Thursday, February 5, 2009

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!


John M said...

Just to clarify your estimates. What period does the GGD of €23bn cover? That is not just for 2009 is it?

Great blog by the way.

Paul MacDonnell said...

On the money Dr. G.

TrueEconomics said...

John - it is 2009 alone. The DofF forecast GGD of €18bn in 2009 assuming €2bn in savings. I add to this €4bn further deterioration in the receipts and €1bn in unrealised savings (Cowen's latest plan for 'cuts' falls significantly short of €2bn, as was widely and correctly reported in the media), bringing the entire GGD to €23bn in 2009. The risk to this estimate is to the upside. In fact, I will work over the weekend to publish my full Exchequer balance sheet projections in line with DofF forecast of January 2009.

John M said...

ThANk you for clarifying that Dr.

These numbers are deeply alarming. I think we all realise that Ireland's political leaders lack the will needed to tackle this crisis (and it is indeed a crisis). I can see a summer of discontent looming.

TrueEconomics said...

This is an edited version of the comment posted by
"Another John M":

* Abolish the Presidency
* Abolish the Seanad
* Cut number of TDs
* Abolish Junior Ministers
* Abolish State cars
* Quango cull starting at all the politically appointed hacks on their boards drawing large stipends for little work. e.g. What qualifications does... author, Deirdre Purcell, have to be a board member of the Central Bank.
* What the hell, abolish the Central Bank.
* Reform public sector pensions. They should be index linked only rather than tied to the salaries of the incumbents.
* Get those rid of those ... e-voting machines.
* Give members of the public a percentage of any valid savings they can find in government.
* Immediate and long-lasting hiring freeze in public sector coupled with reforms to allow for re-allocation of staff.

I disagree with flat taxes. I believe they should be progressive. But that is an argument for another day.

TrueEconomics said...

Guys/Gals, please keep terminology close to scientific and policy levels. We have some sensitive readers (primarily from the 'politically-connected' classes) who need to hear these real world arguments. We do not want to give them a reason to discount our views because of some linguistic considerations.

Mark Wadsworth said...

All good stuff, but you didn't mention VAT, which is The Worst Tax, even worse than PRSI (which I assume is the Irish equivalent of what we in the UK call National Insurance). Get rid of that first.

As to progressive taxes (CG's comment), different tax rates are hokum and do not achieve what they are supposed to achieve. Flat taxes and a much higher personal allowance actually achieve what people think progressive taxation should achieve (but doesn't). This is simple maths.

Sure, we can argue over how high the personal allowance and how high or low the flat tax should be, that's just details.