemployment.
  2. A massive reduction in PAYE and PRSI paid into the exchequer as unemployment grows because of lack of demand and consumer spending.
  3. A consequent increase in social welfare payments to the unemployed.
  4. A return to mass emigration, even to economies with similar problems, due to the plunge in confidence created by this government.
  5. A huge increase in the black economy as people return to cash dealing, with even further losses of VAT, PAYE and PRSI remissions to the exchequer.
  6. On top of losses already made on personal pensions, which will not be recovered, there will be a reduction in personal pension contributions for the next decade. This will create an even greater ticking demographic time bomb, for which there is no Pension Reserve Fund available (having already been given to the profligate banks that got us into this mess in the first place) to defuse it.
  7. A complete collapse of inward investment, and further expatriation and closures of what are left of existing multi-national corporations, as the international community loses confidence in the Irish economy and in the government.
  8. Continuing reductions in Ireland's international credit rating until we become, after years of so-called prosperity, an economic basket case once again.
  9. External intervention in Ireland's economy by the World Bank or the International Monetary Fund and the removal from us of all control over our economic affairs.
In Politics

With the breaking of the Social Contract by the government between it and the citizens, and of the employment contract between employer and employees, anger will rise swiftly in the public sector. Public sector anger will mix with further anger, despair and despondency in the private sector, creating a dangerous cocktail of social and industrial unrest; loss of confidence; inter-class and intra-class tensions; public versus private sector antagonism, and consequent searching for blame and scapegoats. The consequences will include:

  1. The current government will not return after the summer recess, at the latest, and an election will be called, leading to further instability.
  2. Cowen, already a dead man walking, will be removed as Taoiseach and leader of Fianna Fail.
  3. Lenihan will have a very short tenure as Minister for Finance.
  4. Coughlan, ineffectual in the extreme, and clearly out of her depth in any role she holds, will disappear in ignominy from government.
  5. Harney, if she does not go voluntarily, will not be returned to the Dail.
  6. The Greens and Fianna Fail will be decimated in the national, local and European elections.
  7. There will be a return to short-term governments and unstable coalitions, with further destabilising effects on the Irish economy.
  8. The Lisbon treaty referendum will be defeated for a second time, creating more trouble for us in Europe.
Ship of state is foundering

These are black days for Ireland, brought about by a government that rode the waves of prosperity without chart or compass, ignorant of, or unwilling to prepare for, the dangers of the rocky waters ahead. Sadly, when we need real leadership, we have an inept, inexperienced,narrow-visioned and ideologically misguided crew manning the ship of state, and a weak and unconvincing captain at the helm.

While the private sector is often called the "engine of the economy", the public sector is the auxiliary power, on which we hope to be able to rely in times of crisis (for example, in dealing with the collapse, nationalisation and re-capitalisation of the banks; for being a steady hand, conservative, middle class and reliable; for responding to diseases such as foot and mouth, and CJD; for putting out fires and treating the sick; for creating a sense of continuity and social stability in uncertain times).

Having lost his main engines in stormy waters, Captain Cowen, exhausted, panicked, overwhelmed, and indecisive, has just cut off the auxiliary power in a vain attempt to save fuel. A massive, catastrophic and devastating crash upon the rocks of economic ruin is the inevitable consequence of this foolhardy action.

Will it be long before the first cries of "abandon ship" echo through the vessel and the frightened crew, finally coming face to face with their own shortcomings, don their lifejackets and race for the lifeboats?

Monday, February 02, 2009

Ill-considered Pension Levy Will Be Highly Iniquitous And Divisive

The proposed "pension levy" on public sector workers will be highly iniquitous and divisive; will visit inequality amongst them, and will impose different levels of effective taxation on workers on the same salaries in the same employment. These will arise from several aspects.

1. Years of service

It appears that the pension levy will be based on current salary and that it will be based on an assumption of a full public sector career and consequent pension entitlement. However, many staff, especially professional staff and those who have entered the public service after some years in the private sector, will not actually serve the full pensionable service of about 40 years and, therefore, will not be entitled to a full pension. The inequality of taxation in such cases is easily demonstrated.

Let's assume that two employees each earn 50,000 and will retire on the same date. Assume that one, at retirement, will have full pensionable service of 40 years and the other will have 20 years service. For simplicity, let's assume a pension levy of 5% of pensionable salary, amounting to 2,500 per year for each employee. The pension payable is normally based on 1/80 of salary per year of service, subject to a maximum of 50% of salary. In this example, therefore, the employee with 40 years' service will receive a pension of 25,000, while the employee with 20 years' service will receive a pension of 12,500 per annum. However, from the date of its introduction, they will both have paid exactly the same levy amount for their pensions but the employee with the lesser service will receive only half the pension. This is clearly iniquitous and will lead to severe inequality in the treatment of similar employees.

Effectively, this creates, for every single public sector employee, an individualised taxation regime which will be highly divisive, with workers with longer service benefitting significantly over workers with less service in the same scheme. It also effectively represents a change to a scheme without consultation with the members involved and may be open to challenge in the courts.

It also demonstrates that this so-called levy is, in fact, a tax and not a levy, and so should be called such. If it is a pension levy, it should be based on pension income, not on current salary.

2. Coordinated and uncoordinated pensions

Some public sector staff have uncoordinated pensions, which means that their pension is based entirely on their salary at retirement. Other staff, including all staff who joined the public service after 1995, have coordinated pensions, which means, in simple terms, that their pension is based on their salary at retirement, but reduced to take account of the old age pension, which they also receive. Because of this, they pay a higher rate of PRSI (A1) than pre-1995 staff, who pay a lower rate (D1). Therefore, post-1995 workers will pay the same pension levy, plus a higher rate of PRSI, for the same or a lower pension than their pre-1995 colleagues.

However, this iniquity does not end there. Post-1995 salaries were adjusted in some cases to take account of the differential in A1 and D1 PRSI contributions. Therefore, post-1995 workers will pay the pension levy on a higher gross salary (usually about 5% higher, though netting to the same value after PRSI) than their pre-1995 colleagues. So if the levy lasted for seven years, say, an employee who joined after 1995, based on the above example, would pay approximately 875 Euros more than his colleague for the pension.

3. Taxation based on future projected earnings

As the pension levy is not a contribution from which an employee will derive any additional pensionable benefit, it can only be considered as a tax on future potential earnings, based on current salary. For a variety of reasons, an employee's salary might be less at retirement than it was previously; say, perhaps because of a reduction in overtime or allowances that might have been reckonable for pension purposes. So, therefore, the levy will have been paid at a salary level on which the projected pension will never be earned. This is surely unjust.

4. Preserved pensions

Many employees who left the public service may have decided to preserve their benefits when they left. This means that their pension will be paid when they reach retirement age based on their service when they left and on the current equivalent salary level. If an employee returns later on a higher salary than they had previously left on, the preserved part of their pension will be paid at the old salary and the later pension will be based on their current salary at retirement. The levy, however, does not take account of the value of the preserved pension, which is, once again, highly iniquitous.

5. A divisive individualised tax

This pension levy flies in the face of the very concept of personal pension provision as it offers no pensionable benefit for the “contribution”. It will create severe inequality for many employees. Employees with longer service will benefit far more, based on the same contribution levels, than those with shorter service; the levy pits public sector worker against private sector worker; it imposes current taxes on future potential earnings, and it individualises the taxation system for every single public sector worker, breaching the principle of equality in taxation. Could anything be more ill-conceived and more likely to increase division in society than this blunt taxation instrument?

So let’s dispense with the populist charade of calling this a "pension levy" to appease private sector workers; right wing economists; media commentators and employer representatives and call it what it is: a special taxation levy on one group of workers - those in the public sector.