Debt deflation to force Irish transformation from Boston to Berlin?

This weeks budget raised the marginal tax rates in Ireland to 28% and 53% sharply up from 22% and 42.5% this time last year.

The government largely favoured tax rises over spending cuts to bridge a budget deficit due to projected revenues of €34bn and spending of between €55-60bn. However as Michael Taft and Constantin Grudgiev have both suggested these may not actually ensure the government makes their deficit reduction targets. Irish households are among the most indebted in the world, with household debt prior to these budgetary changes standing at 178% of disposable income. Such violent tax rises will dramatically reduce householders’ disposable incomes, these rises will often be accompanied with pay cuts in the private sector and the public service facing a pension levy.

Unfortunately there may be many more tax rises to come. Most of this debt is variable rate mortgage debt, and householders will be relieved that the ECB has cut rates significantly over the last year. For many, despite these cuts the burden of repaying that debt will have grown substantially. With CPI running at a negative annual rate of 2.7% (CPI deflation), real interest rates in Ireland are sky high. A lurking danger for households, however, is the threat that if core European economies recover faster workers may find their disposable incomes decimated by interest rate rises, tax rises and pay cuts in a deflationary Ireland.

Over at the Telegraph Eurosceptic Ambrose Evans-Pritchard succinctly details much of the bind Ireland finds herself in. As a small nation within the Eurozone we simply don’t have our hands on the monetary levers to fight deflation in our own economy (and to create the inflation we need to inflate away our household debt).

While I disagree with the argument that the credit bubble in Ireland was unavoidable, huge policy errors were made and no attempt to talk the public out of their mass delusion – he does make valid points about our current position. A concern of mine, which Ambrose highlights, is that with this weeks budget – the government seems to have abandoned the low tax policy, that created and drove the Celtic Tiger (Corporation tax notwithstanding), and appears to be forced into replicating the high tax structures present in the rest of Europe (without the same value for money in services). Does this crises represent the transition of the Irish economy permanently from Boston to Berlin?

  • kensei

    This is a question as much of temperament as it is of policy. Huge tax rises have been accepted as a negative consequence of the economic collapse. But are they considered permanent? It’s easy to trot the line that government expansion is but it isn’t true. Eventually the economic situation will improve. Will the expectation then be of aggressive tax cuts, or improvements to services. There’ll probably be a mix but I suspect Ireland will mean toward the latter. Expect also spending to begin to get hammered as people object to paying more for inefficiencies.

    Other things worth pointing out. “Boston to Berlin” is a bit of a con. If you ask “London or Dallas” you’ll get a different response, I’d reckon. Over the medium term taxes are rising almost everywhere, and the US will be no exception. And even in the US support for capitaqlism isn’t as high as you might expect at the mo:

    http://www.fivethirtyeight.com/2009/04/have-nots-arent-having-it.html

  • EWI

    A concern of mine, which Ambrose highlights, is that with this weeks budget – the government seems to have abandoned the low tax policy, that created and drove the Celtic Tiger (Corporation tax notwithstanding), and appears to be forced into replicating the high tax structures present in the rest of Europe (without the same value for money in services).

    Low personal taxes created the Celtic Tiger? Given that the Celtic Tiger is generally accepted to be the result of a combination of foreign multinationals and a property bubble, I would think the claim that the low personal taxes introduced as a result of the improving public finances were responsible, would be rather hard to defend.

  • DC

    “Does this crises represent the transition of the Irish economy permanently from Boston to Berlin?”

    Perhaps so.

    Moving from Boston to Berlin might mean ditching too this notion of the employee as the ‘internal customer’. A mindset driven on by the McDonaldisation Nation, which is that US neoliberalism, where external marketing strategies have even entered into the workplace, and been internalised without even the slightest debate about appropriateness. A social chapter here and a tax rise there mightn’t be too bad a thing after all.

    For when employees are on the verge of being labelled internal customers, the marketisation effect has gone too far. The stretching of the market mindset has meant bankers foolishly thinking that they were market financiers, and employers thinking of employees as internal customers. All of this in pursuit workplace happiness and business efficiency but the outcome: social, economic and environmental corruption. This consumerism, this short-termism, is wasteful. For example, the US consumes more than 9 times the needed energy than us Europeans do.

    Let’s get back to some sort of proper, authentic form of organisational process, a proper reading of the working character, a psychological mindset where humans are people and called employees (who have problems with work life, not internal customers seeking and giving satisfaction to their service provider aka employer!). We cannot always be marketable things, such as internal customers, cheered and willed on to consume everything, even our own identity as employees, perhaps even our children.

    Any wonder the bank failures then? As when you believe everything is about customer satisfaction the grounds for legitimate contention become blurred, you fail to identify little system-failures and miss entirely that upcoming bigger breakdown.

    All of this is discounted so long as, however specious the means, the short-term ends of consumer self-satisfaction and money-for-nothing are met.

  • EWI

    By the way, the following assertion:

    (without the same value for money in services)

    Is one which begs comparison to our European partners, along with accompanying figures, if it’s to be made at all.

  • Mack

    DC –

    Good points, although I’ve worked for a few different companies and found US multi-nationals to be much healthier environments in terms of respect for employee well-being than local employers.

  • Mack

    Kensei –

    53% is surprisingly high – given the current crises. I don’t quite get the London / Dallas analogy, care to elabourate?

    I agree we’ll see tax rises everywhere, except perhaps the UK in the medium as the Tories will probably win the next election.

    What makes Ireland’s position different is that each of these events increases the debt burden on the indebted potentially triggering another downward wave in the crises, the government response to which may further increase the debt burden etc. Irish taxes are high in Irish terms now, but who knows where they will end up…

  • Mack

    EWI –

    The Celtic Tiger predated the property bubble by quite some time. In truth Celtic Tiger export led growth stalled in 2001, growth after that period was entirely due to a credit bubble. The period 2001-2007 should not really be classified as part of the Celtic Tiger era. (Even if you do classify it as such, it clearly came after the sustained period of export led growth I’m refering too).

    You don’t seem to have any qualms about hammering PAYE workers? How many indebted young families, facing pay cuts and redundancies, and huge mortgage repayments will these tax rises push over the edge? Or do you even care?

    (without the same value for money in services)

    Is one which begs comparison to our European partners, along with accompanying figures, if it’s to be made at all.

    Funny, on another thread you complained about the modest size of our public sector in European terms – you didn’t respond when I pointed out public spending is now at 40% GNP.

    So which is it modest or superior?

    It just strikes me that you come across as a public service vested interest – defending the public sector no matter what? Whether it be high wages for those at the top, the level of service provided, value for money – you see everything as being perfect now. Is this fair comment?

    http://sluggerotoole.com/index.php/weblog/comments/a-nuclear-strike-to-the-heart-of-the-private-sector-economy-in-ireland/

  • Mack

    EWI –

    Also, please, could you do me the service of not twisting my words. You’ve done this on both threads we’ve debated on. See above

    Low personal taxes created the Celtic Tiger

    I did not say that. I said low taxes, and made an exception for Corporation Tax as it is currently unchanged.

  • kensei

    Mack

    53% is surprisingly high – given the current crises.

    This is the US, Mack. Home of uber capitalism and where “socialism” is used to whip up frenzy. That is a shocking figure, crisis or no.

    I don’t quite get the London / Dallas analogy, care to elabourate?

    Well, people say “Boston or Berlin” or “Boston or Brussels” they are not simply saying the “US or America2 they are putting other associations in there. Ireland has an emotional connection with Boston and it at the liberal end of US politics. Berlin is somewhat distant form Ireland, and Brussels a short hand for the excesses of Europe. Pick a more red in tooth and claw version of American capitalism, and a more flexible version of European capitalism closer to home home, and the associations change. And possibly the result too.

    I agree we’ll see tax rises everywhere, except perhaps the UK in the medium as the Tories will probably win the next election.

    If the Tories run on current rhetoric their hands will be forced.

    What makes Ireland’s position different is that each of these events increases the debt burden on the indebted potentially triggering another downward wave in the crises, the government response to which may further increase the debt burden etc. Irish taxes are high in Irish terms now, but who knows where they will end up…

    Personal debt has risen everywhere, particularly in the US and the UK. A debt-deflation spiral is a real worry. Europe is partially in better shape on this score, but there are still large parts of it beyond Ireland in trouble. The tension is that Germany isn’t in bother. I’d guess the result will be some form of bailout rather than a bout of inflation for the problem areas. Though if the rest of the world attempts to inflate their way out of trouble, it’s hard to say what will happen to Europe.

  • DC

    “I’ve worked for a few different companies and found US multi-nationals to be much healthier environments in terms of respect for employee well-being than local employers.”

    That’s the beauty of it, it is done out of respect as imagining the employee as a customer, but can that possibly be 1) sincere and 2) authentic. Don’t get me wrong it is admirable and desirable to want to be treated with respect like customers are at most times but is such an approach genuine in the workplace, or rather is it really not a little bit specious to try that on?

    Customer psychology as per marketable things is far different than the psychology of organisational behaviour, where the workplace is an organisation with many different factors at play than the ‘customer as king’ philosophy.

    It’s like the Bill Clinton thing where people look on in amazement when he is perceived to be genuinely still smiling and happy after swallowing a shit.

    Once found out by actions disproving the spoken words or perhaps very little action proving such therapeutic lip service, the person tends to have very sincere and serious frustrations towards those people who they thought really meant otherwise. Be they employees or voters etc.

  • Mack

    Kensei – Ok I see what you mean now. I’d always have lumped London in with Boston (as part of Anglo-American deregulated monetarism), which is why that threw me a little.