It happens to the banks, it happens to concert promoters, it happens to record shops, restaurants, hairdressers, airlines, motor dealers, to all sorts of businesses: they are accused of overcharging the consumer. Now it's time for another to be added to the list: the State.
This is one way of looking at the news this week that, yet again, the State has taken more tax from us than it either needed or expected. It is a simplified way of looking at things but, at base, it is valid. People can and do argue that social spending and State investment should be higher or lower than they are at present. In theory, the starting point can be seen as the democratically mandated spending approved by the Oireachtas. The tax take could be viewed similarly - meaning that a big surplus is the right amount. The reality is different on both sides.
Statists and socialists are very quick to point to market failures. There are many public sector failures, too. Public services are not as good as we want them to be and resources are wasted on the wrong things.
Most public services are also under-resourced, making them ineffective. Not raising enough tax, or not borrowing enough, to fund spending requirements is a public sector failure. However, raising too much tax is also a failure. Yet again, the tax take this year is going to overshoot even the excess over spending requirements that the Department of Finance had budgeted for, by €650 million (£512 million). This overshooting of budgeted surpluses has been a constant theme for the past four years, at least.
Prior to the last election, one could argue, the then Minister for Finance Ruairi Quinn lost out because he took on board an over-cautious view of likely tax available for his budget. The election result could have been different if he had promised to spend more on benefits or to cut taxes more. It is prudent for the Department of Finance to underestimate potential surpluses and to overestimate potential deficits in advance. But there must be a point where caution about predictions provides diminishing returns in terms of policy decisions. Is this year's substantial underestimate of tax revenue deliberate, ingrained caution? Or could it be that the model of the economy that the Department is using is just not good enough, running the more serious risk that, when deficits have to be estimated, they, too, may be wrong?
The standard defence is that most forecasters are bound to fail most of the time, if the test is absolute accuracy. Forecasting is really a percentage game, with success gauged by how often the forecaster is close enough in magnitude and direction to the actual outcome. In this light, either the consistent underestimation of tax revenues is deliberate - raising questions at this stage about diminishing credibility - or there is little comfort in the recent batting average of forecasts from Merrion Street. The wider issue is whether repeated surpluses are a good thing, especially those in excess of what are budgeted for?
The extra money is not put to productive use. Temporarily, it is put on deposit at the European Central Bank. This would pay a mere €47.5 million per annum for every €1 billion on deposit. Once the year comes to a close, the end-year surplus is permanently used to pay off the national debt early, rather than left lying around in a bank account. This saves us more than 4.75 per cent, and leaves scope for borrowing in bad times, if needed.
The trouble is that, when public debt is modest, there is no, non-arbitrary, correct level, apart from the argument for no public debt at all. Are there no more productive uses for the money through private or public sector investment than the option of paying off the national debt? Implicitly, by setting up a separate pension fund to invest our tax proceeds in shares and other assets, the Minister for Finance is recognising that there are such opportunities. If our economy is judged to have run out of the capacity to deliver additional productive opportunities, one logical answer is to let the private investor invest in the rest of the euro zone or elsewhere.
The argument against lowering the tax take on the basis that we'd all just go out and splurge, rather than invest, ignores the fact that incentives can be created for private sector savings and investment over consumption.
Should we spend more on social welfare and other supports? I don't see that the danger of ratcheting up public sector spending to unsustainable levels is very great by the Government meeting its target of £100 (€127) per week for the old-age pension now rather than later. On the assumption, though, that a given level of spending is correct and democratic, persistent large Budget surpluses are more of a problem than a cause for congratulation.
Oliver O'Connor is editor of the monthly publication, Finance. E- mail: ooconnor@indigo.ie
