Wednesday, 4 March 2009

Exchequer Returns Emphasise Need for Growth Strategy

Yesterday's exchequer returns mark the end of Ireland's tax strategy since the end of the 1990s. As capital gains taxes collapse and stamp duty returns are all but eliminated, corporation tax is also dropping as Ireland is particularly vulnerable in this area given the amount of transfer pricing and profit shifting for tax purposes within our corporate sector.

This marks the end of what has been a strategy for public revenues that could only work during the boom times. We are now faced with a heavy reliance on income tax and VAT at a time when both are falling (see table below)

Capital gains taxes and corporation taxes won't be improving any time soon (and many of the great and good will be writing off their other taxes against capital losses for years to come). Stamp duty revenues are gone.

We can expand the tax base - carbon taxes and property taxes are the obvious candidates. If a property tax is introduced, we should consider a credit for stamp duty paid in the past ten years (reducing revenue but increasing ability to pay - and fairness). The recent QNHS employment figures show job losses among the younger age groups, who are likely to be carrying heavy mortgages. Any property tax increases would need to be accompanied by anti-foreclosure measures.

We can raise income taxes - some of this has happened already and more is on the way. But we need to be careful how and where we do this.

As Aedin Doris notes in her comment here: "Remember that the tax-free portion of income is pretty much set to exempt those working full-time, full-year on the minimum wage; if 38% of the working population aren’t paying tax, it’s because we have a lot of people working part-time and/or on low hourly pay".

And of course, those people working for these low wages are particularly likely to suffer from the lack of the social, collective goods that come with strong public services in other countries.

This leads her to conclude:

"In my view, widening the tax net should be considered only after all possible tax expenditures have been pruned away, and the extent to which any one individual can benefit from them strictly limited."

So let's clean out a lot of those tax reliefs. Their incentive effects, which were often minimal or perverse, are largely irrelevant these days when stimulus will be much more important. The government cut the state agencies it didn't like pretty quickly when it wanted to - let's have a quick run at the tax reliefs this time around.

The crux of the matter is that this gap is too huge to close with cuts and tax increases, even though those will play a part. We have scope for borrowing, given our low debt ratio but this will give a few years 'breathing space' at best.

What can close the gap is growth. After all, in 1987 we introduced some cuts but the public finances improved when we managed to generate growth. We need to be crafting a stimulus plan for growth, incorporating fiscal measures and programmes that generate employment and are geared towards the medium to long term developmental needs of the economy and society (education and training, greening the infrastructure and economy, small business development, innovation, urban design, caring and other social and reproductive work, and more). Bell and Blanchflower suggest a plan for the UK while Block and Keller propose 'stim-novation' measures, combining stimulus with innovation policy, for the US (see also this report from the Information Technology and Innovation Foundation). We have barely begun this discussion.

Our growth cannot free ride on international trends as it did in the 1990s - it will have to be based on developing new capacities and forms of participation in the economy that keep people attached to the labour market through the recession, meet social and economic needs, and build capabilities that will serve us well when recovery comes. Fixing the financial system so that private investment is forthcoming will be an essential part of this process. Public investment - and therefore borrowing - will be crucial.

This is the kind of debate that might have occurred were the institutions of social partnership playing a central role in the process. ICTU's ten point plan is perhaps the only attempt at such a plan to this point. It is a debate we need to have urgently.


96cambridge said...

Interesting stuff, but how many people have read this article? I think this site and the one by Michael Taft are great, but the message is not getting out there and the alternative economic abalysis is not being listened to by the media, and therefore not heard by the public.

As a result of this there is a general feeling of dispair,hopeless and acceptance of what is going on. The INTO are voting on industrial action at this moment and I doubt they will get the 2/3 majority needed for strike action.

The reason given is "What's the point?". They see the FF/FG approach as the only show in town.

Longman Oz said...

"Fixing the financial system so that private investment is forthcoming will be an essential part of this process. Public investment - and therefore borrowing - will be crucial."

There is obvious merit in your general point that public expenditure cuts and tax raising is unlikely to be enough. However, thinking about what you go on to say, in those two lines above lies the rub. It is hard to envisage banks being involved in significant long-term, capital-intensive projects for so long as their loan books are as impaired as they are and their solvency remains at risk.

Therefore, I would be putting access to capital at the very top of the agenda, as nothing else matters if you cannot finance it.

The other important thing to be quite realistic about is how long such investment projects take to get off the ground (i.e. potentially years). They are not quick fixes, especially if they are to be done in a value-for-money way and not becoming long-term white elephants justified by the short-term view of things.

PatDonnelly said...

I agree with Longman OZ.
This needs to be a harsh budget, with the opposition parties stitched into it. We need credibility if we are to continue to borrow. The harder it is the less the borrowing will cost. For equity purposes, there needs to be a higher rate of income tax and higher rates of excise too. Let those who have prepare to give! There will be little competition internationally, except for the super rich, and their terms have to be worsened if they wish to be Irish. Their ability to bargain is dropping not ascending, in these circumstances. If they want to live abroad fine! Increase passport charges 500% for all. We need to get back that AAA rating!
Once the mal-investments are liquidated we can expand the economy again.
Stimulus now is pointless unless we can print money. We can't, so no stimulus. Paying reduced social welfare will be hard enough, so that will have to be our stimulus. At least we know they won't be saving it....
Dismiss ideas of growth for the next few years. Survival is the only mode and believe me it will provide a strong stimulus.
Those who oppose this? Check out Iceland?
And I advocate sending them some relief: they will never forget, the international impact will be high and they are 50% Irish, genetically. The Sagas admit that the Irish were in Iceland first.