Budget 2011 (ctd)

My prediction earlier this week is now supported by the Times (and again in more detail) and Independent.

I would agree that the focus should be spending cuts rather than tax increases.

However, I would also argue that taxes need to be reformed too. Particularly, I would use the revenues of property taxes and water charges to reduce income taxes — as that would help to price Ireland back into the export and FDI markets.

I have also called for privatisation of particular state companies and agencies (ESB, CIE, DAA, Bord Bia, RTE, etc). This would only improve the public balance sheet if the market would pay a higher price than the current book value — that is, if a private operator thinks she can improve efficiency. However, privatisation would, in the longer run, improve domestic competition and reduce the costs of energy and transport.

These things will not happen soon as the necessary preparations are slow at best. Some have taken this as me criticising the civil service, particularly the DoF. That would be incorrect. Reform is complex and requires careful consideration — and DoF has its own budget cuts and hiring ban; endless complaints from other departments; the EU and IMF; and NAMA to cope with.

Nevertheless, you should never let a good crisis go to waste — and the public sector should be reformed as well as cut in size.

31 thoughts on “Budget 2011 (ctd)”

  1. What is the obsession of so many economists/commentators in Ireland will property taxes? Is it some form of social engineering, whereby they hope to turn Ireland into a nation of property renters rather than property owners, as is the case in many European countries?

    I have no objection to a property tax if stamp duty is reduced to compensate. The former might be more stable. But, while property tax is low in Ireland, stamp duty is very high. Some economists appear to want us to have a high property tax AND high stamp duty. No way, Jose.

  2. “However, privatisation would, in the longer run, improve domestic competition and reduce the costs of energy and transport.”

    Like it did for British Rail! I really think it is about time that economists didn’t automatically assume that privatisation would bring benefits. It might and it might not. Irish semi-states ar every protected so chances are it would. But I would not put it beyond the private sector to f*** it up. The use of terms “might”, “may” or “should” is far more appropriate than “would”. It betrays a presumption that is not always borne out by facts.

  3. @Richard Tol

    Is a property tax to be based on property value? If so, should one be taxed on the oscillations of the market when one does not gain any income from them and any actual gain is taxed through CGT ot CAT?

    Or should a property tax be paid on square footage? or bedrooms? or local autthority costs? If so, would it not be reflected in the cost of housing and therefore in rents and therefore provide little off-set against the cost of living for executives and employees of multinationals?

    As for water charges, won’t they be swallowed up by local authorities in inproving the water mains, installing water-meters, trying to keep as many staff as possible and paying for things like penal put-or-pay clauses in incinerator contracts? If so, how will this help reduce income tax?

  4. I also object to stamp duty both on the grounds of intergenerational equity (it is mainly paid by young people) and on the grounds of housing market efficiency (it discourages people from moving to seek work or because the need a bigger/smaller dwelling) but it is not that currently taxes on housing in Ireland are very low by European standard as are taxes in general.

    True only two other EU15 countries have higher stamp duty rates than us, but three countries apply capital gains to owner occupied housing, seven tax owner occupiers’ imputed rent, nine apply higher rates of VAT to new dwellings than we do and of course every other EU member has some form of property tax even those which have much higher rates of home ownership than us. Therefore there is certainly room for increasing housing taxes in Ireland and a property tax paid by all property owners would be a much more equitable way of doing this. It also provides a more stable source of finance for government and is more difficult to avoid than income taxes.

    I don’t understand why the central government doesn’t delegate responsibility of levying property taxes to local government as was the case when rates were in place. This would help to diffuse the political opposition to this but more importantly would provide a more stable source of revenue for local authorities, eliminate some of the perverse incentives generated by the current system of local government funding (such as reliance on development levies which encourages over zoning and over development) and also strengthen the system of local government. The people of Cork for instance might take more interest in their local elections if councillors were setting the rate of property taxes that apply to the city, and they could choose to vote for more local services and a higher property tax or vice versa.

  5. @ Zhou
    Isnt taxation a route to decommodification of property?

    @ Richard

    I dont like the way the budget is currently forming. Around 6 years ago the Govt turned on the spending tap and flooded the place with services.
    It is at best unstrategic to step back from this, incrementaly with spending cuts at X%.
    Wouldnt it be alot more honest to look at the future viability of alot of what is going on, shut down things which have no future, as opposed to creeping back 10% per anum.

  6. I fail to see the problem with paying 2 taxes on property.

    We pay VRT and VAT when we purchase a car, we pay an annual motor tax and we then pay duties and other taxes on the fuel we put into it.

    Why should property be any different?

    I would be an favor of reducing stamp duty simply to improve mobility in what will be a decade or more of falling or static prices but I see no problem with taxes on the same thing twice as I do it every single day.

  7. The experience of the UK rail privatisation has been a disaster. Private Eye has been following this for a long time and the whole story is just horrific. Why would a privatisation of CIE be any more successful ?

    Who is going to want to buy RTE today ? Does Ireland need 2 TV3s?

  8. @seafoid – “Why would a privatisation of CIE be any more successful ?” because we can learn from their bad experience. The biggest disaster in the UK privatisation was the privatisation of the track, which has for all intents and purposes been reversed. There is no evidence that the current ‘integrated’ public transport company provides an integrated public transport service. What is wrong with the performance of the privately operated LUAS???

  9. @ seafoid

    The UK rail privatisation wasn’t necessarily as bad as people often say. I take UK trains very often and most of them are fine (possible exception of Arriva). Not as good as the Germans, but still very good.

  10. @Al – “Wouldnt it be alot more honest to look at the future viability of alot of what is going on, shut down things which have no future, as opposed to creeping back 10% per anum.”

    Couldn’t agree more. We would just end up with the same services but all performing at mediocre/poor levels. I would rather have fewer, but great, services.

    @seafoid – “Who is going to want to buy RTE today ?”

    A certain Mr Murdoch comes to mind. If he could use it as a platform to demonstrate that he can take over a public service broadcaster and run it OK then he has already won the PR battle when the Tories let him have the BBC over in the UK. Once he’s achieved that then he’ll just shut RTE down and give us Sky-fodder over here. It was interesting to note some weeks back that he was one of the first visitors to Cameron in number 10 and they tried to hide him by bringing him in by some back stairs.

  11. @DE
    And we pay all those multiple car taxes out of after tax income too, don’t forget.

    @All
    There’s no reason why the government should not put multiple taxes on property other than the usual reason which constrains any government from imposing taxes….that they might not get away with it.

    Talk of fairness and morality in discussions of taxation are usually meaningless. The key question on taxation is akin to the old (and rude, so excuse me) question about why dogs lick their balls. Why is the government taxing something? Because they can.

    IIRC , there have been investigations on taxation policy and usage elasticity. At least for European governments the conclusions are clear-ish. People will smoke despite huge costs, so tax them. People still need to drive, so tax them. Most people are fool enough to try to work and better themselves and their families, so tax them. Capital is mobile, so don’t tax it so much.

    Housing is (i) needed and (ii) immobile, so it gets taxed. You can tax its planning, its construction, sale and use. You could tax its demolition. The UK taxes improvements if you make them. And you can do all that out of after tax income. HOW exactly you tax it is a second order question. The key fact is that housing tax is hard to avoid. If a government needs more money, particularly because the previous source of housing tax has dried up, then a usage tax is an obvious call….even if it might be disguised as something else (a service charge) before its full introduction.

  12. @Richard
    wrt to your comments about privatisation improving the public balance, a recent post by myself and Eoin Reeves on the progressive economy blog shows that the revenues from privatisation are rarely maximised and that the Irish exchequer has foregone significant revenues when privatising public enterprises in the past.
    http://www.progressive-economy.ie/2010/07/costly-business-privatisation-and.html

    “this would only improve the public balance sheet if the market would pay a higher price than the current book value — that is, if a private operator thinks she can improve efficiency”

    The empirical evidence on the impact of privatisation on performance is mixed. In the case of Ireland, there is little evidence to suggest that privatisation led to sustained improvements in performance. For example, in the case of Eircom, substantial cuts in capital ependiture and the workforce post-2001 all led to short-term productivity gains, however, the extraction of cash from the company by successive private equity owners and lack of investment in its network seriously damaged Eircom’s long run performance.

  13. @Scorpio
    “What is wrong with the performance of the privately operated LUAS???”

    I think the Luas is not a fair comparison with CIE. For the Luas line the government built the infrastructure; Thus far the network consists of two simple unlinked lines; All veolia have to do is run the trollys every 10 minutes and collect the dosh on two very profitable roots. It’s not exactly the London underground.

    CIE is hardly an touchstone for excellence, but to be fair they operate a far more complicated network and have to attempt to balance the requirements to provide routes in low density areas and try to operate commerically in other areas.

  14. “It’s not exactly the London underground.”

    Private sector involvement in the Tube is another disaster.

    @Marcus

    Jonathan Raban quoted a price of 200gbp Manchester-London for a turn up at the station fare recently in the NYROB. It’s cheaper to fly to Greece. The subsidies involved are eye wateringly high. Safety record nothing to write home about. France, Switz and Germany have far superior rail systems.

  15. The IT reports MoF Lenihan urging people to spend more in the economy. Apparently the savings rate has risen from 4% to 12% and ‘these people’, the savers, must spend more.

    I would be very grateful if someone could explain what exactly is behind these rate figures and how they translate into actual deposit books held in the financial institutions. With unemployment and personal indebtedness being what they are for over a couple of years now it is hard to believe savings in absolute terms are rising. Do the figures mean savings rates were very low and we are coming of an abnormal bottom. Do the figures also include corporate savings? More clarity would be appreciated.

  16. I agree with Richard.

    In the long run, cutting spending is always a better strategy than raising taxes, because it achieves budget balance at a “small-government” equilibrium as opposed to at a “big government” equilibrium.

    Big government tends not to work well, and especially so in countries like Ireland where power corrupts so easily.

    If the HSE is doomed to be hopelessly inefficient, at least it should be small, cheap and hopelessly inefficient.

  17. @ Seafoid

    Manchester-London is about £70. I’m not sure what kind of scenario you’d have to land in to get £200! I think you’ve quoted a rather extreme event there.

  18. @Donal Palcic – some interesting work. Striking is the fact that half of the costs are the employee share deals. Is the conclusion that such costs should not arise in any further sales?

    Privatisation might be seen by some as a quick way to generate some cash, but in my view privatisation should be considered with the long-run in mind e.g. long-run cost to the general public/tax payer. As it stands many of the services provided by SOCs here are either more expensive and/or of poorer quality than those available in other countries.

  19. I agree in principle with the privatisation of some public service providers. Why Bord Bia, they are just a policy and advocacy body? The don’t produce a specific product or service, like Failte Ireland.

  20. @Marcus

    Try virgin trains. £65 one way. Anytime single is £130. Raban wanted a return.

    This was the full quote

    ” Britons are painfully conscious of the fairer social climate enjoyed by their European neighbors. UK budget airlines like easyJet, with its £25 round-trip fares from (for instance) London to Amsterdam, have made flying to Europe far less expensive than taking the train within the UK, where the cheapest standard-class round-trip fare I could find for a hypothetical journey from London to Manchester cost £198. The more that lower-middle and working-class Britons travel in countries like France, Germany, and the Netherlands, the more insulted they’re likely to feel by conditions back home.”

    Privatisation is no Shangri La. Crapita is another favourite from Private Eye. And what about Eircom ? What happened there ?

  21. By far the best course of action for the semi-states would be to merge them with their N. Ireland equivalents. It is ridiculous on such a small island to have two of everything. There should be one airports authority. One body for the marketing of beef and milk. RTE and UTV should be merged to provide an All-Ireland television network. CIE and its N. Ireland equivalents should be merged. If anyone thinks that this is politically impossible, they are living in the past. In the 1960s, all hell broke loose in N. Ireland when it was proposed that there be a tiny inter-connector to link the two electricity grids. The loyalists railed against it. Dr. Paisley led mass marches against it. Yet, a few weeks ago, the ESB took over the N. Ireland electricity provider, Viridian, with no protests at all. Indeed, the first to welcome it was Arlene Foster, N. Ireland minister and probable next leader of Dr. Paisley’s party.

  22. @Conor
    If you go through the list of state agencies and quangos, then you note that a number of them provide private goods and services at the taxpayers’ expense — rather than public goods. Bord Bia is in sales promotion. It is certainly not the only organisation that has no business being funded by the state.

  23. @Edgar
    The 14.9% ESOPs granted to employees in every privatisation (bar the INPC) since the sale of Eircom in 1999 are (as far as I know) far in excess of the shareholdings set aside for employees in privatised SOEs elsewhere in Europe. Where SOEs have been privatised by flotation in other European countries, employees have generally been granted a number of free shares and the opportunity to purchase a set amount of shares at a discount (this was also the case when Irish Life and Irish Sugar were floated in 1991).

    Since the establishment of the Eircom ESOP in 1998, employees have received a 5 per cent stake in return for the acceptance of a transformation agreement (generally involving redundancies, increased pension contributions, changes in working practices etc). The main cost (to the exchequer) stems from the fact that the additional 9.9 per cent stake purchased by each ESOP has been heavily dicsounted in most cases (particularly in the case of Eircom where the ESOP paid €241m for a 9.9 per cent stake which turned out to be worth over €800m at flotation).

    If such stakes are granted to employees as part of future privatisations, it would be preferable if employees paid closer to the market value for the shareholdings they acquire.

    I agree that any decision to privatise whould be made with the long-run in mind. For any potential divestiture to take place, however, considerable restructuring of some companies would be required (for example, splitting the network element of the utility companies from the rest of the business).

    As I stated over on the tasc blog, any future decision in relation to privatisation needs to be taken in the context of a coherent and clearly articulated strategy for Ireland’s SOE sector. This strategy must consider all aspects in relation to the SOE sector and provide a clear statement of the objectives of each enterprise that highlights both their economic and social functions. Any assessment of the performance of SOEs must then be based on consideration of these objectives.

  24. @seafoid – Berlin – Hamburg is a similar journey to London-Manchester. Minimum cost for a return (excluding discounts for special rail cards etc.) on the slowest train is €100, if you want to go fast €126, for a return (including a Friday return). Manchester – London going now coming back tomorrow, £154.70. The ambition for some time has been to privatise the Bundesbahn.

    Anyone who looks at the experience of privatisation will soon find out that the outcomes have been mixed, with lots of good bad and indifferent in there. The fact that good outcomes can be achieved implies that privatisation should not be easily dismissed, but instead needs careful analysis and planning. The key tends to be the regulatory regime that is put in place – arguably this is where the Eircom privatisation failed.

  25. “if you want to go fast €126, for a return (including a Friday return). Manchester – London going now coming back tomorrow, £154.70.”

    So taking the exchange rate into account, Lon-Man is still [B]45%[/B] more expensive and I think you would agree that the EC and ICE are at least as good – in my opinion significantly better – QoS than Virgin Rail.

  26. And in Switzerland a 2 hour trip + return Zurich-Lausanne costs 140chf and you can buy a pass for 200 chf that gives you half price on all intercity trains for one year. The UK train system is a mess.

  27. @ seafoid

    Swiss trains are heavily subsidised by the taxpayers. Annual Report here

    That said, CIE is subsidised too and can’t seem to get any results. So arguably the problem is beyond public/private.

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