Pensions grab justifiable in these desperate times
COMMENT:The funding of the jobs package is dubious – but it should alleviate the scourge of joblessness, writes DAN O'BRIEN
MOST JOBS are the result of private employers hiring private sector workers. Job creation is mostly about demand and supply conditions in the non-government economy.
Those caveats made, there are no shortage of things governments can do to boost the overall numbers at work.
They can employ people directly in the public sector. They can subsidise the private sector to take people on and keep them on. They can buy more goods and services from companies, resulting in more new hires. They can tweak the tax and benefits system to make work more attractive to the inactive. They can invest in “human capital” – economics-speak for making people more employable by training and educating them. And they can ensure that the cost of rules and regulations governing the hiring and firing of workers do as little as possible to discourage companies from creating jobs.
Five out of six of these broad areas of government action on jobs cost money. The Irish Government has almost none. And it is prohibited under the terms of its EU-IMF bailout from spending the very little money it has on anything the bailout supervisors say no to.
The troika told the Government that if it wanted to spend additional money on jobs it would have to find concrete sources of revenue to fund its initiatives. The Coalition chose the dubious, if expedient, option of taking from private pension pots. But before discussing the cons and pros of that issue, the more immediate question is whether yesterday’s package will help the 300,000 people who are unemployed and the additional 140,000 who are entitled to claim the dole, mostly because they are underemployed.
Overall, the package is to be welcomed, despite the questionable manner of its funding. It should help alleviate the scourge of joblessness.
Start with the best bits of the package. The focus on tourism is spot on. There are few more jobs-rich industries and the potential to bring in more visitors is very high – much higher numbers of inbound tourists in the past shows that the challenge is about recovering lost ground, not breaking new ground.
The decision to target (biggish) VAT cuts on tourism-related goods and services was far more sensible than the programme for government commitment to give a small cut across the board.
Other measures, such as scrapping the dunderheaded air travel tax and targeting PRSI cuts on the lower rate, were on the money, too.
Measures to have State agencies and bodies engage more actively with the jobless are urgently needed. The most important new measures will come in the future when the Ministers of welfare and training get to grips with their respective briefs. There were no hints yesterday on the changes to come from either of these departments.
Among the things that were announced by Michael Noonan was an increase in training places and internship schemes. In principle this is a good thing. The need to provide appropriate training has never been greater. As the ESRI pointed out yesterday, shortages of workers are emerging in some parts of the economy despite one of the highest unemployment rates in the developed world. Ensuring the jobless are qualified to do available jobs is an overriding imperative.
But given the appalling mess in the State’s myriad of training bodies and schemes, shovelling more money in does not engender confidence. Nor did the air-brushing of Fás, by far the most important training agency. Mention of that sprawling monster was confined to an appendix-like summary at the back of yesterday’s 32-page document.
The raising of the minimum wage was confirmed in the jobs package, despite it being an anti-jobs measure.
Minimum wages have one purpose: to prevent unscrupulous employers from exploiting the vulnerable. They are not an income-support mechanism. That is the function of the welfare and taxation systems.
Raising the minimum wage will mean some of those who would have found work will not do so. To see why, imagine if the minimum wage was increased to €100 an hour. Would this end poverty and want at the stroke of a pen? No. It would do the opposite, because most employers would be forced to lay off most of their employees.
The higher the minimum wage, the lower employment will be, all other things being equal. The only question is the size of the effect.
Overall though, yesterday’s announcements should, collectively, improve matters somewhat. But will the gains be worth the negative effect of plundering pension funds to pay for all the initiatives?
The answer is not straightforward.
There are a number of clear cons. First, many defined-benefit pension schemes are already in deep trouble. This will merely add to their woes.
Second, the knowledge that the State now believes pension funds are fair game will discourage people from providing for their old age. This will merely exacerbate the long-term problem of providing for a greying population and, ultimately, old-age poverty. It could also discourage savings more generally if people believe it opens the door to other kinds of grabs.
Third, it smacks of expropriation. That is not something a country so dependent on inward investment wants to signal to the world. And it puts Ireland in bad company. Less savoury governments have a history of swiping people’s pensions – the Hungarian coalition did it late last year and the Argentine government did it wholesale in 2001.
Against all those cons, in times as grave as these desperate measures are justifiable. This one probably is, for a number of reasons. First, pension contributions have enjoyed very generous preferential tax treatment in the past. Some clawback is justified under current circumstances.
Second, as a means of raising tax revenues, it is among the least damaging to already feeble consumer spending in the short run.
Third, given that the pensions industry charges fat fees to manage funds, it is likely to encourage the consumer side to seek a reduction in those fees to offset, partially at least, the new tax.
Government action must be proportionate to the scale of the crisis. The measure just about passes the test.
But only when Joan Burton’s welfare reforms are published and Ruairí Quinn’s shake-up of training agencies is set out will it be clear if the Government is prepared to take all available measures to tackle unemployment.