Economics 9/10/10: Path to reforms

This is an unedited version of my column in October 2010 Village magazine:

The events of the recent months have clearly shown that the current policies path leads to a continued status quo. This is the sole and unavoidable conclusion currently being reached by all independent analysts and commentators on either side of ideological divide. It is a non-partisan concern that informs the rising tide of discontent within the Fiana Fail and Green parties, recent changes within Fine Gael, positions of all other opposition parties, and indeed the entire electorate – as reflected in the opinion polls.

At this junction, there is no longer any need to enlist numerous factual manifestations of this reality – they are all around us, expressed by politicians and ordinary citizens. The tide of international opinion concerning the prospects for Ireland should the current policies persist has turned against us. The IMF (since April 2010), the EU Commission (since May 2010), markets makers and participants – all have put out challenging assessments of Irish Government official projections for the recovery. Irish banks – far from being repaired by Nama – just keep asking for more taxpayers bailouts with a frightening regularity of a drug addict returning to a methadone dispensary.

It is, therefore, time to challenge the existent policy consensus. It is the time to put forward proposals for reforms, to debate real alternatives and to provide those political parties and individual politicians willing to champion change with new ideas to energise the electorate.

Here is my own set of ideas – the offshoot of the ongoing ‘Manifesto Project’ I have decided to run on my blog.

To preclude any ‘kill the messenger’ objections, allow me to state that the following is just a set of policy reforms proposals that any party or politician are welcome to adopt in part or as a whole and put to the electorate.

Fine print aside, let me outline the backdrop to the policies – the backdrop of the specific crises we face as a nation. The Irish economy has been hit by a Perfect Storm that combines:

• a deeply rooted crisis in public finances;
• a structural collapse of the banking sector;
• an unemployment crisis stemming from the collapse of employment and jobs creation;
• a competitiveness crisis that is not limited to wages and labour costs, but the cost of living and doing business;
• the crisis in the quality and efficiency of domestic services - dominated and restricted by the excessive market power of the incumbent state-owned and state-regulated oligopolies.
  

These crises have been exacerbated by the Government policies since 2008. These policies have saddled ordinary families and individuals (regardless of whether they work in public sector or private sector, employed or unemployed, young or old) with the full cost of stabilizing vested interests and elites. This manifested itself in rising tax burden, falling provision of public services, lack of reforms in banking and public sectors. The resulting devastation of private entrepreneurship and businesses, contracting investment and availability of operating capital, a catastrophic lack of confidence in economy are the corollaries. The accompanying spikes in unemployment and businesses failures, and a hike in precautionary savings are additional manifestations of these.

The current crisis has clearly shown that the corporatist state - where vested interests, including Political, Business, Social and Environmental collude with the state to set economic and social preferences and priorities - is morally, politically and economically bankrupt. I believe that Irish democracy cannot be surrendered to the vested interests, no matter how broadly-based or highly minded they might be.

There are only two ways forward from this status quo. The first is the path we are travelling – the path of a generations-long and painfully deep crisis of stagnation and declining standards of living. The second one is a path of structural reforms aimed at realigning the current political system to serve the interests of the ordinary citizens and residents of this land.

Such a reform is also a disruptive and a painful one. It can only be achieved by creation of an alternative to the existent policies and structures.

In my view, the agenda for reform should champion the rights of ordinary citizens – consumers and taxpayers – to counterbalance existent system that promotes the interests of the vested pressure groups and elites. It must, therefore, include changes to the state political and governance systems, to the principles governing provision of the public services, to the systems of our private markets and, lastly, to the rebuilding of our financial system. For the sake of brevity, I will focus on the first two objectives.

Changes to political and governance systems

The core changes to the political and governance systems must put transparency and accountability principles of governance to the front. This will require creation of automatic systems of disclosure and control that are not subject to tampering by individual office holders. It also requires ending Social Partnership, delegating all authority, and the responsibility, for developing, implementing and monitoring economic and social policies solely to the Legislative and Executive branches of the State.

In terms of transparency, default setting must be public disclosure and unrestricted free access to all data not subject to the secrecy of the state considerations. Sensitive data should be published with exclusion of sensitive information and identifiers, until the time when it can be published in full.

Accountability requires that performance and productivity metrics should be designed and refined through experience for all branches of public sector. All earnings in the public sector should be linked to individual productivity.

Local authorities must be reformed, reducing the overall number of local authorities to, say, 7, covering: West & North West, South, Greater Cork, Greater Dublin, Greater Limerick, Greater Galway and Border & Midlands.

Seanad should be given real powers of the upper chamber and be elected directly by the people of Ireland, with equal representation for each of the 7 geographic region outlined above. Dail should be reformed by reducing the number of TDs and to cover both local and national mandates. The former will preserve a number of seats allocated locally, while the latter will allocate some proportion of seats based on national polls.

Both chambers along with the Executive should accord no privilege to their members that will put them above the ordinary citizens of the state. This will require abolition of unvouched expenses, enforcement of the Benefit-in-Kind principle of taxation and removal of the un-provisioned pensions entitlements.

All state purchasing should be carried on-line, made public and transparent and subject to annual audits by independent external board.

State services reforms should include the separation of provider of services from the supplier of services. This means that the Irish state should aim to be a purchaser of services, e.g. health care and care for the disabled, for those who cannot afford them. But the State should not own service providers. Instead, public services can be supplied by mutual, private for-profit or non-profit providers. Transition to such an arrangement will require significant training and logistics support for current employees.

Higher education should be based on fees set by universities and overseen by the Department for Education. The State should set up (with participation of charities and other private agencies) a number of funds that will provide financial aid to students based on need (with an objective of creating an equal opportunity for all qualified students to undertake studies) as well as merit (with an objective of rewarding real achievement). A further system of state-guaranteed student loans should be set, subject to independent oversight and audit.

The state should focus significant resources on the need to improve and strengthen provision of universal early, primary and secondary education in order to achieve maximum equality of opportunity for the children independent of the social and/or economic status of their parents.

Changes to fiscal systems

There is a need to rebalance the burden of taxation in the economy to deliver on three core objectives. First, the taxation system should be fair, transparent and protected from abuse. Second, it should involve participation from all agents in the economy. Third, it should not attempt to pick winners and leave in its wake the losers.

With these objectives in mind, I would suggest adoption of a flat rate income tax system with single personal standard deduction plus a child allowance, potentially linked to the level of unemployment benefits. All discretionary tax breaks should be removed, including any tax incentives for farming and any other economic activity. Non-residency limits should be set to reflect the needs of Irish citizens working abroad and commuting home – e.g. a limit of maximum 124 days annually to cover all weekends plus standard vacation. A move to a single rate income and corporate tax can also be used to deliver full equalization in taxation between workers, entrepreneurs and businesses.

Existent Byzantine system of indirect taxes and levies is to be simplified with a view that all such charges should be based on user fee principle and be fully ring-fenced to finance provision of services covered and mitigation of adverse externalities (e.g. environmental degradation etc) generated by these services.

There is a need for having strong, but life-time capped, welfare provisions. This will provide a sufficient insurance cover for all able-bodied working age adults in the country to a cumulative maximum of 7 years over the life-time. Provision of welfare supports to those unable to work due to health or family circumstances (e.g caring for a disabled relative etc) should be exempt from life-time limits.

The basic social insurance pension reform should ensure that the elderly are covered by s sufficient safety net, but the working-age individuals are encouraged to privately invest in their pensions.

Wages for politicians and senior public servants are to be tied to the National Disposable Income in order to create a direct link to the overall levels of welfare in the society (including that of the unemployed and socially vulnerable). There should be no bonuses or discretionary pay and all public sector pensions should be converted to a Defined Contribution system with generous matching from the employer.

Government spending should be benchmarked to a specific range of GDP (for example – 35-38%). A balanced budget should be maintained over every 3-year period. This allows for small emergency spending boosts in recessions, but prevents spending sprees before the elections and other abuses of the public funds.

All quangoes, except those with immediate independent oversight authority (e.g FR and Competition Authority) are to be abolished and their functions transferred to the respective departments. Responsibility for governance and management must rest with the Government.

There is a need for a fully transparent tax on land values (LVT) in order to finance public infrastructure investments and provision of local services, including environmental protection and improvements. I would suggest that the revenue from LVT should be split 50:50 between central & local authorities. Local authorities should be allowed to vary their rate of LVT within reasonable parameters. For example, if LVT is levied at 1% pa, the local authority can be allowed to charge between 0.25% and 0.5% as it deems suitable, while the central government will collect 0.5%.


After three years of ever-deepening crises in political, economic, and banking spheres, Ireland now faces a stark choice between two alternatives. We can, as a nation, elect to either follow the status quo path that leads to a stagnation. Alternatively, we can choose to challenge the existent policy consensus to champion the rights of ordinary citizens – consumers and taxpayers.