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Thinking aloud about goods and services in the public domain

Posted on October 19, 2014 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

‘Economics’ has been defined as a ‘science which studies human behaviour as a relationship between ends and scarce means which have alternative uses’ (Lionel Robbins).  While I have difficulty with an understanding which regards economics as a ‘science’ (scientific methods may be used but, surely, that does not make ‘economics’ a science), the notion of scarcity, choice and desired ends cuts across all public debates on how we should organise production and consumption of the earth’s resources. 

Most ‘goods’ and ‘services’ are not free in the sense that they involve human effort, sacrifice, skill, time, investment and complex systems of production, distribution and exchange.  None of these activities take place in a vacuum where Robinson Crusoe individuals act as rational economic agents.  Rather, social class, ethnic, gender and national identities and complex institutions characterise ‘economic activity’. This is why I prefer the idea and term ‘political economy’ to that of ‘economics’ which has connotations of a standalone body of neutral knowledge and scientific rigour.

The case of water..

The extraction, harvesting, purification, distribution and delivery of water is an example of a scarce public good in a world where much economic activity is directed towards profit and commodification of services and products on a global level. Strictly speaking, water is not a ‘public good’ in the narrow economist’s sense of the term. Economists define public goods as ‘non-excludable’ where one person’s consumption does not reduce its availability to another (examples include fresh air, street lighting, roads, knowledge).

Water as a fundamental human right and necessity..

That water is a fundamental human right is not disputed. A resolution adopted by a Committee of the United Nations in 2002 reads as follows:

The human right to water is indispensable for leading a life in human dignity. It is a prerequisite for the realization of other human rights.

The right to water is defined and assessed by the UN according to the following criteria:

  • Sufficiency (The World Health Organisation estimates that between 50 and 100 litres of water are required per person per day to ‘ensure that most basic needs are met’).
  • Safety
  • Acceptability
  • Accessibility (e.g. with a source within 1 Km of a residence)
  • Affordability (the UN Development Programme proposes that water costs should not exceed 3% of household income although this could be no more than 1% of disposable income considering recent ESRI research by John FitzGerald and Edgar Morgenroth).

How water is paid for..

Clearly, it costs to extract water and deliver it to households, schools, shops and factories.  As a general guide, most advanced societies and economies spend just under 1% of GDP on the preparation and delivery of water to homes and businesses as well as the collection of waste water. Water service provision in the Republic of Ireland is around €1.2 billion a year (not including future costs of investment in upgrading and fixing the current partial Victorian system). To this may be added payments made by approximately 200,000 households in individual or group water schemes.  It is estimated that, within the figure of €1.2 billion, the corporate sector contributes about €230 million per annum in direct water charges with another sum coming from institutions such as hospitals, schools, clubs etc. The rest of the cost – up to now – was made good by central government funding to Irish Water (or the local authorities prior to its establishment). This direct contribution from central government accounts for more than half of the overall public cost.

It is estimated that at current usage and cost levels, the public (tax-financed or borrowed) cost of providing water is in the region of €500 on average per household in the Republic of Ireland). As a point of comparison the average annual water bill charged in England and Wales is £456. Although difficult to estimate it would appear that this cost level would be applicable in Northern Ireland.  Comparative OECD data indicate an average household cost of close to €500 per annum. For further details see McDonnell’s NERI ResearchInBrief ‘Water Charges, Water Poverty and Water Credits’.

Possible benefits and concerns with proposed water charges..

Tom McDonnell argues that the introduction of water meters and usage based water charges will ‘improve water conservation by reducing demand and helping to identify leaks within the system’. However, he points out that changes in the funding model raise serious affordability issues for low income households. He proposes that the most efficient way to address these affordability issues is through ‘the introduction of a system of income related water allowances or water credits’. However, a policy solution which heavily targets low-income households and withdraws the ‘universal free allowances’ could see average household water bills go from €278 (household with two adults) to €424 to make up for the loss of revenue resulting from subsidisation of low-income households. Some households with say four adults could be facing annual charges of over €500 for a (e.g households with more than 2 adults including students over the age of 18).  Little wonder that many are concerned about the matter and the uncertainty around escalating costs in the future.

But, ultimately how to fund water services is a political choice..

The choice about how countries charge for water is a political one. Broadly, European countries fall into three camps:

A  Those with a public system of water supply and where water is ‘free’ at the point of use to domestic users (Northern Ireland and, until recently, the Republic of Ireland)
B  Those with a publicly regulated, but privately owned and operated, system of water supply where users including households pay for water on the basis of usage. (England and Wales)
C  Those with a public system of water supply which is operated on a commercial basis by public authorities or public enterprises and which impose a charge on households. (most European countries)

Categories B and C involve a commercial charge for a commercial product. In other words, water is a private good supplied and consumed by households. Only in the case of A is water a public good which is consumed by households without a charge based on usage and is funded through taxation (which of course comes from households).

The situation in Northern Ireland

Scottish Water and Northern Ireland Water remain the only UK water companies that have not been privitised.  Prior to 2007 the UK Government had sought to introduce household water charges in Northern Ireland. The new administration established after the St Andrew’s Agreement decided not to include water charges in the Programme of Government for 2011-2015 (the issue of water charges was a key election issue in the March 2007 Assembly elections). However pressure remains on Northern Ireland public finances especially in the context of continuing UK-wide fiscal austerity measures.

Following a review in 2007 the executive has decided to introduce no additional water charges up to and including 2015. An estimated £160 is contributed per annum by households as part of the ‘Regional Rate’ according to the 2008 Independent Review Panel on water charges.  The Regional rate is set by the NI Assembly and is used to fund education, health, water and roads (by contrast the 26 District Councils set a District Rate which goes to pay for refuse collections and disposal, leisure, parks and street cleaning). Both District and Regional Rates have been capped in recent years. Note that in the rest of the UK local councils apply ‘Council Tax’ rather than rates. All residents and not just property owners pay council charges in Britain.

The funding allocation for water from the NI Westminster block grant is estimated to be over £200 million. To the extent that the estimated household contribution via the regional rate is not sufficient to fund the household cost of water services in Northern Ireland there is a case for raising regional rates as these constitute a form of taxation on wealth (at least one form of wealth).

The situation in the Republic of Ireland

In the Republic of Ireland until recently households did not pay directly for water and there was no restriction on the amount of water a household could consume (although many areas of the Republic continue to experience sub-standard water supply). Up to 1977 the cost of water services was covered by local authority rates. These were abolished for domestic households and central government raised income tax and VAT to pay for a ‘rate support grant’ to make up for the difference. This support was cut back during the economic crisis of the 1980’s.  Efforts to introduce domestic water charges in the 1990s failed following large scale opposition.

Following a decision of the previous Government and in keeping with a policy of reducing a large Government deficit the Government in the Republic is pressing ahead with a new system of domestic water charges connected to a public water supply (or to a public wastewater service). The decision including its implementation by means of installation of water meters has been hugely controversial. 

Future costs are uncertain..

The charging of water will be on the basis of a ‘free allowance’ of 30,000 litres per household (not per individual in a household). However, there is an extra allowance of 21,000 litres per year for each child under the age of 18 (probably much less than one half of actual consumption). A typical individual adult consumption might be double this at 60,000 litres. An 80 litre shower (for example) might cost around 40 Euro Cent while flushing the toilet might cost 5 cent. Costs will be capped for metered users for the first six months. What the long-term costs will be are unknown for a number of reasons:

  • The final details of the cost structure remain to be adjusted.
  • The universal free allowances were seen, initially, as a transition to help households to adjust to lower levels of consumption.
  • Actual consumption is uncertain and may adapt over time to the new charging regime
  • The details of various reliefs (some of which are signalled in Budget 2015) remain to be clarified.
  • The full public costs of water services may be under-estimated (at €1.1-€1.2 billion).
  • The problems of leakages, inadequate storage facilities and the possibility of a once-in-a-century breakdown in a major reservoir remain – none of this will be necessarily addressed by charging households on a usage basis (although it may be possible to identify leakage problems in the very short distance from the meter to the house).
  • It should be noted that there has been significant and continuous under-investment in water infrastructure over many decades. The problem has been compounded during the recent banking and fiscal crises. A paper entitled ‘Affordability and the Provision of Water Services in Ireland: Options, Choices and Implications’ by Gorecki, Lyons and Morgenroth states:

However, due to the financial crisis and pressure to reduce capital expenditure, State investment in water services has declined from €435 million in 2011 to an anticipated €296 million in 2014

A household with four adults, for example, could be liable for €483 per annum for water and waste services after application of allowances. But, that figure could rise over time (in fact it is certain to rise given future investment requirements). 

Offsetting measures in Budget 2015 not sufficient..

The proposed budget for 2015 (it has to be approved by the European Commission later this year) provides from some relief. Specifically:

  • Tax credits with a value of up to €100 for those paying income tax (this particular measure excludes a large number of low-paid workers who are outside the income tax net).
  • Household package with a payment to offset water payments up to a maximum of €100 per annum per household

All commercial organisations in the Republic pay water charges. Institutions such as hospitals and schools also pay water charges. There are two types of commercial water charges: flat rate or metered on the basis of usage. Similar arrangements apply in Northern Ireland in regards to non-commercial and commercial organisations.

So what is the bottom line?

It all depends on two fundamental questions:

Question 1          Either one believes that the provision of clean water is a public service and should not be ‘commodified’ into something that is bought and sold on the market (Implicitly such a view maintains that the cost of supplying, purifying and conserving water should be covered by local or central taxation at least where households are concerned), or, one believes that it ought to be bought and sold with all the claimed benefits of rationing by price and ensuring responsible usage of water in the wider public interest (the latter view is not incompatible with the retention of water services as a commercial public utility rather like Bus Eireann, Translink or ESB). In brief, the question revolves around what ideological, political or values position one adopts in relation to the matter. While the supply of water is not to be directly compared to the provision of health and education services there is a parallel – once we move from treating education and health as universal public goods (which is generally true of most European countries) to commodities for which users or consumers pay a fundamental line has been crossed.

Question 2          If the answer to Question 1, above, is in the direction of a public good and not for user charging then one must consider whether the option of maintaining it as a non-chargeable (to households) public good and service is politically feasible given the balance of political power, global pressures as well as EU directives and rules across a wide or areas from fiscal policy to competition. In other words, the answer to question 2 concerns judgment and assessment of what is realistic and desirable.

Now, one might answer the first question by saying that water ought to be provided as a free good funded out of general taxation but decide, on considerations under Question 2 that this option is no longer feasible and therefore some form of clever combination of ‘off-the-books’ accounting together with relief for extra needy or poor households is warranted. Hence, the focus of public debate in the Republic over recent weeks has been on ‘how to make the water charging system more fair’ (some might say ‘less unfair’).

Attempts, in the Republic, to arrive at a compromise solution – offering some relief in the case of low-income households as well as extra needy households (for example households containing persons with special needs) are well meaning and motivated. However, within an overall objective of raising a given sum of money from non-exchequer sources any relief at the ‘needy’ and ‘non-affordability’ end of the household spectrum must be made good by higher charges on other households. One strategy is to set up a flow of revenue into Irish Water so that Irish Water may be regarded as commercial agency ‘off-the-books’ as far as EU rules concern public spending and borrowing.  However, right now, Irish Water is on the books. It will take some time before Eurostat – as the official European statistical agency – rule on the status of Irish Water as commercial corporation not included in ‘General Government’ (i.e. not included in rules on the government deficit of 3% and overall borrowing target of 60% of GDP etc.). 

Attempts to keep public utilities ‘off-the-books’ with the EU..

Note that a public commercial enterprise could remain under public ownership and control without being classified under ‘General Government’. Eurostat rules indicate that over 50% of the regular annual revenue stream into Irish Water would have to come from sales of services or products to make it eligible for categorisation ‘off-the-books’. Any moves to offset household charges by means of direct welfare payments, tax reliefs or other subsidies might jeopardise the objective of moving Irish Water to an ‘off-the-books’ status (this area is unclear, untested and highly contested). If, for example, the Irish Government decided that, instead of charging households on the basis of water usage, to levy a certain charge as a proportion of household income (possibly even a progressively rising charge above a certain threshold of income) this could be seen as another form of taxation-funded spending and not as a tariff-based, commercial activity such as is presently planned.

The choice, remains between a system that is tariff-based (albeit with some tweaking and amelioration for households in particular need or with affordability issues) and a system that is ‘free’ in the sense that we have in recent times (albeit with significant charges for businesses and other non-household users of water).  In the matter of paying for water, a middle way is not really feasible for workable. We either pay for water on the basis of consumption or we pay for it through taxation (which could include rates in the case of Northern Ireland or income tax at the level of the UK or Republic of Ireland). However, It might be just feasible to charge domestic users that consume a huge amount of water (such as for a private swimming pool in the back gardens!).

Which is best? Concerns of efficiency, fairness and long-term social vision arise. Empirical evidence reviewed by the OECD suggests a reduction in water consumption as a result of charging more (for a 1% price increase there might be a usage reduction of 0.4%). While there are arguments for charging users of water to achieve greater efficiency (think of the plastic bag levy in both the Republic of Ireland and Northern Ireland) and less waste the concern shared widely by many households and organisations is that:

  • An additional charge running to a few hundred Euro or pounds is an intolerable additional financial burden on households who are already stretched to the limit; and
  • A system of commercial charging for water to cover all users – household and not just businesses and hospitals/schools/clubs – is a backdoor to privitisation with all the consequences that has for public services in general.

In short, it comes down to a political choice. But, it is also a strategic question about what is feasible in the short-run and in the long-run.

Postcript

At €400 million, the estimated cost of cutting the top income tax rate and raising the income thresholds for payment of the top rate in the recent budget in the Republic of Ireland could pay for most of the cost of water services to households. However, a very progressive tax such as income tax was traded for a relatively flat consumption ‘tax’ such as water. Paying for water that way would involve fewer headaches, uncertainty and muddling through. But any notion of not cutting income tax is generally not popular at this time. As a consequence citizens, goods and services in the public realm tend to suffer.

Once again, it’s all about political choices.

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