Miscalculating the Price and the Value

The Green Party’s pre-budget submission is a largely progressive contribution to the economic debate. Of course, the Greens bring a particular perspective, which is becoming increasingly popular if the ‘stealing-of-green-clothes’ by the Right is anything to go by. But even in more traditional economic areas, the Greens are coming forward with proposals which the Left could note: increasing Capital Gains Tax from 20% to 25%, introduction of refundable tax credits (something CORI has consistently called for), a review of Capital Allowances and a Windfall Tax on development land to name but a few.

However, there is one proposal that is quite concerning and completely out-of-step with the thrust of the document and even the title of the submission, ‘Reducing Inequality’. And that is its proposal to fund the reduction of VAT and PRSI with a new Carbon Levy.

The Greens claim that a levy of €20 per tonne could raise enough money to cut VAT and PRSI while increasing social welfare. Let’s leave aside the contentious nature of carbon taxes (George Monbiot argues against such taxes, rightly pointing out that they impact most on low-income groups). In any event, we will need fiscal and budgetary measures to direct consumption away from environmentally damaging activities. Let’s just take the argument as given. There are two concerns here:

First, credibility: if one were to implement the Greens proposal in a modest way, one could envisage a 1% cut in employers’ and employees’ PRSI rates (a ½% for the self-employed) as well as a 1% cut in the standard rate of VAT. What would these two measures cost?

• The cut in the PRSI rates would cost over of €800 million in 2005.
• The cut in VAT would cost at a conservative estimate nearly €400 million (the last figure I have at hand is €325 million back in 2003)

The Greens claim their carbon levy would raise €510 million. However, it can be seen that, in terms of financing cuts in PRSI and VAT, this new levy wouldn’t get very far. It would fund less than half the cuts. The Greens would still need to find €700 million to make the figures balance (and more since they also threw in additional but unspecified social welfare increases).

Of course, they might argue that the cuts would be ‘self-financing’, that cutting employers’ PRSI would result in additional job creation. That argument can only work, though, if it can be shown that PRSI rates in this country are onerous and constitute a bar to job creation. This would be a difficult argument to sustain.

The PRSI burden for Irish employers is exactly half that of the EU average. In other words, employers’ PRSI rates would have to double just to reach the European average. The overall Irish burden is even lower than that faced by employers in the ‘wild west’ economy of the US. In any event, the rate of job creation in the last five years suggests that if there are any problems, employers’ PRSI is not one of them.

Another aspect of this is the effect it would have on the Social Insurance Fund (SIF). All the PRSI paid goes into the SIF to pay social insurance benefits. These are social welfare payments that are based on ‘contributions’, not means-tested payments which are paid out of general taxation.

The SIF has been in surplus for some time, but that surplus is eroding – from €630 million to an estimated €495 million in 2005. Some experts believe the Fund will go into deficit within a few years at current growth rates in both expenditure and PRSI revenue. If that happens, the Government will incur extra expenditure just to maintain current social welfare rates.

There are considerable demands on the SIF – most notably from old-age related payments. These are the fastest growing items in the social welfare budget for obvious reasons – more people are turning 66 years and the Government has, rightly, been increasing payments above the relative poverty line. No wonder then that old-age related payments make up over half of all social insurance payments – and this proportion in increasing.

The Green Party proposals would tear the guts out of the SIF – it could send it into a deficit of over €300 million. This means that the Government would have to come up with this sum just to maintain the Fund. It wouldn’t mean one cent extra to pensioners or other beneficiaries.

The fact is that very soon we will have to consider increases in PRSI just to maintain current social welfare payment levels. Not only do the Greens’ figures not add up, they are going in the wrong direction.

The second problem is more ideological: what kind of society do we want. Ireland annually ranks at the bottom of the EU-15 table on social protection expenditure. Progressives should be looking at ways of reforming social insurance so as to increase people’s economic security – whether they are elderly, sick and disabled, parents, unemployed, widows, or a close relative of someone recently deceased, etc. This will mean, of course, increasing taxation and, in the first instance, PRSI. This doesn’t necessarily mean whacking everybody with a huge increase overnight. It does mean, however, beginning to debate how such increases can be implemented in a manner consistent with economic growth and people’s ability to increase their living standards (of which an increasingly important part would be stronger social protection).

The Greens, of course, are not the only group of progressives who have yet to fully confront these issues. Those who argue that ‘taxes are down and will stay down’ or that there is enough money if we just ‘soak the rich’ are equally guilty. We shouldn’t, though, fear the general public's reaction were we to engage in an open and honest dialogue on what is needed to modernise our social infrastructure. After all, in the recent Irish Times/MRBI poll, nearly 2/3 wanted the budget surplus to be spent on public services or more social welfare protection. Only 6% wanted a cut in the top rate of tax.

If we’re not going to take the lead, then can we at least follow the public's lead?

Comments

[simon]

‘stealing-of-green-clothes’ by the Right The left are at it as well.

But still excellent excellent piece