Invest! - Village Magazine

52 February 2016

What would progressive ﬁscal

policy look like?

As we face into a General Election it is appro-

priate that we consider how we could construct

a ﬁscal policy that can deliver ﬁscal and ﬁnan-

cial stability and sustainable economic growth.

A ﬁscal policy that can provide the investment

required for the delivery of decent services and

infrastructure and that can adapt to changing

demographic pressures. The fundamental

issue underpinning ﬁscal policy is that any deci-

sion to raise or reduce overall levels of taxation

revenue or expenditure should

be linked to demands on gov-

ernment resources.

Now that Ireland is emerging

from the recession there is a

renewed focus on ﬁscal policy.

It is important that we learn

from the mistakes of the past

and ensure that current and

future policies work for the

common good of all in Irish

society. There has been much

discussion and rumination on

the ﬁscal policy of successive

Governments in the decades

leading up to the crisis, but

less regarding what progressive ﬁscal policy

might look like in the future.

So…progressive ﬁscal policy should be able

to deliver macroeconomic stability, investment,

a just taxation system, strong social services

and social infrastructure, good governance in

terms of policy development and policy evalu-

ation, and ﬁnally it must be sustainable in the

longer term. It should incorporate demographic

projections of future expenditure and revenue

requirements.

Ireland’s macroeconomic policy is, and will

continue to be, heavily inﬂuenced by our com-

mitments under the Fiscal Compact and the

Stability and Growth Pact. However, this does

not mean that there is not space for progressive

ﬁscal policy.

The Fiscal Compact introduced an expendi-

ture benchmark but this does not mean that

expenditure cannot increase above this

benchmark; it simply requires that any expendi-

ture above this benchmark be matched by the

required revenue increase.

This is important as Ireland will need

signiﬁcant levels of investment in the future if

we are to address the current deﬁcits in our

infrastructure and services and they can adapt

to meet the changing needs of our changing

demography.

Investment

A programme that invested in social, eco-

nomic and environmental infrastructure would

contribute to growth which would in turn lower

Ireland’s deﬁcit and real-debt burden. It would

also generate sustainable employment and

begin to address the many infrastructural chal-

lenges we face in

areas such as

broadband and

social housing,

for example.

Total invest-

ment as a

percentage of

GDP in Ireland

was just under

17% in Ireland in

2014, the fourth

lowest in the EU. Within this ﬁgure, Govern-

ment investment accounts for just under 2% of

GDP, the second lowest in the EU.

Ireland is starting from a very low base and

the present deﬁcits in infrastructure make it

clear that domestic investment is sorely needed

to provide employment and improve quality of

life and productivity; this would reduce short-

term unemployment and increase the long-run

productivity of the Irish economy.

Debt

It should not be overlooked that Ireland still

faces substantial debt challenges despite the

strong GDP growth ﬁgures for 2015. The rapid

increase in our national debt, driven by the

need to borrow both to replace disappearing

taxation revenues and to fund emergency

‘investments’ in the failing commercial banks,

has increased the ongoing annual costs associ-

ated with servicing the national debt.

The scale of Ireland’s debt is still signiﬁcant

(General Government Debt stood at 97% of GDP

in 2015) and we are vulnerable to international

developments. If there are no additional liabili-

ties arising from the banking sector and no

further economic shocks, Ireland’s debt may be

sustainable, assuming continuing low govern-

ment debt yields and economic growth.

However, deﬂation in the Eurozone could

have implications for Ireland’s real debt burden

if it continues. To increase debt sustainability,

European authorities should also consider fur-

ther changes to the status of the government

bonds which were issued to replace the promis-

sory notes including further extending the

maturity and considering a lower interest rate.

Future taxation needs

The need for a wider tax base is a lesson pain-

fully learnt by Ireland during recent years. A

disastrous combination of a naïve housing

policy, a failed regulatory system and foolish

ﬁscal policy and economic planning caused a

collapse in exchequer revenues.

It is only through a determined effort to

reform Ireland’s taxation system that these mis-

takes can be addressed and avoided in the

future.

Suggesting that any country’s tax take

should increase normally produces negative

responses. People think ﬁrst of their incomes

and increases in income tax, rather than more

broadly of reforms to the tax base.

It is important that we realise that taxation

encompasses far more than just income tax,

and that it is possible to reform and broaden

Ireland’s tax base. There are a number of

approaches available to Government. A brief

(and not exhaustive) list could comprise: eval-

uation of tax expenditures/tax reliefs,

corporation taxes, a site value tax and a ﬁnan-

cial transactions tax.

The ex-ante evaluation of the costs and ben-

eﬁts of any proposed tax expenditure, the need

to collect detailed information on each expend-

iture, the introduction of time limits for

expenditures, the creation of an annual tax

expenditures report as part of the Budget pro-

cess and the regular scrutiny of this area by an

Oireachtas committee should be part of all

future ﬁscal policy. This is a simple and effec-

tive way to ensure that the expenditure in

question is generating the required policy out-

come and a return for the State.

The issue of corporate tax contributions is

principally one of fairness. From a societal per-

spective, it is important that corporations

contribute in a reasonable and credible way to

the costs of running the state in which they

operate and beneﬁt from. Introducing a mini-

mum effective corporate tax rate of 6% would

not only generate signiﬁcant revenue, it would

Total investment was

17% of GDP in Ireland in

2014, the fourth lowest

in the EU. Government

investment accounts for

just under 2% of GDP

Invest!

For social and economic progress

and sustainable development

by Michelle Murphy

GENERAL DELIVERY

February 2016 53

ensure a fair contribution from the corporate

sector to the Irish exchequer.

A recurring site value tax would be a better

alternative than the current Government value-

based local property tax. A site value tax would

lead to more efﬁcient land use within the struc-

ture of social, environmental and economic

goals embodied in planning and other

legislation.

A ﬁnancial transactions tax (FTT) is a progres-

sive tax on the ﬁnancial services sector, applied

to trading in bonds, shares and derivatives. 10

countries in the EU are ﬁnalising proposals to

introduce such a tax. These include Germany,

France, Italy and Spain. Ireland, however, is not

part of this process. It should become part of it

immediately. Such a tax would increase Govern-

ment revenue by about €350m a year and would

be a progressive ﬁscal policy.

It is being supported in Ireland by a coalition

of more than 40 organisations being facilitated

by Claiming our Future. Progressive ﬁscal policy

would not just deliver a broader tax base; it

would deliver a fairer tax system.

Such a system would ensure that those who

beneﬁt the most from the Irish economic system

contribute the most, in the most efﬁcient

manner. There are a number of simple changes

that can be made in the short term to make Ire-

land’s tax system fairer. These include:

standard-rating all discretionary tax expendi-

tures, keeping the minimum wage out of the tax

net, making tax credits refundable and making

the tax system less complex.

Government decisions to raise or reduce

overall taxation revenue need to be linked to the

demands on its resources. These demands

depend on what Government is required to

address or decides to pursue.

The effects of the recent economic crisis, and

the way it was handled, carry signiﬁcant impli-

cations for our future taxation needs.

Despite favourable lending rates and payback

terms, there remains a recurring cost to service

this large national debt – costs which have to be

ﬁnanced by current taxation revenues. Further-

more, the erosion of the National Pension

Reserve Fund (NPRF) by diverting it to fund vari-

ous bank rescues (of over €20 billion) has

transferred the liability for future public sector

pensions onto future exchequer expenditure.

Although there may be good returns from a

number of the rescued banks, overall it is likely

to be small relative to the funds committed and

therefore will require additional taxation

resources.

These new future taxation needs are in addi-

tion to those that already exist for funding local

government, repairing and modernising our

water infrastructure, paying for the health and

pension needs of an ageing population, paying

EU contributions and funding any pollution-

reducing environmental initiatives that are

required by European and international

agreements.

Collectively, they mean that Ireland’s overall

level of taxation will have to rise signiﬁcantly in

the years to come – a reality Irish society and

the political system need to begin seriously to

address.

Social services and

infrastructure

Ireland faces challenges both in delivering

decent public services and in providing high

quality social and physical infrastructure. The

need for increased levels of investment has

been highlighted earlier; present levels of

investment are inadequate to address the pre-

sent infrastructural deﬁcits and will not enable

Ireland to adapt to changing demographic pres-

sures. Levels of public expenditure are of

course, closely linked to levels of revenue.

Chart 1 outlines the Government’s revenue and

expenditure projections up to 2021, as set out

in Budget 2016 documents.

As a society can Ireland provide high-quality

public services to all while allowing total

expenditure to fall as a percentage of GDP?

Can Ireland deliver the infrastructure

required to meet demographic pressures in the

future while allowing total expenditure to fall as

a percentage of GDP?

Demography in Ireland is changing and this

will have a signiﬁcant impact on public policy.

It will mean increased pressure on education

places at all levels, increased pressure on our

health and community services as our popula-

tion ages, and a changing labour force in the

longer term. Extra expenditure will be required

to meet the demands of our changing popula-

tion. A recent presentation on Demographic

Change and Expenditure Pressures in Ireland

given by Dr Thomas Conefrey of the Irish Fiscal

Advisory Council (IFAC) highlighted the implied

steep fall in primary spending as outlined in

Government projections and how this differs

from two IFAC scenarios for primary spending

based on demographic projections. Progres-

sive ﬁscal policy would incorporate these

demographic projections into all medium- and

long- term ﬁnancial and budgetary planning.

The incorporation of these projections would

aid medium- to long-term policy planning, it

would help to ensure that the focus is ﬁrmly on

sustainable growth and predictable revenue

streams, on using windfall gains for one-off

investments in the areas in which Ireland needs

them most.

It would help Ireland to have a real debate

about the levels of services and infrastructure

it seeks to have in the coming decade or two

and how these are to be ﬁnanced.

The question needs to be asked: if we expect

infrastructure to catch up to that in the rest of

Europe, how can we do this while simultane-

ously gathering less taxation income than it

takes to run the infrastructure already in place

in most of those other European countries?

In reality we will never bridge the social and

economic infrastructure gaps unless we gather

a larger share of our national income and invest

it in building a fairer and more successful Ire-

land. This is a question not just for politicians

or policy makers; it is a question for everyone.

There are no easy answers, but it is a fact the

Ireland must face up to now before it is too late.

Progressive ﬁscal policy would mean that Ire-

land would be forced to face up to this fact.

17.5

52.5

2005 2007 2009 2011 2013 2015 2017 2019

2021

Government expenditure as a Percentage of GDP Government revenue as a percentage of

GDP

Total Revenue and Total Expenditure as a % GDP 2005-2021

Evaluate tax

expenditures/tax reliefs,

corporation taxes, a site

value tax and a ﬁnancial

transactions tax