Tag Archives: deficit

IBEC and IBRC and the IMF

This is a version of a column published in the Irish Examiner

It must be dangerous to be a bird in Dublin these days. The government that promised transparency has instead adopted a kite-flying approach. The kites pop up, and like modern day Benjamin Franklins the government minister hangs on as it drifts into the storm, and then gauges the lightening. Occasionally they get singed, sometimes they escape, and withdraw for another day. And its not just the government. Every other aspect of social partnership is busy with economic bals and fiscal paper and silk, constructing and testing kites. In the best Japanese tradition, and as we are heading towards a Japanese style lost decade why not, we even see kite wars. Some kites are saw edged and designed to cut down others. Some kites get smashed down and then amended get relaunched.

 

IBEC have joined in this pleasant pastime recently, with their proposal that public sector increments be paused. The saving from this would be approximately 1b per annum it appears. The problem with such increments is that they are generally paid regardless – one is on a salary scale along which one advances by dint of survival. In a modern managerial environment that doesn’t make a lot of sense – there is little incentive to excel, and little disincentive to slack. Of course, we have know this for decades and for a long time it suited IBEC as a member of social partnership to allow this to go on. Peace at any price was the seeming mantra. Cutting a billion euro from the state budget is eminently justifiable in the context of borrowing a billion. However, throughout the crisis the argument on cutting public sector wages has been notable for a lamentable lack of follow on argument. Cutting X does not save X. At the most basic it saves less than X due to the fact that yes, public sector wages are subject to tax. So 0.7X might be the after tax savings. And then there is the knock-on effect…

 

we have seen recent estimation from the IMF of these effects. In economics the effect of changing one item on another is known as a multiplier. The assumed and conventional multiplier for government expenditure was in the region of 0.5-0.7. This would imply that cutting X would in the end result in a fall in overall economic output of 0.5 – 0.7X. In other words, cutting wages would not have the overall effect of reducing the economic cake by the same amount as the wage cut. This may now need to be revisited in the light of the IMF world economic outlook report which suggested that far from being less than 1 (implying that cutting public sector pay would result in a small fall in output) these shortterm multipliers may be significantly greater than 1. In other words, cutting X will result in a decline of 1.5 X– 1.9X .

 

Whatever the attraction from a government accounting perspective of cutting the short and medium term effects on the rest of the economy would be significant and negative. In the Irish case the effects are complicated by the GNP/GDP issue – while GDP can be growing or contracting slowly the GNP component can be falling more rapidly. Thus we cannot say with confidence that based on the IMF analysis the multiplier is too small we can take it that some very significant work on same needs to be done, pronto, by a combined ESRI-DFinance-C Bank team to ascertain the best evidence. In that context, we might want to hold fire on accelerating the pace of consolidation

 

IBEC have not, to my knowledge, come up with a comprehensive set of implementable performance metrics – that to be fair is not their job – but one must applaud their desire to save a billion. However, why stop at a billion? Why not save three times that much, and harm nobody? Part of the problem with cutting government expenditure is that it gets recycled into the economy. It is rare to have government expenditure which is totally isolated from the economy, and yet we have such.

Each year the government spends 3.1b feeding the IBRC (anglo/inbs) black hole. This year in a cunning plan instead of real money they issued a bond to the beast. The borrowed or tax derived money, you will recall, is given to the Central Bank of Ireland who then destroy it. As far as I can ascertain IBEC have not expressed concern about that, except in so far as the technicalities of the bond v cash 2012 payment impacted on government aggregates. It is abundantly clear that there is little appetite in the ECB for a deal on this money. At the very best we might replace this promissory note (which is not government debt) with a 40y bond. At worst we will be stuck with the full repayment schedule. It would cause nothing but the closure of IBRC and a technical temporary accounting headache for the Central Bank if the government were to announce that in framing the 2013 budget they were not going to make the March 2013 (or any subsequent payment). The ECB would be unhappy but I guess we can live with that. What they would not be able to do is to “cut us off” from liquidity. It would be nice if IBEC were to advocate saving 3.1b but then again IBRC is a member firm of IBEC. This money does not get spent in the Irish or European economies. It vanishes. We borrow it, and we destroy it. Why not…not borrow it.?

 

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Can we have a win-win property tax ?

this is an extended and linked version of a column published in the irish examiner.
There are many economic reasons to tax property, including household land or capital value. There is also the fact that taxing things that cant easily move is easier than those that do, and despite the recent collapse in the economy, household net worth in Ireland is still large, north of €500b, the bulk of which is made up of the value of homes. One taxes where the money is. The government, having made economic political and tactical errors a plenty in the introduction of the household charge, now seem determined to continue to do so with the “proper” property tax. We are told that this is going to be a tax on the market value of ones home, self assessed and returned (although with an option to deduct from PAYE) and that it will come into force in 2013 (although perhaps not until the middle of 2013 and thus requiring a full year tax to be paid over a half year). This makes little economic sense, and seems to be as a result of the government baulking at the rural lobby who felt that a land or site tax would be unfair to rural dwellers. Of course a valuation tax will fall disproportionally on urban dwellers, whose homes are generally more valuable than those of similar type located remotely. With nearly a million more people living in aggregate urban areas than rural as of the last census, this doesn’t seem politically sensible either.

That this tax is not a site and land tax is regrettable, as from an economic perspective this form of property tax is to be preferred. As the commission on taxation stated “We consider that there is a sound economic rationale for considering the introduction of a land or site value tax”, contingent on some practical problems being identified. The main element of these seems to be the ability to value the land-only element of a property. Recent work by Ronan Lyons and Smart Taxes has done that, at a micro level and as yet (6 months later) their methodology is unchallenged. Combined with the imminent (if partial) registry of house price sales, the main technical challenges to a land/site tax have been overcome. And yet, again we see that impartial, expert advice in the economic area is ignored, and instead of evidence based policy we have adhocratic iterative politicized fumbling.

Economically the OECD have suggested in 2008 the least damaging tax (in terms of adverse effects on future growth )is one on immovable property while at the top end of the scale personal income tax and corporation taxes are most impactful. Given this, the proposal to levy the tax via the PAYE system must be seen as a poor choice of collection mechanism. Regardless of the actual basis of tax, deduction from salary impacts as a tax on marginal labor and thus one of the main benefits of the tax will be lost

A further issue that has not been much discussed is the liquidity effect. Although as noted household wealth is large there is an increasing number of persons who are deficient in their mortgages, with the latest central bank figures showing a whopping 128,000 mortgages in arrears, representing nearly 17% of all mortgages outstanding by number and 16% by value. As these losses are washed through the banking system the state will ultimately be required to take this hit, no bondholder having been left unsaved. People who are 180 days behind on the mortgage are most unlikely to pay any form of house tax, no matter how sensible from an economic perspective this may be. With the revenue in charge of the collection this will rapidly result in either revenue seizure of assets (crystallizing the losses for the bank/state) or attachment orders (destroying further credit prospects). Combined with the indications from the Irish League of Credit Unions on the strains on household income and we see a crunch point appearing on the horizon.

And yet there remains a compelling case for taxation of peoperty and a compelling need for cash. One way that would do both, if the state want to tax the value of the house and do not want to exacerbate the financial strains on households, would be to remove the exemption of the personal home from capital gains. This would also, at a stroke, acknowledge that many people who purchased in the boom times and paid high stamp duty now feel it iniquitous to be asked to pay tax on homes that are in negative equity. The bubble prices being washed through any tax on disposal or transfer would automatically disregard that period. A 2010 analysis of this suggested that the annual take from such a tax would be of the order of €2.4b. Even allowing that this was based on 2006 data the removal of this exemption, with tax accruing to be paid only on sale (when funds are by definition available) or transfer (when funds can be obtained by a lien against or sale of the property) should yield much more than the planned 500m from the property tax. It is value based, something the government want, and it is unavoidable. Surely it is worth a debate?