We know that as an economy too much money was spent on property and costs were not kept under control, not only in the Public Sector but in many businesses. We also know that the key to a long term successful economy is that it is an attractive place to do business. In that regard Ireland as a remote location in Europe must have key features which attract and retain business. In this regard a low tax environment is a key feature of what we must retain. In addition a well motivated and energetic work force in both the Public and Private Sectors is critical. The management and leadership challenge to implement the right decisions in this environment are substantial.
The key decisions
Key decisions facing the government in the current crisis are;
- to determine the activities that the State should engage in or finance for its citizens
- to estimate the cost of those activities to the State
- to determine the form of taxation or other sources of revenues that will fund the cost of those activities.
There is an element of chicken and egg here. The decision on tax and other forms of revenue raising cannot be sensibly made until you know how much money is required. The decision on which activities to engage in, and at what cost, cannot be made without knowing what is the capacity of the economy and political will of the electorate as regards tax and revenue raising. The fact that these decisions are so intimately inter-related is one reason why they have to be made by the same body - which in a democracy is the government.
The government has sought advice on these two topics - how much to spend and on what, and how to finance the spending - from two different bodies which report independently. This separation seems to mirror what seems to be a common political failing i.e. to see that decisions on spending drive decisions on taxation and vice versa.
All expenditure cuts will lead to outcry from pressure groups and some cuts may lead to some pain. But we have already suffered severe tax rises in the last two budgets. Further tax rises may do lasting damage to the economy. And it is clear from the report of the expenditure review group that much of our hard earned taxes are spent wastefully. Even if there were no crisis in public finances the vast majority of the recommendations in the report that should be urgently acted on in the national interest.
The decision to seek advice from outside political circles and from outside the public service is not a criticism of either. It is a sound idea. It is in the nature of political parties that electoral pressures can cloud good judgement.
Outside advisors may lack the acute awareness of public opinion and of needs of a politician or the detailed knowledge of the nuts and bolts of State programs of the public service but they can provide an essential source of challenge to existing thinking and be a source of new ideas. It remains the task of public service to evaluate their advice and of the politicians to choose between competing demands and priorities.
Both review groups have worked within timeframes that are unrealistically short for the task given to them. In particular it would seem obvious that the task of extracting value for money, and of prioritising spending over the huge State sector, is one that must not be assumed to have ended with the publication of the report of the expenditure review group.
The Commission on Taxation
The terms of reference of the commission are worth spelling out in full:
“Having regard to the commitments on economic competitiveness and on taxation contained in the Programme for Government, in particular, the commitments
- to keep the overall tax burden low and implement further changes to enhance the rewards of work while increasing the fairness of the tax system,
- to ensure that our regulatory framework remains flexible, proportionate and up to date,
- to introduce measures to further lower carbon emissions and to phase in on a revenue neutral basis appropriate fiscal measures including a carbon levy over the lifetime of the Government, and
- the guarantee that the 12.5% rate of corporation tax will remain,
the Commission is invited, in the context of maintaining an equitable incidence of taxation and a strong economy, to consider the structure of the taxation system and specifically to
- consider how best the tax system can support economic activity and promote increased employment and prosperity while providing the resources necessary to meet the cost of public services and other Government outlays in the medium and longer term;
- consider how best the tax system can encourage long term savings to meet the needs of retirement;
- examine the balance achieved between taxes collected on income, capital and spending;
- review all tax expenditures with a view to assessing the economic and social benefits they deliver and to recommend the discontinuation of those that are unjustifiable on cost/benefit grounds;
- consider options for the future financing of local government, and
- Investigate fiscal measures to protect and enhance the environment including the introduction of a carbon tax.”
Of the four commitments within whose limits the commission is to frame their recommendations, the last – to keep the corporation tax rate at 12.5% - is reassuring especially if it is understood that no other charges are placed on the business sector. The task of keeping taxation low can only be achieved by implementing the recommendations of the review group on spending! Rumours that a valuation based form of property tax is being favoured (hopefully wrong) suggest that the commitment to keep administration simple and cost effective may be at risk.
The commission knows, as does the government, that high marginal rates of tax on earned income kill economic activity and encourage evasion. They know that PRSI is a tax on jobs and a discouragement to create or take up a job. They know that spending taxes levied at the till drive shoppers to Newry and points north. They know that wealth taxes or property taxes based on valuations are a bureaucratic nightmare. They know that illiquid wealth such as farm land and family businesses cannot generate the cash needed to pay wealth taxes. They have not been asked to identify where users of state services could be charged for the use they make of them though this has been highlighted as an important issue by expenditure review group. These limitations on tax policy mean that the critical decisions must be in the area of expenditure.
Expenditure and Public Service numbers review group
The mandate of this group was stated by the minister to be: “The Group will review the scope for reducing or re-focusing the existing range of Expenditure Programmes, and it will look critically at the numbers of public servants employed across all areas of the public service, to assess the scope for transferring staff to priority areas and for reducing numbers overall, and to identify surplus staff. The overall efficiency of the public service will be examined, including any ways of doing business that are out of step with the needs of a modern, responsive public service. The Group will also examine and make recommendations for further rationalisation of State agencies beyond the measures I announced in Budget 2009.”
This sounds like what we might have expected any Minister to do on a day by day basis in any department. Should we be surprised that it is seen as being something to be done only in a crisis?
The report of the expenditure review group makes shocking reading. Its descriptions of chaotic overlapping agencies, lavish salaries and pensions, and trade union enforced restrictive practices are an indictment of successive governments which have avoided decisions and conflict at no matter what cost to the public finances or to the economy. It is our misfortune that no political party in Ireland has seen the protection of taxpayers as being a priority. An example of the consequences of this is a health service that is hugely expensive but which the report notes, is not patient focused!
Given the limitations outlined above which the Commission on Taxation face, it would seem that the extent of political courage in dealing with the issues highlighted by the expenditure review group will determine how satisfactory the decisions on taxation will seem. We base our economic development strategy on being a low tax economy. A low tax economy implies having an efficient value for money public service and prioritisation by the government on the areas of activities in which it involves the State.
The decisions to be made in the public interest in the next budget will be politically costly in the short term. That seems guaranteed by the scale of the crisis brought about by past decisions made with only the very short term in view.
Opposition parties and the pressure groups of the social partnership have responsibilities as well as the government. Let us hope that all do their duty constructively come decision time.