The blog has gotten some updates to its backend and theme, but more importantly, the blog has a new editor, UCC’s Seamus Coffey. Welcome Seamus!
The Fiscal Council’s latest Fiscal Assessment Report, May 2020: “The Fiscal Impact of Covid-19” is out today. This is the Council’s 18th Fiscal Assessment Report, and it comes at a time when the economy is experiencing an unprecedented shock due to the pandemic and very high uncertainty. The Report assesses the economic and fiscal consequences, including a range of possible scenarios to 2025 and an assessment of the policy consequences.
The Council will be hosting a live webinar on the findings of the report on Thursday, 28 May 2020 @ 2pm Dublin time. The Council’s Acting Chairperson, Sebastian Barnes, will give a presentation followed by a Q&A session. The presentation is expected to last 30 minutes.
You can register at: https://zoom.us/webinar/register/WN_qDJrpmjcQQ2Aus7BJbK_Wg
FOUNDATION FOR FISCAL STUDIES
“Reflections on Ireland’s Fiscal Framework”
Thursday 12 March 2020 @ 8.30am
(Registration + tea/coffee/pastries from 8.00am)
Irish Tax Institute, South Block, Longboat Quay, Dublin 2
Seamus Coffey is a lecturer in the Department of Economics in University College Cork. His research and writing focuses on the performance of the Irish economy. He recently completed a four-year term as a member of the Irish Fiscal Advisory Council and served as chair for the past three years. In October 2016, he was appointed the independent expert by the Minister for Finance to undertake a review of Ireland’s Corporation Tax code. This seminar will provide an assessment of elements of Ireland’s fiscal framework including the role and impact of the Fiscal Council, the design and implementation of fiscal rules in the face of Irish idiosyncrasies like GDP and Corporation Tax, and a discussion of some possible changes to the fiscal framework that might arise.
About the Foundation
The Foundation for Fiscal Studies was established in 1985 as an independent, non-profit making body with the primary object of promoting study and discussion of issues relating to fiscal policy. The Foundation provides a unique forum open to academics, policy makers, taxation and legal experts and the general public from which critical and constructive contributions can be made to developments in Ireland and the European Union. Our aim is to assist in the process of debate and decision-making on future fiscal policies.
If you would like to attend, please contact: email@example.com
(Please note that this is an open event and everyone is welcome but we ask that you rsvp in advance)
The measure of a household’s income should include not only monetary components such as salary but also non-monetary components and in-kind benefits, such as imputed rent. Imputed rent is the rent an owner can expect to receive were the house on the rental market. Being an owner-occupier does not provide a rental income however, it saves the owner from having to pay market rent. This is turn can increase a household’s potential to consume other products and services. We recently published a paper in the Journal of Housing Economics looking at the impact of housing consumption on the spatial distribution of income.
Results show that the imputed cash flows from property ownership decreases the income share of those at the bottom of the income distribution and is inequality increasing, except in the case of those aged 65 +. Spatially the benefits of housing are greatest in urban areas where property values are highest. The small area measurements of imputed rent highlight the dis-equalising impact imputed rent and housing wealth has on inequality; the rich being able to consume more housing and thus have higher imputed rents. Overall there is an increase in inequality from a Gini of 0.37159 to 0.38595.
Table 1 highlights the impacts between income deciles. We see the share of income for those in the bottom and top decile both decreased after the inclusion of housing. The middle deciles have experienced the biggest increase in share of income. The lower groups are disadvantaged from paying housing costs and not receiving same in-kind benefits as owner-occupiers. Elderly individuals who were in the bottom quintiles (cash poor but asset rich) have increased their income share after housing costs and benefits are considered.
|Disposable Income||+ Imputed Rent||+ Imputed RMA||Disposable Income||+ Imputed Rent||+ Imputed & RMA|
|Decile||% of median||% of median||% of median||Share||Share||Share|
We see how this looks spatially in Figure 1, which shows the Anselin Local Moran’s I for disposable income including net imputed rent. This is a measure of local spatial autocorreltation, high values located close to other high values indicate positive spatial autocorrelation. The figure shows clusters of high-high areas in the GDA and Cork city. This is because of high levels of disposable income and high imputed rents due to high property values.
Additional housing benefits are related to the benefit derived from the value of the asset. A reverse mortgage/annuity (RMA) enables owner-occupiers to use their home as equity to buy an annuity, which provide them with regular payments, without the need to move out or sell the house therefore providing security of tenure. Without including reverse mortgage/annuity in the analysis, the household would leave behind a significant amount of equity, which is then bequeathed to descendants contributing to inequality. Using reverse mortgage/annuity however treats households as separate units as the household will consume the value of the property before death. Households can overconsume to make up for periods of under consumption, i.e. when paying a mortgage. Reverse mortgage/annuity has the potential to financially protect households 65 + by acting as an additional pension, they have paid into over the term of the mortgage. The stream of consumption value provided by housing compensates the elderly who are ‘cash poor but asset rich’.
After accounting for housing costs in the form of rent and mortgage payments and housing benefits in the form of imputed rent and reverse mortgage/annuity, the spatial distribution of welfare changes. On average the income share of the Greater Dublin Area (GDA) increases, however when the movers are examined, the high rents and property values and overall benefits to owner occupiers in the GDA, are masking the high costs young renters face. This highlights the importance of examining issues such as housing inequality at a detailed spatial scale as opposed to aggregate totals. However, overall the net gain to owner-occupiers does not exceed the net loss to non-owner-occupiers and inequality nationally increases. The inequality measures show that overall housing costs and benefits are having a regressive impact on the income distribution with those at the lower end of the income distribution disproportionately affected. The income share of lower groups decreases after net imputed rent.
In terms of policy implications, a tax on imputed rent should be examined which may reduce the inequality between those who own a house and those who are renting. The current LPT is attempting to address this however the tax is levied on all properties, this is despite private renters not receiving the same level of benefits from housing as owner-occupiers. The LPT should account for the variation in housing benefits across the life-cycle. Effective implementation may incentivise those in the older age categories to take out a reverse mortgage/annuity.
Increased uptake of RMA may result in the older age categories consuming the housing wealth as opposed to bequeathing. This can address issues relating to the inequality of inherited wealth. The high rental values particularly in the GDA may hinder an individual’s ability to save and eventually draw down a mortgage. Solutions are required to increase an individual’s potential to save. There are clear benefits to owner-occupation especially for the elderly. If current trends of decreasing home ownership levels continue, future elderly groups will be particularly vulnerable, as they would not have the financial safety net in the form of a housing asset.
This study examined the impact of net imputed rent on the distribution of income in a spatial context. The spatial impact of net imputed rent, mortgage payments, private rent, public rent (social housing schemes) and reverse mortgage/annuity on the spatial distribution of disposable income was examined for the year 2011. A spatial microsimulation model, simulated model of the Irish local economy (SMILE), was used to simulated disposable income at a detailed spatial scale. Rental and property values are estimated at a spatial scale adopting the kriging methodology. The created rental and property data were merged into the SMILE simulated dataset to examine the impact of housing on the spatial distribution of disposable income at a small area level.
Comparing home ownership rates between the 2011 and 2016 Census (Table 2), there is an overall drop in owner occupancy by 2%. Overall owner-occupier households have declined by ~2300; in addition, there are 48000 new households over this 5 year period. In the future, a large group will not have the benefit of homeownership in retirement in relation to both imputed rent and RMA. Although the numbers renting privately increased, the share remained the same. The difference in households private renting also varies between counties (Dublin city decreasing by over 2%; Longford increasing by 1.3%).
|Owner (outright or mortgage)||0.70||0.68|
|Free of Rent||0.02||0.02|
This research was funded under the John and Pat Hume Doctoral Awards at Maynooth University.
2020 will see an election held in Ireland. By all accounts the election is imminent. The 2020 election will be fought, as all elections are, on the basis of promises. That part of the electorate who show up to the polling stations gets to decide the next government, and it will do so partly on how much credibility it chooses to attach to the promises of the various parties.
The electorate will also make its decision in a markedly different macroeconomic context to 2011, and even to 2016. Given where the current government started from, the macroeconomic situation could not really be much better.
The number of people in employment has never been higher. Inflation is relatively low, growth in incomes is a feature of many workers’ experiences, personal consumption is up, house prices seem to be finally moderating, and the government is spending the proceeds of a taxation exercise that has actually doubled in under a decade. The state’s spending on current, capital, and pay has rarely been higher in any category. The latest figures from the Department of Finance show the government choosing to move quickly towards a surplus, while clearly showing their understanding of the risk to corporation tax revenue arising from changes at the EU and OECD levels coming down the line. Bullet point 4 of the press release, which is repeated elsewhere in the latest Finance discussions, is particularly interesting. It simply says:
Implementation of OECD BEPS initiative will likely result in a decline in corporation taxation receipts, making the need to account for reduced revenue essential.Department of Finance
An electorate looking only at the macro aggregates would most likely return some version of the current government, or another coalition version with an almost identical policy mix. So why doesn’t the government get some measure of praise for its handling of the economy? Paschal Donohoe and his colleagues have chosen to tighten before an election. To call that rare is an understatement.
Over on Twitter, IBEC’s Gerard Brady posed the question below, and the echo chamber podcast posed it as well. Obviously these polls aren’t statistically significant, twitter is not reality, and it is just a small indicator, but it’s roughly what you’d expect at the higher end. The likelihood of the government getting a fair crack of the whip for its work seems relatively low.
One might argue that fiscal tightening like this is mere posturing ahead of an election, but the fact is that the opposite behaviour—spending like it was going out of fashion–would be far more advantageous electorally. Also, fiscal tightening is behaviour economists would praise any finance minister for at this point in an economic cycle, absent an electoral contest.
There is a curious lack of symmetry in the public commentary on the economy between praise and criticism, and this is something I’d like to remedy.
Let’s be real about it: the 2016 election showed voters don’t really connect with positive macroeconomic measures like GDP (or its newer cousin GNI*) the way readers of this blog might. Issues at a more micro level dominate, and that is completely fair.
It is also fair to say macroeconomic figures obviously matter. How much they matter, the credit working on getting the macro issues right, to the public is a testable hypothesis, and the election might well provide us the answer.
Naysayers can, will, and should point to the plethora of cock ups and plain old policy failures that have happened since 2016. Lord knows I have, in the pages of the Sunday Business Post and now The Currency. The health and housing situations have not improved at the speed the public want them to. Some large capital spending projects have been poorly executed. All of those are true, all are important. The country’s emergency rooms are bursting. Homelessness remains a scandal. It is not for me to defend the government’s record on these matters. I’m not a strategist for them, or for any other party.
I would however like us to acknowledge that spending more on housing, health, or education or at a faster rate would imply more deficit spending, and further endanger the economy at a moment when the risks from corporation tax falling off a cliff are high, not to mention Brexit and a host of other macro risks might take a chunk of our growth with them, should they come to pass. In this context, choosing not to do some things and to focus on attaining some class of a surplus should be praised. And it is not. I have a problem with that.
Anyone wanting credibility in the forthcoming election should be prepared to talk about the trade-offs inherent in governing an economy like ours, and justify their choices. The trade-off doesn’t quite boil down to “invest by borrowing and spending on infrastructure to increase quality of life” vs “prepare for future shocks by driving increased budget surpluses”, but it’s not far off. Whichever vision the electorate plumbs for is fine, but the trade-off has to be explicit. Journalists and commentators should be prepared to call out parties advocating vast spending increases and lowering taxes just to attain high office. I want to believe we live in a country where endlessly repeated stupid three-word slogans and unsustainable fiscal phantasies have no place.
Musgrave’s 1959 framework applies to the Irish economy. It says that any government must make sure its finances are in reasonable shape, have some view towards resource allocation, and have a stance on resource redistribution. Undeniably, the first objective has been met. The resource allocation and resource distribution pieces seem to me to be where the arguments are going to be during the next general election. Here again the parties of government can make their arguments for themselves.
I’m all for robust criticism where it is warranted, but I think where praise is justified, it should be given.