Author: Richard Tol

The benefits of increased investment and efficiency in public infrastructure and utilities

A guest post by Paul Hunt

The case for a pro-cyclical fiscal contraction accompanied by a significant “internal devaluation” has been convincingly demonstrated by many commentators and, in particular, on this site by Philip Lane (most recently here).

But Philip has been equally strong on the requirement to tackle rent capture and inefficiencies that increase costs and prices and, to some extent, justify calls for the retention of current nominal pay levels, as in:

“As a complement to pay reductions, it is also vital to more vigorously tackle monopoly power in many sectors of the economy, since a reduction in markups and monopoly rents (often shared between owners, managers and workers in these firms) is an important source of real depreciation and improved competitiveness.” (Irish Economy Note9, p3)

However, apart from a recognition of the importance of this task, it appears that little attention is being paid to what could be done in the short to medium term. There can be no doubt that the bubble economy facilitated increased rent capture and inefficiencies in the sheltered sectors of the economy, but quantifying the scale and extent – not to mind devising effective remedies – is a daunting task. And the political and economic power of the beneficiaries is not insignificant. So it is, perhaps, not surprising that there is little evidence of these problems being tackled effectively.

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Sean Barrett on the transport bill

In today’s Irish Times, Sean is underwhelmed by the transport bill.

In my understanding, the new National Transport Authority merges a number of state bodies and has at least the potential to cut costs and create synergies. I probably disagree with Sean on that point.

I agree with most of the rest. I would have argued, though, that privatising the state-owned transport companies and cutting their subsidies would be welcome news for the budget. Dismantling the transport monopolies would bring welcome cuts in costs for households and businesses.

Carbon tax galore

The Dept Finance has reinfored the expectation that there will be carbon tax as of January 1st, according to the Irish Times.

IBEC does not like a carbon tax (Irish Times), but the Royal Irish Academy does (Irish Times).

Frank McDonald writes about the impact of a carbon tax on the upcoming climate negotiations in Copenhagen. As things stand now, the carbon tax will be announced on the second day of international negotiations. The opening shots will have been fired on the first day, and nothing much will be happening on day 2 with thousands of journalists hanging around Copenhagen itching to write about a success in climate policy. Ireland’s carbon tax will thus attract worldwide media attention.

The economic rationale for a carbon tax in Ireland was first set out in a paper from 1992.

Convery defends the Green New Deal

in today’s Irish Times

Convery starts with stating that “raising the price of carbon is a necessary and sufficient step for tackling global warming” […] if and only if the tax was high enough to achieve the necessary reductions”. This stretches the definition of “necessary”. The carbon tax should, of course, be equal to the marginal damage cost. Such a tax does not lead to the emission reductions required by a forthcoming EU directive. Perhaps that is a sign that the EU is overambitious. But even if you except the writ of the EU, then we should still meet the EU-wide target at a cost that is minimum at the EU-level — and for Ireland not accept a cost that goes beyond that. This means that the carbon tax should equal the ETS permit price. Not less. Not more. Equal.

Convery then argues that, because methane from agriculture cannot be monitored, the uniform price principle is broken. True. He then seems to imply that because it is broken anyway, it does not matter to break it further: Because the tax on methane is zero, the price of carbon dioxide need not be uniform. This is plain nonsense.

Convery does not repeat the recommendation by Comher SDC that the carbon tax revenue should be used to subsidise energy efficiency. That would indeed be wasting tax money on double regulation.

Convery does argue that “[s]ubsidies […] be directed exclusively at enhancing fuel efficiency in poor households.” I have argued that the monies for this can more appropriately be found in the budget for fuel allowances.

Convery finally argues for a stimulus package of 2% of GDP, but does not state where that money should come from. The Comher SDC report recommends more borrowing and using the capital of NAMA, Anglo-Irish and the pension funds.

The affordability of a stimulus aside, investing in renewable energy is not the best stimulus. Climate change may be a problem for Ireland in 100 years, but extra borrowing surely poses a problem in 10 years time. The Irish economy needs jobs and capital, while energy is capital-intensive and labour-extensive. Renewable energy may create export opportunities in 10 or 20 years times, but we need to increase exports this year and next.

If there were money for a stimulus, then we should slash labour taxes. If we cannot slash labour taxes, then we’ll have to slash wages.

Poll tax bad, water charge good

Yesterday’s Independent had a headline on water charges. RTE ran with it too. The story is that a flat rate water charge will be introduced. Water charges are good in principle as they put a price on a scarce good. Flat charges — every household pays the same — are a bad idea. Flat charges do not incentivise water conservation. This is just a poll tax by a different name.

The Renewed Programme for Government also mentions water charges. It suggests a free allowance, and a proportional tax for any household that uses more than the free amount. This is much better than a flat rate, but still not perfect.

I would charge households for every cubic metre of water that they use. This is a consumption tax, and therefore regressive. I would repair the damage to the income distribution by increasing benefits and tax credits by an amount that is equal to the water tax rate times 100 litre per person per day — the amount of water needed to wash your clothes and flush the toilet.

Water charges require water meters. I would charge households without meters for the average water use of unmetered households (about 450 l/p/d) and households with meters for the actual water use. If the water charge is announced well in advance (say in Dec 2009 for Jan 2011), meters will rapidly be installed by those below average. This will drive up the average, so that more meters will be installed.

People on benefits would need a voucher for a meter.