Horses or Hospitals
16 Apr 2004
Article for Irish Times by Paul Sweeney, Economic Advisor, April 2004
The middle classes appear to be fleeing the public health system and the public education system. They are paying for private health and education because the public system is not delivering the quality of services which they expect in a modern European economy. The reason why both the health and education systems are failing to meet public expectations is because they are not adequately funded (though there is also an efficiency problem in the health services). They are not funded to modern standards because the government has decided, consciously, not to fund them to European levels of health care and education. It is not funding them because it does not want to raise the taxes which are needed to pay for modern health and education. As the flight of the middle classes grows, the services get worse, and the government cuts spending more. We will be left with poor services for the poor.
If the Labour Party delegates at today's conference fail to address the burning issues of the appalling health services and an education system which is falling apart at the seams, then the spiral of decline will continue. Labour has traditionally been unambiguous in its support for such public spending. In an economy where private health and education systems predominate, there will be greater inequities, economic competitiveness will be reduced as education standards fall for many and private services will ultimately cost consumers more. Public investment in education has been a key to Ireland's economic success, generating excellent returns.
This week, CORI told of how low social spending is in Ireland. Total current public spending is low in Ireland - it averaged less than 32 per cent of GNP over the past five years compared to an average of 47 per cent in Europe. Total revenue raised by government is also low. CORI says that the Irish government has the lowest taxes in Europe, but it is wrong to state that Ireland is "a too-low-tax economy". While it has the lowest taxes in Europe as a percentage of GDP or even GNP, Ireland is not a low tax economy for most of its citizens. It is a medium tax country for most of us and it is an extraordinarily low tax country for some (eg race horse and property owners). It is the imbalance in the way tax is raised which is the problem.
Ireland has high taxes on spending and on low incomes. Spending taxes generally hit the poor hardest. It is policy of government to rely heavily on high indirect taxes as the major source of revenue, with almost half of all taxes being raised from spending taxes. VAT is high at 21 per cent compared to 17.5 per cent in the UK. High taxes on spending have also been a major contributor to high inflation in Ireland, with such taxes contributing 53 per cent of the rise in one recent month. Corporation Tax at only 12.5 per cent is the lowest in Europe and employer social protection costs are also low. There are a myriad of exemptions and loopholes in the tax system which allow legal avoidance of tax. The tax foregone from avoidance amounts to hundreds of millions and could pay for the capital and current needs of both the health and education systems to bring them up to world class levels.
Mr McCreevy has constantly argued, correctly, that if you end tax breaks, then tax rates can be lowered. When corporation tax was nominally 50 per cent, there were so many loopholes that many companies paid little or no tax. It would be better to have a rate of, say, 20 per cent and have companies pay 20 per cent of profits in tax. But this is not what is happening today. We have a low tax of 12.5 per cent but many pay less than this and others pay no tax, because too many loopholes remain. While many have been closed as part of the government's strategy to reduce the tax rates, it has left a great number and they generally benefit the very wealthy.
Most tax breaks are property-based. It extraordinary that the government continues to give total tax write-off to investors in property in an economy where property prices are over-heated, where house prices have trebled since 1995 and where all property is expensive. Furthermore, stallion stud fees, BES schemes, private nursing homes, private hospitals etc. are some of the exemptions which should have been eliminated by the government. Ireland is one of the few countries in the world where there is no tax on residential property, which means taxes and charges have to be raised elsewhere.
A great myth is that the Celtic Tiger economy came about because taxes were reduced. This assertion suits those who ideologically favour low taxes and who do not care whether there is a good public health or education system because they can afford to pay private for themselves. They are putting the cart before the horse. The economy took off well before taxes were reduced and taxes could be reduced because the boom enabled this to happen.
Top income tax rates remained at 48 per cent from 1990 to 1998 and then were reduced to 46 per cent till 2000. Similarly, corporation tax rates were at 40 per cent to 1995 and were reduced to 28 per cent by end 1999. Growth rates took off in 1994 and remained high until 2000. If the tax cuts did so much for the economy why did growth fall dramatically in 2001 when both income and corporation tax rates reached their lowest levels? The answer is that low taxes did not drive the boom. The Celtic Tiger was based on far more complex factors than tax cuts.
The dramatic growth in employment started well before taxes were reduced and before total government spending was cut. Taxes have been reduced, but this was made possible by a massive growth in the numbers at work of 50 per cent since 1994 when the boom really began. These additional 600,000 workers, paying income taxes and the high spending taxes, combined with booming business activity, enabled tax rates to be reduced over time. The income tax reductions were agreed with the trade unions as part of a package of wage moderation, which benefited employers.
While government spending continued to rise steadily each year (the rise averaged 10.7 per cent each year since this government first took office in 1997), it was also reducing as a percentage of GNP. This was because GNP growth rates were so high and because spending was not rising fast enough to meet the needs of a modern public sector. With the growth in population, with economic growth, growth in real earnings and the increased demands for improved public services, especially health and education, spending needed to increase faster than it did.
The government wants to balance its budget and to save a not insignificant €1,220m each year. Its finances are in good shape. So if the government wanted to spend more on health and education, it could get the money from closing the loopholes and increasing the corporation tax rate. This government is unlikely to raise taxes from those who can best pay them.
Labour's dilemma is not to agree to public spending, but on how to finance it. To raise more in tax, it will have to cut tax loopholes, which will be easy. However, it may not have the courage to raise corporation tax, over time, to the same rate as the standard rate of income tax, 20 per cent. However, it may be assisted by Europe which cannot allow the single market to be undermined by "the race to the bottom", which has been led by Ireland on corporate taxes. Other methods of raising taxes would be to levy a site or property tax and even to raise income tax by a fraction to pay for first class health and education systems. The middle classes know that if you want quality, you have to pay for it.
