ANALYSIS:A cabinet minister should be appointed to push through badly needed reforms in our system of public administration
THE FOUR-YEAR budget plan released on Wednesday would see the EU’s deficit target for 2014 attained through a combination of expenditure cuts and tax increases. If the deficit was Ireland’s only problem, the plan could be considered on its merits as a full policy package. But Ireland also has an immediate debt problem – the International Monetary Fund (IMF) does not need to visit every country with a large budget deficit. The immediate problem is that neither the Government nor the banks, whose liabilities it has guaranteed, are able to borrow in the markets. If there was no exposure to the banks, the deficit problem could be manageable without external assistance.
The package being negotiated this weekend will need to deal with the Irish banking crisis and the exchequer’s exposure in a manner that permits the attainment of fiscal credibility on exit from the bailout. The surgeons need to ensure that the patient can walk away unaided once the treatment is complete. If they fail to do so, the team kicking the can down the road will have been expanded impressively. But the problem will remain to be addressed another day. The apparent lack of coherence in addressing the problems in Ireland has enhanced the risk of contagion to other peripheral euro zone countries and has further unsettled the markets. Flaws in the design of the euro system are being exposed in real time.
This weekend’s talks will focus on the bank exposure. There appears to be an acceptance by the IMF and the European institutions that Ireland has established, with its fiscal actions since mid-2008 and its acceptance of the 2014 targets, that the country’s political leadership is serious about getting the budget in order. This is enhanced by the fact that the four-year plan enjoys support in its overall objectives from the main Opposition parties likely to form the next government.
Some modifications to the four-year plan are possible. It must now be clear that expensive new rail projects in Dublin cannot be financed for the foreseeable future either by the exchequer or through leveraged private finance deals.
The Metro North project never made sense, even in the boom times. Persisting with it now, in the certainty that it cannot be financed, wastes more money on consultants and the planning process and has provoked widespread anxiety amongst city businesses mindful of the mayhem created by the works on the Luas tram lines. Businesses are being blighted to no useful purpose.
Last year’s “Bord Snip” report made numerous recommendations designed to streamline our system of public administration, through the closure and merger of quangos and the reorganisation of government departments. The subsequent efficiency audit of the local government system chaired by Pat McLoughlin made further and extensive proposals for reform in that sector. Given the extreme circumstances, the pace of progress has been modest. The four-year plan features the ritual commitment to reform, is depressingly skimpy on the details but of course contains the usual boilerplate about transformation agendas, e-government and the need for yet further reviews.
In the UK, cabinet minister Francis Maude has been charged with pushing through the reform agenda and the next Irish cabinet should provide for such an appointment. The resistance to reform from targeted agencies and departments is understandably intense and a political counterweight is not available under current Irish arrangements.
Ireland is committed to an extensive (and inevitably costly) expansion of renewable energy deployment, supported by government subvention in various forms. There is also a carbon tax. Economists have long argued that low-carbon forms of energy should enjoy the competitive advantage they deserve, getting the proper credit in the market against high-carbon energy through subvention or, ideally, a carbon tax at the appropriate level. The more carbon tax the less exchequer subvention ought to be required.
The four-year plan proposes that the Irish carbon tax be doubled to €30 per tonne in due course. This would be well above current European prices for emission permits (about €15) and would be one of the highest carbon taxes anywhere to date. I happen to think that this is the way to go in dealing with global warming. It is rather remarkable that this important carbon tax initiative has not been accompanied by an announcement of sharp reductions in exchequer support for the low-carbon sector, whose appetite for subsidy appears to be insatiable.
The biggest anomaly in the taxation of pensions in Ireland is the so-called tax-free lump sum. Under current arrangements, persons in receipt of occupational pensions are liable to tax on the pensions in payment. They will have been granted tax relief on their contributions while the pensions were accumulating, in the case of funded pensions, or will have been spared the imputation of notional contributions in the case of unfunded (mainly public service) pension schemes. This treatment avoids the double-taxation of pensions and treats funded and unfunded schemes similarly. But in the year of retirement, a large sum can be taken tax free and there is of course a sizeable exchequer cost to this arrangement. It would have been possible to scrap or cap the tax-free lump sum in a manner that treated funded and unfunded schemes symmetrically but the Government seems to have chosen a more convoluted approach.
The plan reflects successful lobbying to exempt the education budget from severe cuts. This is being justified in terms of the importance of holding with existing targets for pupil-teacher ratios, notwithstanding the dearth of evidence that reducing these ratios weakens educational outcomes in any measurable way.
The plan reasserts the Government’s commitment to the 12.5 per cent corporation tax. There is no area of international economic diplomacy more prone to hypocrisy than tax competition. Ireland has numerous taxes which are high by international standards, resulting in tax leakage out of Ireland. Why were there traffic jams in Newry these last several Christmases? Each European member state is free to choose its rates of tax. There is no basis in the treaties for the harmonisation of tax rates, and it is quite improper for officials of the EU Commission to get involved in pressuring member states on this issue. Has the commission permitted itself to become an instrument for larger member states to bully a smaller one deemed to be vulnerable?
Colm McCarthy lectures in economics at University College Dublin. He chaired the Government-appointed group which prepared the “An Bord Snip Nua” cost-cutting report