Monday, January 26, 2009

Irish policy & rising jobs losses

750 job losses at First Active, over 2,800 jobs losses last week alone... we are in a meltdown mode by all possible means and the social partnership, the government and most of the opposition are clearly out of depth on what needs to be done.

I said 'most of the opposition' because there are pieces and bits of forward thinking still coming through in a handful of statements issued by FG and Labour. However, these do not, as of yet, represent a credible and effective platform for a policy response.

Here is a statement from
Fine Gael Enterprise Spokesman Leo Varadkar TD issued today:

"Fine Gael has called on the Government to waive PRSI payments in 2009 for companies taking on new employees, declare war on red tape, launch an immediate review of overpriced electricity and gas charges, and impose a freeze on local authority charges and Government levies. The Government must also scrap the damaging VAT hike in the Budget, and overhaul FÁS into a rapid reaction agency which can provide public works schemes for the unemployed.”

Good beginnings of a policy here, but take a deeper look:
  • Waiving PRSI payments in 2009 for companies taking on new employees is, in effect, a subsidy for jobs creation, not for jobs retention. On the margin, it is an incentive to create lower-end jobs, but it will do nothing to preserve thousands of financial services jobs;
  • Declaring war on red tape is simply sloganeering. Most of our red tape comes from Brussels and the Irish Government has no say on this. Instead, culling the army of quangoes that mushroomed in recent years and rebating the savings back to the taxpayers might help;
  • Reviewing energy prices - a good idea, but beware: it will spell an end to the Green Party agenda of subsidising wind and other alternatives via minimum price guarantees. I personally have no problem with this, though;
  • Freezing local charges and levies - at current levels - will do nothing more than provide an injection of a vitamins potion to a dying patient. We need a wholesale reform of the local authorities structure to lead in cutting - dramatically - these costs;
  • VAT increases must be scrapped, and in fact, a cut in the VAT rate should be implemented, but the main problem is in declining after-tax incomes, not in rising consumption expenditure;
  • Overhauling Fas into some sort of a lean, mean jobs-creation machine ignores the basic problem with this organisation - no state body can 'create' jobs. The best Fas can do is take money from the taxpayers and spend this money on token training programmes. The efficiency of such programmes to date has been €250K spent per job added. Even if Mr Varadkar manages to cut this by 2/3rds, it will still be more than €2.40 spent per €1 in average wages added. You might as well pay the unemployed that €1 in welfare and burn the remainder €1.40 in a fireplace. At the very least you'll get some heat - more than what you'll get out of 'overhauled' Fas. For a real solution to the Fas problem - see the second bullet point above.
This brings us to the issue of what should be done. The main problems, as I have pointed on numerous occasions, faced by our economy are:
  1. Public sector insolvency;
  2. Households' and companies' indebtedness; and
  3. Uncompetitive domestic economy dragging down exports growth with it.

All three require a small number of resolute measures.

Public Sector: cut the spending (capital and current) by ca 10-15% and use one half of that to plug the deficit hole, while the other half should be rebated to the households to pay down homeowners' and pensions' deficits;

Households' balancesheets: the above will address, in part, the issue of precautionary savings demand and repair household balancesheets. More, though will be required to restore demand for credit, so use banks recapitalisation scheme to raise equity in the banks and rebate this equity back to the households via a voucher-like scheme;

Companies balancesheets: Many of the domestic Irish companies struggling today are, frankly, insolvent and incapable of operating as an ongoing concern in the environment where growth is slower than 4% per annum. These must be allowed to fail. As there is no better mechanism to sort the sick from the healthy than the market, the State should resist the desire to 'repair' companies' balancesheets. Instead, the state should enact emergency cuts in local authorities budgets and cut local authorities charges and tax cuts to consumers to stimulate demand (see below). One policy on business side to be enacted should involve a PRSI tax cut and the introduction of the full credit for private health insurance purchases against the health levy contributions.

Local Authorities & Quangoes/Regulatory Authorities (RA): Within 4 months, the Government should produce the first draft of a local authorities reforms package cutting the number of local authorities down to 4 - GDA, North East & Midlands, West and South. The savings to be achieved in this reform should be set at a minimum 50% of the combined budgets of the current authorities being pulled. A comprehensive review of the Quangoes and Regulators must be carried out by a non-political independent panel working in a transparent, open manner, reporting by April 1 2009. The objective should be to:
  • completely and effectively separate regulatory authorities from their respective sectors and the Government;
  • introduce effective RAs oversight by the Dail;
  • reduce the number of quangoes by at least 75% and the number of RAs by at least 30%, with corresponding reductions in staff and budgets; and so on.

Domestic economy reforms:

(1) Tax policies:
  • cut VAT back to 17% across the board,
  • cut CGT to 15%,
  • replace stamp duty with a land-value tax (or a variant of such) phased along some amortization schedule for stamp duty paid by the existent homeowners;
(2) Structural reforms
  • dissolve the Social Partnership;
  • privatise - via a public voucher system for disbursement of state shares - all semi-state enterprises (those state enterprises that hold more than 50% market share in their respective sectors - e.g ESB, CIE, DAA, VHI, etc) must be broken up in the process of privatisation;
  • beef-up the Competition Authority with direct enforcement and prosecution powers;
  • reform CBFSAI to detach it completely from the Department of Finance.
This is, by any measure, only a partial list of priorities. In fact, if anyone wants to add to the list, feel free to email your suggestions to me.

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