Michael Taft: Ireland needs a new foundation for our public finances

The Government needs to spend the resources necessary to shore up the productive economy. Picture: Pexels

We are entering into a decade of considerable challenges including the economic repair following the pandemic along with the prospect of a no-deal Brexit, climate chaos and the disruptive technologies of automation. In the long term we also face years of low growth as we head towards the mid-century. These challenges require a new foundation for our public finances to support the productive economy, shared prosperity, climate justice and a Just Transition.

In a policy document published today, Siptu proposes a new fiscal framework to meet these challenges. The Government needs to spend the resources necessary to shore up the productive economy. Over the medium term, it should abandon the Programme for Government’s balanced budget target. Instead, it should adopt the golden rule whereby the current budget (day-to-day spending) is brought into balance or even a small surplus while productive investment is deficit-financed, or borrowed. 

The July Stimulus plan is less than the sum of its parts: under-delivers the headline amount; deadweight, poor targeting and reheating previous commitments. Will it be enough or will we have to return to the stimulus table? The jury is out. https://t.co/fPvwUeQGQE

— Michael Taft (@notesonthefront) July 28, 2020

To this end, fiscal policy should target a 2% deficit over the medium term.Not only would this maximise our investment capacity it would also ensure that we do not return to above-line or covert austerity

Even before the pandemic, Ireland suffered from considerable infrastructural deficits which need to be addressed: social and affordable housing, health sector capacity (e.g. ICU resources, beds, equipment), water and waste, modern childcare facilities, rural development and so much more. 

We will further need green technologies, public transport and building retrofits to confront the environmental challenge, new enterprise supports to see us into the fourth industrial revolution and a substantial increase in education and R&D expenditure to counter the threat of a long-term low-growth future. 

The 2020s should be the decade of expansion and investment.

Fortunately, ultra-low-interest rates make it easier to borrow for productive purposes. However, given that the economy can only absorb so much investment and given the requirement to protect public finances from rising interest rates later in the decade, we should borrow in excess of what we need now and ‘warehouse’ the money to ensure an expansionary investment programme for years to come. It would be economically irrational and fiscally irresponsible not to take advantage of the low-interest environment.

Investment is not a cost. It is an expenditure today in order to grow the economy in the future. Over time, the revenue generated from the actual investment and the boost to economic growth will exceed the initial outlay. This is what businesses do when they invest in new technology, market expansion and new skills. They invest for future returns. Households also do this for home-ownership and energy-reducing retrofits.

Borrowing to boost long-term economic growth can help ensure that the debt burden — debt as a proportion of GDP or GNI*— follows a sustainable trajectory downwards. In the past, Irish governments have pursued golden rule strategies. In the decade following 1987, before the speculative boom, governments ran average annual deficits of 2%. Yet the debt burden fell by half — from a high of 125%  of GNP. This happens when growth, boosted by productive investment, exceeds the deficit.

While we should borrow for productive investment, the golden rule requires that we fund day-to-day spending through our tax base. Clearly our tax base is insufficient to support enhanced public services and a strong social protection system, including in-work benefits. We are a low-tax, low-spend economy compared to other high-income countries. We would have to increase public service expenditure by €8bn to reach the average of our EU peer group. 

The pandemic crisis has shown that our social protection system was not fit for the purpose of supporting households suffering illness and unemployment while highlighting the inequalities in housing and precarious working conditions.

We should wait to increase government revenue until the other side of the crisis. It should be noted, however, that taxes on Irish workers’ wages are about average within our EU peer group. Similarly, taxation on consumption (Vat excise) is average. Our low-tax status can be mostly attributed to a very low level of employers’ social insurance and, to a lesser extent, taxes on capital, assets and wealth. Over the medium term, closing the gap between Irish and our peer group levels will expand our tax base and provide the revenue needed to build strong public services, in-work benefits and social protection.

Finally, fiscal policy is not something only finance ministers do. Employees’ living standards can drive economic recovery through increased tax revenue and business activity. 

The Government can start this drive by ensuring that employees are fully represented on all the Sectoral Taskforces which it has committed to establish in its forthcoming National Economic Plan. This can be the first step towards vindicating the rights of workers to collectively bargain, which has been shown to be particularly beneficial to low and average income earners. Workplace democracy is an instrument of economic recovery and fiscal stability.

Employees can also drive economic recovery through their experience, skills and knowledge of what makes an enterprise succeed - whether in the private or public sector. Greater worker participation in the decision-making process in the workplace improves productivity. In public services, this can be done through a process of employee-driven innovation where employees design reforms to increase efficiency in their workplace. Greater employee-led efficiencies mean we leverage the benefits of increased investment, improve public service quality and enhance working conditions.

Siptu’s proposed framework allows us to embrace a new concept of ‘fiscal responsibility’, one in which full employment with quality jobs, productive investment (in particular, green investment), social security and growing equality are placed at the heart of fiscal policy. Within this framework we can build a resilient economy and a prosperous society while maintaining the debt burden on a downward path. In short, Siptu's progressive fiscal framework has the capacity to combine the needs of the economy, society and public finances for the benefit of everyone.

Michael Taft is a researcher for Siptu