Cowen’s approach: what a Tory approach to the recession would look like?

Conor Ryan has an interesting observation on current problems in the Republic. This, he believes, is the kind of mess the UK would have found itself in if the Tories had continued with the economic policy they were espousing pre Lehman brothers (the detailed picture of the Opposition’s economic policies are much dimmer these days). That is to load indirect taxation whilst keeping direct and corporation taxation as low as you can get away with. Conor’s point: large and rapidly growing fiscal gap when the downturn comes…

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  • kensei

    The problem I think is less the model, which can work (though not really my preferred way of doing things) but the question of what “loading indirect taxation” and “keeping direction taxation low” means. You have to take a view that covers the entire economic cycle and balance accordingly. The problem is that type of responsible accounting gets pushed aside in the mania for votes. So while Ireland’s fiscal position gives some room to move, but it really should have been better. So having followed pro-cyclical policies on the way up, it is now forced to be pro-cyclical to soem degree on the way down.

    But things are in flux. It’s not clear which model will work best over the long run or that what is appropriate for a country of Ireland’s size is appropriate for one of the UK’s size, or indeed that there is one right answer.

  • It was Sammy Mc Nally what done it

    Witchcraft. The pretence that Economics is even a semi-science grows harder to justify as the days pass. The equivalent theoretical re-thinking in Physics would be the debunking of the laws of gravity.

    El Gordo looks like the tribal village elder whose run of good fortune with charms has just run out and Posh Boy David Cameron(PBDC) is strutting around in his grassskirt promising his snake-oil-with-its-secret-ingredients will make everything better – but warning that it will take ages to undo the damage of his predecessor.

    At least FF have belatedly changed their witchdoctor-in-chief.

  • Glencoppagagh

    Fiscal deficits are less of a problem for the UK because sterling government bonds are a natural asset for UK pension funds (no currency risk and minimal credit risk). Irish institutional investors on the other hand can choose from a varied menu of Euro denominated government bonds acc0rding to their risk-return appetite.

  • Driftwood

    I see the TD’s (along with all the public sector) are taking a 10% pay cut.(Under the guise of a pension levy) That would go down well up here. And across the water.

    But up here it would stir the political pot somewhat.

  • Mack

    I’m conflicted by that post – Ireland’s tax structure is part of our comparative advantage, so I don’t want to see it replicated by the UK. However I disagree with his wider argument and the points he uses to back it are largely misinformation.

    Cowen has increased VAT while Britain reduced it, which has led to a mass cross-border exodus to the bargain prices of Newry and a big VAT-induced boost for stores there

    No it didn’t. The exodus to Newry pre-dated the VAT changes, which were largely caused by the collapse of Sterling.

    He delayed a bank bailout for months which has contributed to unemployment rising above 9 per cent.

    Eh? Ireland had the mother of all property bubbles – the construction sector doubled in recent years. We were building almost half as many homes for a population of 4.5 million as the UK for a population of 60 million. This was unsustainable, and was always going to result in large scale unemployment once it stoped. Bank bailout or not. (Is he suggesting the government should have tried to expand the bubble further?).

    Now he is cutting public spending by slashing the pay of civil servants by imposing a levy of up to 9.6 per cent on their gross earnings to cut the Government contribution to pensions.

    Sounds like hyperbole (or makes the cuts seem more effective than it is). There already was a levy, which has merely been expanded. It is also tax deductable – the impact on high earners (those affected by the top rate) will be nowhere near as bad as 9.6%. He doesn’t mention the scale starts at 3%. Private sector workers pay for their inferior pensions – and via the taxation system – for the superior performance of public sector pensions. Why should they get a free lunch?

    ————
    On his wider point. Ireland’s tax system is not what constrains Cowen – in fact it gives him significant room for manoever (Ireland’s income tax rates are substantially below the UKs).

    Ireland’s current fiscal problems, stem from ramping up public sector spending (list below) to unsustainable levels on the basis of unsustainable rises in property bubble related taxes (stamp duty, vat on property, income taxes, capital gains)
    Public sector spending was increased via

    1. Benchmarking – which pushed public sector wages to the among the highest in Europe and perhaps the world (Cowan earns more than Obama)
    2. Increased numbers in the public sector (perhaps to buy elections)
    3. Procurement – costing seems very poor.


    Main points

    1/ Had public spending not been expanded on the back of unsustainable tax revenues this fiscal problem would not exist or be much reduced
    2/ Ireland’s low direct taxes (income tax rather than corporation tax) and the collapse of transaction based taxes (stamp duty, VRT) actually gives Ireland significantly more room to manuover in the long term than Brown’s Labour government in the UK
    3/ What I’d like to see Ireland do now – is cut wages and inefficiencies in the public sector as a first step. It is crazy to borrow to pay wages that are too high. However as part of the process of public sector cuts, the government should engage the social partners and promise increases in government spending. The government should borrow to invest in projects that will provide a long term return and stimulate the economy now. E.g. Third level lecturers could take significant pay cuts, but the money saved should be spent providing training courses for the newly unemployed (and additional employment for staff to train them).

  • Comrade Stalin

    Mack,

    Your contribution there made me think about something. How come it is the case that with significantly lower levels of corporation tax, and before VAT is taken into account, that the Irish retail sector still isn’t competitive compared with the one in NI ?

  • Comrade Stalin

    (Ireland’s income tax rates are substantially below the UKs).

    Aye your bollix.

    Tax free rate : Ireland EUR3660, UK EUR7400

    Low rate : UK 20% on the first taxable EUR42700, Ireland 20% on the first taxable EUR35700

    Irish income tax has always been higher than in the UK, for as long as I can remember. PRSI/NIC may swing it, but I doubt there’s much in it.

  • Mack

    Comrade Stalin – Seriously it is. You’ve completely misunderstood the Irish tax system, which runs on tax credits and is markedly different from the UKs. 2/5ths of all workers pay no tax.

    Irish worker on €36,000 gross. Net is €30204.16

    UK worker on £32,400 (roughly equivalent) gross is £24,163.60

    Which is substantially less tax.

    http://www.taxcalc.eu/

    http://listentotaxman.com/index.php?c=1&yr=2008&age=0&add=0&code;=&pension=0&time=1&ingr=32400&vw;%5B%5D=yr&vw;%5B%5D=mth&vw;%5B%5D=wk

  • Driftwood

    Mack
    There are going to be even bigger savings needed to come close to balancing the Souths balance sheet in the next few years. Do you believe the public sector should carry most of the burden? The alternative is higher taxes. Shouldn’t the higher echelons of the public sector pay more?
    I believe they should up North.

  • Mack

    Irish – gross – €17,000 – net €17,000 (no tax)
    UK – gross – £15,660 net – £12,613.00 (£3,000 tax)

    Irish – gross – €72,000 net – € 49734.78 (€22,500 tax)
    UK gross – £64,800 net – £44,202.60 (£20,600 tax)

    Irish gross – €250,000 net – € 147030.44
    UK gross – £225,000 net – £138,720.60
    ————

    You can see higher middle earners pay roughly equivalent amounts (before additional tax credits such as mortgage interest rate relief). In Ireland PRSI is subject to a ceiling – so high earners pay substantially less tax in absolute terms than in the UK.

    Low & low / middle earners pay substantially less in relative terms.

    There is a lot more room for expansion of the income tax base in Ireland (in particular if indirect, one-off transaction taxes can be abolished. revenues have collapsed anyway).

    http://listentotaxman.com

    http://www.taxcalc.eu/

  • Mack

    Driftwood – Absolutely. I think the recent “cuts” haven’t come close to addressing the issue. I’d like to see real cuts in wages and headcount. Then ramp up government spending (because the private sector is collapsing!) in areas where we will get a return in future – to stimulate the ecomony now. Let’s see high speed rail links, deep water ports, broadband infrastructure, education etc.

    One good suggestion recently was scrapping employers PRSI – that would reduce the cost of paying a nominal wage in Ireland (equivalent to devalution or a global pay cut).

  • Driftwood

    Good luck Mack
    there may be a fallout though, The public sector bubble are not used to this, There may be trouble ahead….

  • Dave

    Good post, Mack. Just to add:

    (a) On the VAT increase point: Ireland doesn’t have VAT on food, so the increase in VAT would not have had any impact on cross-border grocery shopping. As you pointed out, the shopping exodus predates the increase and there is no evidence produced to show that it has accelerated it.

    (b) On the ‘delayed’ bank bailout: Ireland hasn’t bailed-out the banks. In fact, the banks have not received a single penny of taxpayers’ money to date. Ireland was the first country in the EU to offer a state guarantee to specific banks. It could only do that when it decided to break the EU laws that prevented it. Once Ireland set the precedent in ignoring bad EU law, other EU countries followed suit (as did the EU itself). There is no evidence produced to show that any of this has “contributed to unemployment rising above 9 per cent.”

    (c) Why does he think that reducing the fiscal deficit by “cutting public spending” is poor budgetary policy? Bizarre.

  • Mack

    Actually, I made a mistake with the higher earners (those on €250,000 – should have actually done the calculation rather than assumed). Higher payers actually pay the same / or slightly less tax in the UK at current exchange rates (within their recent range). Didn’t realise National Insurance also falls to an effective rate of 2% in the UK. There’s still more scope in Ireland and the bottom end of the scale (and if Sterling falls any further there will be at the top end too).

  • Comrade Stalin

    Mack,

    Who do the tax credits apply to and where are they described ?

    I admit that I was basing my opinion on my recollection of working in Dublin 10 years ago, and I googled to see what the rates are now. The low rate at that time was around 20%, but the high rate was 46% and kicked in at IR£14,000. I do not remember benefitting from any tax credits at that time, so they must be a new innovation ..

    I agree to a certain extent that this is the time to invest in infrastructure, but there are more pressing concerns. Public sector wages, pensions and other costs need to be brought under control, and the way public sector contracts are drawn up needs to be reviewed in an effort to do something about the fact that Ireland seems to pay much more than everyone else in Europe when it comes to upgrades to road and rail.

    The unions will actively attempt to disrupt any effort to improve infrastructure unless they are bribed first. A day of reckoning is required to get them under control. I hate writing that, because I’m not a Thatcherite, but the role of unions is to protect employees and campaign for improvements to their conditions – not hold the taxpayer to ransom.

  • Mack

    Comrade Stalin – They came in around 10 years ago – must have been just after you left.

    Here are the list of credits –

    http://www.revenue.ie/en/tax/it/leaflets/it1.html#section1

    How they work is, your tax bill is calculated normally and then the tax credits are subtracted from your total income tax bill.

    A single person will get the single persons tax credit and the PAYE tax credit (and any others they are entitled too).

    Tax bands are as follows –

    €36,400 @ 20%, Balance @ 41%

  • frustrated democrat

    Mack

    Do your figures include Family Income Credits in the UK, which for a married couple can be had on joint incomes up to about £60,000 for families with children

  • Mack

    Frustrated democrat

    Those figures were for singles.

    I’m not familar with Family Income Credits so couldn’t tell you whether or not those are more generous than Irish schemes (Child Care allowance provides €1000 per child under 6, to help towards child care costs for example).

  • Mack

    Comrade Stalin

    How come it is the case that with significantly lower levels of corporation tax, and before VAT is taken into account, that the Irish retail sector still isn’t competitive compared with the one in NI ?

    There are a couple of ways of looking at this.

    1. People didn’t really travel north en masse until recently.
    2. Companies charge what they can to make profit, they could charge high prices – so they did
    3. Costs are higher – higher minimum wage & rents – rates & electricity are also higher.

    In support of point 2, prices have droppped like a stone in the south recently (retailers here cutting their margins). To the point were many retail goods can be purchased for less (if you are willing to shop around and buy alternatives, often the cheapest price is to be had in the south). I’ve also noticed prices rise substantially in the UK (mostly on internet retailers such as Amazon).

    Historically, Power City and DID Electrical have always been substantially cheaper than northern electrical retailers (often cheaper than internet retailers too). This doesn’t seem to be the case at the moment, I suspect due to the extreme nature of Sterling’s recent collapse.

    http://www.powercity.ie/
    http://www.didstore.com/

  • frustrated democrat

    Mack

    No, the Child allowance is about £1000 per annum but the tax credit is different in that instead of lowering taxes it is a means tested rebate for families to bring up their income.

    It completely confuses the tax rates.

  • Ulster McNulty

    “it is a means tested rebate for families to bring up their income”

    Curiously it can be a disincentive for someone with kids to take on a better paid job.