The NERI gave its opening statement to the Oireachtas Budgetary Oversight Committee last week. You can find our statement here. A video of the meeting can be found here.
We make a few key points:
- The public finances are in good shape in the short-term, with a healthy fiscal surplus and a manageable net debt ratio. Yet the headline figures mask severe vulnerabilities and concentration risks. Thus far, the surplus means that Ireland has been spared
the recent bond market pressure faced by the United States, the United Kingdom, France and other advanced economies. - The economy has been performing very strongly for the last half decade both in output and in employment terms. It does not need the support of an expansionary budget. Net public spending growth (gross public spending growth adjusted for tax increases/decreases) should not exceed the economy’s potential growth rate, which is in the region of 4.5% to 5%. Higher levels of gross spending can of course be funded by broadening the tax base.
- Times of economic strength are precisely when we should be increasing taxes and preparing for the future with strategic foresight. This doesn’t preclude us from protecting people from cost of living pressures, but it does mean we have to choose who to support and how best to do it.
- We are an energy importer experiencing a negative terms-of-trade shock, and we are collectively poorer because of it. Fiscal supports to protect households from the energy crisis should, therefore, be understood as distributional in nature. The nature of the supports are about deciding who in Ireland pays the extra cost rather than avoiding the cost per se.
- Indexation of the welfare and income tax systems to the higher of price or wage growth is, in our view, the most sensible budgetary response to the crisis. This should be combined with a more medium-term policy of generous subsidies to help lower and middle income households reduce their demand for petrol, diesel and gas.
- Now is not the time for complacency and short-sightedness. We have recklessly developed a dangerous dependency on concentrated and potentially transitory revenues. We need a mature and honest debate about how we manage the public finances, about how we raise revenue, and about how we allocate our precious fiscal resources.
- We also outline a set of principles that should inform budgetary policy:
- Always be countercyclical – This means running meaningful current spending surpluses in the good times and even in the normal times.
- Apply medium-term targets for net spending and capital spending that protects investment spending - This is to ensure sufficient and stable resources for investment spending are protected across the economic cycle.
- Quarantine potentially transitory revenues – Windfalls and transitory or cyclical revenues should not be made available for use either to fund day-to-day spending or to finance tax cuts.
- Engage in mature cross-party fiscal debates – This debate should encompass multi-annual budgeting, expenditure needs, fiscal sustainability, intergenerational fairness, and revenue composition and sufficiency.
The hardest of these conversations will be about tax reform.
We can and should make the needed investments in infrastructure, in education, in health, and in many other areas. But we cannot promise these improvements and offer tax cuts at the same time. This is disingenuous and it is time for an honest and mature debate.
We want a taxation system that is not only fair, but where funding for our public services is seen as an investment in our economy, and not a knee jerk reaction to the latest crisis.
In the first instance we need to raise revenue in order to correct our fiscal imbalances. There is already a deficit in the public finances once we exclude the fragile corporation tax receipts, despite the economy running at full capacity. This is not fiscal prudence.
But we also need additional revenues to invest in improving and expanding public services, to invest in social protection and in human capital development and infrastructure, and of course to pay for the increased service demand arising from an ageing population.
The independent Commission on Taxation and Welfare (COTW) proposed a material increase in tax revenue to fund expanded public services, and to fund increased service demand related to the ageing population, as well as the costs related to the green and other transitions.
But it is too simplistic to say taxes will need to go up. We also need to focus on tax design. From a structural perspective the Commission recommended that the tax system should shift its emphasis away from taxing labour towards a greater taxation of capital/wealth and pollution. The Commission’s recommendations called for increased taxation of capital/wealth across a range of areas (e.g. inheritances, capital gains, land and other property) as well as increased taxation of polluting activities.
Perhaps the Commission’s most notable finding in terms of the design and structure of the tax base was that tax expenditures, commonly called ‘tax breaks’, should only be used in extreme and time-limited circumstances. Tax breaks are almost by design economically distortive.
Tax breaks also tend to be regressive – meaning they usually benefit richer households - and tax breaks inherently contain high levels of economically inefficient deadweight. This means they are often extremely inefficient policy levers in terms of achieving their stated goals assuming they do so at all. Narrowing or ‘debasing’ of the tax system in this way is only justified where there is a clear and structural market failure (and only for the duration of the failure) and only after the proposed tax break has passed full and ongoing economic and social evaluations. We do not do this properly if at all. Recent budgets have seen tax breaks
that push up house prices, support fast food restaurants, and a range of other dubious causes.
To protect our public services we’re going to have to clean out the mess of billions wasted each year in tax expenditures. This will require politicians to finally stand up to influential vested interests.