First, I share the criticisms that many people have made in terms of the regressive nature of the budget. The lack of increases for social welfare recipients, no increase in the minimum wage, insufficient funding for childcare and the lack of moves in addressing the housing and health crises are all unnecessary and to be condemned. Rather than give a line-by-line account, I’ll instead challenge some of the narratives surrounding the Irish economy. Challenging these narratives gives a different complexion to what a sound economic policy looks like I don’t have a lot to say about Brexit except that ESRI estimates that over ten years, GDP is 5.0% lower in a No-Deal scenario. The CB estimates that is more pessimistic and that over 5% of output would be lost in the space of two years. This obviously would create significant dislocation to living standards and the public finances. But Brexit is only one of the bases upon which deflationary policy is being justified. And if Brexit doesn’t happen at the end of this month I think there would have been significant scope for public investments. I will focus my presentation on indebtedness and corporate tax reform. I’ll argue that concerns about indebtedness are overplayed. Corporate tax reform would damage Ireland, but a significant component is policy driven. I won’t talk about overheating as I don’t think there is much cause for concern there – inflation was only 0.7% and the employment rate is also considerably below its low point in the 2000s.
The most common measure of national indebtedness is gross debt as a % GDP. As we can see, at just over 60% we’re in the middle for 2018. Though GDP is of course unreliable in Ireland, the measure is still relevant in terms of compliance with fiscal rules, which requires us to be below 60%. In 2019 debt is set to fall below that threshold, which means that we are not required to reduce it further. Of course, GDP is not that economically meaningful in Ireland given MNC distortions. At almost 105%, our national debt is toward the high end.
However, aside from fiscal rules obligations, debt to GDP is not all that meaningful. The Reinhart and Rogoff hypothesis that debt in excess of 90% causing being a drag on economic growth has been discredited. Suppose we take a loan out of 100% of national income so that our national debt doubles to 200% of GNI*. But suppose our lenders say we don’t have to started paying any of that back for 50 years, or 100 years or whatever. Well then it wouldn’t make any difference, as it wouldn’t divert any state resources to debt repayments for the foreseeable future. Japan, for instance, has a national debt of around 250% of GDP, but there’s no a whimper from bond markets – its borrowing at negative rates I believe. Point is is that it is not indebtedness per se, but the burden of debt payments which is important. Principal payments can be rolled over by issuing new debt. The level of indebtedness would fall if nominal national income is growing sufficiently. When we look at Ireland we see the picture is quite similar to gross debt – in the middle in GDP terms but at the high end in GNI* terms, which is the most relevant indicator. Though at the high end we’re quite close to the UK, Spain etc. So it appears that we are at the high end, which suggests constraints on borrowing. But is this true.
It’s worth mentioning that the current period is a period of unprecedentedly low interest rates, so that just looking from a comparative perspective can be misleading. In 2018 the interest payable, or the debt burden was actually below the level we we were at in 1999, when the Celtic Tiger was roaring. For most of the history of the state the burden has been about 2% - the 2000s were actually unusual. So we’re a little above the historical average. However the growth prospects of the economy are much better today than they were 50 years ago, so we have a much greater capacity to reduce our debt burden through increases in nominal GDP. Point is, aside from Brexit, I don’t think the level of concern about our national debt is warranted. Are there risks? About 95% or so of our debt is fixed interest, so the burden on existing debt will not rise if interest rates rise. The cost of issuing debt today is also at historically low levels. Of course debt will need to be refinanced at some stage, say 10 years from now, and that’s something to be considered. Recall that interest rates are so low because of ECB QE, which includes purchases of government debt. If we were to flaunt fiscal rules, the cost of borrowing would surely rise as the ECB has the ability to reduce purchases. But as long as we live within the rules and avoid the naughty step, debt financed public investment should be measured against whether the increase in economic growth compensates the higher debt burden. Given the cost of borrowing is low, it would suggest space for financing investment.
Turning now to the other key fiscal policy issue corporation tax. It’s useful to look at the structure of Irish taxation through time. Dividing taxation revenues into their main components, we see that the 2017 reliance on corporation tax is not unprecedented by historical standards. In the early 2000s, CT was 13% of taxation. The big difference between now and then is that today a larger part of revenues are based on profit shifting/avoidance rather than real investment attracted by low rates. Moreover, changes to the international tax regime in the near future is likely to lower Ireland’s revenues, perhaps considerably. OECD figures run dry in 2017.
So using more up to data revenue figures we report total tax in absolute terms and as a %GNI*. We see that total taxation excluding CIT has fallen by 1.3% of GNI since 2013 and CIT has increased by some 2.2% of GNI*. IFAC reports that some €3 billion to €6 billion of the €10.4 billion corporate tax receipts received in 2018 could be considered excess, suggesting considerable reliance in recent times. IBEC suggests the potential losses from international tax reform to be about 1bn. Even if 6bn is on the high end, the fact that general taxation has fallen relative to national income while CT has surged suggests that the precarious reliance on CIT is, in part, policy driven.
Here we look at how much extra revenue the state would have had under different scenarios. The first column show how extra revenue would have accrued to the state had the share of non CIT tax remained constant as a share of GNI*. Of course this is a simple calculation – the tax cuts boosted national income, and similarly if tax remained the same and the increased revenue was spent elsewhere – that would also affect GNI*. Nevertheless we see that with a constant share of GNI*, we would have had an extra 600m in 2015 and close to an extra 3bn in each of the last three years. That could have been used to fund one off capital investments, such as in the area of housing, could be allocated toward a Brexit fund, or many other items. Importantly if the surge in revenues were used to fund one-off projects then we would be much less vulnerable to a fall in receipts. The second column shows that extra revenues the state would have made if instead of reducing non-CIT tax by 1.3% of GNI* it gradually increased it by that amount over the 5 years. Again we significant revenues increases which if used to fund one-off allocations would insulate us from a worst case scenario of corporate tax reform.
Abstracting from a no-deal Brexit, there is scope for borrowing to fund investment. Assuming that a no-deal does not happen, continued reduction in tax would increase reliance on CIT. Austerity in a slowing economy has a greater effect on income than stimulus in an expanding economy. If no-deal does happen, I would suggest there is some room for borrowing, if we breach the fiscal rules closing the budgetary gap should emphasise increasing revenue, not reducing spending.
Robert Sweeney, TASC post budget 2020 analysis 16 Oct 19
Post budget 2020 analysis
Storm clouds are gathering
• No-deal Brexit
• Corporate tax and fiscal policy