Budgetary Sacred Cows

This is a edited, linked and expanded version of a column published in the Irish Examiner 1 December 2012

sacred-cowSo we will see on Wednesday how nasty the budget bite is to be. We know the broad parameters, with the cabinet clearly leaking like a sieve, and it has been clear over the last few weeks that the reality is beginning to hit home that the pain is not just not over but will be more and more intense as we cut deeper into the deficit. A lot of the low hanging fruit is gone and we have heard time and again “nothing is off the table” when it comes to the budget. But of course, that is not the case. Whole ranges of things are, explicitly or implicitly, off the table and will not be touched in the budget. Ring-fencing anything while the state hemorrhages money is not a good idea. It is a classic case of mental accounting, separating out into discrete and non interchangeable mental packets monies that are in reality a single packet. So, what might be put on the table? Note that I am not advocating any or all of these proposals (not that it will stop people saying “professor urges…”) just that we have a debate. We have dodged and woven for decades without hard debate, and it’s a sign of immaturity – witness the Savita issue. Slagging and roaring is not a hard debate, nor is a retreating into preformed ideological (or all too often idiotlogical) positions. A hard open debate on the pros and cons of issues is the sign of a mature relationship. So what sacred cows might we slaughter in this budget? Heres a herd whose merits we might discuss.

  1. gpyugoThe simplest way of saving cash flow is of course to kill the frankenzombie that is IBRC, the unholy mess that is Anglo and INBS. More specifically, the minister should announce that we are not going to pay the 3.1b due on the wretched promissory note in March. There is no moral, economic nor political sense or justice in asking people to, in effect, take significant cuts in social provision simply to enable the state to collude in the assuaging of unjustified and unrealistic German fears of hyperinflation. This is not the 1920s and trying to avoid the mistakes there is replicating the mistakes of the 1930s. While its not the case that the monies saved will he handed over to AngloStein, the reality is that money is fungible. In other words the state has money that it can use for ay task, but it chooses to use it not to pay down debt, or to run state services but to keep alive a wealthavore that is not yet done. Keeping anglo alive is dangerous – there is a non trivial risk that court cases now running (in the UK and the USA) might cost anglo (us) billions. Billions and billions…and no end in sight. This is hardly what the Labour party signed up for when they went into Government but it is exactly what they are presiding over. At least paying unguaranteed unsecured bondholders gives someone somewhere some money, more power to them – this is colluding in a lunatic scheme to nobodys benefit, purely from political inertia and cowardice.
  2. uncle-sam-taxes-4x3An increase in the higher marginal rate of tax has been ruled out ex ante, and while it is true that we let grow a situation where many on lower or even average income were effectively exempt, remedying that should not rule out a higher tax rate for those earning a lot. And yes, high earners already pay a lot. However an average tax rate for those over 400k of 30% is not exactly insane communism. The superrich might flee, if they haven’t already, but there are many earning over 75k who are in effect trapped and able to bear a third higher rate. Anyhow, even in the USA sometimes taxrates are high. That well known commie General Eisenhower charged 90% at one stage…A radical government might decide that in the same way as a minimum wage is a good idea so too is a maximum wage – a marginal rate of 100% on earnings over say 185k (five times average industrial wage) would have the advantage of ensuring that the bankers wages were capped, something that would be politically a win ; it might also send a signal that we value equity and a flatter income distribution. Recent IMF research suggests that in the long run there is a strong link between sustained growth and equality. And of course we want growth…
  3. vat-90952-400-253We are not, at average wages, a particularly highly taxed country. An OECD spreadsheet on that suggests that we are not especially so. What we do do is to take a higher than average percentage of total tax revenue from consumption taxes, which are inherently regressive. Add to that the fact that retail sales are still flatlining, there is a compelling case to be made for rebalancing tax away from consumption. A cut in VAT combined with rigorous enforcement that ensures that this is passed on might work wonders.
  4. profit-share-nfcs (1)An increase in corporate tax is also ruled out ex ante, but in an environment where “every sector must bear pain” as we are told, should corporate profits be exempt? Akin to the high PAYE earners there is a lot of scaremongering about flight if this is touched, but the reality is a large part of booked corporate profits are part of a global tax arbitrage process which is winning us no friends. We cannot indefinitely shelter behind a low tax as our main attractor to FDI.
  5. DermotMcCarthySep08BillyHigginsThe aggregate public sector wage bill will have to come down, and at present this is being achieved by headcount reduction. At 14b, most of whom are paying higher tax, a major cut would have to be implemented to save significant amounts, and of course the knock-on effects in terms of industrial peace and economic impact would be massive. But a proper economic and industrial analysis would be useful to the debate. Mind you, there is a pervasive meme that any wage over zero is too much for public servants, so that debate could be tough!
  6. _44398757_05ugandamarch_afpWe pay over as foreign aid several hundred million each year. While there is a moral case to be made for richer nations to aid poorer, at the very least we need to rethink the targeting and to see what more can be done with less. And to ensure that the money goes to those that truly need it not to the military or civilian hierarchy.
  7. Chocolate_Fudge_RecipeAll the signs are in place for a massive fudge on housing tax. Despite (because of?) the almost unanimous agreement among analysts that a site value tax is superior to a market (whats that?) value tax the government will press ahead with a market value tax. A site tax is more economically efficient and can allow for local targeting more easily than a value tax, but fudge and political jobbery will result in a poorly designed and almost certainly unimplementable tax being levied. OF course, if we really want a tax on the value of property, we could remove the exemption from capital gains of the principal private residence. Research in 2010 suggested that this could yield over 2b. Admittedly this was based on 2006 data but even in these property crash times with house prices heading back to the early years of the millennium at least a billion should be realizable.
  8. justice scaleWe might go further in two ways, but wont. there is no rational for treating monies different as to their source. If one person gets 20k from private income, another the same from social welfare, then why would we not tax both equally? More specific, we need to impute a monetary value for each social welfare benefit, which can then be included in the tax net. The same approach would also allow for proper tapering of social welfare benefits to eliminate poverty and welfare traps. While we are in the budgetary knackers yard might we consider if tax relief for artists is a good return on investment? A full evaluation of all tax exemptions would literally yield dividends.
  9. norwaySecond, A further change in tax might be to make tax returns public. There is a general and genuine suspicion that “they” are paying less than us. We might follow the Norwegian route and make all tax returns public. While this would not save any money it would, like the much welcomed property price register, make for transparency and clarity. Government is presupposed to be with the consent of the governed and the unhealthy divides in Irish debate between groups should if possible be reduced. Making it clear who is an who is not taking the pain and reaping the gain cannot be but good for the maturity of the state.
  10. scrooge-mcduckA wealth tax is seen still as some sort of raving lunacy. There was a lot of economic moonshine talked by the ULA in the last election about the billions that could be raised from such a tax, but this particular brand of economic hogwash has gone. Other countries have a tax on wealth – the idea, apart from grabbing a few shillings, is to mobilise monies tied up in Monets and get the economy moving. Household net worth in ireland at last count was some 446b. Of that about 320b was net house values, which is of course being taxed in some way. The remaining monies, financial assets, are for the most part taxed (deposits, shares, insurance and pension funds). Any remaining assets such as old masters, classic cars and so on are likely to be both small in value, and extremely hard to value and thus tax. But the principle – that ones net worth should be taxed over and above the yield on same, is one worth a serious discussion
  11. shutterstock_23529820_LargeA standard rating of pensions contributions would , so the ESRI suggest, save the exchequer 1b. At present pension contributions can be offset against tax, within limits. This clearly is of greater benefit to the higher rate earners, and represents on average a transfer from lower to higher paid workers. Cutting this to a standard rate would not be popular with the pensions industry but is worth talking about in the context of a billion euro per annum.
  12. college-animal-house-oDespite not having had any measurable effect on the participation rates of lower socioeconomic groups, the intended outcome, the government continue to offer free fees at undergraduate level. In 2012 this amounted to 350m euro. Cutting it in half and offering generous (and timely) grants to those truly in need might be worth a discussion, were it not for the ideological abhorrence some hold it in.Its a classic case of “knee deep in the big muddy“, or path dependence.
  13. wicker2Finally,but not least, whatever happened the “bonfire of the quangos” which we were promised? Presumably it will be along soon, just after “not another cent for Anglo”…The inexplicable dismissal in fact if not in word of the Bord Snip Nua report, little of which has been implemented, gives scant hope for reasoned decision making. A debate on why we can’t take our own hard won paid for advice is well late

None of these issues are getting serious consideration. All should , if only to dismiss them on the grounds of ex post analysis and reason rather than a priori ideological viewpoints.

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9 thoughts on “Budgetary Sacred Cows

  1. V.H

    I agree with you with much of what you write. However I think things need a really good shake in other areas. Farmers for their own good need virtually all EC transfers removed. It is creating a false pot of notional cash which drives up their costs for everything from tractors and fertilizer to professional advise where all believe the cash exists specially for them. Transport, not everyone lives in a town with a good local service. So why are we still operating as if driving a car isn’t a need since it facilitates the aquisition of the other ‘needs’.. Basically it’s time we quit thinking we are Monaco or Lichtenstein and knock 3/4 of the cost from petrol and manage the garage owner by allowing private imports free of silly tax.
    Sorry, as I said I agree with you and truly believe the idea of a living amount which allows a tapering of social protection with other income reasonable. But I think the issues with the banks and especially the dead ones is simply the stuff floating atop a bucket of otherwise equally distasteful policy. Most of it hateful, racist and baring little good for the population, any of us. Look how the developers are being treated and contrast it with 10 years ago.
    At core we need to ask what the hell is the goal. That’s one I suspect stumped the policy makers in the power centers of Europe when it really dawned there was none and we were still running plays written by a bunch of Tory landowners and Papal Knights round about 1880.
    Slán leat.

    Reply
  2. Sinabhfuil

    What we need more than anything is 1) equality, 2) exports, 3) a national mindset that concentrates on work, getting work and doing work rather than begrudgery – and of course begrudgery is a function of inequality…

    Reply
  3. cboregan (@cboregan)

    Brian, really enjoy your blogs and tweets, I’m up early too! But any chance you could have given a short analysis on the likely impact of each measure? Cut VAT to stimulate retail demand, great but by how much and what are the likely returns? Increase the higher marginal income tax rate -again can you at leaset stab a guess at quantifying the impact of that? Likewise point 8, basic common sense says we look at tax exemptions / broadening the tax base / eliminating welfare traps… but an economics professor might have more quantitative analysis! We need to know a bit more about how successful each step would potentially be (apart from obvioualy not paying 3.1b to Anglo!).
    Finally “there is a pervasive meme that any wage over zero is too much for public servants, so that debate could be tough!” No, the debate will be tough because this is a real sacred cow, the resistance to the debate will obviously be on the public servant side! If it is reasonable to compare average OECD tax rates, why not compare public servant wages with similarly developed countries? Mr & Mrs Gilmore bringing home >€400 curtesy of tax payers and the borrowed troika funds while the country is bust?

    Reply
  4. Bill Noonan

    Point # 4: Any Corporation Tax rate change upwards is off the table until year 2025. This is the near-sovereign guarantee given by successive Governments to major FDI investors from 1999 onwards. It is one of the untouchables to maintain national credibility. It is not that MN’s would walk. It is a matter of credibility……again !

    Reply
  5. p

    But..
    1. on default: Argentina are still being chased aggresively and winning in court by only a minority of debt holders that didn’t accept a % a good few years ago. Would Irish bank debt be different?
    2. on college fees: No bother even for for lower-middle-class in cities where kids can walk to uni; a different thing for same income level people in rural Ireland where parents are already paying for transport, accomodation etc; Don’t ‘ya’ think?

    Reply
  6. Ross McCarthy (@rossmmccarthy)

    In relation to our ‘foreign aid’ I don’t believe it is fair to describe it as a Sacred Cow. Since 2008 it has been cut by over 30%, much higher than almost any other area of Government expenditure, hardly what could be described as an untouchable part of our budget.

    Secondly you suggest that we have not been doing more with less “at the very least we need to rethink the targeting and to see what more can be done with less”. The truth is that in spite of this 30% reduction in funding, our aid programme has been consistently rated among the very best in the world in terms of efficiency and overall quality by the likes of the OECD, the UN and the independent think-thank, The Centre for Global Development.(http://www.cgdev.org/files/1425642_file_Birdsall_Kharas_Perakis_Busan_QuODA_FINAL.pdf).

    The “rethink” of our targeting you are talking about can be seen in the recent Review of the White Paper on Irish Aid which prompted strong public engagement with some 800 people attending public meetings in Dublin, Cork, Limerick and Sligo since the launch of the consultation process in February. In this process social media such as Facebook and Twitter were also used to foster discussion and a wide group of organisation and individuals issued their own submissions.

    Excluding our moral obligation a new report that shows for the very first time how protecting EU aid would not only have a positive impact on millions of lives in developing countries, it would also boost the European economy. http://www.one.org/international/blog/listen-up-leaders-eu-aid-more-than-pays-for-itself/

    Attacking our investment in overseas aid is an attack on the most vulnerable people on earth who do not have a voice to defend themselves. They are an easy target but perhaps a more long term view is needed. As an economist I hope you can appreciate that.

    Reply
    1. brianmlucey Post author

      Attacking ovserseas aid? Nope, merely suggesting that like envy thing else it’s got to be on th table. Thats it, not here advocating a position of pay or not.

      Reply
  7. Gavin G.

    Brian as I recall you advocated increasing the foreign aid budget on the Frontline.Just wondering have you given any thought to how that reflects on you as a professional? Afterall you state that you have taught financial management and have a BA in economics.Now as I understand it, economics pertains to how scarce resources are used and I take it that you know we dont have any surplus to give away.That there even is a foreign aid budget is perverse!

    Reply

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