The resources to end austerity In Ireland

Economist, Michael Burke writes for us looking at the economics of austerity and how they compare in Northern and Southern Ireland

The claim from supporters of austerity is there is no money left and that therefore TINA, there is no alternative policy. These assertions are false.

Table 1 below shows the level of output in the Irish economy on both sides of the border, either GDP or GVA (Gross Value Added). The total compensation of employees is less than half the total out of the economy in RoI and little more than half in NI. (For comparison, in the US the proportion of CoE of total output, known as the ‘labour share of national income’ was 54% in 2014).

Table 1.

RoI, 2014, €billions NI, 2013, £billions
GDP/GVA 185 33
Compensation of Employees 76 19
Gross Operating Surplus of firms 93 14
-Investment 30 8 (est.)

Sources: CSO, ONS

In any economy there are only two uses of output or income, it is either consumed or invested. Only investment can increase the future income or output of the whole economy; it is not possible to consume your way to prosperity.

The reason firms are accorded a central place in explanations of how the economy should work is that they ought to be the primary agents for investment. But in Ireland, in common with almost every Western economy currently, only a portion of firms’ surplus (or profits) is being invested. This shortfall, the very high level of uninvested profits, is in fact the cause of the present crisis.

Identifying the cause of the crisis demonstrates that there are ample resources to end austerity in Ireland. It also provides a pointer as to how that might be done.

As all output/income is either invested or consumed, the very high level of uninvested profits tends to fuel unsustainable consumption. This takes various forms but is channelled directly from firms via enormous bonuses, stock options and so on, and indirectly through the banks who are willing to provide these uninvested profits for speculation in the stock market, the housing market, company mergers of no economic value, the consumption of luxury goods, and so on.

Therefore an overall tax system which directs incomes away from the rich, from speculation and from luxury consumption, and towards public goods and investment is a key part of ending the austerity offensive. This can be supplemented by other important measures, including;

  • Directing the banks towards productive investment and way from funding speculation
  • Direct government intervention, through the creation of funds or banks which channel private savings towards productive investment

In addition firms can be regulated so that they conform to both social requirements and the need for investment (equal pay, apprenticeships, living wages plus training, energy standards, contributions to infrastructure development, and so on). Industry-wide levies can be applied to fund these.

There are plenty of resources available to end austerity and fund investment. What is required is the political will to mobilise them.

The ‘subvention’

Outlandish numbers are frequently cited for the so-called subvention from Westminster, which is not included in the resources generated in NI. But the data above shows that there are resources available in NI that make any subvention unnecessary.

Recent ONS data specified the total of taxes and benefits for all households in Britain and in NI. On average households in NI receive £982 more in benefits than they contribute in taxes and charges. As there 703,000 households in NI, the total subvention to households is just £690 million. To be absolutely clear, these benefits are not welfare, but all forms of social protection,  plus the NHS, education, bus passes for the elderly, free school meals, etc., etc.

(The difference between Britain and NI is households in Britain are net contributors to government finances of £152 per annum. This is accounted for by a lower proportion of the population in work and lower paid jobs in NI- a marker of successive failures of British economic policy in NI).

Complementary economic units

Under certain conditions, economic growth can be a geometric process, not an arithmetical one. Between 1992 and 2000 the RoI economy almost doubled in real terms. By contrast, it has taken from 1985 to 2014 for the British economy to double in size.

The economic unification of Ireland would provide those conditions as they would significantly increase the size of the ‘home market’, the basis for the division of labour and would allow the NI economy to integrate with the world economy, the international division of labour. The potential for very rapid growth can be realised through significantly increased productive investment.

The RoI and NI are in fact highly complementary economies. RoI has a dynamic MNC sector, and an underdeveloped indigenous business sector and public sector. The opposite is the case in NI. Key industries are complementary, eg aircraft leasing/manufacture & medical research and equipment. Education, tourism, transport would all provide very large returns if invested in nationally.

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  • chrisjones2

    “In any economy there are only two uses of output or income, it is either consumed or invested.”

    ….or it flows abroad or, indeed, flows in from abroad.. Neither economy is a closed system

    “This shortfall, the very high level of uninvested profits, is in fact the cause of the present crisis.”

    Which present crisis do you mean? There is no real crisis in NI and the Republic is overcoming its crisis which was caused by an asset price bubble not a failure to invest profits. Bubbles aren’t always fueled by banks borrowing local money – in the world today the money may come from anywhere. Look at Greece. Where did all the Billions spent on borrowed money come from? Internally?

    Your solution also assumes that firms and their senior staff will simply sit and wait while you rape them economically. One of the reason for your figures is that Ireland has attracted so much multinational investment. Apply this nonsense and they will go, leaving people to pick potatoes for a living – or emigrate

  • Reader

    There’s not much point in only mentioning “Gross Operating surplus of firms” in the table – firms pay tax. That will knock a chunk out of 14 billion for a start.
    It looks like the only easy way to rake up a load more capital for investment is to cut pay. I’m not sure that will go down well.

  • Newton Emerson

    Going from “uninvested profits are the cause of the problem” to “speculation on the stock market is the cause of the problem” reveals this for what it is – mad Marxist claptrap.
    On the plus side, I think we’ve found the perfect applicant for SF’s ‘economist’ vacancy…

  • Still agitating on behalf of that “debate”, David?

    With more hollow nationalist rhetoric…

  • barnshee

    This is a disgrace to “o” level economics
    “Gross operating surplus” is a measure which excluded the provision for replacement/investment included in “real” accounting
    “profit” is an accounting concept which recognises increasing value of assets over time
    it is a common misconception that “profit” is a reserve of money to be spent it ain`t

    The posttng is a spoof or another example of financial/economic illiteracy

  • *looks over glasses at David*

    Really?

  • Gingray

    Useful contribution Pete, playing the man. The article above represents one strand of thought, surely Slugger is an appropriate place for blogs on discussing a united Ireland?

  • David McCann

    I did have a reply to you but I deleted it as it was petty and I realised I had a life. So I just filed it under “lifes too short”

  • Old Mortality

    Newton
    I think he’s probably the sole applicant and this post is part of his pitch. I’ve heard that he’s a former Trot, although perhaps not all that former