The Economic and Social Research Institute (ESRI) and the Foundation for Fiscal Studies (FFS) will hold the twelfth Irish "Budget Perspectives" 2010 Conference today. It will examine some of the key economic and public finance issues that need to be considered in framing policy for the forthcoming Budget and the Irish economy medium term.  A paper on an Irish property tax says a system could be designed to take considerations of fairness and ability to pay into account. Another paper says social partnership is essentially an interest or pressure group model of decision making.

Conference Papers

Budget 2010 will be presented on Wednesday, Dec 09, 2009.

In related news, it's reported that the Government has not taken any decision as to when it will abolish the employee ceiling for Pay-Related Social Insurance (PRSI) contributions and introduce a single 30 per cent rate for tax relief on private pension provision. Both of these proposals are contained in the renewed Programme for Government agreed between Fianna Fáil and the Green Party last weekend. Further proposals for a site valuation tax on residential property and water charges are expected to take a number of years to implement.

ESRI director, Frances Ruane, comments on today's conference that a key focus is the work of the Commission on Taxation, with a research paper on selected issues and overall responses from a panel comprising Donal de Buitleir (FFS), Philip Lane (TCD) and Richard Tol (ESRI). Two other papers extend the bounds of the usual discourse at Budget time: one deals with Ireland’s approach to the EU budget, and the other with the pressures for protection via regulation, which become stronger during a downturn, and appear to have low or nil budgetary cost, but have high economic costs in the long term.

Analysis of a potential property tax, by ESRI researchers Tim Callan, Claire Keane and John Walsh, shows that the amount of property tax payable, if any, could be effectively linked with ability to pay. For example, a tax which provided full or partial relief to the one-third of the population with lowest incomes could still raise revenue of close to €1 billion per year.

The Commission on Taxation recommended last month the replacement of stamp duty with an annual property tax based on the value of the taxpayer’s home.

The authors say annual taxes on property are widespread in the OECD and have several advantages over stamp duties which are the main form of property taxation in Ireland. Stamp duties put barriers in the way of mobility, and distort decisions about whether to move or refurbish/extend an existing home in the face of changed circumstances. But moving from stamp duty to an annual tax, as recommended by the Commission on Taxation, does encounter problems of fairness in the transitional phase. The Commission recommended an exemption for a fixed, seven-year period from the date of purchase. The ESRI researchers suggested that the length of the exemption might vary to take account of the rate of stamp duty paid, and the point in the house price cycle at which it was paid.  Consequently those who paid most stamp duty during the years of rapidly rising house prices would obtain greatest relief.

The paper says a recent OECD study on taxes and economic growth summarised the main advantages of property as a base for taxation:

• property is immobile,
• property taxes are hard to evade or avoid,
• property tax revenue can be used to reduce the burden of income taxation, and has fewer behavioural consequences than income taxes,
• property taxes can offset distortions caused by favourable tax treatments of owner occupation which tend to cause overinvestment in housing,
• property is a major component of wealth,
• property is suitable as a local tax base.

The paper says Dublin accounts for a higher share of the yield from property tax than its share in the population of households. However, Dublin also has a higher share of disposable income, indicating a higher than average income. Given the progressivity of the income tax code, the share of Dublin in the gross income would be higher than 44 per cent, and its share in the revenue from income tax would be higher again. Thus, while Dublin’s share in the property tax is above its share in the population, it is not so far above its share in income or income tax - -  and a long way below the share it contributed in the narrower Residential Property tax, which was abolished in the mid-1990s.

The authors say that the Commission on Taxation also recommended that child benefit be included in the income tax base. This has advantages over simply cutting rates of payment for Child Benefit, as in the McCarthy Report. Analysis using the ESRI’s tax-benefit model shows that making Child Benefit taxable could provide similar savings to the Exchequer to the rate cuts proposed in the McCarthy report, but with much greater protection for those on the lowest incomes, and a greater net reduction for those on high incomes.

EU budget

In a paper to be presented at the conference, Trinity College professor, Alan Matthews, looks at Ireland’s role in the negotiations on the next EU medium-term financial framework, when for the first time in 40 years, the country will become a net contributor to the EU budget.

Prof. Matthews says Ireland is in danger of focusing on maintaining its large agricultural share in the new EU budget, rather than seeking increased EU expenditure on areas which may be more beneficial to the State in the long term, such as research and development.

He says other Member States will also approach the budget negotiations from the perspective of minimising their net national contribution or maximising their net national transfer, so there is a real danger that the outcome could be very far from the budget that Europe needs to meet the global challenges that it faces.

To address this problem, Alan Matthews proposes a mechanism to separate the distributional consequences of EU budgetary decisions from their substantive impact; “this would give the Member States an incentive to focus on constructing the right budget framework for Europe, and not the budget which simply seeks to preserve the existing pattern of net transfers,” he says.

Prof. Matthews says the Irish government made its own submission to the budget consultation process last year.

On the financing side, this emphasised its opposition to dedicated EU taxation revenues and any move away from a GNI-based basis for EU finances. On the expenditure side, it sought continued significant funding for agricultural and rural development spending, the concentration of structural and cohesion funds on the new member states, and an enhanced role for other areas of EU activity.

Matthews says that as a small open economy with an obvious interest in a cohesive and well-functioning EU budget, it is not surprising that we should favour the consideration of potential EU spending initiatives on their merits. However, past experience suggests that net contributors do not welcome an expanded EU budget, and Ireland will also need to be mindful that it will enter these negotiations (as will the other Member States) in a severely weakened public finance position. We will argue that this implies no real expansion in the current size of the EU budget, and that this will require the government to make choices between its budget priorities. We will also argue that taking explicit account of the net balances position of Member States rather than ignoring it will make it more likely that an optimal EU budgetary outcome can be achieved.

SEE: Finfacts Feb 2008 report: Ireland's 40-year bonanza of foreign aid from the European Union will amount to €41 billion by the time we become a net contributor in 2013

Protectionism

ESRI research professor, Paul Gorecki, says in a paper that under pressure from the recession, specific groups, industries and professions often look for government intervention to protect their position. Governments tend to give in to such requests for tailored protection more often than they should, for a number of reasons e.g., because the benefits of the protection granted are concentrated and visible, and the costs are dispersed and not so visible. He analysed why government decisions in this area tend to depart from what is best for the economy and society. He suggests that governments need to consider three questions in deciding whether or not to grant such bespoke protection:

• Why?
• Which instrument - - budgetary, regulation, or competition?
• What are the consequences for productivity and growth?

Three mechanisms are suggested for nudging policy outcomes closer to the best results:

• providing better information on the impact of granting bespoke protection;
• a regulatory budget that sets out the costs of new regulatory interventions; and,
• tests that must be satisfied before bespoke protection is granted through increased regulation or exemption from the Competition Act.

In terms of current issues under consideration, Prof. Gorecki argues that if this approach were applied, demands for bespoke protection such as a cap on the number of taxi licences or approval of the proposed Code of Practice for grocery undertakings or exemption of certain medical professions or actors from parts of the Competition Act would not be accepted.

Gorecki  says a specific institutional structure, social partnership, has been put in place that is conducive to facilitating the introduction of bespoke protection. Although partnership is primarily concerned with pay bargaining, since its inception in 1987 its remit has gradually been extended. He says it's a corporatist arrangement whereby, primarily, representatives of organised labour and business, together with the government taking the role of chairman, reach multi-year agreements on important aspects of economic and social policy.

For example, the partnership framework for 2006 to 2015 is 140 pages in length - - not including a separate 11 page document on agriculture - - and covers everything from the Irish abroad to better regulation. Partnership is essentially an interest or pressure group model of decision making. He says it is typically the well organised groups representing labour and business which do a deal, with the blessing of government. There are no groups representing consumers. The advantages of any partnership agreement reached, even if it contains bespoke protection, is likely to be stressed by the parties to the agreement. It is very difficult for the outsider to unpick the deal, as the negotiating process and the various trade-offs reached are conducted in secret, with very little involvement of the legislature.