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Invest!

As we face into a General Election it is appropriate that we consider how we could construct a fiscal policy that can deliver fiscal and financial 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 decision to raise or reduce overall levels of taxation revenue or expenditure should be linked to demands on government 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 evaluation, 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 commitments 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 expenditure benchmark but this does not mean that expenditure cannot increase above this benchmark; it simply requires that any expenditure 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, economic 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 challenges we face in areas such as broadband and social housing, for example.

Total investment as a percentage of GDP in Ireland was just under 17% in Ireland in 2014, the fourth lowest in the EU. Within this figure, Government 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 liabilities arising from the banking sector and no further economic shocks, Ireland’s debt may be sustainable, assuming continuing low government 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 further changes to the status of the government bonds which were issued to replace the promissory 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 painfully 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 mistakes 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: evaluation of tax expenditures/tax reliefs, corporation taxes, a site value tax and a financial transactions tax.

The ex-ante evaluation of the costs and benefits of any proposed tax expenditure, the need to collect detailed information on each expenditure, the introduction of time limits for expenditures, the creation of an annual tax expenditures report as part of the Budget process and the regular scrutiny of this area by an Oireachtas committee should be part of all future fiscal policy. This is a simple and effective way to ensure that the expenditure in question is generating the required policy outcome and a return for the State.

The issue of corporate tax contributions is principally one of fairness. From a societal perspective, 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 minimum effective corporate tax rate of 6% would not only generate significant revenue, it would 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 structure of social, environmental and economic goals embodied in planning and other legislation.

A financial transactions tax (FTT) is a progressive 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 Government 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 Ireland’s tax system fairer. These include: standard-rating all discretionary tax expenditures, 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 implications 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. Furthermore, the erosion of the National Pension Reserve Fund (NPRF) by diverting it to fund various 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 addition 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 present infrastructural deficits and will not enable Ireland to adapt to changing demographic pressures. 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 population ages, and a changing labour force in the longer term. Extra expenditure will be required to meet the demands of our changing population. 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. Progressive 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 simultaneously 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 Ireland. 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 Ireland would be forced to face up to this fact.