THE coverage of the ESRI Medium-Term Review in the special Irish Times Supplement last Wednesday was comprehensive. Nevertheless, in the light of the impending general election, I feel it worthwhile to return to one aspect of the review which surely ought to be central to the electoral debate ahead, viz. the disposition of the additional resources which now seem likely to become available to us through economic growth during the next decade or so.
The ESRI projects a percentage increase in GNP in the next 10 years similar to that of the past decade - but because the 1996 base of this increase is so much bigger than in 1986, the potential increase in public revenue at prevailing tax rates is a good deal larger - over £9.5 billion in 1996 money terms, as against just over £6 billion during the past decade. To this must be added the amounts released by the reduction in national debt interest - in 1996 money terms a further £7 billion in the decade ahead on top of the £4 billion reduction during the past decade.
However, allowance must also be made for the fact that, whereas in recent years the yield from company taxation has been very buoyant and has added significantly to the resources available to the Exchequer, during the next 10 years corporate tax rates will have to be reduced. This is because the EU corporate tax derogation that permits us to charge a discriminatory tax rate of only 10 per cent on industrial profits has to be phased out by the year 2010, while the 10 per cent tax rate on profits in the Financial Centre has to be eliminated by the year 2005.
To ensure that these 10 per cent corporate tax rates do not then have to be raised too sharply, our standard 36 per cent tax rate will have to be reduced, so as to give us eventually a single corporate tax rate of, perhaps, 12.5 to 15 per cent.
When these two factors are taken into account the total amount likely to be available for other purposes during the next 10 years is projected by the ESRI at about £10 billion in 1996 money terms - as compared with just under £7.5 billion during the past decade. Of course, this is an indicative rather than a firm figure, but it provides a basis upon which to discuss how we might deploy additional resources during the decade ahead.
IN ITS projections, the ESRI has assumed increases in welfare payments in line with the projected rise in average earnings in industry - in contrast to Britain and some other countries where such payments are being indexed only to the cost of living, thus providing no real increases. Allowing for the continued decline in the number of children in the years ahead resulting from the post-1980 collapse of the birth rate, and also for the expected drop of over two-fifths in unemployment, total welfare expenditure is expected to rise in real terms by only one-quarter in the next decade. This would absorb £1.5 billion in 1996 money terms, which is in fact somewhat less than the increase in spending that has taken place under this heading during the past decade.
Of course, welfare payments could be increased even further, but if unemployment payments were to rise faster than pay rates, this would intensify the already-existing disincentive to work. And unless this constraint on welfare payments is tackled by some radical move such as the substitution of a basic income system for our present tax and welfare provisions, further moves to relieve poverty may have to take other forms, such as, for example, radical improvements to facilities and infrastructure in areas of deprivation.
The ESRI review assumes that increases in public service pay will settle down after 1999 to the private sector level. And it provides for a 2.5 per cent per annum increase in the numbers of workers employed in the health and education sector, and a 2 per cent annual increase in other public service employment, together with a somewhat faster increase in non-pay spending.
Overall, this would involve a significantly more rapid rise in the volume of public consumption than has occurred in the years since 1990: in 1996 money terms an increase of £3.25 billion as against £1.7 billion in the past decade. And the annual increase in total current spending (including social welfare and subsidies, but excluding national debt interest), is projected to be 3.4 per cent a year which is fractionally higher than during the past decade.
Nevertheless, such an increase in current expenditure would still leave room for a significant reduction of £2 billion in the burden of income and expenditure taxes, to a level lower than that of any other EU country today. About one-third of this would be accounted for by the cuts in taxation in the next two years that have already been provided for in the recent national pay agreement.
PUBLIC investment in productive and social infrastructure was reduced sharply in the 1980s to cut Exchequer borrowing levels, and although it has risen again during the current decade, its volume is still somewhat lower now than 10 years ago. While those cuts were clearly necessary at the time, they have inevitably left us with a major infrastuctural backlog which is now in danger of causing bottlenecks and pushing up costs - unless advantage is taken of the continued expansion of our national output to increase such investment quite radically.
The ESRI projects an increase of £1.35 billion in the annual level of public investment by the year 2006, which would raise the volume of such investment by over five-sixths. This may seem ambitious - but during the past decade Exchequer borrowing was reduced by well over twice this amount in 1996 money terms.
But none of these proposals are meant to be prescriptions as to how the State should deploy an additional £10 billion of resources: they simply provide a frame of reference for the decisions that only politicians can take with respect to the deployment of available resources. Perhaps the most crucial, and potentially most controversial of these key decisions concerns the relative size of the resources to be devoted to tax cuts on the one hand and current public spending con the other.
While it is unlikely that the provision for increases in social welfare payments in line with pay rates rather than prices will be seriously contested here, there is certainly room for political argument with respect to the rate of increase in public consumption. For example, the increase in expenditure could be held down if the growth of employment in the public administration area was maintained at the .25 per cent annual increase of the past five years, rather than expanding by the annual 2 per cent provided for by the ESRI. And it, as the ESRI projects, public service pay increases from 1999 onwards remain in line with those in the private sector, this would also leave more resources available for other purposes.
For these reasons, some politicians might well argue that our public services could be significantly improved, and deprivation in disadvantaged areas effectively tackled, with a slightly slower growth in public spending than the 3.4 per cent per annum projected by the ESRI - say 3 per cent a year. And they could then go on to argue that if current public spending were to increase by three rather than 3.4 per cent, the resources available for tax cuts would thus be expanded by at least one-third, reducing the share of GNP absorbed by current public revenue to as little as 35.5 per cent by the year 2006.
However, proposals to reduce the rate of growth of current public spending to between one and 2 per cent a year - as the Progressive Democrats have recently suggested - are in my view quite unrealistic. Such a policy would eliminate any real hope of providing adequate funding for education or for improved health services, or of seriously tackling poverty and deprivation. And in any event the ESRI projections indicate that such a constraint on the growth of current spending would be quite excessive and indeed unnecessary. Because of our high growth rate we are now in a position to look forward to reducing our tax level to below that of any other EU country, including Britain, without any such reckless undermining of our social provisions, and without abandoning the fight against poverty. {CORRECTION} 97050300007