Thursday, 24 April 2014

Water Charging and Affordability

Nat O'Connor: Minister Phil Hogan has announced that the final detail on water charging will be announced soon. Meanwhile the Water Regulator (part of CER) is running a public consultation on its role in water charging.

TASC has published a four-page policy brief on an equitable solution involving Water Credits for low income households. A detailed analysis of the economics of water charging and its affordability for low income households is here.

The core issue is not whether we should pay for water. We already do, through income tax and VAT. The real issue is who will pay more - and who will pay less - when we shift the cost of water from general taxation to household charges.

Micheál Collins at NERI has published a working paper showing that the combination of direct and indirect taxes describes a U-shaped curve. In terms of how much tax people pay in real terms, as a percentage of their gross income, the top 10 per cent pay 29.24%, while the bottom 10 per cent pay 27.67%. Everyone else pays less, with those in the middle paying between 17.19% and 22.25%.

As the public water supply is currently paid from the single pool of general taxation (i.e. the Exchequer), the same distribution of the cost applies.

Domestic water charging in normal times could represent a reduction in taxation for everyone, as metering leads to more water conservation, leaks in private property being fixed and therefore less costs to produce water (which currently costs €1 billion of tax money per annum). Even if that €1 billion cost could be reduced by €50 million, that is a lot of money that could be used for more socially useful purposes.

Unfortunately, given the scale of Ireland's debt and deficit, any savings will be quickly absorbed by debt interest payments. But absent this saving, further taxes or cuts would be required for same, so the genuine benefit to citizens of reducing the cost of water treatment and distribution remains.

Domestic water charging is fairer than general taxation because people who use more water, pay more. And rather than everyone subsidising a property-owner who does not fix their pipes, the cost will be paid by the user.

The problem with water charging is that many people simply cannot afford an additional charge on top of their current expenses. We know that many people cannot meet the cost of living as it is, and even if the charge is €240 per annum (€20/month) as recently announced, many people will have to go without other necessities to meet that cost. And with the meter ticking, water 'rationing' in low income households will add further stress and strain.

TASC's solution is to charge everyone for water - so that everyone is metered and becomes conscious of their usage and any leaks in their property. However, people on low incomes would simply apply for a generous allocation of Water Credits to pay for their water. Those on higher incomes would pay the full cost, and people on the edge of the low income threshold would get a diminishing number of Water Credits (so there is no disincentive to taking up better paid employment).

In terms of the above U-shape curve, the cost of water charging would be carried by the middle to upper income groups, because they can afford it. Even so, the percentage of gross income paid in taxation by the lower income groups is likely to remain higher than the middle, which is highly regressive. Water Credits is a way to make a small correction in the distribution of income that will nonetheless have a real benefit for people on the lowest incomes.

Conversely, continuing to provide water 'free of charge' leaves the cost distributed as before - and would require new (probably less progressive) forms of taxation or cuts to cover the deficit. Any 'free' allowance of water likewise retains that part of cost of water from general taxation.

The most progressive approach is to charge the full economic cost of water to everyone who can afford to pay for it, while using the annual subsidy to Irish Water from general taxation to provide Water Credits.

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