Thursday, 19 November 2009

Deal fairly and immediately with the fiscal crises

Slí Eile: The fiscal deficit mirrors at least two other deficits -a deficit in non-Government investment and spending and a deficit in social infrastructure to meet the fundamental human needs and rights of all members of society. The key to fixing the fiscal deficit is to address all of these deficits at the same time. In fact, I can't see another way.

Fixing the fiscal deficit by means of a massive and prolonged deflation (=€12bn over three years by current plans) will takes its toll humanly and economically over time - even if it is done purportedly with a 'human face' (more anon in a later blog). Leaving the public sector deficit stand at its current level is not an option either for all sorts or good reasons including the cost of repaying debt for future generations. The public sector deficit needs to be tackled now and not later but it needs to be tackled in a way that is credible, fair and workable from the point of view of maintaining social cohesion and democratic norms of debate and cooperation. In essence it needs to be tackled by a three prong approach:
A Using Public enterprise holding companies to borrow 'off balance sheet' to invest in new technologies, broadband and infrastructure upgrade (transport, early childhood care, primary health care...) - this is the capital portion of the public sector deficit;
B Using the current account to undertake a forensic, targeted stimulus to raise public and private consumption in sectors such as health, education, tourism (where the multipliers are higher than elsewhere) - the contra-cyclical response to a cyclical deficit;
C Close the structural deficit by raising taxes through a combination of measures on asset-rich and income rich groups coupled with broadening of the tax net.
Very approximately (estimates will vary) A, B and C account for about one third of the current annual borrowing level. There is scope to increase these with a view to generating recover in tax revenues. What is striking about the difference in estimates of tax between the Pre-Budget Outlook document for 2010 and the April Supplementary Budget macro-economic outlook is the collapse in revenues and GDP.

There is a job of work to be done in convincing the EU institutions. However, the schedule is already slipping and there is mounting evidence that we are deflating ourselves into a fiscal deficit trap by neglecting the non-government investment and consumption deficit.
We are confronted with a rapidly evolving situation and one in which could seriously undermine social cohesion, democracy and any prospects of a rapid recovery. A number of critical steps are involved under C:
- Fast-track reform of taxation through an emergency budget by immediately ending all tax breaks and non-standardised tax relief except where there is an immediate administrative or economic imperative to do otherwise;
- Raise the top income tax rate to at least 48%;
- Stop postponing carbon taxes - phase in a significant shift to consumption energy-using taxes over a three year period beginning now;
- Raise Corporate taxes to 15%;
- Introduce property taxes on second homes as well as property over €1million;
- Fast-track local revenue raising and linking these explicitly to local services where people can see where their tax money is going (early childhood care, local health centres, community facilities);
- Introduce a higher super tax rate to apply to salaries over €250,000;
Under A
- Fast-track those elements of the Capital Programme that are labour-intensive and that will yield quick gains in terms of schools, hospital facilities and social housing.
Ideas and objections welcome.


An Saoi said...

Slí Eile - I can't agree in relation to the increase in Corporation Tax. As you are aware,many of the core CT payers are facing a 25% increase wef 1/7/10 when the manufacturing rate disappears. As I pointed out elsewhere, almost all CT is now paid by MNEs which are not indigenous or even actively trading in Ireland. An increase of 25% is already on the Agenda,50% is perhaps a step too far.

The use of an Alternative Minimum Tax seems most effective way of moving much greater proportion of the income of the better off into the tax net. The reason why I would prefer it to actual increases, is that it hits those who use tax shelters.

The other key area is Social Insurance.In many ways, Ireland is not so much a low tax country as a low social insurance country. Increasing Social Insurance is also more socially acceptable than tax increases as the income is seen as ring-fenced against acceptable expenditure.

Niall Douglas said...

I should be highly careful of making any suggestions which don't involve very deep cuts to public sector costs. Much as I may not like the idea, the only other conventional alternative is the mass privatisation of the public sector which in my mind is worse because it's effectively a firesale.

One solution I'm fond of - but admittedly unconventional and therefore unlikely to be acceptable - is the conversion of most of the public sector into competing consumer owned cooperatives which use local income taxes and fee based services to fund themselves. This reduces national government to basically an advisory and coordinating role taking no more than 3-5% of GDP.

Despite its unorthodoxy, the British Conservative Party may try rolling this solution out in selected Northern regions in the UK after election - in fact, I'll be attending one of their strategy meetings in December so I'll find out then. It's a good half way house before going as far as establishing a local parliament and it may even prove much more effective on solving local issues.

BTW I agree with the previous poster that any changes to MNC taxation are infeasible. Promises were given and the markets would be extremely upset if Ireland reneged on them. Indeed, if anything, considering the last Finance Bill we are reducing Corporation Tax still further for R&D investment into Ireland.


Proposition Joe said...

I'm really surprised that the alternative minimum mechanism isn't more widely promoted from the left-hand side of the aisle.

OK so it lacks the cutting class-warfare edge of a super-tax rate of 70% or so.

But it has a lot going for it:

- the legislative mechanism is already in place and proven over a couple of tax years, so the thresholds and rates just need to be tweaked

- it wouldn't have the same disincentive effects as super-high marginal rates

- it would avoid a case-by-case trawl through the tax reliefs (how come trade union subs remain tax free when medical expenses don't etc. etc.)