This weeks NERI blog by Co-directors, Paul Mac Flynn and Dr Tom McDonnell is an article that they wrote for the Irish Examiner on 24 May 2021.
Employment and strong wages, not tax hikes, are the key to restoring the public finances.
The financial crash of 2008 and the subsequent recession were thought to be a once-in-a-generation economic event. But it is remarkable that just over 10 years later we face a recovery from a deeper economic shock.
Of course, the nature of our Covid-19 crisis presents a different set of challenges but even so, there are lessons we would do well to remember.
Mercifully, much of the international economic and political establishment has learned that cutting public expenditure in the teeth of a recession – austerity – does not lead to recovery but prolongs economic misery.
Supporting people’s incomes
We also learned that supporting people’s incomes is the most efficient way to stabilise the economy and return it to full productive capacity as quickly as possible.
The creation of the Pandemic Unemployment Payment (PUP) and the Employment Wage Subsidy Scheme were welcome innovations in Ireland.
The third lesson is a more troublesome prospect.
Stable economies require stable tax bases and we learnt to our cost in 2008 that becoming heavily reliant on revenues from the construction and property did not make for stable public finances.
There are ominous signs we may well face a similar reckoning with corporation tax revenues, but there is a more pressing challenge on this front.
"The experience of the pandemic has shown that threadbare public services are one of the greatest threats to the viability of the economy".
A conversation has now begun about how the revenue base can be bolstered to strengthen public services.
However, there is a danger that in our enthusiasm to learn one lesson, we fall victim to another.
Seeking to raise taxes in the next budget would be premature. An economy needs time to recover.
There is no immediate concern about the sustainability of the public finances and no one should use the current budget deficit to invent a crisis. Employment and strong wages are the key to restoring the public finances.
Some economic sectors, such as aviation and arts and entertainment won't return until late summer.
"It's crucial we maintain the PUP until at least the end of September and that we immediately reintroduce it were there to be further lockdowns".
We will eventually need to increase taxes and social contributions, but that moment will come when the economy and labour market have had time to strengthen.
Moreover, when we do come to look at building our revenue base for the longer term, our gaze must not be inward, but outward.
Ireland is a low-tax economy
Ireland is a low-tax economy, but not in the areas we think it is. When Ireland is compared with our near neighbours, the real gaps in our revenue emerge. For example, the largest of these gaps, by far, is in employers’ PRSI. In Ireland, employers pay less than 60% of the European average for social contributions.
Ultimately there will be a choice.
Do we want world-class public services in areas like education and health? Do we want a proper social insurance system? Do we want the State to be able to intervene meaningfully to directly increase housing supply? Do we want to have the resources to help people transition to a zero-carbon economy?
If so, we are going to have to accept that some taxes and social contributions are going to rise. The question then will be how best to go about doing that.
Article written for the Irish Examiner, Monday, 24 May 2021.