Debt Mountain 'Ireland Inc' III

An anonymous reader asked in a comment to the previous post if I can provide any solutions to the problems we currently face in Irish economy.

It is a matter not to be taken lightly, but given time constraints - this has been an extremely busy week for me - here is an outline of what my thoughts are on this subject:

Policy 1: cut excessive public sector expenditure:
DofF projected budgeted expenditure to be in the region of €49bn and receipts in the region of €37.7bn. I forecast, based on the latest Exchequer results the latter to be no more than €33.6bn. My figures now imply (assuming that the €2bn savings factored in by DofF in January and announced this week will yield real savings of €1bn) a General Gov Balance of €23bn (or 12.1% of GDP) up from €17.98bn (or 9.5% of GDP) allowed for by DofF. Note - yes, you've read it right - GGB of €23bn for 2009!

Allowing for the deficit of 7% in 2009 implies Exchequer balance for 2009 of -€13.3bn and savings to be achieved of €9.7bn. Thus, my fiscal plan, inclusive of stimulus package finance (see below) would be to:

• cut by 40% net capital budget expenditure - saving ca €3.3bn in 2009,
• cut by 17% net current expenditure - savings ca €8.3bn in 2009.

To achieve the latter savings, I would suspend up to 75% of the overseas assistance, cut by 75% pre-funding for future pensions liabilities, roll back all public sector pensions indexation to 2006 level, carry out significant cuts in non-front-line personnel in health and education, public service and semi-state companies, and cut welfare payments by approximately 5%.

I would also move to privatise the remaining public assets, etc. Some of the cuts can come through a direct increase in the efficiency of public sector operations. For example, we can use existent IT and university facilities to increase the number of students attending each class, accommodating those who become unemployed and wish to pursue educational opportunities. This will save significant amounts on the Continued Education grants.

Policy 2: Stimulative measures for economy
1) Banks: I would use recapitalisation scheme to inject equity (stock options) into households' savings and draw down household debt - I've outlined such a scheme before. The real stimulative benefit of the planned €10bn recapitalization scheme will be (assuming 15% appreciation in banks shares to 2013 and a one-off 40% CGT on options at maturity) ca €2.2bn pa through 2013. Draw-downs in HHs debt (at 50cents per €1) will imply additional benefit of €1bn pa.
2) Taxation: I would finance through a surplus savings of ca €2bn on the expenditure side (see bullet points above) a tax cut in employer PRSI and expand investment tax credits for labour-intensive investments. I will also freeze local authorities charge and levies, review regulated price controls (energy, gas, water, public transport etc).

Long Range Reforms:
1) Local Authorities: drastic redrawing of the entire local governance structure in Ireland, reducing the number of local authorities to 4 or 5 (e.g GDA, South, North East & Midlands, West) with proportionate 40% reduction in personnel;
2) Property/Land Value Tax: to finance local authorities I would impose a land value tax to be computed on the value and size of the plot occupied by your dwelling. The tax will be phased in allowing for those who have paid stamp duty in recent years to obtain credit against the tax value. Stamp duty tax will be abolished.
3) Flat income tax: on all income, including corporate profits - to be set at a revenue-neutral rate (suggesting, for example a tax of ca 16% flat on all income in 2008 terms). I provided details of calculations and complexities involved in computing this tax years ago, but the core idea remains. If this implies raising our corporate tax a notch - so be it. There is absolutely no economic or moral reason as to why physical capital should be taxed at a different rate from human capital.
4) Balanced Budget & State Property Amendments: pass a constitutional amendment to ensure that the real growth in Government expenditure cannot exceed at any year (with exception of the national emergencies, of course) the real rate of growth in GNP less 1%. Pass a constitutional amendment barring the State from ever holding a stake (except in the cases of emergency, subject to a 2/3 majority vote in the Dail) in any commercial enterprise.
5) Spatial Development & Social Partnership: I will abandon all economic and social engineering projects that do not explicitly and directly involve a 2/3-majority vote in the Dail;
6) Anti-monopoly laws: I will strengthen the Competition Authority to reflect the powers of competition enforcing bodies in the UK and will require that no company in any sector be allowed to control more than 30% of the market share.

Sorry, guys & gals - we are in 1am territory and I have a busy day ahead. I will return to this topic in the future posts, but for now a call to arms - send me your ideas for reforms!