Its all about choices

Listening to the RTE News at 9 pm some evenings is not a healthy night cap for those worried about jobs – their own or those of their loved ones. Between Rating Agencies, banking economist forecasters, Government ministers and political pundits, you could be forgiven for thinking that the end of the world is nigh. At least three features of this hysteria stand out:

• There is a terribly narrow and short-term focus: the latest closure, the latest shocking live register figures, the latest rumour about more cuts and budgets on the way (does anyone think that April 7^th is the end of it?)

• Evidence is selective (picking those facts that suit and brushing over inconvenient facts)

• The recipe is similar: cut wages, cut public spending, leave some lucrative tax reliefs in place and - not infrequently - open the way to more public asset-stripping.

To redress the balance, one should look at a working paper by the Economic and Social Research Institute. Bergin, Conefrey, Fitzgerald and Kearney make the case that things are not so bad that we do not have opportunities to address the disorder in public finances while continuing to invest in key areas such as health and education. Yes, the ESRI researchers do call for public spending cuts, including cuts in wages and salaries (as does Henricksson), but they also point out that:

• If the international economy recovers as early as 2011 Ireland is set to bounce back and possibly grow faster than other countries, given the estimated size of the Output Gap (actual to potential following the 2008-09 recession) in Ireland (page 7);

• When allowance is made for financial assets held at the National Treasury Management Agency, our debt to GDP ratio is not as bad as its seems – in fact it is closer to 20% and not 40%; and

• The Balance of Payments is heading for surplus in 2009 (as imports fall).

So we are still some distance from a sovereign default and the IMF, ECB, Germany, etc coming into ‘sort us out’. The ESRI make a useful conceptual distinction between the structural and cyclical components of the Government deficit – a point picked up swiftly by Fine Gael and Labour in their pre-budget submissions. However, in practice, such a distinction is difficult to put into operation as the structural component, itself, is contaminated by cyclical elements (the skewed nature of our tax base and its inter-action with the Construction sector) and is related to the unusually low level of direct taxes (by international and EU level). Nevertheless, the ESRI paper says that Government should seek to address the structural component – which they estimate to be between 6 and 8 % of GDP) and the not cyclical one.

The ESRI authors make the case for a front-loading of fiscal adjustment ‘just in case’ the international recession lasts longer than two years. Clearly, they are on the side of cutting nominal wages (but not necessarily real?) as well as well public spending. They support new sources of revenue including taxes on carbon and on property. Tellingly, they comment:

If the public wishes to preserve the current level of public services, then revenues will have to be raised to between 35 per cent and 40 per cent of GNP

(not to divert to a technical discussion at this point – they should be relating taxes to GDP and not GNP since taxes are levied on all income or output generated within the State and, potentially, taxable before it flows out through profit and other income repatriation).

This is a key point and one that the political parties – by and large – have evaded since the onset of the Celtic Tiger. What level of public services do people want and how do they want to fund it? For a long time, some interests tried to evade the issue by pretending that vast improvements in public service delivery could be made through efficiencies without significantly touching the tax base and tax rates. This fallacy is being exposed in the clear light of the new economic realities. Ireland lags behind most European countries in terms of tax take as a percentage of national income – whether measured by GNP or GDP.

CORI Justice argues that Ireland’s total tax take should be raised to a level that is 1.5% below the EU-average between now and 2013 – providing two thirds of the adjustment sought by Government and the European Commission. This is a very modest but realisable goal.