Economic and Social Review, Summer 2018

The latest edition of the Economic and Social Review (Volume 49, No.2) is now available, containing the following research and policy articles:

Articles

The Socioeconomic Determinants of Crime in Ireland from 2003-2012 by Stephen Brosnan

Householder Preferences for the Design of an Energy Efficiency Retrofit Subsidy in Ireland by Matthew Collins, Seraphim Dempsey and John Curtis

Decomposing the Drivers of Changes in Inequality during the Great Recession in Ireland using the Fields Approach by Cathal O’Donoghue, Jason Loughrey and Denisa M. Sologon

Policy papers

The Impact of Free GP Care on GP Utilisation in Ireland by Paul K. Gorecki

Lifting the Lid: the Private Financing of Motorway PPPs in Ireland by Dónal Palcic, Eoin Reeves and Anne Stafford

If the retired are not poor, is it right for them to keep all-day free bus passes?

There has been a considerable fuss over a suggestion for a modest scaling-back of the benefits to the retired. It was proposed that ‘free bus travel’ be available only at off-peak travel times. At all other times, free bus travel would continue to apply.

The fuss has been strikingly one-side: the proposal was denounced by politicians, interest groups and journalists. Otherwise, silence; including on this blog.

The case for this change is easily stated – rush hour is busy because of workers travelling to/from work at times they don’t control. So it is a more efficient use of the bus system that people with more discretion over when to travel, notably the retired, would use (free) buses only at other times.  (Of course they could travel as paying passengers at any time.) Nearly one-tenth of passengers on the buses at rush hour use free bus passes. So either we expand the bus system or we move bus-pass holders to (free) travel at another time and release a lot of bus space.

Available information suggests this change would also improve fairness. There is considerable evidence that the retired are not poor, either in income or in wealth terms. Removing a small fraction of the bus subsidy would seem to be fair, especially if it also made the bus service work better.

The CSO’s 2013 Household Finance and Consumption Survey (Table 12) indicates that in households where the head of household was under 35, median net wealth was €4,000. For households headed by a person 65 or older, median net wealth was €348,000. It seems legitimate to conclude that the retired are not poor in terms of their net wealth. (This is hardly surprising; they have had decades more than twenty-somethings in which to save. Grey and wrinkled has a few compensations.)

For incomes, the CSO Survey on Income and Living Conditions (Table 1e) reported that in 2016 median net disposable income (adjusting for household size) was €21,387 for those aged 18-64 and not a very great deal less, €17,956, for those over 65. So for every €100 of net disposable equivalised income of the median member of the first group, the median retired person has an income of €84. The costs of the retired are surely lower than those working (mortgage, children’s education costs)? In any case, according to the report (Table 2) those aged over 65, have a lower risk of poverty (10.2% v. 16.6%) and also a lower rate of deprivation (13.1% v. 20.9%) compared to those of working age.

Given the similarity of incomes, there seems a solid basis to say the over 65s are not poor in income terms either, compared to the working age population.

Yet the older generation have various non-means-tested benefits including free bus passes. They were also essentially exempted from the post-2008 income and benefit reductions. I will leave the inter-generational aspects of the planning laws for another occasion.

Subsidies for the retired was recently raised in the UK which “continue[s] to treat pensioners as though they need free travel, winter fuel allowances and the like, despite the fact they are on average now the best-off demographic group in the country.” In a comment pertinent to the Irish case, the writer argued that amongst the UK groups needing more public funds are children and the mentally ill. If money goes to the over-65s, it will be harder or impossible to finance the other programmes.

The broader setting for this discussion is whether our prevailing redistributive and other policies in fact discriminate against younger rather than older generations. Many of the retired and soon-to-be-retired, benefitted from lower costs of going to college, drastically lower house prices, and much more generous pension schemes that today’s twenty- than thirty-somethings will have. On top of this there are pensions, free bus travel and other benefits; some of this money may have more deserving uses, not excluding healthier public finances.

From this perspective, do we redistribute income on the basis of means or, say, voting propensity? Regarding the latter, a rough calculation (exit poll age data, total turnout, and population less non-nationals) suggests that in the 2016 general election turnout was 41% for voters under 24, and 61% for those over 65. 

How, then, was the bus-policy reform proposal responded to? It did not go down well! Its author was personally vilified and the proposal was drowned in ridiculous hyperbole, while more important aspects of the speaker’s policy recommendations at the conference passed unremarked. One Minister remarked that the civil servant’s suggestion was unprecedented. It’s not hard to see why.

There was the usual claim by a journalist that “free bus pass holders have contributed to the economy for decades” On that principle, shouldn’t everyone have everything free forever? (Where are our free newspapers?)

Senator Buttimer of Fine Gael demanded that the civil servant be fired. The Independent Alliance judged that this change would cause “severe hardship” and could jeopardise the ability of the retired to get to hospital. (Severe hardship? Really? No pensions, no cars, no taxis, no offspring, in Independent Alliance constituencies?)

Even the elusive Minister Ross took to the battlements to declare that the change would happen only over his dead body, although some think the Minister’s body has been alarmingly immobile since he took office. (Missing Minister.)  The Minister added that this modest change was no less than “an extraordinary assault on the rights of older people.” (An extraordinary assault?)

As for the temerity of the civil servant, I believe the department he works for is called Public Expenditure and Reform. His remarks were made at a conference where the OECD recommended that Ireland needs to focus more on evaluation of the impact of public policies. The responses amounted to saying: our supporters like this policy, we are not interested in any evaluation.

This sorry episode is reminiscent of the ‘anti-expert’ commentary of members of the Bertie Ahern governments. Minister Martin Cullen in the mid-2000s dismissed warnings of economic overheating contained in an ESRI mid-term review of the public investment programme, as merely the views of ESRI ‘sandal wearers’. He insisted that the government would press ahead in the face of the advice it had itself commissioned. Ten years on, some current Ministers seem to believe much the same thing.

The retired in the population used to be poor. That’s not been true for a long time. Policy has to catch up. The Government should seek to improve the efficiency of the transport system particularly when it can be achieved at no loss of fairness. In any event, they should give a civil hearing to policy suggestions.

Complete inflexibility from the retired may leave them with few sympathisers should the large deficits in the public pension scheme require real fiscal surgery in the future.

41st DEW Annual Conference – September 14/15, Clayton Whites (Wexford)

The 41st Annual DEW Economic Policy Conference, supported by Dublin Chamber, takes place in Whites of Wexford on Friday 14th and Saturday 15th September, 2018.

The conference opens on Friday afternoon with the Cantillon Lecture delivered by Minister for Finance, Paschal Donohoe. The two other sessions on Friday deal with the all-island economy, including Aidan Gough (Intertrade Ireland) and Tom Healy (NERI), and “Ten Years Since the Crisis“, where the expert panel includes Sharon Donnery (Central Bank) and Ann Nolan (ex-Department of Finance).

Saturday morning starts with a session on Housing Supply, featuring among others Orla Hegarty (UCD) and Colette Bennett (Social Justice Ireland). Next up is an expert panel on Higher Education, with Michael Horgan (Chair, Higher Education Authority), Brigid McManus (ex-Department of Education) and Linda Doyle (Vice-Dean for Research, Trinity College Dublin).

After lunch, there are parallel sessions on the application of behavioural economics to policy and on public finances. The conference concludes with an expert panel on Ireland 2040, chaired by Robert Watt (Department of Public Expenditure and Reform), and the William Petty lecture, by another government minister.

For more on the conference, including how to book, please visit the DEW’s website: http://dublineconomics.com.

Latest Assessment Report from IFAC

The Irish Fiscal Advisory Council has published its latest Fiscal Assessment Report.  The report and some additional resources are available here.

Accompanying the report is a working paper that looks at how a counter-cyclical “rainy day fund” could be incorporated in the framework of the Stability and Growth Pack.  Last week, IFAC published its assessment of compliance with the Domestic Budgetary Rule in 2017 as well as an update of its Standstill Scenario which estimates of the cost of maintaining today’s level of public services and benefits in real terms over the medium term.

A bullet-point summary of the latest FAR:

  • A rapid cyclical recovery has taken place since at least 2014 and this is continuing at a strong pace.
  • Ireland’s debt burden is still among the highest in the OECD.
  • Negative shocks will inevitably occur in future years and there are clear downside risks over the medium term, namely those associated with Brexit, US trade policy and the international tax environment.
  • Improvements on the budgetary front have stalled since 2015 despite the strong cyclical recovery taking place – one that is reinforced by a number of favourable tailwinds.
  • Any unexpected increases in tax revenues or lower interest costs should not be used to fund budgetary measures.
  • The Council welcomes the Department’s publication of alternative estimates of the output gap.
  • The Medium Term Objective (MTO) of a structural deficit of no less than 0.5 per cent of GDP was reached in 2017.
  • The Council sees the fiscal rules as a minimum standard for sustainability and continues to recommend that the Government commit to adhering to the Expenditure Benchmark even after the MTO is achieved.

And on Budget 2019 in particular:

  • The Government should at least stick to existing budget plans for 2019 as there is no case for additional fiscal stimulus beyond existing plans as set out in the 2018 Stability Programme Update.
  • Estimates of the medium-term potential growth rate of the economy and expectations of economy-wide inflation for next year imply an upper limit for increasing the adjusted measure of government expenditure of 4.5%.
  • In nominal terms this translates into spending increases or tax cuts of up to €3½ billion (“gross fiscal space”) as the starting point for Budget 2019.
  • Previously announced measures – including sharp increases in public investment – mean that the Government’s scope for new initiatives in Budget 2019 will be limited.
  • If additional priorities are to be addressed, these should be funded by additional tax increases or through re-allocations of existing spending.
  • Improving the budget balance by more than planned would be desirable, especially given current favourable times, possible overheating in the near-term and visible downside risks over the medium term.

A gap in current policies for Irish financial stability

In a recent speech, the Deputy Governor of the Central Bank of Ireland, Sharon Donnery, floated the prospect that the CBI might impose Counter Cyclical Capital Buffers (CCyB) on Irish banks, in order to guard against an unstable credit build-up in the currently strong economic environment. She also used the speech to discuss current conditions in the Irish financial system and review the macroprudential regulation policies of the CBI.

In many ways, Irish macroprudential regulation has been exemplary, but there is a glaring defect. Stanga et alia (2017 and 2018) compare 26 countries regarding mortgage arrears, financial stability and macroprudential policies, and Ireland’s profile is remarkably poor. As Stanga et al. note, controlling mortgage arrears is a key objective of macroprudential policies, and Ireland has very poor performance by this metric.

Ireland’s intractable mortgage arrears problem stems in large part from its defective legal system regarding loan security, with extremely limited lenders’ rights to collateral repossession. This defect in turn limits the reliability of Ireland’s quite restrictive macroprudential policies. As Stanga et al. state in their international overview:

“Better institutions – which improve judicial efficiency and make it easier for banks to enforce their rights – reduce the level of mortgage defaults. We consider several proxies for institutional arrangements and compile an index of institutional quality (IQ). We find a significant and negative relationship between IQ and mortgage arrears, both before and after the onset of the financial crisis – the higher the average quality of institutions, the lower the average mortgage default ratio (Figure 3). Moreover, the effects of macroprudential policies and institutional quality on mortgage defaults are mutually reinforcing. As illustrated in Figure 4, the effect of the MPI [Macro Prudential Index] on defaults becomes stronger in countries with better institutions. This result suggests that the effect of tougher macroprudential policies (that reduce household leverage and ultimately deter defaults) is amplified in an institutional environment conducive to an efficient judicial system with better protection for lenders’ rights and better enforcement capabilities.”

In addition to making banks more cautious, the limited-repossession system in Ireland makes the CBI more stringent in its macroprudential squeeze on credit flows. The prospect of a future spike in mortgage defaults is a key concern for the CBI, along with the high average loss-give-default in such a scenario. Because of this, the CBI is correct to stamp down hard on any signs of substantial credit flow into the domestic housing market.

When it comes to tackling the underlying defect in the Irish system (the too-limited repossession rights of lenders) the CBI has taken the line that this is somebody else’s problem. The CBI harangues the government endlessly on tax and spend policies (which are also not strictly the CBI’s problems) but when it comes to addressing the big defect in the Irish system regarding repossession, the CBI is as quiet as a mouse.

Who is paying for this unusual Irish system of extremely-limited repossession rights? Nondelinquent mortgage borrowers pay for the limited-repossession system since their mortgage interest rate includes the expected cost of default, capturing both a high probability of default and a high loss given default. Households looking for mortgages suffer in two ways: one, the Irish limited-repossession system makes mortgages more difficult to obtain; two, the system has a knock-on effect on housing construction: property development is a high-risk business and with no guarantee of mortgage-ready buyers, developers are extra-cautious.

The net effect of the Irish limited-repossession system on housing prices is indeterminate since there are opposite effects on the demand and supply sides. Cash buyers might benefit or lose on a net basis: they lose from the decrease in house construction (hence higher prices) but benefit from reduced bidding competition against mortgage-based buyers. Existing mortgage holders (other than defaulters) lose, and prospective mortgage holders lose twice over.

At the conclusion of her speech Donnery states:

“While there are uncertainties placing a precise value on the short-term benefits and costs, in the longer-term, increasing the margins of safety in an uncertain world is of benefit to all.”

Consider a young Irish household wishing to buy a family home using mortgage finance. In exchange for a mortgage loan, they might be willing to take a chance that they lose the house in some future scenarios if things turned out badly and they could not pay the loan back. They want a house now and are willing to take a chance on the future. Such a mortgage contract is not legally available to them in Ireland nowadays, since repossession can only be enforced in ridiculously limited circumstances and, due to this legal reality, banks are not allowed to issue mortgage loans unless they are virtually default-risk-free. The young household will have to rent or live with parents, for many years into their future.

The Irish financial system, where there is virtually no chance of receiving a default-risky mortgage and even less chance that such a loan could end with repossession, is not of benefit to all. For many people in many circumstances, risk is good.

Sharon Donnery (Deputy Governor, Central Bank of Ireland) speech on macroprudential policy

The Department of Economics, Finance & Accounting at Maynooth University welcomes Sharon Donnery, Deputy Governor of the Central Bank of Ireland, who will deliver a talk on “Building resilience in the face of uncertainty – what role for policy?”, followed by a panel discussion, chaired by Bridget McNally (Maynooth University) with panelists Robert Kelly (Central Bank, Head of Macro-Finance Division), Dermot O’Leary (Chief Economist at Goodbody Stockbrokers), and Gregory Connor (Maynooth University), on Thursday 31st May 2018,  at 11am – 12:15 pm, Renehan Hall, Maynooth University. R.S.V.P. EconFinAcc@mu.ie. For further information tel: 01-7083728 / 7083681

The Meeting of the Waters

The editor of Critical Quarterly bought me a drink last December and told me that he was planning a special issue on, of all things, Thomas Moore’s The Meeting of the Waters. Would I care to write an economics column on the theme?

Well, it’s one thing to write a quarterly column on whatever is interesting me at the time, another entirely to write them to order. But since we were coming up to Christmas, and since my father’s family is from Wicklow, I said yes.

You can read the result here, and while I’m not sure how much economics there is in it, I did manage to work in a reference to Sargent and Velde!