Monday, 7 March 2016

An EU Mirror Held Up To Ireland’s Economic Policies

Paul Sweeney: In this final blog on the recent EU report on Ireland, a few more issues will be examined. 
We Irish are fascinated with how other perceive us, particularly as our economy is recovering after the self-inflicted Crash of 2008. This report is like a mirror allowing us to see ourselves our policies and actions.

Of course, the EU is dominated by conservative parties and this is reflected in the EU’s poor economic performance largely due to adherence to fiscal rectitude, the fragility of the Euro and in many of the Commission’s recommendations to its member states. 

The report finds that inequality, absolute poverty, including amongst children, has decreased but rates remain high. It finds that social protection expenditure is important in lifting “a significant proportion of the Irish population away from the risk of poverty (at 60 % of the national median disposable income).”
Overall, the EU report finds that the welfare system “has worked well to contain the effects of the crisis on poverty and inequality”, but barriers to inclusive growth remain. 
“Monetary poverty and income inequality after social transfers are today below pre-crisis levels and euro area averages. However, when taxes and social transfers are discounted, both indicators worsened dramatically after 2008.”

Fiscal Policies - Taxation
The EU Ireland report warns that “no progress have been made on discretionary powers to change expenditure ceilings.” It does not like the fact that “These have been revised upwards on the back of better than expected growth.” Thus it is a typical technocratic and conservative reaction to increased expenditure ie the move away from austerity in the run-up to the election. Yet it also recommends increased investment.  While investment is capital spending, it would still impact on this kind of fiscal conservativism.
It also reiterates the point made by TASC and taken up by the electorate in the recent election, to the surprise of some parties, which is that “Ireland's tax revenue to GDP ratio is low compared with the EU average”. Importantly it warns that the low rate is “is marginally decreasing.” 
The authors are surprised that the Budget reduced taxes further and it says that the only tax increase in 2016 is on excise duties for cigarettes. It concludes that “recent tax measures would not seem to be geared towards broadening the tax base.” It also points out again that Irish employers’ social charges are the second lowest in Europe.  It advocates ending many tax breaks, reforming VAT and shifting to environmental taxes too.

Irish Water and Water Charges
The report says, perhaps prematurely, that “The constraints or negative effects that poor water supply and wastewater treatment facilities impose on growth, competitiveness, housing development and the environment are fully apparent already. In turn, this seems to favour a gradual acceptance of water charges for households and the single utility model, following a difficult start for Irish Water.” Thus it concludes that “the necessity to invest heavily in water infrastructure is now widely recognised.” 
After the election, this is not so. It is clear that there is a substantial number of parties and individuals who are against such investment in practice if not in theory. In spite of the seriousness of the housing crisis, water charges seems to be dominating Irish politics. 
The report points out that “Irish Water’s continued dependence on government funding creates challenges for infrastructure development.” In plain English, if people will not pay directly for the efficient central provision of fresh water and sewage as in other modern economies, there will be a continuing shortage of investment in it. 
It says that because Irish Water will not be a self-funded or largely self-funded state enterprise, it will have to compete for state investment against hospitals schools and clinics. Who will win such a competition for funds?
A powerful case for direct and immediate investment in housing can and should be made thus; if Irish Water is more than half funded by charges, then it moves off-balance sheet (Irish Water becomes somewhat like the ESB) and this frees billions immediately to invest in social housing. 
Those opposed to what are modest water charges (and for many it was a step too far in austerity) might be persuaded to pay, provided they know that the money would be immediately invested in social housing. Direct investment in social housing brings certainty and speed over PPPS and other financialisation methods.
The difficulty is that most parties promised tax cuts. They were not credible in making the case for the powerful link between funding over half of Irish Water directly though water charges which would allow a major investment programme in water. Importantly, as the EU says, it wont be competing with housing and hospital for funds. I think most people would go for housing if certain that this choice was on offer.
This is in a country which is disinvesting as you read this. This year, investment will be at its lowest level ever since records began about 50 years ago. People can rail against politicians but in the case of decent water and sewage, they can only blame themselves. What should be a minor issue has taken attention and it is taking huge sums from more pressing issues like the housing crisis and other important reforms.

Property Tax
This is another hoary chestnut in Ireland and it has been since rates were abolished in 1977. The abolition of rates on homes, combined with massive spending, plunged Ireland into a deep crisis and led to a deep recession throughout the 1980s. Property taxes, which are progressive, are opposed by some left-wing parities in Ireland. 
On property tax, the reports finds the level here is low, at about 62 percent of the EU average tax. This is giving advantages to the wealthy. 
It is critical that the government, under pressure, granted a number of exemptions, including for newly developed houses. It is also critical of the delay of three years to November 2019 in the revaluation of properties, which is yet another tax transfer to well-off property owners. It is already impacting on inflating property prices as the fat property supplements in the Irish Times last week showed. 
The report calls for property tax to be applied to non-agricultural land. This would broaden the tax base and improve the efficiency of land use. It says, mildly, that “the latter point may be pertinent given current housing supply constraints.”

Ireland’s public spending on healthcare of 8.3 percent of gross national income was 1.1 percentage points higher than the EU average in 2013 and second only to Denmark’s 8. percent. This is even without adjusting for Ireland’s unusually high proportion of young people (who demand less from healthcare).
What is even more surprising is that Ireland has an unusually – by EU standards – high proportion of the population covered by private health insurance. This means that there should be even less pressure on public spending. 
In spite of such high public spending on health, our outcomes are middle of the road, the report states. 
Further, the EU report finds unequal access remains an issue. We also spend too much on drugs too, it finds. This may be because the importance of the Pharma industry and its lobby groups. Big Pharma, Ireland’s biggest exporter and a good employer with many well paid jobs, has given this industry undue influence on successive Irish governments. All have been afraid to seek reasonable pricing on drugs used in the health system by confronting Big Pharma. 
It is clear that most of the 110,000 people are working hard in our public health system but they are certainly not all working smart. There are many inefficiencies in it. It is not just too many managers, too few beds, lack of IT systems and weak or non-existent financial systems and controls. 
Urgent reforms are needed - not more taxpayers’ money. It may be time that the initiative began under Mary Harney and abandoned - for a radical partnership of all employees and stakeholders in the system - is tried out again.
There are other issues of policy covered such as greenhouse gas emission reductions targets - which are not on track - and more. 

In Conclusion.
Overall, this report is interesting and is a good mirror of current policy. It is certainly much more comprehensive and erudite than any Party’s manifesto for the 2016 election. But I see its overall fiscal stance, bar the investment section (which challenges its own restrictive fiscal policy), as a blemished mirror, though it does point out that taxes (thus public spending) are low in Ireland. This view does not show us as a coherent, caring or an efficient country.

Paul Sweeney is Chair of TASC’s Economists’ Network.

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