Fiscal Adjustment and Re-Balancing the Irish Economy Post author By Philip Lane Post date November 27, 2009 Here is the paper by Colm McCarthy from last night’s SSISI fiscal workshop McCarthySSISInov26th2009 Categories In Fiscal Policy Tags Irish fiscal policy 30 Comments on Fiscal Adjustment and Re-Balancing the Irish Economy ← The great trade collapse → Foreign Policy List of Most Influential 30 replies on “Fiscal Adjustment and Re-Balancing the Irish Economy” Thank you Colm. This is economics at its very best. Eh Colm, didn’t you get Mr. Cowen’s memo about being hopelessly optimistic? Maybe the optimistic bit was blurred? Great paper from my amateur perspective. I particularly agree that the identification of where the mistakes were made in the banks/government/regulators needs to be addressed. New ad-hoc structures are being put in place that will ossify into future failures. In response to questions afterwards Mr. McCarthy spoke of the “hollowing out” of government departments by transfer of power and functionality to quangos. Blair Hogan, on the other hand mentioned about the need to “reintegrate” these people back into the public service. What can I say? Niamh Hardiman’s paper was really refreshing and should be read, because as a political scientist she brought a diversity of ideas to the symposium. Without her contribution, and ideas it could have been described as as very much the usual fare though Colm McCarthy was as solid as a rock and I think his philosophy is to just drill it in! Couldn’t get to this but enjoyed greatly the papers I have seen – Colm brings forward again a critical point about the use of auctions for key assets which has been overlooked in the debate. And to add to the recommendations for the Hardiman paper from @Robert Browne and from Colm and David Madden in a previous post about this meeting – really excellent contribution (figures 8/9 or so onwards scare me!!) Colm McC asks for a project evaluation unit in the Department of Finance. I thought there already was one, but only for EU funded projects. Colm makes the point that we gave away licenses cheaply to date. Mobile telcos made a profit of over €500m here last year… that strikes me as supernormal profit… at least part of which is due to license exclusivity. So we should seek to eliminate us paying the telcos for the exclusivity we gave them via a fair profit share. Say levy them all X% of profits that are more than Y% of turnover. Y could be say 5%… and X 25% … but exact values to be determined by econometric modelling …. and in time for December’s budget ! Can I also add that I found Niamh’s paper a fantastic read. Also couldnt get there but her paper is a must read Capital spending. I suspect there are a number of infrastructure projects relating to flood prevention that are on people’s minds at the moment. Instead of dole payments to construction workers for the past year, maybe a salary and one of those projects would have been a better investment… @Desmond Brennan What profits telcos may now be making will reflect the large amounts of capital they invested in networks, marketing, equipment, and I am not suggesting a retrospective tax on these. It is clear that the radiomagnetic spectrum they were given in beauty contests would have fetched far higher prices at auction, and the spectrum asset, and other similar intangible state assets (eg emission permits) should be sold to the highest bidder in future. Colm, Radiomagnetic spectrum in Ireland, in my fairly extensive experience in the industry is not a naturally scarce commodity. It may be scarce in the future, but this will be in large part because of government levies on developers of fiber infrastructure and tax-exempted profit taking, not because it is naturally scarce. Which radiomagnetic spectrum sold or licensed in the last ten years could have achieved a higher price at auction, in your view? Another sector I have expertise of is road transport. Unlike radiomagnetic spectrum, there is an actual, acute scarcity of road space, at least 500 days of the year. Why not auction road space (as they do in Singapore)? Interesting to read the reaction to Niamh Hardimans paper. Usually political science arguments get very little response here.She certainly has brought attention to some of the issues that need to be raised and that some of us lesser mortals have tried to raise here and elsewhere. Light overall on solutions especially in relation to social partnership but a good start. @Antoin O Lachtnain Both the 2G and 3G allocations would have made more at auction – comparable allocations made more in countries where the auction route was chosen. What future allocations might make is another story – telcos bid too much for 3G in the UK, for example. But the desirability of auction is independent of scarcity of the resource Antoin, Meant to add, road pricing a la Singapore has been advocated by economists here and in UK for many years. Netherlands is committed to road pricing nationwide from 2012. Colm Re road pricing. I took a course from Sean Barrett in 1982 – he was advocating it then. Can anyone go back further? Colm: I agree that an auction coupled with a system of trading might be desirable. But it is naive to think that it would yield any sort of windfall. The purpose of the market should be to optimise the use of the asset, not to generate free money for the government. There were only three applicants for the four 3G licences in 2002. How could an auction have resulted in a premium in these circumstances? We could have made some money by auctioning the 2G licences. But it wouldn’t really have been that much – maybe two or three hundred million all-told? A licence auction would have reduced the eircom windfall too -. An auction for car ownership entitlement and a dynamic charge for congested road space would have much more potential to close the gap in the public finances. And it would actually result in a tangible improvement in ordinary people’s lives. Antoin, The UK government raised £22.5 bill from 3G, at the height of the madness admittedly. We raised less per unit spectrum/per cap than most others. We could indeed have raised more from 2G, and saved some tribunal costs. My point is merely that govt should sell these assets for what they are worth, in the interests of transparency, patronage/corruption minimisation, revenue maximisation and most importantly economic efficiency. Auctioning ‘car ownership entitlement’, whatever that means, has nothing to do with road pricing. In Ireland at present, over half the taxes on private cars do not vary with usage – VRT, VAT and the annual license cost the typical motorist more than fuel taxes. This is fine for raising revenue but not conducive to externality minimisation or optimal use of scarce resources. Brian, Road pricing goes back at least to the 1960s (Smeed Report). @Colm @Brian @Antoin re. Road Pricing in Singapore Are you guys really serious about using Singapore as a model? Road Pricing is only one element of an integrated transport policy in what is effectively a one-party state. Singapore 1. has 4.6m people – about 10% more than this Republic 2. covers under 700 sq. km – about 1% of this state’s land mass 3. is an island, with land boundaries – which this state has 4. favours public transport – which this state does not 5. auctions permits to own cars – twice a month So the challenges they face are very different to what we face hereI have taken the following extracts from Singapore’s Land Transport Authority http://www.lta.gov.sg/ As a city state, Singapore is the second most densely populated country in the world. Today, roads take up 12 percent of our total land area and the demands on our land transport system are set to increase by 60 percent, from our current 8.9 million daily journeys to 14.3 million by 2020. Making public transport the centrepiece of our land transport system will be crucial to keep congestion in check and help protect the environment. The LTA was established on 1 September 1995. We were formed through the merger of four public sector entities, namely: Registry of Vehicles Mass Rapid Transit Corporation Roads & Transportation Division of the Public Works Department Land Transport Division of the then Ministry of Communications The Vehicle Quota System was implemented on 1 May 1990. Under this system, LTA determines the number of new vehicles allowed for registration while the market determines the price of owning a vehicle. In determining the number of cars allowed for registration, we take into account the prevailing traffic conditions and the number of vehicles taken off the roads permanently. The quota allocated to each vehicle category is in proportion to that category’s share of the total vehicle population. The vehicle quota for a given year is administered through the monthly release of Certificates of Entitlement (COEs). From April 2002, the Closed COE Bidding System was replaced with the COE Open Bidding System. http://en.wikipedia.org/wiki/Government_of_Singapore The PAP has been returned to power in every general election and has thus formed the Cabinet since 1959. The Government is generally perceived to be competent in managing the country’s economy and largely free from political corruption. On the other hand, it has been criticized for using unfair election tactics and violating freedom of speech. The kind of simplistic advocacy of road pricing a la Singapore leaves a lot to be desired. It is the kind of thing that gets economists a bad name. Sorry, it’s a bit of a technical term. ‘Certificates of entitlement’ are the first tier of the Singapore road pricing scheme – http://en.wikipedia.org/wiki/Certificate_of_Entitlement . Essentially, there is a fixed number of permits (‘Certificates of Entitlement’) for new cars each year. The number of cars is allowed increase only at a small rate. Consumers bid in an auction for a certificate. @All I don’t hear much about all tax breaks being scrapped and residency rules being hugely tightened, as one might expect in a deep crisis. Surely if rates can’t be increased much more this must be done? Would it not be preferable to mooted income tax increases on the lower paid which will hit consumption, reduce saving for their greater likelihood of unemployment and contribute to a poverty trap? Donal: There are obviously many differences between Singapore and our fair nation. The reason Singapore has road pricing is not for some ideological reason. It is so that they can maximise throughput of the road system and keep the traffic moving at speeds of around 55 km/h on the motorway and 25 km/h on all the other roads. This seems like a basic objective that we should have in Ireland. Obviously, we would have to achieve that objective in a different way. It is hard to underestimate how serious the transport problem in Dublin is. It is an extraordinary drain on resources and morale and saps at quality of life. I am not an economist, I run a bus company and have to deal with traffic every day. If I am giving economists a bad name I apologise unreservedly. I would say that this is a situation where a sensible pricing/auction system could deliver results in a short time. (I would respectfully suggest that it would be quite some time and require quite a lot of progress in in radio engineering before spectrum pricing would yield any useful dividend.) It would be easy to make trite remarks about a one-party state! Ireland’s lesser population density actually makes the problem of road space and road investment more acute, not less acute, because it means that a greater amount of vehicle mileage and time in traffic is required in order to carry out the same amount of economic activity. There are problems with public transport in Ireland for sure, but it would be quite wrong to suggest that governments have not made public transport a priority. There has been massive investment in buses, for instance (but very little return as regards improvements in service). I’m not sure if anyone elses thinks that the real significance of the paper presented by Colm McCarthy and of that presented by Niamh Hardiman at the SSISI workshop is being missed in this thread. (Colm’s points about revenues from intangible state assets – which seem to have attracted most comment – are valid at all times and in all places, but there is an echo of the clanging stable bolt and any revenues are likely to have a minimal impact in the context of fiscal consolidation. I find it interesting that there is no corresponding focus on the ownership and management of tangible state assets where some semi-states have created independent fiefdoms that no longer operate in the public interest and are sitting on equity war chests – much of which have been accumulated by overcharging consumers. Freeing this equity to leverage the financing of investment in 21st century infrastructure and utilities would contribute to a deleveraging of the state’s balance sheet, enhance future economic performance and growth and provide a positive signal to the international capital markets. In passing, long term, public/private infrastructure investment has been advanced by both main opposition parties in Britain in the last week and there is a possibility that the UK Treasury will address this potential in the upcoming pre-budget report.) For me, Colm’s paper highlights what can and should be done within the current framework for policy design and implementation; Niamh Hardiman’s paper highlights the glaring inadaquacies of this framework. Perhaps the most eloquent demonstration of Niamh Hardiman’s thesis is the fact that Colm McCarthy was commissioned to reprise 20 years later his original Bord Snip role. As usual, we seem to have no shortage of prescriptions and the diagnosis of the underlying failures in policy design and implementation is impeccable, but there is little evidence of the formulation of the package of political and institutional reform that is required. And, in so far as there is any evidence, those on whose shoulders the burden of design and implementation will fall are either deaf or failing to engage. The current government has no interest in, or incentive to pursue, the scale and extent of reform required. The opposition parties make some noises, but seem more intent on grabbing the unreformed levers of power. Politicians everywhere and at all times will seek to exercise power while minimising transparency, scrutiny and accountability. If they fail to exhibit a willingness to accept the necessary checks and balances in the public interest they should be forced to engage in the “public square” and to accept the shortcomings of the current arrangements and to propose reform. Unfortunately, such a “public space” does not seem to exist in Ireland – and blogs of this nature are a welcome, but poor, substitute. Singapore has restrictions on the number of cars and also congestion charging, which is what is meant by road pricing. These are distinct. Restricting the number of cars is not a component of road pricing. This is why road pricing is not called car pricing. Ireland has (relatively) high purchase and ownership taxes on cars, fuel taxes and (virtually) no road pricing. I think we should have road pricing, but I am not sure that it would yield extra revenue, since purchase and ownership taxes may be too high, and should probably be reduced with road pricing. We should watch the Dutch experiment carefully – Ireland should try to avoid frontier technology and let others do the experiments. This is part of my alternative ‘smart economy’ policy, deploying the word smart in its traditional meaning. @All On the subject of fiscal adjustment here is an interesting article: http://www.sbpost.ie/newsfeatures/lenihan-must-deal-with-some-taxing-questions-45891.html “Indeed, Lenihan had many times expressed the government’s insistence that further tax increases would be unproductive. In other words, not alone would increasing rates of personal income tax send out the wrong signal both domestically and internationally, but it would probably fail to bring in significant additional revenue”. Ok, but why not abolish all remaining tax breaks and reduce and limit that for pensions? Why not drastically tighten non-residency? Also when are we getting the property tax? We are in a deep crisis aren’t we? We should scrap NAMA, implement McCarthy/other measures and get €4 Bn of cuts and raise €2 Bn in taxes. That way we would be ahead of other economies in consolidating. “The introduction of a carbon tax was to be largely revenueneutral, or at best raise a limited amount of extra cash”. Why? “Some of those politicians around the cabinet table have begun – according to several people with knowledge of their deliberations – to question the notion that there should be no increases in income tax. The tax question, it appears, is not quite so clear cut now. There are several reasons for this. One is simply that Lenihan can annoy his cabinet colleagues with his sometimes overbearing insistences about financial reality, and some of them are less inclined to accept every word of his economic analysis”. His cabinet colleagues are absolutely right. Lenihan’s “reality” is an alternate financial universe where he bangs the table about saving net €300m on public sector pay while borrowing 180 times that in the same year on NAMA – of which €38Bn plus interest will be lost per Morgan Kelly. The funniest bit though was this: “Privately, Department of Finance officials expressed fears that raising income tax would do the opposite, and actually reduce income tax receipts, as some higher earners either left the country or restructured their tax affairs. They relentlessly pointed out that a small proportion of the population paid a huge share of income tax – 4 per cent of taxpayers pay half of all income tax,while half of income earners pay no income tax”. Does anyone believe that these officials advised him to tax only in his first budgets and are now telling him to cut only in this one? If they are the DoF are as bad as Lenihan himself. http://www.irishtimes.com/newspaper/frontpage/2009/1130/1224259710586.html?via=mr “New levy likely for high earners as budget details to be finalised”. “However, to avoid the perception of unfairness, an extra imposition of another kind on single-income earners above €150,000 is under serious consideration. This would be favoured by Green Party Ministers John Gormley and Eamon Ryan and some of their Fianna Fáil colleagues. The precise form of such an imposition is not agreed but it is thought to be an increase in the income levy rate of 1 or 2 per cent for that category”. I think we need to avoid what we did in the 80s and make sure to abolish all tax breaks and crack down in a draconian way on tax evasion. We have never had the Lester Pigott Des O’Malley promised us 20 years ago. This was how the rich avoided & evaded higher rates in the past. For them higher income tax rates are a challenge not an imposition. “Another item of high expenditure that may be cut is the rent supplement scheme, which provides a subsidy for unemployed people living in rented accommodation. This was “costing a fortune”, said one well-placed observer.” On the other hand it keeps property values up. Save money vs maintain property prices. I think the government will go for a small cut only. “Proposals for restricting the rate of tax relief on pension contributions to 30 per cent, and removal of the ceiling for pay-related social insurance (PRSI), are also said to be “on the table”. It will be interesting to see if they amend the tax relief on pension contributions. I don’t think the rich will allow them do anything major. “The urgency of agreeing the budget terms tomorrow derives from the fact that Mr Lenihan will “need seven to 10 days to put the finishing touches”, sources said. You really shouldn’t believe him on this. It’s probably a negotiating tactic. He should have been preparing this budget since last April. What has he been doing since? More proof that he and the cabinet spend all their time saving developers from their losses. He has been failing to get the banks to lend more since Oct 08. http://www.irishtimes.com/newspaper/breaking/2009/1130/breaking24.htm But it’s ok – Mary Coughlan is now responsible. No, her department’s civil servants are responsible. No wait, Forfas, who are responsible to her department, are responsible. Forfas will liaise with the Dept of Finance and the Central Bank, and they will in turn… Niamh Hardiman’s paper was linked from this earlier blog entry. http://www.irisheconomy.ie/index.php/2009/11/25/resolving-irelands-fiscal-crisis/ These might be of some little relevance. Kathy Sheridan wrote something in today’s Irish Times, which really scans the decade to look at various social trends etc. http://www.irishtimes.com/newspaper/features/2009/1130/1224259707502.html I haven’t been able to devote much time myself this winter to reading the many excellent books available which look at the last decade in Ireland. But this article is useful for those of you would like a ‘sample’ of what an analysis of the period might look like. John McManus offers his views on one state establishment, the DDDA here: http://www.irishtimes.com/newspaper/finance/2009/1130/1224259710165.html hi folks – newbie poster. Firstly great article colm. I was wondering would it be possible to direct me to any research on 0% Corporation Tax or even better to have a discussion here on the merit of such a policy for the situation we face at the moment. I believe it is an option that deserves more attention (Apols if I have missed a discussion here). I am aware of the dire straits we are in and forgoing this revenue makes it a difficult sell but we have taken far greater risks recently. Would love to hear the positives and the negatives? Would love to discuss but don’t want to bombard this post! @Colm “Ireland should try to avoid frontier technology and let others do the experiments. This is part of my alternative ’smart economy’ policy, deploying the word smart in its traditional meaning.” 😯 But what about the wheel-reinventing industry? It is a vital sector of both economy and society. It has direct feeds into the just-doing-what-the-English-ended-up-doing industry. The former comes up with something indescribably complex and bad and the latter copies something indescribably inappropriate, scales it down and balkanises it, while setting up parallel structures, overlapping responsibilities, and plonks a corporate structure on top of it. Without these smart-arsed industries, what would our consultants, solicitors et al. do? hyman: Google ‘mirrlees review’ and try the chapter on Taxing Corporate Income. thanks colm Comments are closed.