Economics 16/08/2009: A tax too far?

Here is a nice one from the Sunday Papers. Sunday Times "In Gear" supplement is featuring tow different cars: a Devon Motorworks GTX, 8,354cc V10 650bhp super-car that goes 0-60 in 3.5 sec and costs £300K (pages 4-5) and Mazda MX-5 1,999cc 4-cylinders, 158bhp ordinary bloke/gal car, priced at estimated €37,000 pages 14-15. Guess why am I writing about them?

Well, Devon's in the UK road tax band M, which sets you back £405pa, or €470.06pa, Mazda is in Ireland's rod tax band E, which sets you back €630pa.

Assuming that

• a 'sensible' consumer would tend to purchase a car for about 7-12% of their income;
  
• hold it for 7-10 years;
• sell at the end of the holding period of 50% or 20% of the value, then
  

the following table shows just how close our road tax policy comes to highway robbery:
Yes, you are reading it right -

• a buyer of a small middle class car in Ireland will pay between 1.4 and 2.1 percent of their annual income per annum in road tax;
• a buyer of a large super car in the UK will pay between 0.14 and 0.315 percent of their income in annual road tax.

And I know what you are going to say - the UK is closer to meeting its Kyoto Protocol commitments than we are, and it has better roads than we do.

Where is our National Consumer Agency in all of this? Oh, well, busy counting Government payoffs for staying quiet on the rip-off culture of our public policies...

Economics 15/08/2009: Migrants in Ireland - a recent study

Here is a quote from the recently published paper on immigration to Ireland, Alan Barrett (ESRI) "EU Enlargement and Ireland’s Labour Market" IZA DP No. 4260, June 2009 that actually getting me going, folks (emphasis is mine):

"In order to get a sense of the educational profile of EU10 immigrants, we need to
draw on earlier research. Barrett and Duffy (2008) show the education levels of EU10
immigrants, along with those of other immigrants based on data from 2005. In Table
5, we present their figures.

The first point to be taken from the table is that Ireland’s immigrants, in general, are relatively highly educated. We know from Barrett et al (2006) that about 30 percent of the Irish labour force have third level qualifications. Hence, the proportion of immigrant with third level qualifications, at over 40 percent, points to a high-skilled inflow.

As regards immigrants from the EU10, although they have the lowest proportion of highly educated across the immigrants groups, they still compare favourably with the domestic labour force in terms of skill levels."

Now, there are several things going on in this statement. Here is the table Alan actually refers to:
Obviously, disregard the USA part - there are only 28 observations in the entire sample of American respondents in 2005 data set (couldn't find any Americans, folks?). But the rest is pretty much in line with what we do know... And here are the issues:

• 6.4% of the EU10 migrants report only a primary level or less - the highest number for all migrants. For all Irish residents, this figure was around 14% in 2008 and it was 16% in 2005. The fact that the EU10 citizens come from the countries with compulsory primary and secondary education helps, and the quality of their primary and secondary education should be pretty comparable to that of their Western European, American and Irish counterparts.
• 9.3% have lower secondary education and 37.8% have upper secondary education. Seems like EU10 workers are more educated. They are not - these percentages refer to the highest level of education achieved. So 53.5% of the EU10 residents in Ireland have attained, as their highest level of education only 'at or below higher secondary level'. This is more than any of the other migrant groups: 47.3% for UK, 25.7% EU13, 33.4% for Other and 39.2% for the entire migrant population. In other words, more EU10 migrants stopped their education at higher secondary level than any other group of migrants. For the overall Irish labour force this number was 65% - meaning only 35% of Irish resident labour force has moved on to reach higher educational levels.
• Of course, any education below a full third level degree means little in terms of skills - Alan should know this. For anyone without a third level degree, their skills are determined largely by the length of tenure and work-related training. I wrote about huge returns to tenure in Ireland, relative to education and this surely explains much of wages differentials for migrants. It is slightly surprising seeing a good economist, such as Alan, occasionally mixing up the two concepts. Here, of course, EU10 migrants lose, for they are (a) relative new comers (have not enough tenure to acquire requisite skills); and (b) might have greater language barriers to absorbing on the job training as efficiently as their UK, US and Irish counterparts. One must also add that Irish companies are not really as well advanced in formal and structured on-the-job training and that leaving work training to FAS (as many do) is a veritable disaster. All of this likely reduces actual skills of the lower (below college degree level) educated migrants.
  
• Now, consider those who actually finish their third level degree or progressed above it. EU10 = 19.2%, Irish labour force average = 16% (recall we are comparing 2005 figures here). A small differential, which is likely to be statistically significant only if the data is measured accurately (it is not - see below). But when it comes to comparing EU10 nationals to other migrants - well, they are not in the running, are they?

So Alan's conclusion that EU10 migrants are relatively well educated only holds water when compared against the native workers, but not against other migrants, and if we are to assume that data for the EU10 migrants is free of self-reporting biases and errors, and if their degrees are actually fully comparable to those in the rest of the world.

Here is a different look at the same data (augmented with the latest CSO stats):There are more fundamental difficulties in making these comparisons that really are not Alan's fault, but do distort analysis.

One simply cannot bunch those EU10 migrants who arrived before the Accession 2004 (many) and those who arrived after (even more). In econo-speak, there are cohort effects.

These cohort effects distort 2004-2005 data, because in those years, majority of EU10 citizens residing in Ireland were most likely the same residents who lived here before 2004. Few years back I published a paper on the topic and showed some evidence that the pre-2004 group - selected under meritocratic migration policies - was indeed of a better quality than those that followed them post-2004. Not surprisingly, given that back pre-2004 they had to prove that they can compete against Americans, Europeans, Asians and the rest. Post-2004, this requirement was removed - the EU10 states were simply encouraged by this Government to displace workers from elsewhere. Of course, such displacement took place in the sectors where skills are less important than brawn - construction, retail, hospitality. Hence, not surprisingly, many of post-2004 workers were elected (and elected themselves) into lower paying domestic economy jobs, for:
(a) the path of least resistance made them move into jobs available to them, and
(b) they actually might have had difficulty proving to productivity-focused MNCs and a handful of externally trading domestic firms that they have better skills than, say, Indian software engineers, American finance specialists and so on.

Third problem is in the data itself. Virtually every taxi driver in NY is a self-reported 'medical doctor', 'dentist', 'pharmacist', 'physics professor', 'engineer' or a 'lawyer'. And yet none work in their fields, despite the US operating an extremely meritocratic system of qualification examinations to confirm medical degrees, for example, or to pass your bar exams, has comprehensive degree recognition culture and requires no specific certification for many fields. This is the issue with self-reported data when it comes to educational attainment questions - it is often of extremely poor quality.

Workers from the UK or US or EU13 might have fewer reasons to embellish their qualifications - they do not perceive this labour market to be discriminatory toward them. And, if you hold a degree from an internationally ranked university, you have nothing to prove to anyone. Those from the countries identified by their compatriots or Irish media or trade unions as being at risk of discrimination will have an incentive to gold-plate their qualifications. And if the university from which you obtained your degree does not rank in top 100-200 in the world, well - you just might add that extra claim to your qualifications, to strengthen your CV. Not all will take such steps, but some (how many?) will.

These, in my view, are very interesting areas for inquiry. I certainly wish Alan would have explored at least some of them. And I certainly hope he will update his data sources, for 2005, hmmm - that is ancient history by today's norms.

Economics 15/08/2009: US rally is unlikely to last - implications for Ireland

Some are making lots of hay out of the idea that Germany, France, the US and the UK economies are improving and that this will have a positive effect on Ireland. Let me play a devil’s advocate here.

Yesterday I wrote about my view of GDP growth debate when the premise of growth is predicated on our exports (here).

One more factor is worth considering in this debate: interest rates and FOREX.

Scenario most likely: US is coming out of the recession in Q1 2010. By then, inflationary pressures are building up in the EU (we might be still below the target rate, but Monsieur Trichet is by then fully cognizant of deflation being over and money supply being out of whack by a thousand miles stretch). US inflation is already there, also below the target, but much closer than Eurozone’s. What happens next? Interest rates rise in the US and in the Eurozone. Dollar/Euro rate heads South, boosting our exports somewhat. But our CPI heads North as a combination of high taxes and rising mortgage financing costs wipes out households’ saving nests. Do you call this ‘growth’? or do you call it a disaster? Brendan Keenan and the likes of Davy seems to be happy to say it is the former. I would conjecture it is the latter.

Scenario less likely: US and EU come out of the recession jointly – around the end of Q1 2010. This means all of the above, but with Euro actually staying strong or even appreciating against the dollar. Double whammy then.

So let us cheer carefully any turnaround in the ‘partner’ economies, then…

But now, consider the whole idea of a turnaround. So far, our not too financially savvy media has been confusing stock market rally with economic fundamentals. I fear this is about to change in September/October. Here are three barometers:

Barometer 1: Personal. Last year, the crisis in our markets spelt a dramatic decline in my own income by ca 80% within a span of August-October. This year, the same process has just started anew with my sources of income falling and companies owing me cash falling further behind on their payments. And we are talking non-trivial amounts backlogged for over 90 days on invoices.

Barometer 2: Global trade. Once again, 2008 is perfectly reflected in 2009. In 2008, crisis in global trade and finance was pre-dated by the bottoming out of commodities cycles in late January 2008. In 2009, the same has happened in February 2009. As economy fell in 2008, Bear Sterns got rescued (March 15, 2008). In 2009 it was the turn for the Obama’s economic stimulus package – signed on March 6, 2009. Now, all along, global trade collapse followed smaller pre-shocks. June-August 2008: Baltic Dry Index, having peaked in May, collapsed 28%. June-August 2009, having peaked for the year in June 2009, BDI falls 25%. All seasonally adjusted, mind you. In 2008 this was followed by massive short selling in the financial markets and bottoming out of stock markets on July 15, 2008. Short-covering leads to a rally thereafter with the next two weeks yielding a 5% rise in S&P500. In 2009 the story is slightly different yet the timings are the same and the net impact is the same as well. Banned naked shortselling implies longer lags for translating expectations into price movements, so July 10 stock markets bottom coincident with the Fed injecting some $80bn into the market for the first time in a month, produce a short-covering rally of 12% (S&P500) in exactly the same period as last year.

Barometer 3: Fundamentals. In the meantime, as 2008 short-covering rally was unfolding, global trade was shrinking fast – chart below.

In case you are still wondering, the same has happened in 2009 so far (chart below):

So in both years we have BDI scissoring away from the S&P500 – right before the main wave hits the shores on Wall Street. The real economy took hold with a delay back in 2008 due to the short-covering rallies triggered by regulatory moves. Ditto this year. And trade flows fundamentals are not alone in showing no support for a sustained rally in the stock markets. Here are some other signs:

Short run dynamics in the stock markets are now firmly showing increasing volatility: VIX has declined from July 2008 through August before taking off up the cliff in September 2008. So far, the same dynamics are present in terms of decline and increasing volatility of VIX itself.

The US consumer sentiment index fell unexpectedly in early August to 63.2 from 66.0 in July - the lowest reading since March, according to the Reuters/University of Michigan index. Now, as the chart illustrates, UofM survey index also peaked in August 2008 before heading rapidly South.
Although the seasonally adjusted output of the US factories, mines and utilities increased 0.5% last month (for the first time since December 2007), reversing course after a 0.4% decline in June, annual output is still down 13.1% in the past year. But the current bounce is fictitious, as capacity utilization increase from 68.1% to 68.5% was minor and on top of the record low of June – so no restart of an investment cycle any time soon. Worse than that – all gains in industrial output in July were due to teh US car makers deciding to re-supply stocks. Motor vehicle production jumped 20.1% on a back of a planned increase following earlier severe production cutbacks as General Motors and Chrysler went through bankruptcy. So ex autos, industrial output for July was off 0.1% while manufacturing output rose just 0.2%. Output of high-tech industries rose 0.4% in July (still down 20% in the past year).

Finally, unemployment – I wrote about this ‘surprise dip’ in last month’s unemployment figures before (all based on an actual fall in the labour force participation rates, not on a slowdown of jobs destruction. But while ordinary unemployment rate is scarry, the duration of an average unemployment spell (the second chart below) is frightening. Since the Department of Labor started collecting data in the late 1940’s, there hasn’t been unemployment spell that lasted this long: July 2009 at 25.1 weeks. The previous highest peak in the average duration of unemployment: July 1983 = 21.2 weeks.


So nothing, short of something strange brewing in Wall Street’s Caffeteria, underpins the last rally. And this means a nasty September/October market is a distinct possibility.

And what does this mean for Ireland? Ok, there is an interesting analysis to be had on the spillover from the potential correction in the US to that in here. In particular, we should look at the fundamentals behind the financial sector risk exposures to any additional shocks. Remember - in 2008 the meltdown of financials was much deeper in Ireland than it was in the rest of the Euroze. And of course in the rest of the Eurozone it was much deeper than in the US.

Why? Risk exposures differentials due to leverage. Americans had a subprime crisis. True. Eurozone had an over-borrowing crisis. Prior to the onset of the financial crisis, US financial sector leveraging was around 40% of GDP, Eurozone stood at 70% of GDP, in Ireland - at well over 350% of GDP. Hmmm... smelling the rat yet?

Well, take a look at the two charts below (courtesy of R&S - Mediobanca):The first chart shows leverage as % of GDP in the financial sector, the second one - risk exposures measured as total securities relative to net tangible equity. Now, for Ireland, the comparable figures are: leverage at 425% (Q1 2009), risk exposure is simply indetrminable as our banks have been engaged in a wholesale re-shifting of liabilities and rewriting of assets, but it is hard to imagine our risk ratios to be less than 15% (given some of our banks are facing 30-39% stress on their loan books).

So if the US were to catch a cold in October, while Europe is to get another bout of flu, Ireland might come down with something so nasty, we wish we had an H1N1 'swine' flu hitting our financial markets...

What's that stock market equivalent of Tamiflu, then?

Economics 14/08/2009: Irish welfare rates - Part II

I grew tired of, honestly, of the bull surrounding the OECD stats on social welfare. So I crunched through the data, available from their database on the subject. The link to this data is here.

Tables below rank Irish welfare payments as per the percent of the Average Production Wage (average wage in manufacturing for production & maintenance workers). Rankings are given for EU and OECD as a whole, comparing these in 2001 and in 2007 - the latest year for which data is available.

First Tables:

So, of course, 1 above refers to Ireland being ranked the country with the highest level of benefits for the specific type of welfare assistance or unemployment assistance received.

That is bad enough? Oh, I also looked through the OECD methodology. And what I found confirmed exactly what I was saying before in yesterday's post:

• Only cash incomes are considered, so no in-kind benefits, e.g health cards were factored in;
• Average wage was not accounting for childcare costs despite welfare recipients having that taken care of;
• Only income taxes and own social security contributions, so no health levy was factored in;
• Housing costs, childcare costs and any other forms of “committed expenditure” are not deducted when computing net incomes. Nor are they counted on the 'income' side as benefits-in-kind for welfare recipients;
• As benefits included in the calculations exclude benefits “in-kind”, free school meals, subsidised transport, free health care, etc. are not included. Occasional, irregular or seasonal payments (e.g. for Christmas or cold weather) are not included. Also excluded are benefits strictly related to the purchase of particular goods and services (other than housing or childcare as described below), reduced price transport or purchase of domestic fuel or the purchase of medical insurance and prescriptions;
• Cash benefits excluded are: old-age cash benefits, early retirement benefits, childcare benefits for parents with children in externally provided childcare, sickness, invalidity and occupational injury benefits and benefits relating to active labour market policies;
• Subsidies for the construction of housing, purchases of owner-occupied housing, subsidies for the interest payments on owner-occupied housing, and other similar payments are not included. Similarly, the assumption of living in private rental accommodation means the benefits in kind provided by social housing, usually involving rents below the market rate, are not taken into account in the comparative tables;
• It is assumed that families live in privately rented accommodation and the level of rent for all family types regardless of income level and income source is 20% of the gross earnings of an average production worker. In Ireland today this means that OECD figures only account for maximum of €565 per month per household. Real levels of subsidy in Dublin would require a minimum of €750-800 pm for one bedroom property and over €1,000 for two-bed rental (Daft.ie figures on rental properties). Thus OECD underestimating Irish welfare recipients' housing assistance by a factor of 2.

Taking into account these omitted variables, my figures from the earlier post show that pretty much anyone working in lower grades of all sectors in Irish economy would be better off on social welfare.

I stress, again, that my assertion concerns people on social welfare. It does not cover people on unemployment assistance.

Economics 14/08/2009: Turning point, but not for you and me...

NCB's Brian Devine issued a new update on Irish economy. Clean and tight as ever, and a worthy read. It makes the case for upgrading Irish GDP growth, but unlike a host of the note stamped out by Davy's boys on a weekly basis, NCB's note is backed up by a bit more real analytical beef.

"Irish data (PMIs, Live Register, industrial production, retail sales, exports etc..) have stabilized and in some instances risen from the lows. Consequently, the NCB economic activity index which had been indicating that activity was contracting at a seasonally adjusted annualized pace of 12% in February is now signalling that the economy was contracting at an annualized pace of 6% in May. Our more timely, PMI based, growth indicator is also well off its lows and continued rising in June and July (Chart 2)."
So far just fine. There is no claim, of course, that Ireland is growing again (i.e that we've bottomed out).

"When the Irish data is combined with better than expected data from the US and the Euro area it causes us to upgrade our annual 2009 and 2010 forecasts to -7.6% (previously -8.1%) and -2.0% respectively (previously -3.1%). While we are upgrading our GDP figures we do not see the trajectory of the recovery being any different than previously – the bottom in the economy will be formed in H12010, with sustainable growth not expected until H2 2010. It is possible that we get positive GDP on a q/q basis before Q3 2010 given the volatility in Irish GDP and GNP (Chart 3) but we do not see there being sustainable growth until H2 2010 (Chart4)."
This is a little optimistic from my point of view, but not as widely off the mark as other brokers. I still do not see domestic growth posting any improvements on earlier forecasts.

On GDP side, there is lots of volatility, as Brian's note states, and the large share of GDP volatility is strategic tax optimization decisions made by the MNCs. Thus, should Intel/Dell/Pfizer and so on decide back in their US HQ that now is the time to book more profits outside the USA, Irish GDP might rise. Otherwise, it might fall. Who knows... But really, who cares.

Our economic problems in this country are not with the MNCs-component of the economy - they are with

• the fiscal wreck left behind by the Government overspending;
• the labour markets that are absolutely out of touch with productivity - a legacy of our Trade Unions and Professions;
• deteriorating quality of our workforce, courtesy of education system that is more suitable for a Faulty Towers sketch than for a 21st Century economy; and
• uncompetitive domestic markets, supported by the Social Partnership.
  

Do any of these things have a chance of seeing an improvement should Pfizer decide to produce more Viagra here?

Will Dell shipping more PCs out of this country really change the fact that our 'flagship plcs' are like drug junkies depend on state contracts and acquisitions of competitors at the top of market valuations (preferred mode for growth as opposed to organic expansions throughout the 2000s)?

Will GSK opening a new facility for 200 scientist (of whom 100 come from outside Ireland, and GSK would love to get the other 100 to come from outside Ireland too, but, alas, it can't, for it promised the 'knowledge'-driven Ireland Inc that it will hire home-grown workers too) change the fact that our clientilist system is about to saddle the entire country with onerous debts of the few developers?

The answer to all of these is 'No'. It won't.

"The cyclical downturn is always going to end but growth does not necessarily imply an economy without problems. We are still in the camp that believes the recovery process will be long and gradual with unemployment, fiscal consolidation and the oversupply of property continuing to weigh on domestic demand. We see the main driver of the exit from the cyclical downturn being the contribution from net exports (expanding global demand combined with weak demand for imports)," says NCB note.

That is a polite way of saying that under the current policies and in the current economic development environment within the country, there is no chance Irish economy can pull itself out of this recession, especially out of its structural component.

A much better, more realistic analysis from NCB, as compared to used car sales lot than the one from the Dawson Office...

Economics 14/08/2009: Irish welfare rates and the tragedy of poverty

On last night's RTE Prime Time I referred to the OECD 2007 report that shows Ireland having the second highest welfare rates in EU27 (and the third highest in the OECD).

Here is the link to the report.

Here is a chart from the report:
Here is an excellent article on the report.

And here is my follow up analysis.

The OECD data was in the range of 2005-2006. Since then:

• Taxes on work in Ireland increased substantially
• Wages have declined in 2007-2008
• Earnings other than wages (overtime, bonuses, commissions) also have fallen
  
• CPI has dropped in July 5.9% yoy and HICP fell 2.6% yoy

So after tax returns to work have declined rather significantly in real terms - a good deal 10-15% for an average wage earner, depending on the sector.

In the mean time,

• Welfare rates have gone up (since January 2009) by 3% nominally, or between 5% and 8% in real terms;
• Indirect benefits rose in real terms, as rents fell off the cliff and not all these savings were passed on to the Exchequer - some of these savings could be easily 're-distributed' between assistance-receiving tenants and the landlords;
• Black /gray cash economy is thriving, providing additional earnings to some welfare recipients; and
• Costs of services to those of us in employment that are free to welfare recipients have gone up, implying a rise of benefit to the welfare recipients.

But let us be clinical about this. I did an balance-sheet analysis before on current (post-April 2009 Mini-Budget) after-tax earnings here.

Our replacement net of tax wage - equalizing the value of benefits obtained by the welfare recipient (in the case of my model - single parent with one kid) to make them even with the wage earner - now stands at €31,102.

The above figure is not inclusive of Income Taxes, Income Levies, PRSI and Health Levy contributions exacted by the state off those working. So let us add this to the numbers above.

For PAYE:

• Health levy adds 4% on all earnings below €75,036;
• PRSI levy adds another 4%
• Income tax and Levies (here) - €31,102 after tax is consistent with the pre-tax earnings of €39,870pa
  

Replacement wage for PAYE (inc PRSI and Health Levy): €43,059.60.

For Self-Employed person:

• Health levy adds 3.333% on all earnings below €75,036;
• PRSI levy adds another 5%.
  

Replacement wage for Self-Employed (inc PRSI and Health Levy): €43,191.17.

If we are to recognise that a self-employed person has to cover some of the costs of their work out of pocket, say 25% of the net revenue received in income (a conservative assumption if you need to operate some equipment, run a van etc), a self-employed person working in this country would have to generate around €54,000 in revenue in order to come close to breaking even with a welfare recipient!

Comparatives: Pre-tax average wages by sector (for All workers and for lower grade of P&M Workers):

• Industry: All employees = €42,078 pa (-€981pa relative to a welfare recipient), Production & Manual Workers = €34,507 (-€8,552pa);
• Mining & Quarrying: All = €40,435 pa (-€2,624pa), P&M Workers = €36,878 (-€6,181pa);
• Manufacturing: All = €41,184 pa (-€1,875pa), P&M Workers = €33,675 (-€9.384pa);
• Electricity, Gas & Water Supply, Waste: All = €55,286 pa (+€12,227 pa), P&M Workers = €46,592 pa (+€3,533pa);
• Financial & Insurance Services: All = €56,742 pa (+€13,683pa), P&M Workers = €34,445 pa (-€8,614pa).
• Minimum wage earners €17,992 pa (-€25,068pa worse off working than being on welfare).

So here we have it - our incentives to work or choose welfare.

Now, there are many studies out there doing international comparisons of pensions and other benefits across the EU.

Majority of them count a particular benefit alone and disregard in-kind payments and other assistance, such as housing allowances, rent supports, bills assistance, lack of apartment maintenance fees, etc. Majority of them disregard the fact that a working family has to pay its own healthcare costs in this country on top of paying taxes to cover our public health services. Or that we pay for child care, while our welfare recipients do not. Or that we pay to commute to work, that we also pay more for our food, because we do not have the luxury of eating all our meals at home. This makes these comparisons extremely stylized.

Another example is Eurostat adjustments of welfare supports for PPP differentials. This is suspect practice because PPP refers to HICP inflation adjustments and exchange rates differentials. However this presents several problems in comparing welfare benefits baskets in Ireland with the rest of EU:

1. We have many more non-rates benefits (housing assistance, healthcare cards, etc) not reflected in HICP;
2. We have larger relative share of imports in welfare consumer basket of goods than larger countries of the EU, so stronger Euro here buys more for our welfare recipients than it does in the rest of the EU, even after we adjust for nominal exchange rates;
3. In most of the EU there are caps and declining scales of benefits. Not in Ireland, where a life-long benefit is available at a flat rate irrespective of the person's ability to work, health status and duration on benefit; and so on.
   

Methodology is important.

The real tragedy of Irish welfare system is that we tend to lump together people on unemployment benefits with:

• long-term welfare recipients (often generational ones) who are able-bodied working age adults; and
• long-term disability aid recipients.

This is simply immoral and wrong economically. They are not the same. Unemployed seek employment. Welfare recipients do not. Elderly and disabled have a real claim to make on the society for help - they deserve it and they should not be stigmatised for this assistance. Those who can work, but choose not to have no such claim to make.

Our unemployment assistance rate is below our long term welfare rates. This is farcical. It is an incentive for some to move off unemployment roster and out of the labour force. But it also fails to recognise that people who find themselves in unemployment have some consumption commitments that are reasonably based on their prior income (so these commitments are not some extravagant spending of the past) and have to be met. The long-term social welfare recipients have a steady income instead.

From my point of view, the real problem is that we are paying a number (no one can tell us how big it is) of people who made it their career to milk the taxpayers. I have no problem with helping those in real need of help - the elderly and those with severe disabilities. And I have no problem with providing a safety net for those who pay for it through taxes.

But I have significant issue with seeing perfectly healthy individuals not working, while many people with real disabilities are leading productive lives, ordinary families taking their hard earned cash and sending it the way of those who never intend to contribute to the society.

High cost of social welfare is economic (lost jobs and lost investment due to high tax burden, discouraged younger workers and so on), but first and foremost it is social. The latter manifests itself in a culture of entitlement developed in the mindset of our long term welfare recipients and their advocates.

How many times do we hear that welfare recipients are

• poor (see figures above to show that they are not);
• never gained from the Celtic Tiger (welfare provisions increased between 97% and 110% since 2000 alone);
• neglected by the society (welfare costs have risen from 8% of our GNP in 2000 to over 13% in 2009 and this does not include massive indirect transfers from the private sector through schools allocations, sports grounds, community facilities etc); and
  
• ignored by private sector growth (there is a deeper question to be asked here in return: Why should someone who never worked in their life be entitled to benefit from the wealth and income created by the sweat and labour of others?)
  

Welfare spending now accounts for over 70% of the annual Exchequer tax intake. It is more than 37% of our current expenditure bill. This is not sustainable.

An argument that NAMA funds can be better spent on social welfare supports is a fallacy, for there are no NAMA funds. We will have to borrow to finance both. If we are to borrow to retain current welfare spending, some €5bn per annum in fresh debt will have to be added to our own and our children's obligations.

A simple math - through 2013, doing nothing on Irish social welfare spending will cost us additional €23bn in debt we will have to pay down in the future. Scared? If unemployment remains at the levels we are seeing today through 2015-2018, this bill will rise to €44-61bn, once interest payments on the requisite bonds are factored in.

That is a disaster on the same scale as NAMA.

Instead of strengthening the fabric of our society through providing a real safety net and real help to those who cannot contribute to this society through work due to age or health reasons, by having this lavish welfare system with a maze of benefits supplied on the unlimited life-long basis, we are actually destroying the moral state of Ireland. That is the real cost of our welfare-as-entitlement industry that is still thriving in this recession.

What should be done?

We need serious reforms of the welfare system in the long run. I will write about this at some point in the future. In the immediate term, we need:

• a cut in welfare rates of 12% for all able-bodied long term welfare recipients, bringing the rates below the unemployment assistance rate;
• a system of two-tier old-age pension: one basic rate for all, set at 1/2 of the current rate, and a second, top-up rate for those who pass means testing (the second rate to be set at 1/2 of the current rate) - on the net, poor pensioners will be guaranteed current level of benefits with no change, while wealthy pensioners will see a cut in their rate of 50%;
• ensuring that no public worker retired on full public pension benefits is in receipt of the old-age pension allowance - at either rate stated above. There should be no double pension allowance;
  
• a 3% reduction in unemployment benefit to reflect the fall in HICP;
• enforcement of the rent support scheme to extract savings, generated in the private sector on falling rents;
• introduction of co-pay on hospital visits for welfare recipients to reduce use of emergency rooms as their primary care physician access.
  

This really is a basic starting point for restoring sustainability to our public finances. No matter how you turn the arguments about welfare system around, it has to be done!