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NERI Quarterly Economic Observer (QEO) - Summer, 2019

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Slides from NERI Quarterly Economic Observer (QEO) Summer, 2019 Launch which took place in Buswells Hotel on Thursday 18th July, 2019. The QEO proposes changes to the taxation of capital stocks in the Republic, in particular reforms to Local Property Tax.

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NERI Quarterly Economic Observer (QEO) - Summer, 2019

  1. 1. NERI Quarterly Economic Observer Summer 2019 Dr. Tom McDonnell Senior Economist NERI (Nevin Economic Research Institute) Tom.mcdonnell@nerinstitute.net Launch, 18th July 2019
  2. 2. Part 1 Economic Outlook
  3. 3. Dashboard of Macroeconomic Indicators 2014 2015 2016 2017 2018 2019 Real GDP Percentage volume change over previous year Euro area 1.4 2.1 2.0 2.4 1.8 1.3 United Kingdom 2.9 2.3 1.8 1.8 1.4 1.2 United States 2.5 2.9 1.6 2.2 2.9 2.3 Unemployment** Percentage of active population Euro area 11.6 10.9 10.0 9.1 8.2 7.7 United Kingdom 6.1 5.3 4.8 4.4 4.0 4.1 United States 6.2 5.3 4.9 4.4 3.9 3.8 Inflation*** Percentage annual average rate of change Euro area 0.4 0.2 0.2 1.5 1.8 1.3 United Kingdom 1.5 0.0 0.7 2.7 2.5 1.8 United States 1.6 0.1 1.3 2.1 2.4 2.0 Compensation per Employee Percentage change from previous period Euro area 1.3 1.3 1.0 1.5 2.1 1.9 United Kingdom 0.6 1.1 2.8 3.1 2.7 3.1 United States 2.9 3.1 0.9 3.1 2.7 3.0 Employment Percentage change from previous period Euro area 0.6 1.2 1.8 1.5 1.3 0.6 United Kingdom 2.4 1.7 1.5 1.0 1.2 1.0 United States 1.7 1.7 1.7 1.3 1.6 1.2 Current Account Balance Percentage of Gross Domestic Product Euro area 2.5 2.9 3.2 3.2 3.0 2.9 United Kingdom -4.9 -4.9 -5.2 -3.3 -3.9 -4.2 United States -2.1 -2.2 -2.3 -2.3 -2.3 -2.4 Fiscal Balance Percentage of Gross Domestic Product Euro area -2.5 -2.0 -1.6 -1.0 -0.6 -1.0 United Kingdom -5.3 -4.2 -2.9 -1.8 -1.4 -1.3 United States -3.7 -3.2 -3.9 -3.8 -4.3 -4.6
  4. 4. Dashboard of Macroeconomic Indicators (ROI) 2014 2015 2016 2017 2018 Latest Percentage volume change over previous year Gross Domestic Product 8.6 25.2 3.7 8.1 8.2 6.3 (Q1’19) Modified Domestic Demand 4.2 4.5 5.8 2.8 4.7 1.5 (Q1’19) Personal Consumption 2.4 3.2 5.2 3.0 3.4 2.9 (Q1’19) Retail Sales 6.3 8.4 7.9 3.9 3.8 2.9 (M1-M5’19) GNI* (current prices) 8.6 9.4 8.0 4.7 7.3 7.3 (2018) Percentage annual average rate of change Employment 2.6 3.5 3.7 2.9 2.9 3.7 (Q1’19) Average Hourly Earnings -0.3 0.2 0.8 1.7 2.8 2.3 (Q1’19) Average Annual Earnings 0.2 1.2 1.3 1.9 3.3 3.4 (Q1’19) Inflation (CPI) 0.2 -0.3 0.0 0.4 0.5 1.0 (M1-M6’19) Percentage of annual GDP or quarterly GDP Mod. Investment (% GNI*) 17.4 18.4 19.1 19.5 20.5 20.5 (2018) Current Account Balance 1.1 4.4 -4.2 0.5 10.6 13.2 (Q1’19) Government Balance (GGB) -3.7 -1.9 -0.7 -0.3 0.0 -2.2 (Q1’19) Gov. Gross Debt (end year) 104.1 76.8 73.4 67.8 63.6 65.6 (Q1’19) Percentage of labour force Unemployment (SA) 11.9 9.9 8.4 6.7 5.7 4.5 (M6’19) Long-term Unemployment 6.7 5.4 4.3 3.0 2.1 1.7 (Q1’19) Percentage of households Deprivation 30.5 28.9 25.4 21.0 18.8 18.8 (2017) At Risk of Poverty 16.2 16.7 16.3 16.2 15.7 15.7 (2017) Percentage Gini Coefficient 31.8 32.1 30.8 30.7 31.5 31.5 (2017)
  5. 5. Are we overheating? – On the bubble • We cannot directly observe the cyclical position. • Menu of indicators: 1. A falling and below the long-term average unemployment rate; (Yes but the UR is higher than in the UK, Germany and US. Ireland ranks joint 9th in the EU) 2. A rising and above long-term average employment rate; (Yes but employment rate (20-64) was just 16th in the EU in 2018, 8.5pp behind Sweden (74.1 vs 82.6) – job vacancy rate is 4th weakest of 24 EU countries) 3. A faster than average rate of growth in consumer prices, (No – CPI has increased 2.6% in nine years and is currently 1.1%) 4. A faster than average rate of growth in asset prices; (Somewhat - Annual property price increases have softened to 2.8% - and are just 82% of peak) 5. A faster than average rate of growth in wage inflation; (Somewhat. Annual hourly earnings were +2.3% in Q1 (weekly is +3.4%) -context is a decade long stagnation) 6. A faster than average rate of growth in underlying investment, (Yes – 8.5% growth in 2018 – strong growth in construction related investment – but coming from low bases) 7. A rising and above long-term underlying investment rate as a per cent of modified output; (Somewhat. Rate was a sustainable 20.5% in 2018) 8. A faster than average rate of growth in private consumption (Yes – real growth of at least 3% for four consecutive years – context of pent-up demand following long stagnation) 9. A faster than average rate of growth in private sector credit (Mixed – lending to households is growing at 2.1% on an annual basis - lending for house purchases was up just 1.7% y-on-y in May, - credit advanced to non-financial corporates has accelerated in recent months (5.4%yoy in May)) 10. A deterioration in the current account balance particularly if it is already negative, (No – modified current account balance was €12 billion in surplus in 2018) 11. A sustained deterioration in the savings rate (No – savings rate of households is rising and well above the long-run average.
  6. 6. Economic Outlook for ROI • We project real GDP will grow by a strong, and above trend, rate of 4.6% in 2019 on the back of strong employment growth as the cyclical upswing continues. • Growth should start to slow to its trend rate thereafter. We project real growth of 3.3% in 2020 and then annualised growth of close to 2.5% to 3% thereafter. o Note that the 2020 forecast is extremely tentative given the inherent uncertainty surrounding Brexit negotiations • Labour market conditions should continue to improve in 2019 and 2020. We expect total employment to increase by about 70,000 in 2019 and 45,000 in 2020. • The unemployment rate will slowly decline and we project it will average 4.3% in 2020 • Wage and employment growth will vary from sector to sector but average growth (hourly basis) should be between 3.5% and 4% in 2020 given the tightening labour market • Inflation remains subdued but wage pressure and strengthening domestic demand should start to push up prices gradually over the next 6-18 months • Public finances are in structural surplus – this means the Government can let the automatic stabilisers operate fully in the event of a no-deal Brexit o But volatile CT receipts suggest caution is warranted – are they ‘structural’?
  7. 7. Macro projections (ROI)
  8. 8. Downside risks to growth (broadly similar to last year) There is a wide range of other downside risks to our baseline projection including: 1. Brexit: o Lower growth and potential growth in the UK o Weaker Sterling and currency volatility o Impact on trade o Impact on investment decisions 2. International moves towards protectionism o Escalation in protectionism would reduce global trade over time and obviously harm an SOE like Ireland 3. Euro area o Rising interest rates are unlikely in the short-run – potential for an Italian sovereign-bank doom loop • US tax policy; EU level CCCTB o Fiscal implications (could impact FDI but limited employment impact) • Declining competitiveness – housing and childcare costs o Can be ameliorated through public policy • Downward trend in productivity growth becomes structural o Public policy needs to focus on the inputs to long-run growth…….
  9. 9. Part 2 Taxing Capital Stocks
  10. 10. Tax Revenue Comparisons2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total revenue Ireland 30.8 29.0 28.1 27.8 28.0 28.3 28.7 29.0 23.4 23.3 Ireland (GNI*) 36.7 34.7 35.4 36.2 37.8 39.2 37.7 38.1 38.1 36.2 European Union 38.0 37.8 37.1 37.2 37.7 38.3 38.7 38.7 38.5 38.9 By type Indirect taxes Ireland 13.2 12.1 10.9 10.9 10.5 10.6 10.8 11.0 8.7 8.7 Ireland (GNI*) 15.7 14.5 13.7 14.2 14.2 14.7 14.2 14.5 14.2 13.5 European Union 13.1 12.7 12.6 13.0 13.2 13.4 13.5 13.6 13.6 13.6 Direct taxes Ireland 13.4 12.4 12.0 11.8 12.3 12.9 12.9 13.0 10.8 10.7 Ireland (GNI*) 16.0 14.8 15.1 15.4 16.6 17.9 16.9 17.1 17.6 16.6 European Union 13.4 13.3 12.4 12.3 12.5 12.9 13.2 13.1 13.2 13.3 Social Contributions Ireland 4.1 4.4 5.2 5.0 5.3 4.8 5.0 4.9 3.9 3.9 Ireland (GNI*) 4.9 5.3 6.6 6.5 7.2 6.6 6.6 6.4 6.3 6.1 European Union 11.5 11.8 12.2 12.0 12.1 12.1 12.2 12.1 11.9 12.1 By function Consumption Ireland 11.0 10.5 9.8 9.9 9.5 9.5 9.8 9.9 7.8 7.8 Ireland (GNI*) 13.1 12.6 12.3 12.9 12.8 13.2 12.9 13.0 12.7 12.2 European Union 10.6 10.3 10.4 10.7 10.9 10.9 11.0 11.0 11.0 11.1 Labour Ireland 10.7 11.2 12.2 12.0 12.8 12.8 12.8 12.8 9.9 9.8 Ireland (GNI*) 12.7 13.4 15.4 15.6 17.3 17.7 16.8 16.8 16.1 15.2 European Union 18.4 18.8 19.2 19.1 19.1 19.4 19.6 19.4 19.1 19.3 Capital Ireland 9.2 7.3 6.1 5.9 5.8 6.0 6.1 6.3 5.8 5.7 Ireland (GNI*) 11.0 8.7 7.7 7.7 7.8 8.3 8.0 8.3 9.4 8.9 European Union 9.0 8.5 7.6 7.5 7.7 8.0 8.1 8.2 8.4 8.4
  11. 11. Capital Taxes2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total capital revenue Ireland 9.2 7.3 6.1 5.9 5.8 6.0 6.1 6.3 5.8 5.7 Ireland (GNI*) 11.0 8.7 7.7 7.7 7.8 8.3 8.0 8.3 9.4 8.9 European Union 9.0 8.5 7.6 7.5 7.7 8.0 8.1 8.2 8.4 8.4 By function Income of corporations Ireland 3.4 2.8 2.3 2.4 2.2 2.3 2.4 2.4 2.6 2.7 Ireland (GNI*) 4.1 3.3 2.9 3.1 3.0 3.2 3.1 3.2 4.2 4.2 European Union 3.3 2.9 2.3 2.4 2.5 2.6 2.6 2.5 2.6 2.7 Income of households Ireland 2.0 1.3 0.9 0.8 0.7 0.8 0.7 0.7 0.9 0.9 Ireland (GNI*) 2.4 1.5 1.1 1.0 0.9 1.1 0.9 0.9 1.5 1.4 European Union 0.9 0.9 0.8 0.8 0.8 0.9 1.0 1.0 1.1 1.0 Income of self-employed Ireland 1.1 1.1 1.2 1.2 1.0 1.0 1.0 1.0 0.8 0.8 Ireland (GNI*) 1.3 1.3 1.5 1.6 1.3 1.4 1.3 1.3 1.3 1.2 European Union 2.0 2.0 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 Stock of capital Ireland 2.6 2.0 1.7 1.6 1.8 1.9 2.0 2.1 1.5 1.2 Ireland (GNI*) 3.1 2.4 2.1 2.1 2.4 2.6 2.6 2.8 2.4 1.9 European Union 2.7 2.7 2.6 2.4 2.5 2.6 2.7 2.8 2.8 2.8 Property taxes Recurrent taxes on immovable property Ireland 0.6 0.7 0.8 0.8 0.8 0.8 1.0 1.0 0.7 0.6 Ireland (GNI*) 0.7 0.8 1.0 1.0 1.1 1.1 1.3 1.3 1.1 0.9 European Union 1.2 1.2 1.2 1.4 1.4 1.6 1.6 1.6 1.6 1.6 Other taxes on property Ireland 1.8 1.1 0.7 0.6 0.8 0.9 0.8 1.0 0.6 0.5 Ireland (GNI*) 2.2 1.3 0.9 0.8 1.1 1.2 1.0 1.3 1.0 0.8 European Union 1.1 1.1 0.8 0.8 0.9 0.8 0.9 0.9 1.0 1.0
  12. 12. Taxing Capital Stocks (Property and other Wealth) • Why do we care? o Property taxes are the most growth friendly form of taxation (OECD) • Property taxes are taxes levied on one or more types of asset. Eurostat (2013) identifies six broad categories of property tax. These are: 1. Recurrent taxes on net wealth (e.g. Net Wealth Taxes) 2. Recurrent taxes on immovable property (e.g. Residential Property Taxes and Land Taxes) 3. Other recurrent taxes on property (e.g. Domicile Levies) 4. Other non-recurrent taxes on property (e.g. Capital Levies) 5. Estate, inheritance and gift taxes (e.g. Capital Acquisitions Tax) 6. Taxes on financial and capital transactions (e.g. Stamp Duty) • Reorienting the composition of our tax base towards property taxes would be an important structural reform o What to do with the revenue is a different question (A)reduce debt, (B) increase spending in growth enhancing or other areas, or (C) reduce other taxes
  13. 13. How Ireland compares? • In output terms, in 2016, recurrent taxes on immovable property were 0.9 per cent of Irish GNI* (0.6 per cent of GDP) and 1.6 per cent of the EU’s GDP. • This amounts to a gap of €1.2 billion. • Ireland is also relatively low in terms of its receipts from other taxes on property, at 0.8 per cent of GNI* in Ireland versus 1.0 per cent of GDP in the EU, a difference of close €350 million. • Overall, in relative economic output terms Ireland collects over €1.5 billion less than the EU in receipts from stocks of capital in 2016 (1.7 per cent of GNI* in Ireland compared to 2.8 per cent of GDP in the EU). • Capital Acquisitions Tax (CAT) brought in €522 million in 2018 • Local Property Tax (LPT) brought in €455 million in 2018 • Stamp Duty brought in €1.45 billion in 2018
  14. 14. The Property Tax • There are strong theoretical arguments in favour of recurrent taxes on immovable property (the LPT in the Irish case): 1. LPTs have been shown empirically to have a minimal negative impact on GDP; in other words, it is a growth-friendly tax; 2. LPTs are very difficult to avoid or evade; 3. Unlike transaction-based property taxes, LPTs are reasonably stable throughout the economic cycle and therefore provide a reliable tax base; 4. LPTs do not by and large penalise productive activity; 5. Taxes on immovable assets are particularly appropriate in the context of increasing globalisation where the factors of production are increasingly mobile; 6. LPTs do not create a barrier to labour mobility (unlike transaction based property taxes which potentially add an additional cost to moving for economic reasons); 7. LPTs can encourage investors to redirect capital to more productive sectors of the economy; 8. LPTs can be progressive if correctly designed and 9. LPTS enable the State to recoup some of the costs of public infrastructure provision through the increased (and unearned) value that will accrue to local housing.
  15. 15. Property Tax Issues • Hardship concerns? o Common to all taxation – best resolved through a deferment system • Home is not wealth? o Can be bought or sold, most significant inter-generational wealth transfer o Allows access to financial markets o Renters often pay more but only the homeowner ends up with a valuable asset • Horizontal equity – core tax principle o Requires that the tax be a fixed portion of value regardless of geographic or other factors – doesn’t inform as to what the rate should be • Equalisation funds and local authority discretion o We propose scrapping equalisation, but also scrapping downward discretion
  16. 16. Property Tax Revenues • Evidence suggests that recurrent taxes on immovable property (known as RP taxes) are generally more growth-friendly than other taxes - a greater reliance on these types of taxes will be growth enhancing. • Ireland got just 2.6 per cent of aggregate tax and SSC revenue from this type of tax in 2017, whereas the average for the EU was 4.0 per cent. • There therefore appears significant scope to shift the composition of revenue away from other forms of taxation in order to improve Ireland’s growth potential • Recurrent taxes on immovable property would have needed to be €2.9 billion in 2017 in order to reach the EU average as measured by proportion of economic output. • An indicative 50-50 split in the yield between commercial rates and taxes on residential property (i.e. €1.45 billion from commercial rates and €1.45 billion from the LPT) would imply almost an additional €1 billion needed from taxes on residential property, or a trebling of the current yield. • Rebasing at 2019 values would increase the yield to €771 million – rate needs to be 0.34% to reach €1.45 billion • Political economy realities means pace of increase needs to be slow (0.01% or 0.02% per annum over 10 years
  17. 17. Net Wealth Taxes • Advantages and disadvantages • Case in favour: A) Revenue yield; B) Redistribution; C) Horizontal equity; D) Fighting tax evasion (taxing trusts); E) Can promote efficiency and growth • Case against: A) Effect on savings; B) Ease of avoidance; C) Valuation difficulties; D) Compliance costs • 2013 yields based on plausible designs: •
  18. 18. Potential yields from a net wealth tax • Lawless and Lynch (2016): Revenue in 2013 from alternative wealth tax scenarios with and without a 33 per cent income cap, 1 per cent rate, no exemptions or deductions, € millions Revenue without cap Revenue with cap €1 million threshold (double if married), €250,000 per child 248 182 €500,000 threshold (double if married), €125,000 per child 622 508 All net assets excluding household main residence 2,041 1,935 All net assets 3,781 3,593 Net household wealth increased by two thirds between 2013 and 2017 suggesting yields would be much higher now
  19. 19. Other taxes on wealth and property • CATs o Tax reliefs as hidden spending o What is the economy-wide return on the business and agricultural reliefs? • Can inherit over €3 million before attracting any liability • Stamp Duty o There is an argument for abolishing and replacing stamp duty on land and property (€660 million in 2018) with recurrent taxes on property (e.g. land tax, wealth tax, beefed up LPT) o Stamp duty receipts tend to be volatile and are often sharply procyclical. Stamp duty also discourages capital transactions and acts as a barrier to economic efficiency.
  20. 20. NERI Quarterly Economic Observer Summer 2019 Dr. Tom McDonnell Senior Economist NERI (Nevin Economic Research Institute) Tom.mcdonnell@nerinstitute.net Launch, 18th July 2018

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