Transcript TOPIC A: Irish Economic History to Independence

TOPIC D:
PUBLIC FINANCES,
DEBT & TAXATION
TCD M.SC.(EPS) – RONAN LYONS – EC8001
IRISH ECONOMIC POLICY ISSUES & CONTEXT
MODULE OUTLINE
Topic Title
EoI Ch
Dates
A
Irish Economic History to Independence
1+
MT1-2
B
Irish Economic History since Independence
1+
MT3-4
C
The Economy & Economic Growth
2, 7
MT5-6
D
Public Finances, Debt & Taxation
3, 4
MT8-9
E
The Labour Market
6
MT10-11
F
Social Justice & Inequality
8
HT1-2
G
Regulation & Competition
5
HT3-4
H
Competitiveness & Trade
9, 11
HT5-6
I
Health & Education
12, 13
HT8-9
J
Natural Resources & Real Estate
10, 14*
HT10-11
OTHER READING & DATA
• OECD
• Taxing Wages
• Tax Revenue Statistics 2013
• Government at a Glance
• European Union
• Taxation trends in the European Union
• Ireland
•
•
•
•
Dept of Finance: Ireland – Budgetary Statistics 2014
DPER: Estimates for Public Services
Budget 2015
Publicpolicy.ie
TOPIC D: STRUCTURE
Public Finances, Debt & Taxation
1.
2.
3.
4.
5.
6.
Why a government at all?
Size and levels of government
Spending: principles and features
Taxation: principles and features
Government liabilities
Government assets
IN CIRCULAR FLOW, GOV IS UNIQUE
• Basic circular flow: households (consumption) and
firms (production)
• Real and corresponding monetary flows back and forth
• Factor services (input into production) and goods/services
(input into consumption)
• Extensions
• Non-consumption: saving and the financial sector
• Consumption of foreign goods: imports and exports
• Consumption of public goods: taxation and gov spending
• Government is unique because of powers of
compulsion
• Gov’s aims as per last week: high(er) living standards
ASPECTS OF GOVERNMENT
• Regulation: the state as
referee
• Legal system underpins
contracts that govern
economic activity –
property rights underpin
stocks of capital/land
• Public goods: the state as
owner and/or manager
• Funding (and thus
taxation)
• Direct service provision
• ‘Pure’ vs. ‘quasi’ public
goods
PURE PUBLIC GOODS
• Two key features of pure
public goods
• Non-rival – my
consumption does not
affect yours (≠ water)
• Non-excludable –
benefits not easily
withheld
• E.g. of national defence
• In particular due to nonexcludable nature,
market will not provide
pure public goods
VS.
MARKET FAILURES
• Not all costs reflected in
market price
Negative externality
€
• Rationale for intervention
• Aligning social MC with
private MC
P=SMC
• Externalities
• Positive – e.g. education,
road network
• Negative – e.g. pollution,
fisheries
• Other market failures
• Monopoly power (IRTS)
• Imperfect information
(e.g. BER, PRSI)
P=MC
D
Q1 Q0
Q
Without Pigovian taxes, market will
over-provide (i.e. misallocate
society’s scarce resources
GOVERNMENT FAILURES
• Small number of pure public goods
• Although note their real-world importance (e.g. climate)
• Large number of goods with externalities
• Thus large potential scale for government involvement in
the economy
• Costs – as well as benefits – to government
intervention
•
•
•
•
•
Electoral pressures and political business cycles
Interest group lobbying
Perverse incentives in administration
Corruption
Restrictive practices, inflexible procedures in public sector
TOPIC D: STRUCTURE
Public Finances, Debt & Taxation
1.
2.
3.
4.
5.
6.
Why a government at all?
Size and levels of government
Spending: principles and features
Taxation: principles and features
Government liabilities
Government assets
LEVELS OF GOVERNMENT IN IRELAND
1. Global
• UN: budget of ~€2bn [Ireland contributes ~€8m]
• Also IMF, World Bank and WTO
2. Supranational
• EU: budget of ~€120bn [Ireland contributes ~€1.3bn]
3. National/Federal
• Ireland: government spending is ~€55bn (incl non-voted)
4. State level
• N/A in Ireland
5. Municipal
• 31 local authorities: budget of €4.2bn (€1.1bn in grants)
THE GLOBAL REFEREES
• Globalization of economic activity means greater
need for global framework
• Cf. 19th Century globalization – self-destructing?
• National action can be self-defeating if L, K is mobile
• WTO: replaces need for bilateral agreements
• In a world with 200 countries, ~20,000 bilateral relationships
• UN: global public goods
• E.g. response to climate change, global inequities,
geopolitical threats
• Difficulties: what is correct policy? Domestic political
considerations
• E.g. of past emissions by developed countries
CONTINENTAL GOVERNANCE
• Roots of the EU in the “Coal & Steel” community
• Post-war reconstruction – ‘traders must be friends’
• Elaborate institutional structure: Council, Commission, EP
• Four Freedoms – the Single European Market
•
•
•
•
Free movement of goods and services [+ competition pol]
Freedom of establishment
Free movement of persons [political pressures?]
Free movement of capital [monetary trilemma]
• Taxation
• ~1/8 of budget funded by VAT contributions; rest by GNI
• Significant freedom in domestic tax infrastructures
WHO PAYS FOR THE EU?
Rebates
GNI
VAT
AT
BE
BG
CY
CZ
DE
DK
EE
GR
ES
FI
FR
HU
IE
IT
LT
LU
LV
MT
NL
PL
PT
RO
SE
SK
SI
UK
€550
€500
€450
€400
€350
€300
€250
€200
€150
€100
€50
€0
-€50
Per capita contributions to the EU budget, 2011
Source: European Union
WHO BENEFITS FROM THE EU?
Per capita receipts from EU (2009)
€500
EU spending by
heading
€400
€300
CAP
€200
Regions
€100
Internal
€0
Admin
External
-€200
Other
-€300
AT
BE
BG
CY
CZ
DE
DK
EE
FI
FR
GR
HU
IE
IT
LT
LU
LV
MT
NL
PL
PT
RO
ES
SE
SK
SI
UK
-€100
Source: Deutsche Bank
GROWING PAINS
• Democratic accountability
• Concern that decisions are too far removed from citizens
• Which is worse – EU institutions or inter-governmental?
• Treaty reforms… but perception counts?
• Single currency
• Under Maastricht Treaty, Economic & Monetary Union
• Originally 11 MSs, now 18 (334m) – further 210m pegged
(most in Africa)
• One-size-fits-all monetary policy & Financial Crisis
• ECB – mandate of price stability (German CB tradition)
• Since 2009, ‘zero lower bound’ so ‘liquidity operations’
• Public debt crisis – so now EU constraints on Fiscal Policy
IRELAND & THE EU
• 6% of all income in fifteen
years to 1997
• Much of this came
through CAP
• Most of remainder
through structural and
regional funds
• Ireland now roughly ‘in
balance’
• About 1% of income
Ireland’s EU transfers
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
Receipts (% GNP)
Payments (% GNP)
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
• EU was a significant
contributor to Irish
incomes in 1980s,1990s
Source: Dept of Finance
LOCAL GOVERNMENT SPENDING
• Irish local authorities
spend money in six main
areas
•
•
•
•
•
•
Housing
Roads
Water
Environment
Development
Recreation
• This is broadly in line with
municipalities in other
countries
Irish LA spending by
heading
Housing &
Building
Road Transport
& Safety
Water Services
Development
Management
Environmental
Services
Recreation &
Amenity
Other
• Cf. schools, healthcare…
Source: publicpolicy.ie
LOCAL GOVERNMENT RECEIPTS
• Irish local authorities earn
revenues in two ways
• Selling goods and
services, e.g. rents,
landfill/refuse charges,
parking fines…
• Commercial rates
• The remainder of Irish LA
receipts come in grant
form
Irish LA receipts by
heading
Goods &
Services
Rates
Grants &
Subsidies
General
Purpose Grant
• Ear-marked (from central
voted expenditure)
• General purpose
Source: publicpolicy.ie
IS IRELAND MISSING A LAYER OF GOV?
Municipalities per million
inhabitants
600
500
400
300
200
100
0
AT
BE
CZ
DK
EE
FI
FR
DE
GR
HU
IE
IT
LV
LT
LU
NL
PL
PT
SK
SI
ES
CH
SE
UK
EU
• “The principle of subsidiarity
is fundamental to the
functioning of the European
Union (EU… [it] determines
when the EU is competent
to legislate, and contributes
to decisions being taken as
closely as possible to the
citizen.”
EU Website
• Ireland has 7 municipalities
per 1m inhabitants
• EU average is ~25 times this
Source: Analysis of Wikipedia content
SIZE OF NATIONAL GOVERNMENT
20
Korea
Switzerland
Australia
Estonia
United States
Slovak Republic
Canada
Israel
Ireland
New Zealand
Poland
Japan
Czech Republic
Spain
Luxembourg
Germany
Norway
United Kingdom
Greece
Iceland
Portugal
Hungary
Slovenia
Netherlands
Italy
Sweden
Austria
Belgium
France
Denmark
Finland
25
30
35
40
45
50
55
60
Receipts (% GDP)
Spending (% GDP)
Source: OECD
ONE SIZE FITS ALL?
• Is there a “correct” size for governments, relative to
their overall economy?
• Generally accepted that less than 10% is probably too small
relative to the scale of market failures
• In same fashion, presumably 75% or more leaves people
hugely vulnerable to government failures
• Examples of high-income and/or fast-growing
economies at top, middle and bottom ends
• Korea, Estonia, US: small government
• Netherlands, Denmark, Finland: big government
• Perhaps question is a level further down
• What are principles of good government spending?
TOPIC D: STRUCTURE
Public Finances, Debt & Taxation
1.
2.
3.
4.
5.
6.
Why a government at all?
Size and levels of government
Spending: principles and features
Taxation: principles and features
Government liabilities
Government assets
THREE TYPES OF SPENDING
• Main spending headings
35%
Gross
current
30%
Capital
voted
25%
20%
Capital
other
15%
VK/All
voted
10%
5%
2011
2007
2003
1999
0%
1995
• Since 2007, fraction of
spending on capital has
halved
40%
1991
• Declined in size (relative
to economy)
• Switched somewhat from
current (consumption +
transfers) to capital
45%
1987
• In boom, Irish Exchequer:
50%
1983
• Public consumption
• Public investment
• Transfers
Spending by type (% of GNP)
Source: Dept of Finance
PUBLIC SPENDING: CONSUMPTION
• Consumption
2014 spending, by type
• Administration, defence,
education, health
• Service provision vs.
service funding
• Funding due to market
failures (including
endowment effects /
redistribution)
• Direct service provision?
• ~2/3s of all consumption
is health, education
DSP
Health
Education
Other
current
Voted
capital
• More in Topic I next term
Source: Dept of Finance / Budget 2015
PUBLIC SPENDING: INVESTMENT
• Goals of investment
• Three areas dominated
by investment
• Environment
• Jobs/enterprise
• Transport
• Add health, education –
€2.9bn of €3.6bn in 2014
70%
60%
50%
40%
30%
20%
10%
0%
Agriculture
Arts HG
Children YA
CENR
Defence
Education
ECLG
Finance
FA&Trade
Health
Jobs
Justice
PER
Social Prot
Taoiseach
Transport+
Total
• Boost productivity of
economy
• Maintain assets/amenities
that provide social return
% of spending as investment
Source: Dept of Finance / Budget 2015
Roughly 3/4s
Maternity
17%
Other income
BTW/BTE
Other emp't
Rent supp't
Other child
Community, TUS
Carers
Other supp't
€1,000
Admin
Other illness
One-parent
26%
Widows
€6,000
Child benefit
€2,000
Disab/invalidity
€4,000
Jobseekers
€5,000
Pension
PUBLIC SPENDING: TRANSFERS
DSP gross spending by heading (& type)
SIF
Voted
€3,000
10%
4%
€0
Source: Dept of Finance / Budget 2015
PUBLIC SPENDING: TRANSFERS
6%
Where series
line up, 20:1
ratio (i.e. 5%
interest rate
100%
80%
5%
4%
60%
3%
40%
2%
20%
1%
Debt (LHS)
Servicing (RHS)
2013
2011
2009
2007
2005
2003
0%
2001
0%
1999
• Roughly 5% of Irish
income is spent paying
off national debt
• More later…
120%
1997
• No good or service is
being provided, nor is any
capital being formed
National debt & debt
servicing, as % of GNP
1995
• Repayment of national
debt is also a form of
transfer
Source: Dept of Finance
TOPIC D: STRUCTURE
Public Finances, Debt & Taxation
1.
2.
3.
4.
5.
6.
Why a government at all?
Size and levels of government
Spending: principles and features
Taxation: principles and features
Government liabilities
Government assets
WHY DOES THE GOVERNMENT TAX?
• Charges versus taxation
• Two reasons for taxation
• Revenue collection (aim
to minimise distortion of
behaviour)
• Externalities argument –
may be revenue-neutral
(aim precisely to change
behaviour)
• Tax breaks: form of
government spending
• Aim: change behaviour
• Regressive? Why not
subsidy?
WHY DOES IT NOT TAX (MORE)?
• Limits on Ireland’s
taxation policies
• Small open economy:
what are systems in other
countries?
• EU member state: what
are rules for Irish taxes
• History: “the best tax is an
old tax”
• Human behaviour: “the
second best tax is a
hidden tax”
PRINCIPLES OF A GOOD TAX SYSTEM
• Equity
•
•
•
•
Horizontal equity: how are those on similar incomes treated?
Vertical progressiveness (or regressiveness)
Transitional equity: winners and losers from changes
Intergenerational equity: borrowing vs. taxation
• Efficiency
• What (unwanted) distortion of behaviour is there?
• Deadweight loss; income & substitution effects
• Simplicity
• What scope and incentive is there for avoidance, evasion?
MAJOR FORMS OF TAX
• Consumption
• Rationale: provision of
market infrastructure? (Cf.
EU contribution)
• Income
• Rationale: inequality
aversion? Inability to bring
in user charges for many
publicly-funded services?
• Wealth
• Rationale: inequality?
• Cf. land tax: value of land
and recouping taxpayer
investment
THE IRISH SYSTEM IN PRACTICE
All-in tax rates, by decile and source tax, ca.2010
45%
40%
35%
30%
VAT
25%
PRSI
20%
USC
15%
Income tax
10%
5%
0%
1
2
3
4
5
6
7
8
9
10
Source: Analysis of ESRI, Revenue Commissioner & CSO statistics
TAXES VS. CHARGES
• Unavoidable taxes:
• Income tax, PRSI, USC (direct) and VAT (indirect)
• Avoidable taxes (cf. P = SMC)
• Duties (e.g. on cigarettes, alcohol, fuel)
• User charges
•
•
•
•
•
Motor tax, toll roads, air travel tax, car registration
Licences for gambling, liquor, TV
Water charges
Carbon tax, landfill levy, plastic bag levy
Stamp duty, property tax
LAND, WEALTH & FISCAL POLICY
• Value of land is major part of overall stock of wealth
in modern economies
• Estimate for USA, 2006: ~$24trn in residential housing of
which ~$11trn in residential land
• In Ireland (2007), ~75% of all wealth in real estate – largest
chunk in residential, of which land comprises largest share
• Example of Jubilee Line (1999 extension)
• £3.5bn invested by general taxpayer
• Land values rose by an estimated £13.5bn
• Full Land Value Tax (5% of capital value) means £675m in
revenues foregone [vs. ~£150m in interest costs]
TAXES AS PRICES OF SOCIAL SERVICES
• Fiscal policy often seen as black box
• “Increase spending – on something, anything – to stimulate
economic activity when it’s needed”
• But not all fiscal policy is the same
• Recent explosion of data enables us to say with greater
certainty where social return on spending is highest
• Opportunity cost of austerity
• E.g. of lack of social housing – now resulted in hotel bills
(plus social costs)
EXAMPLE OF BUILT HERITAGE
• If this is minimum benefit,
what is current cost? ROI
Average
Leinster
Dublin
Munster
Crash
• Excludes other benefits
(e.g. direct revenues)
Bubble
• Combined effect of €3.6bn
means LPT revenues due to
built heritage of ~€6.5m
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
-2.0%
-2.5%
Rent
• Ireland’s 6,700 castles add
~€2bn to value of housing
• Churches add ~€1.4bn
• Historic homes add ~€300m
Effect of proximity to castles
Overall
• Hedonic regression analysis
Other Cities
Conn-Ulster
TOPIC D: STRUCTURE
Public Finances, Debt & Taxation
1.
2.
3.
4.
5.
6.
Why a government at all?
Size and levels of government
Spending: principles and features
Taxation: principles and features
Government liabilities
Government assets
DEFICITS ARE FUTURE TAXES
• Not all government spending is covered by public
revenues
• By design – a planned deficit
• By accident – economic conditions mean revenues are
worse than expected
• All spending must be covered, however
• Thus spending is either covered by current taxes & charges
or future ones
• Is it (a) possible and (b) desirable if a government
runs a deficit every year?
• Current versus capital spending
DANGEROUS SLIDE IN FISCAL POLICY?
2011
2008
2005
2002
Capital
1999
1996
Current
1993
• Concerns?
1990
• Mid-2010s: large current
deficit; capital in balance
1987
• What went wrong?
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
Capital and current account
balances, % GNP
1984
• Mid-1980s: sizeable twin
deficits
• Mid-1990s: small twin
deficits
• Mid-2000s: large current
suplus, capital deficit
WHAT EXACTLY IS OUR DEBT?
• Debt has risen from
~€35bn in mid-1990s to
~€200bn now
• Government Bonds mostly fixed rate
• Due 2019, 2020, 2025
• Floating rate: 2038-2053
• Troika funding
• IMF: 2016-2021
• EFSF: 2029-2034
• Half of debt Irish-held…
• … but most of that is
Central Bank
Ireland's National Debt
(Oct 2014, €bn)
Gov
bonds
Troika
State
Savings
Shortterm
TOPIC D: STRUCTURE
Public Finances, Debt & Taxation
1.
2.
3.
4.
5.
6.
Why a government at all?
Size and levels of government
Spending: principles and features
Taxation: principles and features
Government liabilities
Government assets
TRADITIONAL STATE ASSETS
• Cash and financial assets:
• Gross debt of ~€200bn, but assets of ~€23bn
• Net national debt (Oct 2014) of €182bn
• Semi-states
• Previously very important
• Small number of SOEs currently – soon to be smaller?
• NewERA
• Aim is to dispose and restructure state-owned enterprises
• ESB, Ervia (formerly Bord Gais), EirGrid, Bord Na Mona, Coillte
• In other countries, rise of SWFs
OTHER STATE ASSETS
• NPRF – originally to overcome PAYG pensions
• Fund worth about €20bn – of which €13bn is in AIB, BOI
• Average annual return of 4%
• Move from long-term to job-creating (ISIF)
• NAMA – originally to save Irish banking system
•
•
•
•
Buy €77bn of loans (on collateral worth ~€100bn at peak)
But for how much? From ~€55bn to ~€35bn
About €15bn generated in cash by mid-2014
About €20bn left in “loans & receivables” by end-2013
• NDFA (National Development Finance Agency)
• Advises re public investment projects >€20m (e.g. bundles
of schools or courts, DIT campus)
RECAPPING…
• Clear benefits of government intervention –
particular for pure public goods and externalities
• But costs of intervention too
• Importance of equity, efficiency & simplicity (on taxes)
• Health, education and redistribution make up the
bulk of day-to-day spending
• Taxes as the prices of social services?
• Greater move towards charges, not taxes?
• Balance sheets matter
• Spending not covered by tax means future taxes: debt
• State also has assets
ESSAY & EXAM-STYLE QUESTIONS
1. Is Ireland’s taxation system equitable, efficient and
simple?
2. “Ireland’s fiscal policy since the 1970s has rarely
been best practice.” Discuss.
3. What is the role for cost-benefit analysis in the
future of Irish policymaking?