Colm’s columns

Colm Rapple
Irish Mail on Sunday, September 27, 2009

Who says that Tánaiste Mary Coughlan always gets it wrong? She was certainly right when she said in the Dáil during the week that many of the recommendations in the Bord Snip report don’t make sense. But they don’t have to, since most of them will never have to be implemented.

Colm McCarthy and his committee created a menu from which the Government can pick and choose and while the budgetary problems are severe they are not insurmountable. Unless, of course, Mary Coughlan is right in claiming that her Government need to cut spending by €4 billion next year. But that’s where she got it very wrong.

The targets for easing our way out of the current budgetary difficulties were set down back in April and the target is to cut the budget deficit by €4 billion next year. But it was originally envisaged that day-to-day spending would be cut by only €1.5 billion. Another €750 million would be cut relatively painlessly from capital spending while €1.75 billion would be raised in taxes.

Recent comments from the two Brians, Lenihan and Cowen, suggest that they want to ease up on the tax hikes and get more of the savings from spending cuts. That certainly doesn’t make a lot of sense because there is ample scope for raising some extra tax particularly from those who did very well from the Celtic Tiger and are currently among the recession proof.

They may be keeping a low profile, but they are there. Every asset that was bought at an inflated price during the boom years, was sold at an inflated price and the sellers pocketed the money.

Tax revenue of €1.75 billion wouldn’t be too hard to find.  To put that figure in context, the extra taxes announced in the April budget are set to raise €3.6 billion in a full year while the changes announced last October are expected to raise almost €2 billion this year.

If €1.75 billion can be raised in extra taxes, the necessary spending cuts are a lot more achievable. The €1.5 b target for day-to-day spending cuts represents less than 30% of the potential cost savings of €5.3 billion identified by Bord Snip and, to put that in context, it’s not much greater that the €1.2 billion expected to be achieved in a full year from the cuts unveiled in the April budget.

So what’s needed are cuts on a slightly larger scale than those announced in April. Given the amount of waste identified in the Bord Snip report, that should be achievable without cutting into the quality or quantity of public services. It should be possible to shave €1.5 billion off the Government’s spending budget without any across-the-board reductions in social welfare benefits or public sector pay.

Private sector pay has undoubtedly fallen behind, and the size of the gap is amplified by the enhanced value that the recession gives to the security and pension rights of public sector workers. But trying to impose pay cuts on any but the higher echelons of public servants risks a backlash that could cause more damage to the economy than any benefits that payroll savings could ever provide.

Far better to achieve higher productivity, increased flexibility and extra revenue from a fairer distribution of the €1.4 billion pension levy that would reflect the real value of pension rights for the different grades and types of civil servants. Gardaí, for instance, would have to contribute over 32% of their pay to buy their pension rights while nurses would only have to contribute 13% and some low paid civil servants even less.

The pension levy doesn’t take accounts of such differences.

There is a budgetary gap to be bridged and that can’t be done without pain. Choices have to be made but they must not be made on the basis of assuaging those who shout loudest. It has become very evident that many interest groups believe that those who shout loudest and wave the biggest sticks will win. And they will unless the politicians start showing a willingness to put country before political advantage.

Colm Rapple
Irish Mail on Sunday, September 6, 2009

Tax is going to replace NAMA as the hot economic topic tomorrow with the publication of the Tax Commission’s report. Much of it has already been leaked and it appears that few of the proposals are going to find their way into December’s budget. The notable exception is a carbon tax, much beloved by the Greens and certain to be introduced if they are still in office.

The residential property tax seems likely to be long-fingered. Changes in income tax are likely but mainly to consolidate and simplify the current mishmash of tax levies and PRSI. A change in the relief on pension tax relief is long overdue and was on the cards even before the Commission was established, and a clear-out of some remaining tax breaks has been signalled.

But the carbon tax seems to be a certainty. At the behest of the Greens, the Programme for Government includes a commitment to phase in a carbon levy and its rapid introduction is sure to be demanded in the current review of the programme.

The big question, however, is how far the initial environmental justification for such a tax is going to be superseded by a desire to raise money for a cash strapped exchequer. If that is going to be the objective, then a carbon tax that will hit hardest at the poorest, fuel inflation and erode competitiveness is not the best way to go about it.

A carbon tax was first proposed in 2002 and abandoned by Charlie McCreevy in 2004 after he published a discussion document and garnered submissions.

The 100 or so largest energy users in the country have were given carbon quotas by the State some years ago. Those quotas cover most, if not all, of their emissions and, although they didn’t have to pay for them, they are free to sell surplus quota on the open market. In total they account for about a third of the country’s total emissions and they are likely to be exempt from the proposed carbon tax.

A tax rate of between €7.50 and €25 per tonne of CO2 was suggested at the time and in its submission the Greens, then in opposition, proposed a rate of €20. The sole objective was to encourage people to switch from more highly polluting and therefore more highly tax fuels, to less polluting options.

All the revenue was to be recycled, It was to be evenly split between increasing social welfare payments, cutting VAT, reducing employers’ PRSI and funding grants to promote energy efficiency.

A carbon tax of €20 is estimated to raise consumer prices by about 0.6%. That’s the average but the impact will be far greater on poorer families. It is estimated that about 300,000 households rely on solid fuel ranges or open fires as their main source of heat. The tax could add over 20% to the cost of solid fuels but far less to the cost of gas, heating oil and electricity.

Many of those who rely on solid fuel are on relatively low incomes. The top ten percent of income earners spend only 4% of their disposable income on fuel while the lowest ten percent spend about 16%.

When the Exchequer was awash with money, it was easy to argue that all of the extra revenue from a carbon tax should be spent  ameliorating the impact of higher fuel prices on family budgets and business competitiveness. But will that logic hold in the current climate. And if not, does the carbon tax make any sense at all.

Charlie McCreevy was not always right – far from it – but his reasons for abandoning the carbon tax back in 2004 are worthy of consideration at this time.

He concluded that the environmental gains from a carbon tax could not justify the difficulties created, particularly to households. He pointed out that most of the fuels and other products involved were already subject to excise duties that could easily be increased as an alternative to introducing a new tax.

Even with a complicated array of compensation, revenue recycling and abatement measures, a carbon tax, he believed, would produce adverse social and economic effects.