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Budget 2014 Principles for a fair and progressive approach

Tommy Broughan TD John Halligan TD Patrick Nulty TD Thomas Pringle TD Catherine Murphy TD


Principles for a fair and progressive Budget Seven austerity budgets have devastated Irish society: with 400,000 people unemployed and with our public services creaking, many citizens are shell shocked and feel they have no more to give. Citizens carrying the load of failed bankers and failed banking policies are seeking policy alternatives to mark a new beginning. We come together as public representatives to endorse three principles for a fair and progressive budget. We feel that Irish politics desperately needs viable, workable alternatives to an austerity policy which is failing our people. These proposals do not represent a final word: rather we invite questions, debate and discussion about how policies can be implemented which create employment, provide the services citizens require and build a republic of equality and citizenship.


Here are our principles for a fair, progressive budget:

1. Fair taxation Introduce a wealth tax. A wealth tax is a levy on the total stock of wealth held by high net-worth households. We argue that such a tax could be applied to the value of net property, stocks & shares and savings of wealthy households. We believe pensions should be exempt from the assessment. In their recent analysis1, NERI & TASC state that a Wealth Tax in Ireland would impact on 25,000 households with significant net wealth, with estimated yields coming in between €100m and €750m per annum, depending on the rate applied, with the highest rate set at 1.5%. There is wealth in Ireland to tax: The Credit Suisse Report (2011), cited by NERI & TASC, estimates that the top 1% of the population hold 28.1% of the household wealth and the top 5% held 46.8% of household net wealth in 2011.2 Irish concentration of wealth is one of the highest in the EU-15. 28% of all wealth is owned by the top 1% of adults. The top 1%is made up of approximately 36,000 adults. This group owns approximately €130.2 billion. A wealth tax, applied similarly to the French model, would raise between €400m - €500m, according to a parliamentary response from Minister Noonan.3 1

McDonnell, Tom: Wealth Tax: Options for its Implementation in the Republic of Ireland, NERI Working Paper 2013/06, NERI:2013 2 Credit Suisse Global Wealth Report, 2011. 3 PQ 14408/11


National Debt & Banking Debt Irish Government Debt is rising at a rate of €1,000 every 3 seconds. In the five years from 2012 to 2016 inclusive, the Irish State will further borrow to pay out over €40 billion towards the total cost of servicing our colossal stockpile of debt (Fig 1). This figure is stark. With the cost of banking rescues and recapitalisations amounting to nearly €64 billion, it’s important when speaking of the need to protect core services and fund productive investment projects, that the contrast is made between just how much of our borrowing goes toward debt servicing and the fraction of this figure that would be required to avoid cutbacks and engage in stimulus spending. Figure 1

The cost of servicing debt, 2012-2016 (Department of Finance, 2013) Year

Debt cost as % GDP

Debt cost as % of Tax Revenue

Annual cost of debt servicing

2012

3.7%

10.8%

€6.13 bn

2013

4.9%

14.0%

€8.23 bn

2014

4.9%

13.8%

€8.54 bn

2015

4.9%

13.9%

€8.90 bn

2016

4.8%

13.9%

€9.01 bn


Figure 2

Composition of National Debt, 30th September 2013 (NTMA) Government Bonds

€114.85 bn

EU/IMF Programme Funding

€63.82 bn

Medium & Short Term Debts

€0.77 bn

State Savings Schemes

€15.11 bn

Short Term Debt

€5.32 bn

Cash & other Financial Assets

(€30.32 bn)

National Debt

€169.55 bn

In response to a parliamentary question4 from Deputy Thomas Pringle on September 25th, Finance Minister Michael Noonan noted that if government expenditure was maintained at existing levels coupled with 0.5% real GDP growth in 2014 that the general government deficit in 2014 would be -5.8%. The policy menu proposed in this document on the taxation side would ensure that we meet the -5.1% target agreed with the Troika. It is also worth noting that the Department of Finance is estimating at present a 1.8% increase in GDP for 2014.

4

PQ 39966/13


2. Preserve Primary Spending Spending cuts introduced over the past seven austerity budgets have not only made Ireland a vastly more unfair society, they have led to further economic stagnation. Our approach is for a budget based on increased taxation of the wealthy and high income groups and a better economic performance through kick-starting investment, rather than further spending cuts. We also favour using the gain of the promissory note savings in full for the benefit of citizens. The Nevin Economic Research Institute have modelled the effect of a € 3 billion fiscal adjustment, broken into € 1.9 billion in spending cuts and €1.1 billion in revenue raising measures. They show that such an adjustment would reduce total employment by 22,000 in 2014 and by 39,000 in 2015.5

The last two budgets introduced by the Fine Gael-Labour coalition have been regressive. There is an opportunity to introduce a budget this year that is progressive and it is that type of people centred approach to our economy and society that is required.

Therefore we are totally opposed to any further cuts in social welfare and frontline services in health, education and public transport. In addition, a lifting of the moratorium on public sector recruitment to enhance frontline staffing provision would also be logical. Additional recruitment in areas like speech and language therapy, nursing and special needs assistants are some obvious examples.

5

Irish Congress of Trade Unions Pre Budget Submission

http://www.ictu.ie/download/pdf/jit16_prebudget_submission_fiscaladjustment_web.pdf


3. Address the Investment Crisis Target the critical sectors of Education, Communications, Energy & Water infrastructure in a programme of Productive Investment. Ireland is enduring an investment crisis, with investment levels persistently at historically low levels.6 Our recovery depends not solely on trade, but also very much on our capacity to domestically generate real employment opportunities today while also ensuring tomorrow’s businesses will continue to want to locate here. We believe that a targeted approach in certain key sectors will help achieve this.

Education & Training The best investment we can make is in people. Investing in pre-primary education, re-skilling people who are unemployed, investing in literacy and numeracy programmes; all these create the basis for prosperity, not only for the economy but for people themselves and their communities. If we do not invest in our economic capacity and in our citizens, we will not grow our way out of the current stagnation. If we are to enhance the innovative capacity of the Irish economy it is necessary to invest in human capital in various ways, and in particular, Education and Training (from pre-primary to tertiary levels). Investment cannot be random, for it to be productive it must be targeted and focused on reducing the levels of structural unemployment in the long term. O’Farrel, Rory, An Examination of the Effects of an Investment Stimulus, Nevin Economic Research Institute Working Paper 2012/4, NERI, July 2012 6


Projects targeted must be those that can increase the skills and employability of the unemployed. The areas targeted for investment must directly correlate to the skills and other attributes of those who are unemployed in the labour force in order to provide new skills that will fit with future employment and growth opportunities.

Housing Numbers on local authority housing waiting lists are at crisis levels. Huge amounts of public funds (in 2013, ₏403m was budgeted for Rent Supplement alone)7 are being directed towards housing support schemes that were originally designed for the short-term only. This system is creaking under the strain of the numbers making demands upon it, while at the same time rents are rising and cut-offs and qualification limits are being reduced. Considering the 60% rise in the numbers living in private rented accommodation since 2006, and the decline in incomes over that period, we cannot continue with a system that can force large sectors of society into long term poverty traps and, in some cases, homelessness. As a priority, we must look at creative ways of accessing the vast amount of vacant properties throughout the country to bolster the stock of social housing units available, and where this isn’t possible, look to financing new units with joint assistance from the European Investment Bank. At the same time, external funding sources to add to the available housing stock remain untapped. We must also look to improving the regulatory framework surrounding private housing associations. Many housing associations lack the capacity to access funding from the EIB - up to 80% of

7

Department of Social Protection


an available pool of €500m cannot be accessed8 - due to the lack of a formal independent regulatory regime and a lack of capacity amongst the housing association sector. This policy failure is being addressed, although much swifter progress is essential if we are to unlock an available funding source and help create valuable new construction jobs.

Communications & eGovernance Ireland’s communications infrastructure risks falling far behind that of our main competitors. The McKinsey Global Institute estimates that internet activity accounts for up to 6% of total GDP in developed economies. In recent years, the internet has accounted for as much as 21% of GDP growth in some economies.9 Our recovery depends upon having advanced IC technology and that requires Government investment. We have to aim for universal provision of broadband of at least 100Mbps. Furthermore, we should in tandem be looking to achieve savings and improve public services by switching in as far as practicable to an advanced e-governance model of service delivery to the citizen. Countries like Norway have led the way in recent years - their Altinn e-governance facility has saved the Norwegian state over US$7bn since its introduction, with a 17% reduction in hours spent on administration at the participating agencies.10 This kind of efficiency saving should be the goal if we are to seek to redirect revenues towards preserving frontline spending. We should be expanding workable Irish examples such as revenue online to cover all citizen interactions with the State.

Joint Oireachtas Committee on the Environment, Culture and the Gaeltacht, 1st October 2013, debate on Management and Operation Housing Associations (Accessed 7th Oct 2013) http://oireachtasdebates.oireachtas.ie/Debates%20Authoring/DebatesWebPack.nsf/committeetakes/ENJ 2013100100001?opendocument 8

Internet Matters: The Net’s Sweeping impact on Growth, Jobs & Prosperity, McKinsey Global Institute, 2011 9

10

The Government of Norway: Innovative e-Government Capabilities; Accenture, 2009


Renewable Energy and the Green Economy Traditional non-renewable energy sources are trending towards being scarce and expensive. Ireland is dangerously exposed to a very high dependence on imported fossil fuels. The SEAI estimates that Ireland’s import dependency increased from 67% in 1994 to 89% in 2001 and has remained at an extremely high level since, coming to 88% as recently as 2009. While progress has been made in developing renewables, particularly in installed wind capacity, Ireland compares far less favourably with the EU average import dependency figure of 55% (2008).11

The price of oil, gas and electricity from non-renewable sources have all remained at very high levels since the mid-point of the last decade. By far, fluctuations in the price of crude oil has had the most dramatic effect on the Irish economy and we remain critically exposed to another ‘oil shock’ that the economy would struggle to weather given that the severe after-effects of the housing crash, banking crisis and fiscal crisis have not yet abated.

Both large multinationals and indigenous SME’s suffer very high overheads as a result of energy prices, and given the restrained access to credit, find it doubly difficult to pay recurring operating charges. Government policy officially recognises this critical exposure, however presently measures designed to enhance energy independence are weak, primarily restrained by the domestic fiscal crisis and the lack of access to international debt markets for specific infrastructural development.

11

Energy Security in Ireland: A Statistical Overview, Sustainable Energy Authority of Ireland, 2011


Ireland is globally acknowledged as one of the prime sites in the world for the development of renewable energy capability, particularly in the State’s wind and marine energy potential. Wind speeds offshore and at coastal areas from Galway to Malin consistently register at an average of 10.3m/s or greater, while other areas of the country register average speeds almost as strong. Ireland has made progress in harnessing this potential and is now ranked 4th in the EU for the percentage of total electricity consumption coming from wind on a per capita basis.12

However, even other countries in the EU who generate energy domestically from fossil fuel resources emerge with a distinct competitive advantage taking into account Ireland’s very high dependence on imported fossil fuels.

Ireland, if it is to remain competitive, must enhance its domestic renewable capability. There are a number of specific areas which specific investment could be directed: Offshore and onshore Wind; Ocean Energy; High Capacity transmission lines, building the ‘smart grid’ and developing more undersea interconnectors; Hydroelectricity; Biomass and Waste-to-Energy; Smart Metering; and Corporate, Community and Domestic Microgeneration projects.

12

Wind in Power: 2012 European Statistics, European Wind Energy Association, 2012


Water Infrastructure Ireland’s water infrastructure is aged and unfit for purpose. The leakage rate from pipes in some counties approaches 66% of treated water. Nationally, the average figure is 42% lost - which is far worse than many developing countries. A much needed programme of investment in upgrading towards a state-of-the-art water treatment and delivery system will put thousands of people to work in the short-term and increase our capacity to grow in the future.


The Multiplier Effect of Targeted Productive Investment Measuring the broad aggregate benefit of these individual investment opportunities in an open economy like Ireland is difficult, but some general observations can be made based on the experience in similar jurisdictions. A report prepared by TASC in July 2012, using a methodology prepared by Nakamura and Steinsson (2011), highlighted a fiscal multiplier of 1.5 in individual US states on economic inputs versus outputs. Medium sized US states offer similarities to Ireland in that they are small, open, trade-dependent economies within a currency union (albeit at a much greater level of openness).

13

A report from NERI in 2012 explored the effect that targeted investment would have on unemployment using the HERMIN model originally developed to measure the economic impact of EU cohesion funding. It found that for every billion euro spent in one year on direct productive investment opportunities, approximately 16,750 short term jobs and between 675 and 850 sustainable jobs were created. Of course these figures would vary quite a bit when considering the focused specific remit of enhancing education & training and investing in renewables infrastructure etc.; nevertheless it’s clear that there would be a substantial economic benefit as a secondary effect of increased investment.

13

14

Prospects for Job Creation, TASC Report for Catherine Murphy TD, 2012

O’Farrel, Rory, An Examination of the Effects of an Investment Stimulus, Nevin Economic Research Institute Working Paper 2012/4, NERI, July 2012 14


Opportunities exist. For example, several studies have been undertaken in recent years into the possible economic gains to Ireland of enhancing our wind energy industry. Given that the EU accounts for 48.9% of global wind energy production the importance of this emerging industry to Ireland is very much apparent. The large population clusters at the core of Europe recognize the energy crisis that they face – in particular the Greater London region, the Low Countries and the Ruhr valley. They also recognize the potential that the periphery can play in helping to prevent this energy crisis from becoming a catastrophe, particularly as many Governments in the area have committed to move away from nuclear energy in the medium term. The opportunity to create a stable domestic industry, providing long-term employment and where the main raw material is inexhaustible and free is an economic no-brainer, yet the country has failed to capitalise on it at the speed one might expect for a country in such economic difficulties.


Menu of Revenue Options Additional Revenue Raising Measures

Yield

Increase Capital Gains and Acquisitions Tax from 33% to 40%

€170m

Increase audit investigation, compliance resources by 125 qualified staff

€93m

Eliminate property based tax relief legacies like Section 23 relief

€327m

Increase PAYE tax rate to 48% on the portion of incomes over €100,000 per annum

€365m

Confining tax relief to a rate of 30% for individuals who can obtain relief at the 41% rate in respect of individual contributions to occupational pension schemes, retirement annuity contracts and personal retirement savings

€245m

Reduce the level at which persons and companies may claim interest repayments against tax for residential rental properties from 75% to 40%

€157m

Limit the Business and Agricultural Reliefs for Capital Acquisition Tax (CAT) by reducing the discount on market value before tax is calculated from 90% to 60%. Introduce a combined €3.0 million ceiling on the qualifying amount for these reliefs

€75m

Introduce a Financial Transactions Tax

€163m

Introduce a Wealth Tax

€450m

TOTAL

€2.045 billion

(http://taxpolicy.gov.ie/wpcontent/uploads/2012/07/FTT_Report_2 012-040712.pdf).


Source Material Collins, Micheál (2013) Nevin Economic Research Institute; NERI Working Paper 2013/05 “Income Taxes & Income Tax Options: A Context for Budget 2014” http://www.nerinstitute.net/download/pdf/income_taxes_and_income_tax_options_neri_wp_sep_2013.pdf

Credit Suisse Global Wealth Report 2011. http://www.corkeconomics.com/wp-content/uploads/2011/12/71154576-2011-Global-Wealth-Report-Data book1.pdf

Energy Security in Ireland: A Statistical Overview, Sustainable Energy Authority of Ireland, 2011 http://www.seai.ie/Publications/Statistics_Publications/EPSSU_Publications/Energy_Security_in_Ireland/E nergy_Security_in_Ireland_A_Statistical_Overview.pdf

Internet Matters: The Net’s Sweeping impact on Growth, Jobs & Prosperity, McKinsey Global Institute, 2011 http://www.mckinsey.com/insights/high_tech_telecoms_internet/internet_matters

Irish Congress of Trade Unions Pre Budget Submission http://www.ictu.ie/download/pdf/jit16_prebudget_submission_fiscaladjustment_web.pdf

Joint Oireachtas Committee on the Environment, Culture and the Gaeltacht, 1st October 2013, debate on Management and Operation Housing Associations (Accessed 7th Oct 2013) http://oireachtasdebates.oireachtas.ie/Debates%20Authoring/DebatesWebPack.nsf/committeetakes/ENJ 2013100100001?opendocument

McDonnell, Thomas (2013), Nevin Economic Research Institute & TASC; NERI Working Paper 2013/06 “Wealth Tax: Options for its implementation in the Republic of Ireland” http://www.nerinstitute.net/download/pdf/neri_wp_no_6_2013_mcdonnell_wealth_tax.pdf


Nakamura, E. and J. Steinsson (2011) “Fiscal Stimulus in a Monetary Union Evidence from US Regions,” NBER Working Paper 17391

Nevin Economic Research Institute, Quarterly Economic Observer - Autumn 2013; NERI, September 2013 http://www.nerinstitute.net/download/pdf/neri_qeo_autumn_2013.pdf?issuusl=ignore

O’Farrel, Rory (2012) An Examination of the Effects of an Investment Stimulus, Nevin Economic Research Institute Working Paper 2012/4, http://www.nerinstitute.net/download/pdf/neri_working_paper_rof_no_4.pdf

Parliamentary Question 14408/11 of the 7th June 2011 (Minster Micheal Noonan) http://debates.oireachtas.ie/dail/2011/06/07/00008.asp

Prospects for Job Creation, TASC Report for Catherine Murphy TD, 2012 http://79.170.44.204/catherinemurphy.ie/wp-content/uploads/2011/08/Catherine-Murphy-TD-Prospects-f or-Job-Creation-TASC-2-July-2012.pd

Social Justice Ireland; Budget Choices 2014 http://www.socialjustice.ie/sites/default/files/file/Budget/2013-06%20-%20Budget%20Choices%202014%2 0-%20FINALFINAL.pdf

The Government of Norway: Innovative e-Government Capabilities; Accenture, 2009 http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture_Human_Services_Norway_Altinn_e Goverment_Capabilities.pdf

Wind in Power: 2012 European Statistics, European Wind Energy Association, 2012 http://www.ewea.org/statistics/

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