Phantom Income, Phantom Jobs?

The problem with a magic trick, though, is ultimately it’s nothing but a bit of sleight of hand and misdirection. And that is what Budget 2012 is, both in receipts and in expenditure. Let’s look at receipts first. When it comes to government revenues, there are effectively six main headings:

• taxes on consumption (in particular VAT and Excise),
• taxes on income (both personal and corporate),
• other taxes (in particular stamp duties)
• social insurance (in particular PRSI)
• other current receipts (that departments receive doing their day-to-day business)
• and then some various other current and capital receipts (e.g. EU transfers, Central Bank income and even interest on our loan to Greece)

The Government has judiciously assumed that most of these are going nowhere next year: even with the higher rate of VAT, consumption tax revenues are only predicted to grow by 1%, as are revenues from other taxes. Social insurance receipts are projected to fall. And yet – out of nowhere – direct taxes are projected to grow by 7% or over €1.3bn to €18.9bn. This is being driven entirely by projections about income tax, which is expected to grow by almost 10% in 2012.

Bear in mind that tax credits were not changed, nor were the headline rates. So how would this stack up – where will this extra €1,250m in income tax come from? This would only stack up in two scenarios. The first is that everyone’s income grows by 10% next year. “Not bloody likely!”, says you, so I think we can rule it out. The second is that employment grows. How many extra jobs would we need for the Government to meet its targets?

Let’s assume that two types of job are created in equal measure: high-skill jobs, where the salary is €60,000 and more tentative new jobs for those with fewer skills or years of experience, where the pay is €30,000. Let’s also assume that the typical job is created in June (a rough way of saying that not every new job will give 12 months of taxes to the Government in 2012). This means that over the six months, the typical high-skill job will generate €7,200 in income tax and about €1,800 in USC. The other job will generate €3,000 in income tax and a further €700 in USC (all figures thanks to HookHead’s tax calculator).

So without any changes to the tax code, and barring unforeseen growth in incomes, for the Government’s figures to stack up, the economy will need to generate an extra 100,000 high-skill jobs and the same number of lower-paying jobs! Economists are often criticised for making heroic assumptions but surely we’re in the ha’penny place when it comes to this. Really does the Government really believe this is going to happen?!

Clearly, it won’t all come down to jobs growth. As last week’s controversy about older people paying their fair share of tax shows, there is some income that is not being taxed fully at the moment and doing so may generate some extra one-off and recurring revenue. But even as the year only starts, the idea that even a hundred thousand new jobs might be created this year seems far-flung. And without that and without any other measures to boost income in any substantial way, it seems pretty clear that the Government’s revenues are going to fall next year, not rise.

Spending: the usual suspects

There is any number of ways of divvying up how the Government spends money. Two key distinctions to understand are current vs. capital (capital leaves an asset, current does not) and voted versus non-voted (non-voted is effectively done outside the Budget, i.e. no element of choice for the Government of the day). My preferred classification has eight main headings:

• Social welfare
• Health (and children)
• Education (and skills)
• All other current expenditure
• All capital expenditure
• Servicing the national debt
• Bank recapitalisation
• Other “non-voted” expenditure (both current and capital)

As the graph below shows, almost three quarters of all expenditure in 2012 will be current: €52bn out of €71bn. (Quick note for those interested in reading through the budget.gov.ie 2012 reports themselves: always work in gross figures even though the Government insists on working in net figures!) The remainder is made up of €4.4bn in capital spending and €15bn in non-voted expenditure, which in 2012 includes €7.5bn on servicing the national debt and €4.4bn on bank recapitalisation.

Government spending 2012, by major area

The Government of the day has no say in non-voted expenditure (at least not without major fuss such as international defaults), so we can set that aside. And as I’ve pointed out before, there really is no more scope for cutting the capital budget. More importantly than that, provided capital spending is done according to proper cost-benefit analysis, deficits due to capital spending do not matter – the deficit that matters is the one on current spending (including national debt repayments).

So when it comes to closing the deficit, we need to get the €66.8bn in non-capital expenditure back down into line revenues of just €51.2bn. Realistically, if we ignore the bank recapitalisation as finite deposit insurance that is added to the national debt, this is about closing to zero over the next five years the gap between current spending of €62.3bn next year and receipts of €51.2bn.

To give you an idea of the scale of the challenge, it is expected that gross expenditure by the Government will be €1.2bn lower in 2012 than what was budgeted for 2011. To give you an idea of the strategy so far, the pie-chart below shows you which of the four areas of expenditure has contributed to these savings. The share of expenditure is shown in brackets in the chart’s legend.

Proportion of 2011 savings and 2012 cuts by area (area's share of 2012 expenditure in brackets)

All current expenditure outside the areas of health, education and social welfare constitutes about one sixth of all spending but has made up almost two thirds of the cuts. Clearly, this can’t go on. You could scrap every single one of these departments, from Taoiseach’s right down to Arts & Heritage and you still wouldn’t have cut current spending by enough to balance the books.

So if the country is to avoid bankruptcy, it needs to face up to the harsh reality: spending on the poor (social welfare), the young (education) and the old (health) will have to be reformed. One giant step in that direction would be to make all income from any source – including jobseekers allowance, children’s benefit or the statutory pension – should be taxable. Ironically, given the discussion above, doing this would actually significantly boost income tax receipts, perhaps not by the equivalent of 200,000 news jobs – but it would make sure that those who earn enough anyway pay their fair way. And perhaps even more importantly than that, there would be no welfare trap.

We already know, through the Taoiseach’s State of the Nation address that, on the taxation side, there will be no change to the income taxation system but instead, VAT will increase. In fact, we knew this already as Ireland’s budgetary plans were, per the terms of the EU-IMF loan, sent to those lending to us so they could be kept abreast of their borrower. Unfortunately, Ireland operates under a bizarre system of national budgeting, where the Minister of Finance is supposed to pull rabbits out of hats on Budget Day to the oohs and aahs of the media (and perhaps the public). So the Irish public was none too impressed to learn many of the details of the Budget via the German parliament.

Traffic jams to Newry?

The increase in VAT rates, likely to be two percentage points, led to a rush of people decrying that this would be like 2009 all over again, with traffic jams on the way to Newry, as Irish consumers exploit arbitrage opportunities between Northern Ireland and the Republic. Clearly, if such a stampede were to happen again, more retail jobs would be at risk.

However, what impact will the VAT rate actually have on cross-border differentials? It turns out that this sort of thinking flatters the government, in terms of the power if has over these things.  The graph below takes a hypothetical basket of goods that cost €100 in late 2007 and the same, i.e. £70, in the North. By late 2008, the value of sterling had collapsed, with the euro now worth 97p, rather than the 70p it was a year earlier. That – and the VAT cut from 17.5% to 15% – meant that the Northern Ireland basket now cost just €72, whereas the Irish basket – thanks to inflation – cost €104.

Price of a basket of goods, North and South, from 2007 to 2012

With about €20 in fuel and tolls for a return trip to Newry from Dublin, you could make your money back on a weekly shop. Since then, though, sterling has strengthened somewhat, with the euro now worth about 85p. Meanwhile, VAT in the UK has risen from 15% to 20%. And whereas prices in Ireland are now only about 1% higher than four years ago, prices in the UK are over 15% higher.

The basket of goods that cost €100 both North and South in 2007 would now, after VAT increases to 23%, cost about €104 in the Republic – and about €98 in the North. Whereas you could make your fuel and tolls back with the weekly shop up North in early 2009, now you’d need to spend €400 just to break even. If inflation continues at 5% in the UK and 3% in Ireland, the gap on this basket will narrow by the next of next year from €6 to €4. To put it another way, to make a saving of €100 from a cross-border shop, you’ll need to spend €2,600, rather than just the €300 needed in 2008.

Competitiveness and cost of living

The risk to the economy from the VAT increase is not about people scooting up North and making a saving. It’s about destroying consumption, not diverting it, in two ways: firstly, it pushes up the cost of living, already a concern in relation to attracting investment into Ireland. More pressingly, it is effectively a tax that falls most heavily on poorer households.

This paper by Eimear Leahy, Sean Lyons and Richard Tol, of the ESRI, outlines the percentage of disposable income paid in VAT by different income groups. Whereas VAT is like a tax of 6% on the disposable income of the richest households (who will be doing tax efficient things like saving in their pension and owning their own home), the poorest households feel VAT as a 16% tax on their disposable income. But with Ireland’s marginal rates of income tax already so high in an international comparison, something has to be done, right?

The government thinks it’s in a bit of a bind. How do you increase taxation revenues, as it must, without affecting either Ireland’s cost of living or its competitiveness, as VAT and income tax inevitably do? Thus it has chosen what it regards as the lesser of two evils: raise VAT, not income tax.

The obvious “third way” in all this is to tax land. It’s immobile, so it’s not going to go anywhere in response to a tax increase, nor will people’s decisions be distorted as a result. I’m hoping the €100 household charge, which is of course incredibly regressive, is only a measure to take the sting of moving from a country with no property tax to one, like every other developed country, that does have one.

The more and more land – residential, commercial or agricultural – is taxed, the less income and consumption have to be taxed. Given that Ireland needs more tax revenues, it’s obvious which choice is best.

Rent Supplement: the story so far

A couple of weeks ago, the latest Daft.ie rental figures came out. The picture was one of stabilising rents, particularly in the urban areas and in the larger homes segments, with rents actually rising in some markets. However, there is something of an asterisk attached to all of this. Whatever about segments where rents are increasing, stabilising rents may reflect as much government intervention in the market as it does stable demand. For those not familiar with rent supplement, a system of state-provided rent supplement is available to the unemployed, with maximum rents which vary by local authority area. Effectively, if you’re on this scheme, you can rent properties with monthly rents up to those indicated.

This is a huge scheme. The Department of Social Protection in Ireland funds about half the private tenants in the residential lettings market in the country: in June 2011, there were 97,000 recipients of rent supplement nationwide. As of the 2006 Census, there were just 150,000 households privately renting in the country. Even if that is an underestimate and the true figure was 200,000 and has since grown to 300,000 (which would require the ‘would-have-been first-time-buyer’ cohort to grow significantly faster than the ‘we came here to build properties and have since headed home’ cohort), the Department controls a third of the market. This is huge market power. And just like in the case of electricity, where the same Department is trying to get a better discount out of the ESB than the current meagre 1%, the Department should use it to the advantage of the taxpayer.

But this is about more than just using market power for the benefit of the taxpayer. This is about a potential price floor, which keeps the cost of accommodation higher for all tenants and thus reduces Ireland’s competitiveness. This is because there is no incentive for a tenant on rent supplement to see their rent reduced, as their likely contribution stays at €24 a month.

Are taxpayers paying for a price floor?

So, as rents generally fell by 25% over the course of 2008 and 2009, they got closer and closer to a point where working tenants could effectively be outbid by welfare tenants. Granted, rent supplement has been cut twice since 2007. The first time, in the Supplementary Budget for April 2009, it was effectively cut across the board by 8%. The second time, in June 2010, maximum supplements were cut in many cohorts but not for single persons (i.e. not for one-bedroom accommodation).

Overall, since 2007, maximum rent supplements have fallen by an average of 14% across the country. However, rents have fallen by closer to 30% for most types of accommodation. The result is that, for one-bedroom properties in particular, taxpayers may now be artificially propping up rents… and footing the bill. To see this, consider the chart below. It shows how the maximum rent supplement compares to the average rent, both at the peak of the market in late 2007 (the blue line) and now (the red line). The closer to 100% it gets, the more the taxpayer has set a floor on rents, as those who are ambivalent to higher rents (those on rent supplement) can outbid the average working tenant.

(Notes for the graph: (1) The figures include the €24 contribution provided by recipients on top of their supplement.  (2) This graph compares the market average with the local authority maximum. The Department of Social Protection tells me they expect those on rent supplement to find accommodation at the 40th percentile, i.e. at a quality a little below the market average. This means that the price floor is even more of an issue as they are competing with bigger budgets for accommodation that costs less than the average. (3) I’ve assumed that both singles and couples with no kids are in one-bedroom accommodation, and that an extra room is added for each child. Where singles are required by their local authority to live in bedsits, or where children are of the same gender meaning two adults and two kids are expected to share two-bedroom accommodation. Again, this would push the bars above higher, as the same household has a bigger budget for cheaper accommodation.)

As you can see, despite the reductions in the supplement, there has been a definite drift towards supplement acting as a price floor. The only segments where this has not occurred (in Connacht and Ulster in 3-4 bedroom homes) were among those segments most distorted to begin with, with rent supplement covering effectively the average mortgage on average.

The most noticeable increases, i.e. where the potential is greatest for a distorted market where there was none previously, have been in Leinster and Munster. Where rent supplement had traditionally been 80% of the average rent, it is now 100% or greater. This is particularly acute in the two-bedroom segment, where every single local authority has maximum supplements for a couple above the average rent paid. If I’d compared single person supplement with bedsit rents (not one-bed accommodation), the problem in that segment would look equally serious. The short version is: welfare tenants – with no incentive to haggle down their rents – are easily able to outbid working tenants.

And yet lower rents may be wishful thinking (for some)…

I would be careful about believing that reform of rent supplement will push rents significantly further down in all segments. Within Dublin, for example, there is a noticeable difference between Dublin’s southside, where maximum supplements are still just 50%-75% of average rents, and the North city and West Dublin regions, where particularly for two, three and four-bedroom homes, the figure is over 100%. Where rents are well above supplement rates and not only stable but rising at the moment, there’s little to think that reduction in supplement rates will have an impact.

Added to this, it may also be the case that working tenants and welfare tenants form separate markets, at least in some parts of the country. On daft.ie, those listing their ads can state whether they will accept rent supplement. Only one in six do, meaning that there are large cohorts of landlords who are not interested given the perceived extra costs associated with Rent Supplement tenants. (There are also, presumably, many roll-over Rent Supplement landlords, who don’t need to advertise on daft.ie.)

What to do next?

Ultimately, the problem here is that Rent Supplement tenants are currently being sent into transactions with their landlord, without any incentive to haggle the rent down. The cost, as ever, falls on the taxpayer. Reforming Rent Supplement without addressing this is just a stop-gap.

It’s my own belief that rent supplement should be incorporated into general welfare payments, or ‘social income’ and that this income should be treated as taxable. This would level the playing field between workers and welfare recipients and make it far easier for someone coming back into employment to take a job offer. It would also encourage Rent Supplement recipients to haggle on their rent, as they would see some of the savings.

Clearly, there are issues about those on Rent Supplement regarded as vulnerable, including those with addictions. However, that is not an excuse not to reform a broken system. Where there are vulnerable people in society, provisions should be made for making sure they are not damaged by lack of care for their welfare.

That property two doors up from me I mentioned at the start, the one with 17 bedsits, went on fire a few weeks ago. The woman who discovered the fire said to me out on the street “How can they allow people to live in accommodation like this?” And she lives there. One can hardly argue that the current system, which sustains properties such as that one, is working for our most vulnerable.

In the forthcoming budget, the Government has the opportunity to achieve a triple-win by reducing rent supplement. The first win is for the taxpayer: the taxpayer is currently spending about €500m a year on rent supplement for almost 100,000 tenants. Significant savings can be made as the Department uses its market power to lower rents. The second win is for the welfare tenant: by making better quality accommodation more affordable, society can at last move beyond the modern urban tenement.

The final win is for the working tenant and for Ireland’s competitiveness: while some tenants will see no reduction, particularly in family homes in the cities, many will enjoy collateral benefit from the Department using its market power. The glut of property in the country generally should mean Irish rents are cheap compared to other countries and thus the post-rent disposable income here compares favourably. This December, with the Budget, a major step in that direction can be taken.

A higher interest rate does not a greedy banker make

Once you’re aware of this trade-off, it appears everywhere in current economic discussion. This morning, word has come out that National Irish Bank is ignoring the Financial Regulator’s call for the ECB’s rate cut to be passed on variable rate customers and will instead proceed with its planned increase in variable rates of almost 1%. Given that An Taoiseach Enda Kenny said last week that he would bring in laws to force lenders to lower rates in response to ECB cuts, surely this must be a case of greedy bankers taunting the public, right?

There are a couple of facts worth pointing out at this point. Firstly, according to CSO data, the average variable rate in Ireland is currently 4.3% so by raising its rate to about 4.5%, what NIB is proposing is effectively bringing itself into line with other banks – as shown in the graph below. Secondly, and related to this, NIB has also not increased its variable rates since June 2008. Thirdly, National Irish Bank is not funded by the ECB – it’s a subsidiary of Danske Bank – so changes in the ECB rate are largely irrelevant to the bank.

Variable interest rates for 80% LTV, various institutions

Most importantly, however, An Taoiseach Enda Kenny and perhaps more worryingly the Financial Regulator Matthew Elderfield are falling in to the trap of thinking that interest rates cause mortgage arrears. To put NIB’s move into perspective, its variable rate customers will face an interest rate of about 4.5%, which is in line with the average variable rate charged by Irish banks over the period 1999-2011. If its customers are struggling, they are struggling to pay back at a rate similar to when interest rates in Ireland were at historic lows. If that’s the case, something is wrong and it’s not the interest rate.

What causes mortgage arrears?

Last month, the Central Bank organised a conference, The Irish Mortgage Market in Context, which I attended as a discussant. The second and third sessions featured presentations on understanding what drives mortgage arrears and repossessions. The key debate at the conference was among those who believe that negative equity drives arrears (BlackRock Solutions, responsible for the stress tests) and those who believe that unemployment drives arrears (the academic experts). This is the so-called ‘double trigger’: negative equity and unemployment are both needed for arrears – the argument is about the weight attached to each part.

Ireland’s policy in relation to the mortgage market here urgently needs to reflect this discussion: interest rates don’t cause mortgage arrears, some mix of unemployment and negative equity does. The government getting into the business of setting prices charged by banks shows a complete misunderstanding of the nature of the problem. Given that the negative equity part of the equation will not be going away any time soon, to halt the slide into mortgage arrears, the government needs to tackle unemployment.

Today’s borrowers versus tomorrow’s borrowers

Policy here also needs to reflect the trade-off between current borrowers and future borrowers. According to work by economists at the Central Bank, just 30% of outstanding mortgage balances is on a variable rate mortgage. Of the 145,000 mortgages in negative equity out of the 475,000 mortgages covered in that study, 40,000 were on variable rates.

It’s my own belief that the next generation of Ireland’s mortgage market won’t just happen, it will need to be created by policy and that a central feature of the new market should be a requirement to issue covered bonds: i.e. banks borrow long (30 years) to lend long (30 years). Where this is the requirement, there is no such thing as a variable rate mortgage, a product viewed in the same terms as subprime mortgages in the US. Instead, the monthly mortgage repayment is fixed, providing consumers in Ireland with insulation from interest rates set with the rest of the Eurozone in mind.

However, I appreciate that until such a change is made, almost all new borrowers are going to be on variable rate mortgages.  This is a stream of probably 40,000 new borrowers a year into the future. So we face a situation where out of myopia and incorrect diagnosis of the problem, the needs of the 40,000 are being placed above the needs of the 400,000, the generation born in the 1990s. No-one is arguing that the pain faced by those on the cusp of mortgage arrears isn’t real – but in this debate we need to also remember that the welfare of others, less obvious or less vocal, also matters.

As outlined by Bob Quinn over on Money Adviser, the Financial Regulator believes that banks setting their own interest rates is self-defeating, “adding to the mortgage arrears problem and ultimately costing more in terms of capital”. Surely that is for NIB/Danske Bank – and possibly the Danish taxpayer as shareholder of last resort – to worry about.

What is certainly self-defeating is preventing banks in Ireland – particularly the few we have that are not taxpayer-owned zombies – from covering their costs. This is a Pyrrhic victory for current homeowners: its biggest impact is not reducing the price of mortgages, it reduces the number of new mortgages given out. This contraction in the supply of credit pushes down house prices, leading to greater negative equity. And unlike interest rates, negative equity does actually have an impact on arrears.

If the Government wants to change Ireland’s mortgage market, it should set policy not prices.

Getting back on track

It is no surprise that both these trends have proven unsustainable and in the last three years, Ireland has been trying both to regain international cost competitiveness and to put its Exchequer on a sounder footing. On incomes, since 2006, wages have been static: OECD figures suggest that a household with one earner on the average wage and another earning two-thirds of a full wage earned €65,900 in 2010, barely up from the €65,600 they earned in 2006. In contrast, wages have grown by almost 10% in France and Germany, while they have been static in Ireland.

If wages continue to be largely static in Ireland between now and 2014, rising by just 1% a year on average, this would mean that wages would have risen by 43% between 2000 and 2014. If current trends continue elsewhere, this would compare with a 52% rise in the Netherlands, 42% in France, 38% in Austria and 31% in Germany. Likewise, the tax burden is reverting to normal. In 2006 it was just 11% compared to an OECD average of 20%. In 2010, it had risen to 13% and – with reduced tax credits in particular but also perhaps taxable child benefit – it is likely to reach 18% by 2014.

So far, this just sounds like yet another economist drooling over austerity. But this matters for our future prosperity because Ireland needs to restore its competitiveness. The good news is that Ireland has been making significant inroads to restoring its competitiveness over the four years. Key to this has been the collapsing property market.

There is lots of worry at the moment about what kind of Ireland this generation is leaving to its children. I’ve outlined before how the banking debt is almost certainly going to be not a worry for our children and grandchildren. On the other hand, while falling property prices are bad for the generation who bought in the 2000s (born in the 1970s), they are really good news for those who will be looking for work in the 2010s (born in the 1990s).

Housing & competitiveness

To see how this connects back up to competitiveness, remember that just as income levels determine property prices, so do property prices determine wage demands. In an economy ticking along without bubble or crash, people will set aside about one quarter of their wages to cover accommodation, either rent or mortgage repayments. So if house prices fall by a half, that frees up disposable income, even if taxes increase.

The graph below explores the impact both of falling prices and the reordering of Ireland’s financial system on mortgage repayments. Ireland’s property prices look set to fall by between 55% and 60% from the peak. A South Dublin family home that cost €750,000 at the peak had a typical mortgage repayment of about €3,150 – this is based off a 35-year mortgage, 4% average interest rate and a 95% loan-to-value.

How a mortgage repayment on a South Dublin family home may change, 2005-2015

Assuming banks require a greater deposit of say 15%, to protect both lender and borrower from negative equity, this actually pushes down the mortgage repayment to €2,800. However, banks will also be reluctant to issue 35-year mortgages and so a 30-year ceiling would push up the repayment by €200 a month. More significantly, Irish households can no longer plan on interest rates of 4% and will instead be budgeting for interest rates of 6% on average of the lifetime of the mortgage. This pushes the repayment up a further €800. However, by far the largest impact is the fall in house price. A fall of 45% in the price of the house to about €340,000 would cut the mortgage repayment by over €2,000 to just over €1,700.

Competitiveness regained?

So we know that incomes in Ireland have been stagnant the past few years, while taxes have risen but property prices – and thus accommodation costs – have been falling. What has been the net effect on Ireland’s ability to attract workers? How does after-tax, after-rent income in Ireland compare to elsewhere?

The graph below uses OECD figures on incomes and taxes paid by the average family, as well as information from daft.ie and Global Property Guide on prevailing rents, to see how disposable income (i.e. after tax and after rent) has changed in six European cities of similar scale over the past decade. Information on rents has been used because this is easier to compare across countries (mortgage market considerations are left aside) and also because this is probably the more appropriate for executives considering relocating as part of an FDI operation. Growth in rents over the period 2000-2010 uses the housing component of each country’s consumer price index.

Annual income by category, for standardised family, selected cities, 2000-2014

A scenario for 2014 has been included – feel free to skip this paragraph if the details don’t interest you particularly. For cities other than Dublin, this scenario involves extending out 2009/10 growth rates in incomes, maintaining current tax burdens in percentage terms, and assuming growth in rents of 2%, in line with inflation. This latter assumption is used for Dublin also, but instead of extending the 2009/10 trend, which would mean falling nominal incomes, instead growth of 1% a year has been assumed instead, and the tax burden on the average family is assumed to be 18% in 2014, rather than 13%. The level of rents in each city in 2010 is assumed to be three quarters of the rent of that city’s prime areas (taken to be Dublin 4, 6 and 14 in Dublin’s case).

I think there are three things of note from the graph:

• The tax burden (the red bar) faced by the nuclear family in Dublin has been and will continue to be small when compared with other cities. This initially sounds promising – but it is worth remembering that very high tax-free allowances in Ireland mean that there is a large gap between the average rate (on all income) and the marginal rate (on the next euro of income). This is an economist’s nightmare, as it muddles with people’s will to work and means people feel heavily taxed even when they are not.
• The property bubble is clear when looking at the 2006 figures: the green bar gobbles up almost 30% of total income in Dublin in that year, compared to about 20% in the other cities. This appears to have fallen back somewhat – to about one quarter of total income – but is still high in international comparison. Figures using mortgage repayments (as per the graph above), rather than rents, may reveal a more dramatic change.
• Perhaps most importantly, though, disposable income enjoyed by a Dublin-based family compares favourably with income enjoyed by families in other cities. This will still be true in 2014, even if the tax base is increased between now and then (hopefully by reducing tax credits, not by increasing rates) and if incomes are static while rents rise slightly.

The analysis above does not correct for difference in the cost of living, which would certainly have punished Dublin in 2006, as prices rose far in above of elsewhere in the Eurozone. Since then, though, as with wages, prices have been remarkably static, which if it persists augurs well for future competitiveness and creating jobs for the next generation.

Increasing taxes while improving competitiveness is a tricky tightrope to walk, as disposable incomes take a hit. The last four years in Ireland have shown that it is possible – provided you have a property crash to unwind. Those that genuinely care about the prospects the next generation enjoy should see pretty readily that the more accommodation costs for families and businesses fall, the better off the next generation will be.

The remaining €57.5bn – or the vast bulk of what the Government spends – is “voted expenditure”, and as such is up for Ministerial and Budgetary discretion. Of that amount, this year just €4.7bn will be spent on capital investments, down from €8.9bn in 2008. So of the €68.3bn in total spending, almost four fifths (€52.8bn) is current voted expenditure.

Ireland’s deficit is currently €15bn and by 2015 that will need to be no more than €4bn. So the country needs about €11bn in savings, about €7bn will have to come from spending cuts, while the remaining €4bn will be from tax increases. But where can we find spending cuts of €7bn over the coming five years?

Closing the budget gap by 2015

Clearly, it is in current expenditure that the bulk of savings will have to be made. This is because we’ve practically no wriggle room in relation to non-voted expenditure and we’ve already taken the low-hanging fruit of drastically cutting capital spending (down over €4bn in three years). The beneficiaries of capital spending are disparate and often distant, as they are members of the general public in the future. In contrast, the beneficiaries of the bulk of Government spending – current spending – are concentrated and current.

The 2011 Revised Estimates for Public Services break down that €53bn in current spending. Three quarters of the total, €39bn, goes directly as someone else’s income, either in the form of public sector pay (€15.8bn), public sector pensions (€3.2bn) or social welfare (€20bn). Of these three, public sector pay has already been significantly reduced, once to partially offset the money spent on pensions but also to reduce to actually reduce the Exchequer’s pay liabilities. The scope for further reductions is limited. Public sector pensions could be reduced but is unlikely to save large amounts. That leaves social welfare. How can you cut monies spent on social welfare and not appear callous? [...aware as I am of the opinion certain fringe commentators have of me!]

What’s not clear to me is why we should treat half the money given out by the State as income in one manner and the other half completely differently. What I mean by this is that the €20bn given out in public sector pay and pensions is part of taxable income. The State gives 100% with the right hand but then – as with everyone else – takes away with the other hand in the form of income tax. On the other hand, the €20bn given out in social welfare is – by and large – “free money”. For large swathes of it, there is no means-testing so there is no guarantee that is going to households that need it.

How can cuts be fair(er)?

For example, there’s a lot of talk at the moment about whether the country can afford to give universal child benefit to people regardless of their income. That strikes at the heart of the point: a family earning €100,000 a year get their child benefit tax-free, just like the family earning €25,000 a year. Another point about fairness could be made here: is it fair that a family earning €50,000 a year through hard work have to pay more than half of their income over in various taxes if they work hard for another €5,000… but no tax at all on €5,000 by dint of having three children?

People are very imaginative at justifying when they have to. On child benefit, this is also true. But to me there is a gap between the reason most commonly given, that society needs children, and what is the real – or certainly more political – reason: universal child benefits convince the middle classes that at least some of their taxes go on something they would call useful (i.e. something they benefit from directly). But, to my mind at least, these issues of “externalities” (i.e. indirect benefits of having children) and fairness can easily be achieved in other ways. On the first, give tax credits for children. On the second, tax all income.

Even on a practical level, it just will not be possible to close the deficit while also ring-fencing all €20bn spent on social welfare schemes. And more fundamentally, we should be using this crisis as an opportunity to craft the fairest system we can, one that will promote future growth.

Social welfare spending by area (€m, 2011)

The graph above shows the amount spent by the taxpayer on over a dozen main headings of spending in Social Welfare. To understand the scale of these payments, here are three examples:

• The €4.7bn spent on various forms of the State pension would be just enough to pay the wages of every single public servant in the country outside the education and health services for a year.
• The €1.5bn spent on the various widows and deserted wives benefits is similar to the entire higher education budget of €1.7bn (which includes €400m in direct student income support).
• Almost €500m is spent on rent supplements a year, broadly similar to Ireland’s entire overseas aid budget (the amount voted for 2011 for International Cooperation was €533m).

These comparisons hopefully show that even at the smaller end of the scale, these are significant sums of money. The entire national spend on Gaeltacht support (€37m) or on sports (€87m) are almost rounding errors in comparison.

Joining Social Welfare & Revenue

The good news is that the Department of Social Protection is now cross-checking the people in its system with those elsewhere in the Government records. While looking for rogue taxi-drivers and landlords is useful, really the main system that needs to be hooked up to the Department of Social Protection Records is the Revenue Commissioners.

My suggestion for Ireland’s Exchequer finances is that all income – from public sector employment, from private sector employment, or from the taxpayer in social welfare – should be treated as part of the household’s income. In Budget 2012 for the first year as a transitional measure, only Universal Social Charge could be levied. Thus, those for whom these measures are almost their entire income would be subject to tax of just 2%. Those for whom these payments are certainly welcome but not the boundary between starvation and survival will see their payments fall 7%. An average saving of 4% across the various social welfare schemes would save about €700m.

The aim from Budget 2013 on, though, should be to integrate USC into the income tax system anyway and thus full tax liability on social welfare income should apply from 2013. This is not for a minute to deny the underlying reason for many of these benefits, such as the “socially optimal” supply of children or ensuring those with disabilities truly have equal opportunity. However, these issues should be dealt with through tax credits, not income loopholes. These tough decisions should be made during 2012. Assuming that half of recipients of any given scheme (apart from unemployment) would be liable for an additional marginal rate of 20%, this would generate additional savings of approximately €1.5bn from 2013 on.

Remember the context. About €7bn in spending cuts is needed from €60bn in discretionary expenditure and social welfare accounts for one third of all discretionary expenditure. Therefore, the question is not whether social welfare should contribute between €2bn and €2.5bn in savings but how. To me, and to hopefully anyone who engages with the issue for more than a minute, blanket cuts in social welfare rates are not the solution. In my opinion, the solution lies in ending the loophole that has kept social welfare out of taxable income. Not only would this help the country balance its books, it would also boost transparency, simplicity and fairness.

In particular, economists focus a lot on the Industrial Revolution, as before that time there had never been a society where prosperity had risen steadily. Instead, prosperity and the wages of the common labourer tended to be inversely related to population. When population crises occurred, those who survived were able to reap the rewards of the scarcity of human labour. Since the Industrial Revolution, though, a growing number of people – now the majority of the world’s population – have enjoyed steadily increasing incomes, generation after generation, all while the human population grows and grows.

Growth and banking

Understandably, given such a shift change, every economist – indeed probably every social scientist – has their own pet theory for the answer to social science’s Big Question. And perhaps predictably, most tend to think that the most important factor was something they have spent their lives working on. As I develop my research career, I won’t have that option, as the intriguing economic force I hope to understand better (urban agglomeration – what happens when people come together and live in cities) clearly only dates from the Industrial Revolution and thus cannot have caused it!

There is general agreement, though, on the necessity – if not the sufficiency – of a number of conditions an economy needs for people to enjoy increasing incomes, generation after generation. Property rights and the enforceability of contracts is one: if you can’t prove you own something, it’s harder both to trust the system you work in and to motivate yourself to generate wealth. Extreme temperatures have, at least until now, proven a block to human industry: a brief pause to consider the role of air conditioning in the development of the US South will surely convince people of that.

Another factor that no economy has growth without is banking. This is the process of turning savings into investments, i.e. of turning current production into future consumption. Much of modern macroeconomics has tended to ignore the fractional reserve system of banking that we all depend on: this is probably part of a broader issue with modern macro, which is less concerned with why incomes grow over the long run and more concerned with why incomes bobble up and down around that trend in the short run.

However, the power of banking is undeniable. Even if I were writing before the tumultuous economic events of the last few years, history is replete with examples. For instance, one of the main reasons the mighty Spanish empire was defeated by the United Dutch provinces in the early 1600s was because, for all Spain’s New World silver, its Genoese bankers just couldn’t mask the empire’s lack of creditworthiness. The Dutch, on the other hand, could borrow at will.

A banking-free Ireland

My worry is that Ireland is adding itself to the list of powerful examples of the importance of banking. Not only what happened in the run-up to 2008 – and the effect of the Anglo-Irish Bank model of banking – but also in what’s happened since. Currently, banks are worried solely about day-to-day, month-to-month survival. They are not in the slightest bit interested in generation-long mortgages. The result? Two friends of mine, recently married, decided to buy. They were told that even though they currently pay a monthly rent of €1,300, his job “doesn’t really count” and she “could get pregnant” and thus they would only be eligible for a loan whose monthly repayment would be €600. I’ve argued before that current asking prices look high relative to long-term averages… but it shouldn’t be rocket science for banks lend based on ability to pay and according to standard valuation methods for properties.

An economy without mortgage credit will muddle on with falling house prices and widespread negative equity. House prices will probably overshoot on the way down. But ultimately, people will survive. The even greater worry is an economy without business credit, because an economy without business credit will never be able to create jobs. And Ireland is not just an economy without business credit. It’s an economy where there are no banks interested in business banking whatsoever.

That’s a strong statement. For evidence, though, I need look no further than my fiancée and her friend, who run a very successful online wedding magazine, One Fab Day. The site has over 30,000 readers a month, making it one of the most popular wedding websites in the world on a per capita basis. Audience is one thing, revenue another and it has a lot of paying clients and some excellent ideas for how to generate new revenue streams. However, like any modern business, it requires a bank account. What amazed me was just how long Irish banks were able to drag their heels, no matter how many client cheques were waved in front of them, before they would even open a bank account!

SMEs, banks and jobs

In any ordinary developed economy, with their track record over recent months, One Fab Day would now be taking out a working capital loan, hiring staff and expanding. Instead, in the modern Irish economy, they realise that they will have to grow without credit and thus significantly more slowly. There are lots of things they could be doing but without the credit, they just can’t.

One thing they could certainly do without credit, though, is start selling their services online and reach international markets. (In fact, as proof of concept, they’ve already had paying clients from both North America and Europe!) However, to trade online properly (i.e. beyond PayPal), you need an online merchant account. And guess what? Irish banks are just not interested.

To even consider approving your business for online trading, they do the whole chicken-and-egg thing: they expect you to have two years of online trading behind you and audited accounts to prove it! They are prepared to make an exception and accept a business plan, but only if you can produce three years of forecasts for online trading that they will then judge to be realistic or not. If you haven’t traded online yet, this of course gives them ample room to refuse. And lastly, even if you do meet the above conditions, it will take at least four months to process!

This might be understandable prudence on the part of Irish banks but for two facts. The first is that there is almost no marginal cost for the banks in helping SMEs trade online. They are not exposing themselves to huge risk – as they might with mortgage lending – by enabling transactions from which they take a cut. Effectively, they are only interested in online trading if you are a large company and thus there are large amounts of euro on the table for them, risk-free, Day 1.

The second is the bigger picture (lest you think this was all written out of a sense of nuptial duty!). Information & communication technology have done a huge amount to flatten the playing field between large and small firms. Things that had been prohibitive fixed costs (like buying a supercomputer) have been turned into utilities that can be tapped on demand. However, if you literally cannot take the money in, it’s all for naught.

Percentage of enterprises selling over the Internet (by number of employees), 2010

The graph above shows the percentage of enterprises trading online. In Ireland, one in three companies with more than 50 employees is selling online, while for those with 10-50 employees, it’s one in six. There are only a handful of countries that produce statistics for micro enterprises (1-4 workers) or mini ones (5-9 workers) [not shown above]. Portugal is one and its profile is similar enough to Ireland’s that it’s fair to say probably no more than 5% of micro enterprises in Ireland are selling online. The figure in Germany is 18%.

It’s a truism to say that SMEs provide the bulk of jobs in Ireland, a cliché to say that there is no recession online, and a mantra that export-led growth will lead Ireland out of recession. Sitting in the middle of all three of these statements is an obvious point for the new Government, if it’s truly serious about turning the SME sector into an engine of jobs growth through online exports. The Government, as key shareholder in practically the entire Irish banking system, must make bank management, who are only there to execute the wishes of shareholders, set ambitious but deliverable targets in relation to SME online trading. The first step is giving AIB and Bank of Ireland targets for new online merchant accounts by the end of this year, say 2,000 each.

With the will and the support systems in place, across banks, Enterprise Ireland, the county enterprise boards and Irish companies such as Realex, it should be entirely possible to have one in four Irish SMEs trading online in less than five years. As you may have guessed, I know a business that will do it tomorrow, if only they got the chance!

But just how much should we be worrying about the monthly household budgets of our grandchildren come the 2050s? That’s a question I hope to shed some light on below. Before we can look at how much they’ll be forking out for our folly, though, the necessary starting point is to figure out just how much debt there will be in the first place. In my opinion, we can think of three kinds of debt: pre-crisis debt, banking debt, and then what you could call crisis-era deficits.

Scale of the debts

Before the crisis hit in 2008, Ireland had a pre-existing stock of national debt of about €40bn. All told, banking shenanigans will add probably about €50bn to Ireland’s national debt (it could be more, but it could easily be less as well if recapitalisations are repaid in some form down the line). So we are up to about €90bn in debt.

What about other debt? Well, to get a figure for that, let’s assume that Ireland’s austerity measures deliver a balanced budget by 2016. In that scenario, government deficits from 2008 to 2015 (i.e. crisis-era non-banking debt) will add another €90bn or so Ireland’s debt. Given that Ireland’s non-banking debts in an optimistic scenario (most people believe the deficit will be down to 3% by 2016, not 0%), it’s amazing how public anger and grandkid-angst is focused almost exclusively on the banks. (The point could be made that we feel it is money down a black hole, but that ignores the fact that these monies have preserved our €160bn or so in savings.)

The rise of Helen Lovejoy economics

But a debt figure of €180bn is just a stock of debt. No-one really lives in a world of stocks, we live in a world of flows, like monthly income or GDP. So what is the flow equivalent of all this debt? Let’s first take a high 6% interest rate. This would mean that Ireland’s annual debt servicing bill would be just over €10bn. Spread across 1.8 million households, this represents a monthly income tax bill of €200 for the average household, with another €215 coming from consumption taxes. Put another way, the monthly cost of Ireland’s “deposit insurance” recapitalisations of the banks will be about €115 per household.

At a 4% interest rate, the equivalent figure would be about €75. Certainly expensive deposit insurance, but small even compared to non-banking debt (€200 a month per household at a 4% interest rate). More importantly, it is considerably smaller than the money the typical household will spend on on-going services like education (€325), health (€540) or social welfare (€770).

Think of the grandchildren!

Still, something like €115 or even €75 a month adds up month on month and year on year. What sort of burden will that represent to our grandchildren?

The important thing to remember here is how compound growth really adds up over time. It seems like a tempting rule of thumb to think that if say GDP growth is 10% a year, in 10 years GDP will have doubled, in twenty years trebled and so on, so that in forty years, GDP will have increased five-fold. However, 10% growth for forty years would mean GDP increased not by a factor of 4 but by a factor of 45! Growth year-in year-out can really mess with the mind.

Now, I’m not for a minute suggesting that any economy – let alone Ireland – will have average growth of 10% every year for the next four decades. But the point about compound growth remains, however, even if what we should be expecting is growth of 2% a year over coming few decades.

Why 2%? Well, while there are the inevitable snakes and ladders of boom and bust, the developed world has seen relatively steady growth in income per capita of the order of 2% a year over the last century. There is little to believe that this will change substantially over the coming century. Much as we love to think “Ireland is different”, sure enough if you look at the last century, the same rule applies. In 1900, per capita income in Ireland was on average – in modern euro terms – €4,100 a year. By 2000, that had risen to €33,000, a rise of just over 2% a year on average.

If Ireland does indeed average 2% growth a year between now and 2050, our grandchildren will have an average income of €77,000 a year, in our purchasing power terms, i.e. adjusting for inflation. Just think how much less we’d be worrying about our debts if our income was more than twice what it is today!

Of course, not only that, over coming decades we should also expect “price stability”, i.e. inflation of about 2% per year. This means that while in terms of how far your euro would go today, our grandchildren will be earning €77,000 a year on average by the 2050s, their P60 certificates will report an annual income of €170,000.

The compounding nature of both economic growth and inflation are hugely relevant before we fret too much about how bad our grandkids have it. At the moment, the typical household has 1.5 incomes, with average output per head €35,000. This means that servicing the debts due to bank recapitalisation represents about 1.8% of the typical household’s income.

By 2050, inflation and economic growth will mean that banking debt will be about 0.4% of the typical household’s income. Worried about the great-great-grandkids? Well, 2% growth and 2% inflation would mean that by 2100, servicing the bank debts would cost one twentieth of one percent of the typical household income.

Keep Calm & Carry On

So would our grandchildren gladly swap to be in our position? I think we’ll find it’s extremely unlikely.

So do your best to ignore those who says things like “Every man, woman and child in the country is in debt to the tune of €25,000 because of the banks”. And don’t pay any attention to someone who says “Our grandchildren and who knows even their grandchildren will still be paying for our mistakes.” Both of these statements are completely true but completely meaningless.

One the first, it is recurring costs of debt matter, not the stock of debt. On the second, the important thing to remember about a country’s debt is that it is never repaid. Because countries, unlike households, never die, a country’s debt is only ever rolled over and at some point growth and inflation mean that it has become too small to worry about.

Remember, all Ireland’s debt from the 1980s never actually got paid off. It was rolled over until the Irish economy grew by enough that we no longer worried about it. Likewise, taxpayers in the UK are still paying off the debts of the Napoleonic Wars of the early 1800s and those of the Anglo-Dutch Wars of the 1650s and 1660s and probably those of actions taken even further back in the mists of time!

Does that mean that any one of us would gladly swap with our ancestors to live with guineas of debts, rather than billions? Of course not!

On the latter, he gave some more specifics. According to the Irish Independent, O’Leary said: “Anybody earning under €50,000 should pay 10 per cent tax. If you’re earning under €100,000, you pay 25 per cent and anybody earning over €100,000 pays 50 per cent. I’m one of the largest taxpayers in the country and I have no problem paying 50 per cent of my income in tax.” So how do his suggestions stack up?

Keep it Simple, Stupid

What’s not clear from that is whether he means a flat rate (i.e. someone earning €250,000 would pay 50% on all their income) or three marginal rates (i.e. that person would only pay 50% on income over €100,000). I’m going to assume he meant the latter, otherwise you would have the odd situation where workers earning €48,000 a year dread overtime or even worse a promotion as their tax bill would rise from €5,000 to €12,500 a year.

A Twitter connection of mine pondered out loud about what sort of impact such a system would have on the Government coffers. I’ll do my best to answer, using the Revenue Commissioners figures for 2008 on who earned what and how much income tax they paid. (As before, PRSI may look like a tax, but it’s actually an insurance premium you pay, so the Revenue does not include these figures in their totals. Health and income levies were not included but now – as the revamped Universal Social Charge – are part of the income tax system so I’ve included them below.)

One thing that is worth noting in passing is that even though we rightly think of housing bubble having come to an end in 2007 (or even late 2006), there is scant evidence of any hit in incomes as of 2008. There were 757,000 people earning €40,000 or more in 2008, compared to 640,000 in 2006 – indeed, the number earning more than €100,000 rose by 25% in the same period. It’s difficult, in that context, to be certain about what an income tax in 2011 (or realistically 2012) would raise, as we don’t know yet who’s been hit and by how much.

Given all that, let’s compare instead the income tax system we had in 2008 with what Michael O’Leary’s three-band taxation system would have raised in 2008. First things first, the biggest change to the tax system is the abolition of tax credits. Anyone earning under €50,000 would pay 10% of their income over in tax – including, one would assume, those earning less than €15,000 who are currently paying only the Universal Social Charge.

Winners & Losers

This would be a big culture shock for the vast majority of earners. Two years ago, I wrote about how the median earner in the country in 2006, earning €25,000, paid just 4% in income tax, compared to 20% in most other developed countries. By 2008, the median earner was taking home about €27,500 and still paying just 4% in income tax (this excludes PRSI, remember, which is insurance not tax).

Even taking account of the health levy or, to make it more relevant to today’s earners, the Universal Social Charge, as is shown in the graph below, the average tax rates enjoyed by Irish earners up to about €50,000 are still well below the international benchmark of about 20%.

Average tax rates by 2008 income bands, according to various schemes

What about Michael O’Leary’s system? That’s shown in red in the graph above. There are effectively three significant changes under such a system. Firstly, all those earning €30,000 or less would pay a flat 10% of their income over in tax, compared to 5% or less under the 2008 system and anything from 0% to 10% under the current system. Secondly, those earning more than €200,000 would see their average tax rate increase from about 34% now (including the USC) to 43%-51%. Lastly, those earning from €40,000 to about €150,000 would see relatively significant falls in their average tax rate. For example, the average amount of tax paid by those earning €60k-€75k is currently 22% (including USC) but this would fall to 14% under the O’Leary system.

Will the Government bite?

But would the Government be interested in such a scheme? It’s safe to say that the Government would only be interested if it resulted in more income tax coming in to the coffers. The 2008 system of income tax (and health levies) brought in about €13.9bn. Applying the 2011 system to the incomes earned in 2008 would have brought in €18.4bn, which is the benchmark for any new suggestions to beat.

The straightforward “three marginal rates” system (with no USC) would have brought in €15.6bn in 2008. So it’s safe to say, for all its simplicity (and the unknown impact of that in creating new jobs), it’s not a runner. The reason so much tax revenue is lost is because of what happens the €40,000 to €100,000. Suppose O’Leary’s proposal was adjusted so that people paid 25% on everything earned between €25,000 and €100,000 (and 50% above that). Such a system would have brought in €18.6bn, based on what was earned then.

I’ll suggest one more tweak. This would be to include all social welfare as taxable income – they are the people marked “LR” (Live Register) in the graph above. The primary aim of this measure is reduce the barriers to returning to work. Like every other developed country in the world, in Ireland someone who earns €10,000 should make some direct contribution in income tax. However, it’s simply not fair that someone earning €10,000 working has to pay tax while someone who receives €10,000 for not working doesn’t. And that lack of fairness affects people’s decisions.

Such a revised system of income tax would face stiff political resistance, as although high earners would pay significantly more in tax, so would those who earn less than €25,000. Nonetheless, there are three principal benefits. Firstly, it would increase revenue to the Government. Secondly, it would create a simple and fair tax system, where everyone contributes and those who earn most contribute proportionately more. Lastly, it would demolish the artificial boundaries between money earned through various sources including social welfare.

One of the final sessions of the week was based around the question “Is Ireland a country for young men and women?”. Three “young-ish” people (the School’s description of us, not mine!) were asked to give their thoughts, including Andrea Pappin and Ruairi McKiernan of spunout.ie. Here are my thoughts – if you don’t like the jokes, or if a few of the passages seem familiar, go easy on me, I’m not used to reading out a speech!

–

One of the challenges I had when thinking about today’s topic was to define – to myself even if to no-one else – what exactly “a young person” is these days. The barstool definition is that you’re old if when someone describes you as young, you take is as a compliment, rather than bristle. I’m not sure, though, that for as prestigious a platform as this, that definition will pass muster, particularly as by that definition I’m definitely old!

I think it’s easier for an economist such as myself to seek refuge in numbers instead. The median age in Ireland is 35, so I guess it’s fair to describe those under that age as “young men and women”. And today, I hope to discuss three things in relation to that younger generation in Ireland:

• firstly, to give my own perspective on the questions posed for today’s theme, in particular what we mean by participation
• secondly, to outline some of the ideas for the future that young people in Ireland have put forward in these challenging times
• and lastly, to explain why I believe that those born in the 1990s, will yet emerge as Ireland’s luckiest generation

Naturally, as I speak, I’m doing so from my own perspective and do not claim for a minute to speak on behalf of all people born after 1975.

What is participation?

In fact, that’s one of the first points I’d like to make. One of the scene-setting questions for today’s session asks: “What is their view of politics and political institutions and why do they not participate more?”

This is a somewhat loaded question – in two ways. Firstly, do all young people really have the same view of politics in Ireland? Would we say that of women or migrants or the elderly? As long as we talk about young people as some “other” out there, as the object of discussion, it’s going to be very difficult to invite them properly to join that discussion.

And secondly, do we really know that young people do not participate?

Certainly, people have long fretted about how few young people vote in elections. But is it really any surprise that young people haven’t voted in large numbers in recent elections? Civil War politics is hardly a turn-on for a generation that barely remembers the tough times of the 1980s, let alone the 1920s. To young people born in Ireland, who regard themselves as young Europeans – indeed global citizens – there hasn’t – at least until recently – been an awful lot to get particularly excited about when it comes to national politics.

And it’s not just the content, it’s the context. 16/17-year-olds aren’t allowed to vote, while the policy of having elections on a Friday means that 18-22 year old students find it difficult to vote.

The other night, I went to see Roger Daltrey, lead singer of the Who, in Marlay Park. Sure enough, he performed one of their biggest hits from nearly half a century ago, “Talkin Bout My Generation”. And it struck me as he sang, that his generation, born in the 1940s and 1950s, have gone from brash upstarts to holding the reins. Many young people today watching him sing would not see an anthem for a social revolution that they could happily sign up for. They see a man hitting retirement age singing about the past.

To me, the system as it’s set up this is a bit like this. We’ve a generation in control, with a system set up to their tastes and often to their benefit. And that generation is puzzled why their children are not particularly bothered about joining in.

Participation is not a single-issue subject, “vote or else”, nor is it a static concept in a rapidly changing society. I think the key to understanding participation in the modern world is to remember that there are hundreds of different ways of doing it. And as fashions change, so do ways of joining in.

In fact, I’ve something of a confession to make. At every session I’ve been at this week, even as session chairs have been urging us to turn off our phones, I’ve been playing away with mine. What I’ve been doing, though, is sharing what’s been happening here at MacGill with hundreds of people around the country via Twitter. That’s one example of what participation looks like these days – for me and others like me, it seems alien to go to something interesting and not share it with the world.

This leads me on to another question in the blurb for this morning’s session, whether young people get more fulfilment from the web than from the environment in which they live and work. To me, this misses the point – the web is not some alternative to the environment I live and work in, it’s a fundamental part of it.

Most of my work and research is effectively online. In 2007, I got my job via the web. The vast majority of those under 35 work, live, chat, buy music and books, make friends, find new jobs, new places to live, even husbands and wives all online. Participation is different now.

Ideas for the Future

So when people ask “Do young people care anymore?”, my argument is yes – they just show it in different ways. What I’d like to do now is take a few moments to go through some of the interesting ideas that those under-40 have put forward into the public domain, as Ireland faces a range of challenges and crises.

Earlier this year, a book was published, “Next Generation Ireland”. It contained nine chapters, each written by emerging experts in a particular policy area. And each of which is designed to answer in a non-technical way the question “What Now?”. The book covers nine different areas of policy, from political reform and the public service to climate change and Ireland’s diaspora. I was lucky enough to edit the book, together with Ed Burke. And the dark secret of these books is that you learn a lot more by editing it than any reader ever will!

For reasons of time, I can only go through a couple, but the general point I’d like to make is that there are a lot of smart young people out there with excellent suggestions for how Ireland can get itself out of this mess – we just have to listen to them. The “Next Generation Ireland” book is hopefully a useful tool for doing just that.

Reading the chapter on climate change, for example, I learnt that Ireland can never become environmentally sustainable without sorting out each of the following three things: our farms, our houses and our cars. This can’t be done at the stroke of a pen but Joe Curtin in his chapter outlines the steps that can be taken now to do just that.

Similarly, on political reform, as has been stressed on a number of occasions this week, we need to be wary of consensus. The political system needs to be set up to foster dissent in the design stage, so what emerges as the end product is robust. Eoin O’Malley suggests a few ways this can be done, for example vastly reducing the size of the Cabinet, establishing a Civil Service Department of the Opposition or even just changing the role of the Ceann Comhairle.

Lastly, on our public services, we need to move away from a fallacy that lies at the heart of how public money is spent these days: that public services incur costs but no benefits. In effect, we need to move away from an accounting model where public services have costs, to an economic model that attempts to understand the benefits as well as the costs, and thus enables us to make better decisions about how taxpayer money is allocated.

Ireland’s Luckiest Generation

I’m aware, though, that time is tight and I haven’t yet addressed the central question of this session: “Is Ireland a country for young people?”

The theme of this year’s school is ultimately about what the Ireland of 2016 will look like. So why don’t we consider the graduating class of 2016? To steal a trick from David McWilliams, let’s call these 16 and 17 year-olds, who were born in the early 1990s, “Charlton’s Children”.

Odd as this may sound to them in particular, but in my opinion “Charlton’s Children” are perhaps the luckiest generation Ireland has ever had. It’s not difficult to see that they are definitely luckier than those in their 20s now. Ireland’s 20-somethings picked their college courses at the boom turned to bubble, often without reference to the underlying skills it would give them. This happened because we’d become victims of our own success: there was a general feeling that there would be jobs for graduates out the other side, no matter what their degree. As we all know now, though, jobs are never guaranteed and they have been graduating into one of the toughest labour markets Ireland has ever seen. Even more worryingly, many have qualifications for sectors that are in serious contraction.

I would also argue that Charlton’s Children are luckier than Ireland’s 30-somethings. Sure, those born in the 1970s found it easy to get jobs when they finished their education. However, shortly after that, they were also showered with cheap credit. Unsurprisingly, with house prices now down by half in five years, this cohort forms the bulk of hundreds of thousands of people around the country who are in negative equity, often €100,000 or more. If you gave them the chance to start all over again, there wouldn’t be too many who’d refuse.

And I hope it’s not too contentious to say that Charlton’s Children are luckier than those born before the 1970s, who typically had to scatter around the world to find livelihoods. These generations didn’t have the same opportunities, and the majority didn’t go to college. As I mentioned before, I love my stats, and so I think one or two are in order here. In particular, I’d like to compare Ireland’s 20-somethings with Ireland’s 60-somethings.

Of 65-69 year-olds, only two in five made it to the Leaving Cert, compared to four out of five of their German pen-pals. By contrast, Ireland’s 20-24 year-olds are the best qualified in Europe –just one in ten does not have their Leaving Cert, about half the EU-15 rate. Not only that, and notwithstanding the very good points made on Wednesday night about our education system, our statistics in relation to access to higher education are equally impressive. In Ireland, the proportion of people under 30 with higher education is close to a half, the highest in the EU.

“Charlton’s Children” are lucky because they are the first generation to see Ireland for what it is and pick their future accordingly: a small open economy completely dependent on its ability to sell its talent on international markets, but with plenty of opportunity for those with the right skills. Yes, there is lots of unemployment in Ireland. Yes, there is a lot of debt and, as we’ve heard this week, for the next few years, there will be tough Budget after tough Budget.

But Ireland’s teenagers can sidestep all that, because they have a clean slate. Let’s not forget that Ireland attracts more FDI jobs per capita than any other country in the world. The companies that come here often can’t find all the skills they need in Ireland and so bring other workers here. People in Ireland are unemployed not because there is no demand for workers, but because there is demand for workers with skills a, b and c, while those unemployed have skills x, y and z.

“What about all the debt we’re leaving them?”, people will say. On that, we really need some perspective. I estimate that by the time we balance our books, the monthly income tax bill per household will be about €1,300. Of that, €800 will be social welfare, health and education spending. Just €200 will be debt repayments, and €50 of that predates the crisis, while the bill for the banking bailout will be about another €50 per household, per month. It’s very expensive deposit insurance, certainly. But it’s not the be-all-and-end-all.

I should definitely wrap up by this stage.

What I’ve tried to show today is that first we shouldn’t really be thinking of young people as some “other”, outside the conversation. Participation is like fashion – sure, the way younger people do it seems odd to older people, but you guys seem pretty weird to us too, if you don’t mind me saying so!

Secondly, I think that if we stop and listen, we’ll see that Ireland’s under-40s are producing some excellent contributions to public discourse. Hopefully, what Ed, I and the other authors have done in “Next Generation Ireland” is a part of that. The key thing is that we need to be prepared to listen.

And lastly, is Ireland a country for young people? My point today was that, as long as we keep a bit of perspective, I think to me it’s pretty clear that Ireland is a country for young people.

I’ll leave you with one more stat. A month ago, we found out that our lead had grown at the top of a very important league table, the one measuring birth rates. Ireland’s birth rate is 17 per 1,000, compared to less than 13 in 2^nd-placed UK and France and more than twice the rate in Germany, which trails in last. So I would say that Ireland is not just a country FOR young people: Ireland is a country OF young people.

Thank you.