In yesterday's National Recovery Plan 2011 - 2014 issued by the government of Ireland at the behest of the IMF as a condition of their bailout loan, a couple of key items caught my attention.
In the first, the government of Prime Minister Brian Cowen will reduce the Ireland's minimum wage by €1 per hour to €7.65. The government claims that the current level of the National Minimum Wage (NMW) created "a barrier to employment". Here is the direct quote from the Plan:
"Where a NMW is imposed at a level higher than the equilibrium wage rate, unemployment will result. Some workers will be willing to work for a wage lower than NMW but employers are restricted from providing these job opportunities. Other negative effects include:
␣ Acting as a barrier for younger9 and less skilled workers to enter the labour force and take up jobs;
␣ Preventing SME’s from adjusting wage costs downward in order to maintain viability and improve competitiveness; and
␣ Reducing the capacity of the services sector to generate additional activity and employment through lower prices for consumers.
The NMW was introduced during a period of sustained economic growth and rapid wage increases. Our circumstances have changed dramatically in the last three years. Price levels have reduced and earnings have adjusted downwards to help to preserve jobs. A reduction in the minimum wage level – as proposed by the OECD10 - can also be expected to remove a barrier to job creation. Therefore the Government have decided to introduce legislation to reduce the rate of the minimum wage by €1 per hour, or 12% to €7.65"
So, basically, the government is now stating that they erred by allowing the minimum wage (which was set in 2000 at €5.59 and has increased 55 percent over its original subsistence level to a new subsistence level) to rise out of sync with local price increases. That would never do! They state that the new NMW rate will still keep Ireland in the top tier of EU minimum wage rates.
What is particularly galling about this move is that the elite (and highly paid) leadership of the country is asking those at the bottom of the economic ladder to bear a rather large disproportionate share of the misery that they had no part in creating. That is not fair!
As an aside, Prime Minister Cowen's salary for this year was €228,446, a cut of 11 percent from the previous year.
But, on the other hand, corporations still benefit from the largesse of government. Here's a quote from the Plan:
"Finally, it is important that we look at revenue raising measures across all areas – income, capital, indirect, expenditures, reliefs and incentives. The Government remains steadfastly committed to the maintenance of our 121⁄2% corporate tax regime as the cornerstone of industrial policy. Research by the OECD34 points to the importance of low corporate tax rates to encourage growth. In ranking taxes by their impact on economic growth, corporate tax was found to be most harmful. In other words, governments seeking additional tax revenues would be advised to consider increasing all other types of tax (property, consumption and income) before increasing corporate taxes."
Here's a chart showing the corporate (and personal) tax rates for all EU Member States taken from the European Commission Taxation and Customs Union website:
Note that the corporate tax rate arithmetic average (on the top line) for all 27 member states in 2010 was 23.2 percent. Ireland is third lowest after Bulgaria and Cyprus who are both tied at 10 percent. I'd say that the Cowen government really likes big business far more than they like those who get paid the National Minimum Wage, wouldn't you? As voters, we hear far too often that corporate taxes must remain low to create jobs. Look how well the 12.5 percent corporate tax rate has worked out for the 13.6 percent of Irish workers who were out of work in October 2010.
Secondly, Ireland will raise its VAT rate from 21 percent to 22 percent in 2013 with a further increase to 23 percent in 2014. As it stands now, 23 EU Member States have VAT rates in excess of 19 percent including the United Kingdom where the rate will rise to 20 percent on January 4th, 2011. This additional tax burden is expected to yield an additional €620 million in a full fiscal year.
Now, back to where the rest of the world lives. We see growing and alarming debts and deficits from many developed nations around the world; the United States, Japan, the United Kingdom, France, Belgium, Austria, Germany and Canada to name but a few nations with mounting debt levels and deficits that are becoming structural where, no matter how fast an economy grows, the government is simply unable to balance its budget. As we all know, politicians are not particularly original thinkers; they look to other leaders around the world and mimic the solutions adopted elsewhere to suit their own local circumstances. Now that Ireland has set a standard by lowering its minimum wage and raising its consumption tax to stratospheric and obscene levels, how far behind can the United States, Canada and the United Kingdom be? To politicians, it looks like a very simple solution; cut the minimum wage and the jobs will magically appear. Maintain low corporate taxes and even MORE jobs will appear! Raise taxes and the debt and deficit will magically disappear.
Unfortunately, my suspicion is that wage cuts and tax increases (unless you happen to be a corporation) are going to happen sooner rather than later, particularly in the United States and Canada where corporate taxes are higher and consumption taxes are far lower than the EU.