Michael Taft: Previous posts by Paul Sweeney and Sinéad Pentony refer to articles from two newspapers which occupy different ideological zones. Yet they point to similar conclusions that TASC bloggers have been discussing for some time – the failure of the Government’s deflationary policies. Even the ESRI found these policies would fail to repair public finances or prevent the debt from spiralling out of control. That said, what are the fiscal principles that progressives can unite around in the run-up to the budget – principles which would have the capacity to unite the broadest alliance for an alternative strategy?
I would propose five principles. The first two are general.
First, when in a hole, stop digging. Public spending cuts and tax increases on low-average income earners are not part of the solution; they are part of the problem.
Second, repairing the public finances is dependent on repairing the economy and, in particular, reversing the rise in unemployment. We can learn a lot from Keynes’ dictum – ‘look after unemployment, and the budget will look after itself.’ Grow the economy, shrink the deficit.
The next three are particular to the upcoming budget.
Third, investment, investment, investment. Through investment we can repair the major infrastructural, social and enterprise deficits in our economy – succinctly listed in the TASC open letter: physical infrastructure, public services, poverty and low incomes, defects in our indigenous enterprise base and carbon-heavy economic activity. Repairing these defects is not a cost – it is an investment which will return higher growth, productivity, incomes and, most importantly, employment.
Fourth, as the G-20 put it, implement growth-friendly fiscal consolidation. What does that mean? The ESRI has published two papers in the last year that puts the answer beyond dispute – taxation. Increasing taxation is less deflationary and, therefore, yields higher Exchequer savings than spending cuts. In the long-term, taxation will have to increase throughout the economy but for this year, at least, increased taxation must impact primarily on high-income groups – which will have even less deflationary impact than what the ESRI has measured.
Fifth, save, reinvest and remove the deflation from the economy. Where efficiency savings are made in public spending, where savings are made in reduced unemployment costs – take this money and start restoring deflationary public spending cuts. We can’t repair all the damage in one budget but we can make a start. I would prioritise reversing social welfare cuts, health and education cuts, and wage cuts to low-paid public sector workers. Remember: deflation depresses future growth. Therefore, taking the deflation out of the economy will liberate economic growth.
These five principles will not be easy to implement. The Government has painted us in a right corner. For instance, borrowing for investment purposes would normally not be contentious. But their fiscal and banking policies have made a mess of our debt profile in the international markets. Therefore, we will have to look to our cash and assets on hand which the ESRI estimates will amount to over €48 billion next year (or nearly 30 percent of our GDP – significantly higher than other EU countries). In addition, the Government has cut over €6 billion from current spending – that can’t all be restored. Scarce resources meeting high demand will mean some cuts will have to wait to be restored.
But already some organisations are starting to make the running. For instance, the Community Platform’s 4Steps2Recovery campaign – envisaging up to €3 billion in tax increases on the high income and wealth groups - is an excellent example of growth-friendly fiscal consolidation.
Identifying the key short-term investment priorities, drawing up a progressive taxation schedule, ascertaining real savings and productivity increases – and modelling all this to show beyond a doubt that an expansionary fiscal programme is superior to what the Government has been doing: this is the work that must be conducted in the next few weeks. Yes, there will be disagreements over details, priorities, programmes – but if we start from the same principles, those disagreements can be resolved.
The sooner we start, the sooner we can rescue the debate from the cul de sac it has found itself in.
Showing posts with label expenditure. Show all posts
Showing posts with label expenditure. Show all posts
Thursday, 23 September 2010
Friday, 20 August 2010
Were we reckless spenders?
Tom McDonnell: Tuesday’s €1.5 billion bond auction by the National Treasury Management Agency ensures that Ireland will successfully get through the year without defaulting.
One rare and related piece of good news is that Ireland has today dropped out of the top ten list of countries most likely to default (we were ninth as recently as Tuesday). The odds on us defaulting/restructuring are now just over 20 per cent. Greece, in contrast, is still considered to have a better than even chance of defaulting. Nonetheless the overall picture is still pretty grim and this brings us back to how we as a country tax and spend.
In a previous blog I looked at where Ireland prioritises its spending. The table of public spending shown below (click on it for a bigger view) compares Irish spending to EU 15 spending across the functional categories of government; for example, defence or health. Blue boxes show where Ireland spent a smaller proportion of its GDP on a particular functional category and orange boxes show where Ireland spent a higher proportion of its GDP on a particular functional category.
2007 is an interesting year because it provides a snapshot of spending just as it was just before the economic crash. In 2007, Ireland’s public spending/GDP ratio was just 79 percent of the EU15 average public spending/GDP ratio although this figure rises to 93 percent if we choose to use GNP as a better measure for Ireland (see table below). These numbers appear to indicate that Ireland’s public sector was smaller than European norms before the crash.
The Eurostat data shown below indicates that Ireland had the lowest level of public spending in the EU15.
However if we break the figures down by functional category we get a more complicated picture. Ireland (measured as public spending/GDP) spent relatively more than the EU 15 average on housing and community amenities; environmental protection; economic affairs (primarily physical infrastructure) and health. If we use GNP instead of GDP for Ireland then education spending and public order spending are also seen to have been above the EU 15 average.
The very low unemployment rate prior to the crisis had kept public spending on social protection, which is by far the largest area of public spending, very low prior to the crisis. In GDP terms social protection spending was just three fifths of the EU 15 average. This was the main driver keeping overall public spending below the EU 15 average. Our relatively mild debt burden (part of general public services) also helped in keeping our public spending at low levels.
It is self-evident in retrospect that such a low level of social protection spending could not have been maintained in perpetuity. This is because levels of social protection spending move counter to the economic cycle. We were at the peak of the cycle in 2007 (a precipice as it turned out) and therefore social protection spending was at a natural trough. The figures for 2010 will paint a very different picture.
Public spending only tells half the fiscal story. I’ll turn to the tax revenue side next week.
One rare and related piece of good news is that Ireland has today dropped out of the top ten list of countries most likely to default (we were ninth as recently as Tuesday). The odds on us defaulting/restructuring are now just over 20 per cent. Greece, in contrast, is still considered to have a better than even chance of defaulting. Nonetheless the overall picture is still pretty grim and this brings us back to how we as a country tax and spend.
In a previous blog I looked at where Ireland prioritises its spending. The table of public spending shown below (click on it for a bigger view) compares Irish spending to EU 15 spending across the functional categories of government; for example, defence or health. Blue boxes show where Ireland spent a smaller proportion of its GDP on a particular functional category and orange boxes show where Ireland spent a higher proportion of its GDP on a particular functional category.
2007 is an interesting year because it provides a snapshot of spending just as it was just before the economic crash. In 2007, Ireland’s public spending/GDP ratio was just 79 percent of the EU15 average public spending/GDP ratio although this figure rises to 93 percent if we choose to use GNP as a better measure for Ireland (see table below). These numbers appear to indicate that Ireland’s public sector was smaller than European norms before the crash.
The Eurostat data shown below indicates that Ireland had the lowest level of public spending in the EU15.
However if we break the figures down by functional category we get a more complicated picture. Ireland (measured as public spending/GDP) spent relatively more than the EU 15 average on housing and community amenities; environmental protection; economic affairs (primarily physical infrastructure) and health. If we use GNP instead of GDP for Ireland then education spending and public order spending are also seen to have been above the EU 15 average.
The very low unemployment rate prior to the crisis had kept public spending on social protection, which is by far the largest area of public spending, very low prior to the crisis. In GDP terms social protection spending was just three fifths of the EU 15 average. This was the main driver keeping overall public spending below the EU 15 average. Our relatively mild debt burden (part of general public services) also helped in keeping our public spending at low levels.
It is self-evident in retrospect that such a low level of social protection spending could not have been maintained in perpetuity. This is because levels of social protection spending move counter to the economic cycle. We were at the peak of the cycle in 2007 (a precipice as it turned out) and therefore social protection spending was at a natural trough. The figures for 2010 will paint a very different picture.
Public spending only tells half the fiscal story. I’ll turn to the tax revenue side next week.
Monday, 10 May 2010
Who will pay the inevitable tax increases?
Nat O'Connor: As part of our analysis of the Finance Act 2010 we looked at the national finances. An Saoi has pointed out that tax revenue is more or less on target. But even if those targets are met, the size of the deficit makes tax reform essential.
The primary role of the Finance Act is to make sure that the State's tax revenue is stable, sustainable and sufficient to fulfil its functions. But our analysis shows serious deficiencies in this area.
The following two diagrams illustrate the Department of Finance's headline figures on revenue and expenditure. Source for 2001-2008 data: Department of Finance (2009) Budget and Economic Statistics 2009. Source for 2009-2010 data: Department of Finance (2009) Pre-Budget Outlook November 2009. Figures for 2009 are provisional and figures for 2010 are projections.
Figure 1: Central Government Revenue and Expenditure (2001-2010), in Millions of Euro, net figures
Figure 1 includes all revenue and expenditure (including sources of revenue in addition to tax, such as selling State assets, loans to the State, etc).
Figure 2: Tax Revenue and Current Expenditure (2001-2010), in Millions of Euro, net figures
Figure 2 limits the figures to tax revenue and year-on-year ('current') expenditure only. This is to remove 'one-off' effects, such as from capital spending.
Simply looking at the illustrations shows the extent of the fiscal crisis. Both figures show the sharp drop in tax revenue (by a third, €14.2 billion) between 2007 and 2009. Some of the tax decline is due to the overall global economic recession. Optimistically, maybe half. The rest of the decline is due to the collapse domestically, especially in the construction and housing sectors. This is tax revenue that is not likely to ever return to mid-2000s levels.
Figure 2 also shows that the Department of Finance's 2010 projection for tax revenue is for less than 2009, whereas expenditure is increasing. In other words, the current deficit is getting larger, not smaller.
Figure 1 shows the reverse only because of large one-off cuts in capital expenditure, plus the effect of non-tax sources of revenue. In the absence of additional capital spending items to cut, any serious attempt to close the current deficit at the next Budget must involve more deep cuts in current spending and/or significant increases in tax.
Tax revenue for 2010 is projected to be €30.8 billion, whereas current expenditure is projected to be €47.5 billion. That's a gap of €16.7 billion.
Let's assume that global economic recovery will close half the gap in tax revenue over time (which is a big assumption). On this basis, using the Department of Finance's projections for 2010, the gap that remains to be bridged by spending cuts and/or tax increases is at least €8.3 billion.
(Note) This is a simplification of the overall situation. I am assuming that it is necessary to balance tax revenue with current expenditure because the major cuts on capital spending between 2009 and 2010 cannot be repeated and are not a permanent way of bridging this gap. I am also assuming that non-tax sources of revenue (currently including the Pension Levy) are not a stable replacement for tax revenue, although they provided over €800 million in 2009 and are projected to provide €2.3 billion in 2010. There is always disagreement about measuring the deficit, and of course State-led economic stimulus could also help decrease the gap by boosting economic activity. Yet, I think it is worth focusing on the basic mismatch between tax revenue and current spending because the gap is so large. And it seems certain that the Government must deal with the €8.3 billion question soon.
Unlike the last budget, which involved cutting one-off capital spending and making a pre-payment to the National Pensions Reserve Fund (NPRF), a continuation of the cuts strategy will require much more to be taken from front-line services. If the Croke Park deal holds, with its commitment for no more pay cuts, it is hard to see where billions in cuts can happen. Hence, I come to the conclusion that some significant tax increases are inevitable to help bridge the gap.
Tax increases at this time may further depress the economy, especially if they are based on income tax or consumption taxes. So there is a need to look at broadening the tax base to include different forms of tax, including taxes on wealth, in order to minimise the dampening of consumer spending. For example, ex-Taoiseach Bertie Ahern's regret at abolishing property tax may just be one example of the discussion on new taxes yet to come.
From an equality perspective, there is a clear need to examine how much tax everyone currently pays, relative to their income and their needs, and to seek the establishment of a much more progressive tax system, where those who benefit more from the economy also pay proportionately more tax. At the same time, we need to establish a target, such as the 45 per cent of GDP suggested by John Fitz Gerald of the ESRI, because we are not talking about temporary tax increases to weather out the crisis, but a long-term restructuring of the tax system to make it more sustainable and sufficient for the level of public spending that we settle on.
There is a real risk that new taxes (and service charges) will fall disproportionately on low and middle income households, while those on high incomes continue to benefit disproportionately from tax expenditure. While any move to consolidate Western European levels of tax and spending will require virtually everyone to pay more tax, there is nevertheless a need for more public discussion now on the future shape of our tax system, including how much taxation should be paid by different groups in society.
The primary role of the Finance Act is to make sure that the State's tax revenue is stable, sustainable and sufficient to fulfil its functions. But our analysis shows serious deficiencies in this area.
The following two diagrams illustrate the Department of Finance's headline figures on revenue and expenditure. Source for 2001-2008 data: Department of Finance (2009) Budget and Economic Statistics 2009. Source for 2009-2010 data: Department of Finance (2009) Pre-Budget Outlook November 2009. Figures for 2009 are provisional and figures for 2010 are projections.
Figure 1: Central Government Revenue and Expenditure (2001-2010), in Millions of Euro, net figures
Figure 1 includes all revenue and expenditure (including sources of revenue in addition to tax, such as selling State assets, loans to the State, etc).
Figure 2: Tax Revenue and Current Expenditure (2001-2010), in Millions of Euro, net figures
Figure 2 limits the figures to tax revenue and year-on-year ('current') expenditure only. This is to remove 'one-off' effects, such as from capital spending.
Simply looking at the illustrations shows the extent of the fiscal crisis. Both figures show the sharp drop in tax revenue (by a third, €14.2 billion) between 2007 and 2009. Some of the tax decline is due to the overall global economic recession. Optimistically, maybe half. The rest of the decline is due to the collapse domestically, especially in the construction and housing sectors. This is tax revenue that is not likely to ever return to mid-2000s levels.
Figure 2 also shows that the Department of Finance's 2010 projection for tax revenue is for less than 2009, whereas expenditure is increasing. In other words, the current deficit is getting larger, not smaller.
Figure 1 shows the reverse only because of large one-off cuts in capital expenditure, plus the effect of non-tax sources of revenue. In the absence of additional capital spending items to cut, any serious attempt to close the current deficit at the next Budget must involve more deep cuts in current spending and/or significant increases in tax.
Tax revenue for 2010 is projected to be €30.8 billion, whereas current expenditure is projected to be €47.5 billion. That's a gap of €16.7 billion.
Let's assume that global economic recovery will close half the gap in tax revenue over time (which is a big assumption). On this basis, using the Department of Finance's projections for 2010, the gap that remains to be bridged by spending cuts and/or tax increases is at least €8.3 billion.
(Note) This is a simplification of the overall situation. I am assuming that it is necessary to balance tax revenue with current expenditure because the major cuts on capital spending between 2009 and 2010 cannot be repeated and are not a permanent way of bridging this gap. I am also assuming that non-tax sources of revenue (currently including the Pension Levy) are not a stable replacement for tax revenue, although they provided over €800 million in 2009 and are projected to provide €2.3 billion in 2010. There is always disagreement about measuring the deficit, and of course State-led economic stimulus could also help decrease the gap by boosting economic activity. Yet, I think it is worth focusing on the basic mismatch between tax revenue and current spending because the gap is so large. And it seems certain that the Government must deal with the €8.3 billion question soon.
Unlike the last budget, which involved cutting one-off capital spending and making a pre-payment to the National Pensions Reserve Fund (NPRF), a continuation of the cuts strategy will require much more to be taken from front-line services. If the Croke Park deal holds, with its commitment for no more pay cuts, it is hard to see where billions in cuts can happen. Hence, I come to the conclusion that some significant tax increases are inevitable to help bridge the gap.
Tax increases at this time may further depress the economy, especially if they are based on income tax or consumption taxes. So there is a need to look at broadening the tax base to include different forms of tax, including taxes on wealth, in order to minimise the dampening of consumer spending. For example, ex-Taoiseach Bertie Ahern's regret at abolishing property tax may just be one example of the discussion on new taxes yet to come.
From an equality perspective, there is a clear need to examine how much tax everyone currently pays, relative to their income and their needs, and to seek the establishment of a much more progressive tax system, where those who benefit more from the economy also pay proportionately more tax. At the same time, we need to establish a target, such as the 45 per cent of GDP suggested by John Fitz Gerald of the ESRI, because we are not talking about temporary tax increases to weather out the crisis, but a long-term restructuring of the tax system to make it more sustainable and sufficient for the level of public spending that we settle on.
There is a real risk that new taxes (and service charges) will fall disproportionately on low and middle income households, while those on high incomes continue to benefit disproportionately from tax expenditure. While any move to consolidate Western European levels of tax and spending will require virtually everyone to pay more tax, there is nevertheless a need for more public discussion now on the future shape of our tax system, including how much taxation should be paid by different groups in society.
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