Writing in the New York Times, Paul Krugman is unimpressed by the latest ESRI report.
He writes: "The authors simply assert that more austerity now would lead to a lower risk premium and hence higher growth, based on no evidence I can see. They don’t even offer any quantitative assessment of the extent to which more austerity while the economy is still depressed would reduce future debt burdens."
16 comments:
Did anyone else notice the comment by a certain Ray McSharry to Paul Krugman's post?
Surprise, surprise: he states that there is nothing the Irish government could do except 'trim spending' and 'engineer an economy wide deflationary effect on wages and costs'. He also hopes that taxes won't be raised on private enterprise.
You'll have to forgive my ignorance, but what exactly is the worst case scenario if the government were to stop practising austerity and were to stimulate? Would it be bankruptcy? If so, then really the austerity measures are not helping a great deal. If we were to see an increase in the structural deficit now, could we not rectify that in later years with a progressive tax policy, or is that a naive assertion?
As a lay-person, I am still in the dark about what, in the minds of the government and other 'deficit hawks', we might face if we were to implement a stimulus package.
@ Chris Excellently put
Chris,
"what exactly is the worst case scenario if the government were to stop practising austerity and were to stimulate?"
My perception is that the Government fears that if it borrows more money now, and pays it back over a longer number of years, it will end up paying even higher interest rates and over-burden the economy for decades with high annual debt repayments. That the spectre of the 1980s.
High annual debt repayments is indeed something to fear, but where the Government seems to be going wrong is in the chain of cause-and-effect between what they are doing and achieving their desired outcome. I take their desired outcome to be economic growth coupled with the smallest possible national debt.
But debt should not be seen as an absolute figure, it is always relative to the size of the economy. So, we may indeed end up with a smaller national debt by following a policy of austerity. But we will also have a smaller economy (i.e. GDP and GNP). Crucially, GNP is still shrinking, and that's where we live - the domestic economy that will have to pay the national debt, including payments to Anglo, etc.
The counter-argument is to target a few billion into infrastructure to raise employment, lower welfare costs, raise tax, and generate further positive benefits in the economy. Reducing out-migration and keeping skilled people in Ireland is good for long-term growth in the private sector. The infrastructure itself, such as schools or roads, will also boost economic development. The goal is to grow the economy so that we have a better debt-to-GDP-ratio at the end of the day.
Why does the Government not do this? They may feel that they are not competent to manage the spending of money in a targeted way, in order to maximise the multiplier effect. The worst of all worlds would be a botched stimulus that increases debt without boosting national growth!
Another goal they have is to maintain Ireland’s ‘low tax’ model. We have now got used to higher levels of public spending, and real improvements in some public services. I’d argue that most people don’t want to see this cut back enormously. But the tax money that paid for it during the boom was unsustainable, mostly borrowed money. So, now we have a choice. Either we are willing to pay for (and reform and improve) European levels of public spending and public services, or else we are willing to return to mediocre service levels in order to pay less tax individually. The Government seems clearly intent on cutting the money available to public services in order to avoid a permanent upward readjustment in the level of tax revenue.
Low tax is not just ideological, it is tied to the Government’s plan – I wouldn’t call it a strategy – of ‘keeping the head down’ and continuing to sell Ireland’s low tax and tax avoidance measures to foreign investors, and wait for export-led growth.
A further explanation is that the Government is indecisive and stalling. Cutting a percentage off all departments and all government programmes underlines their inability to judge the effectiveness of their own policy implementation. They should be culling bad programmes and boosting good ones. If you look back over the years of the crisis, the Government has actually done very little except cut across the board. And inaction is a choice. The price of inaction on stimulus is the sacrifice of a generation of (mostly young) emigrants.
Nat -
"My perception is that the Government fears that if it borrows more money now"
The thing is the government is borrowing more money now, to pay back private debts that should be defaulted on rather than to spend on productive investment :(
"The goal is to grow the economy so that we have a better debt-to-GDP-ratio at the end of the day.
Why does the Government not do this? They may feel that they are not competent to manage the spending of money in a targeted way, in order to maximise the multiplier effect. The worst of all worlds would be a botched stimulus that increases debt without boosting national growth!"
How long does the multiplier effect last for? I.e. Could we have slightly higher GDP this year,only for it to fall back once the stimulus runs out (while the debt remains in place)? (Thought this post illuminating). Nouriel Roubini in 'Crisis Economics' reckons authoritarian states like China do stimulus better.
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Outside of corporation tax, I'm not convinced we have a 'low-tax' model. Income tax rates are low for the lower-paid, but indirect taxes (VRT, Stamp Duty, Electricity costs, medical costs) are high. For middle income workers and above income taxes are high not low (53% marginal rate -3rd highest in Europe IIRC). There are tax calculators online which will show how much income tax you'd pay in the UK or Germany at various income levels. Worth playing around with to explode the 'low-tax' myth.
Mack,
"Could we have slightly higher GDP this year,only for it to fall back once the stimulus runs out (while the debt remains in place)?"
Only if stimulus is done badly. The car scrappage scheme is an example. Car sales rose, but it may have been people buying their 2011 car in 2010 to avail of the scrappage discount. Once the scheme expires, there will probably be a significant drop. Also, there is a low multiplier, as we import cars. End result, a boost to the industry for one year paid for by taxpayers money.
Conversely, if you build infrastructure that can be used to boost trade, like a necessary road or a commercial centre located close to isolated housing, the added value of this to the economy lasts as long as the physical infrastructure can be used.
"Income tax rates are low for the lower-paid, but indirect taxes (VRT, Stamp Duty, Electricity costs, medical costs) are high. For middle income workers and above income taxes are high not low (53% marginal rate -3rd highest in Europe IIRC)."
Total tax revenue at a proportion of GDP has consistently been way below most of our EU partners. That's the fundamental basis of 'low tax', as the state simply has less money to spend compared with average EU levels.
But I agree that tax is distributed unevenly, with some people paying relatively high levels of tax. Individuals are effectively subsidising our low corporate tax rate, as well as the many tax relief schemes. Crucially, our theoretical tax rates may be high for high earners, but we have more ways to avoid tax, so effective tax rates are likely to be much lower.
Also, we may pay less tax but pay more in energy bills, health costs, etc because we are purchasing them individually rather than collectively.
Nat -
There's a degree of circular reasoning in that definition of low tax. Our GDP is boosted by foreign corporations operating here because they can pay lower rates of corporation tax here, both in terms of their actual activities here and because the choose to account for foreign revenues here to pay less tax.
I.e. if we were to increase corporation tax, or other taxes on employers, we might very well find that the MNC's leave, and our GDP in that scenario would be much lower. Are we still low tax if we account for that? (Presumably that would be lower figure again than GNP which would include some of the activities of MNCs)...
Or maybe we could agree that 'low-tax Ireland' is primarily a marketing term to attract MNC's but in reality Ireland is not a lox-tax environment for the people who live here.
By the way, I take your point on tax reliefs some of which are ridiculous. The only one I avail off is that for defined contribution pension contributions - which can be taxed when withdrawn on retirement. Closing them off is probably fair enough, but it is unfair in those circumstances to ask private sector workers to fund superior pensions for public sector workers through their pensions. It should be the same scheme for everyone.
But when comparing the tax I'd pay in the UK or Germany, I note that those same reliefs would be available to me in the UK and that Germans tend to have better non-contributory (?) pensions provided by their employers.
Mack,
There’s nothing circular about comparing tax-GDP ratios and finding Ireland’s ratio is lower. It’s a standard measurement.
I agree that if we raised corporation tax, some multinationals would leave. Others would stay, and pay more tax. GDP would probably fall in the short term but we'd have a more balanced tax system and a higher tax-GDP ratio. Would we be better or worse off? It’s not a straightforward calculation. It depends on what companies would leave, how many people they currently employ and what other spending they do in the economy. It would also depend on whether we reform our public services to give good value for the extra money the state would have. In the longer-term, the challenge would be to ensure we recoup the loss of jobs and spending by building up more domestic economic activity and boosting exports.
But to focus on the key question: Would we be better or worse off if we had close to European standard levels of tax and spending, even if that means the end of aggressive tax competition with our EU partners? Certainly, the EU as a whole would have a higher tax revenue. I don’t think companies would pull out of the EU entirely. And of course, we could retain a smaller degree of tax advantage to counter-act our geographically peripheral position without gouging the currently quite significant wedge that we take out of other EU state’s tax take.
As for personal taxation, you also have to compare tax bands and wage levels, as well as the top marginal rate of tax and services (like pensions) that you rightly mention. In reality, Ireland is a relatively low tax environment for some people on higher wages, but they lose much of the benefit of having more cash because they pay higher costs for housing, health, etc in the private market. So they are perhaps not better off than they would be in the UK or Germany, but they get to spend more cash individually rather than collectively (although direct debit tends to make this less obvious).
Nat -
Even allowing for tax bands (more generous in the UK than here by the way) and tax credits, once you go over €50k income taxes are higher in Ireland.
E.g.
Ireland €50k income
Net = €36,068.16 or £32.4k
Germany €50k income
Net = €36.446,42
UK €50k income (£45k)
Net = £32,860.40 or €36,511
See
http://www.hookhead.com/Tools/tax2010.jsp
http://www.parmentier.de/steuer/incometax.htm
http://listentotaxman.com/index.php
Germany).
Just for completeness -
At €36k
Ireland (Net) €29,124.16
Germany (Net) €27.983,06
UK (Net) €26978
At €25k
Ireland (Net) €22,424.16
Germany (Net) €20.668,17
UK (Net) €19388
At €75k
Ireland (Net) €48,318.16
Germany (Net) €50.388,96
UK (Net) €51261
I suspect all wage levels would be better off with German service levels & taxation. Even though net wages would be lower for lower-paid workers..
Zombie hotels, ghost estates, confidence fairies; now I understand the term voodoo economics :)
Mack,
I grant you that incomes over €50k have a greater personal tax liability, as you show. But my main contention is that many people with incomes over €50k avail of tax reliefs, tax breaks, etc that reduce the level of effective tax paid to much less than is possible in Germany or the UK. (TASC will be publishing a more comprehensive analysis of tax expenditure before year-end and this should provide stronger evidence to back up this contention).
In addition, another factor that adds to Ireland’s low tax-GDP ratio is the fact that employers’ contribution to social insurance is higher in the UK and Germany, which is tax directly linked to the employee. If you look at the Eurostat figures for implicit tax on labour which includes all taxes and social protection payments, Ireland is at 24.6 per cent compared to 26.1 per cent in the UK and 39.2 per cent in Germany.
"I suspect all wage levels would be better off with German service levels & taxation. Even though net wages would be lower for lower-paid workers."
I tend to agree with you.
I reread Ronan Lyon's post 'are Irish workers undertaxed' this morning. And there is an argument that social transfers on the other side also reduces the net burden of taxation.
http://www.ronanlyons.com/2009/04/27/are-irish-workers-undertaxed/
I guess we have a system which at any given income level, reduces the burden of taxation for some lucky workers, rather than spread the benefits equally - at that income level / nominal level of taxation.
Low tax for some, not for others..
Mack,
I note your calculations are in respect of a single person. If you do the same calculation in relation to a single income married couple, the Irish family comes out considerably better off. The other key area is tax expenditures such as Tax Relief at Source for mortgages & private health care do not exist in the UK.
An Saoi -
"the Irish family comes out considerably better off"
They don't, believe it or not. The German family do even better again.
Double income family. 50k each
Ireland (Net) €60,753.20
UK (Net) €66,011
Germany (Net) €72.892,83
Double income 75k total
Ireland (Net) €48,318.16
UK (Net) €51261
Germany €57.868
You won't get many professional level jobs that pay combined salaries of less than €75k. My point is that workers at that level are already hit particularly hard in Ireland in terms of personal taxes.
You could certainly argue that we are low tax for less-well paid lower skilled jobs. And for those earning huge salaries with large mortgages and investment properties or other, um, scams.
TRS on mortgage interest is being phased out (and good riddance). In the UK you don't need tax relief on medical expenses because they have the NHS.
For me personally, I'm in the odd position that
#1 I'd earn more in London than Dublin (not sure about German salaries but I think they are at least comparable to Dublin if not London)
#2 I'd pay less tax in London or Germany
#3 Public services (for employed workers) are better in London & Germany
We are competing with both those locations for knowledge workers. The vast majority of people hired by the company I work for over the last 5 years or so, have been foreign. I'm not going anywhere, but can we be sure they will continue to come?
I'm not making an argument for lower taxes. But a realistic appraisal of the type of tax system we have - for many people here, it is simply not low tax. And of what we would like to have.
The odd thing is, I would guess that many in the Irish middle class would be comfortable with a more German / European type tax / services mix, if they realised that they probably already were paying higher levels of income tax than the Germans. The bed rock of resistance to the European model might vanish..
Apologies - forgot to switch the Irish tax calculator to married double income -
For a married couple €50k each -
Net €68,397
Lower tax than the UK, but not as good as Germany
On €75k between them
Net €55,962
Again, better than the UK, higher tax than Germany.
Single Income on 75k is
Net €50,208.16
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