From budgets to borders, we must break free from knee-jerk decision-making

Online EditorArticle

By Cormac Lucey

There was broad dissatisfaction expressed in the country’s opinion pages about the 2019 budget. Very few of those commenting have personal experience of operating inside Ireland’s political system and its constraints. The primary limitation is that every government wants to be re-elected. Decisions are therefore almost inevitably oriented towards sustaining ministers’ political popularity, and this can produce strange consequences.

In Ireland we ask our income tax system to do an awful lot. It generates far more revenue than any other source of governmental income. Next year, it is budgeted to bring in €22.9bn out of a total projected tax take of €57.9bn. Total income tax revenues next year are expected to be 168% of their 2007 level, while the overall tax take will reach only 123% of its 2007 peak.

It is therefore unsurprising that central government should seek to boost alternative revenue sources. Jim O’Leary, a senior research fellow at the Whitaker Institute in NUI Galway, published a paper examining two such efforts over recent years. O’Leary’s paper, titled How (Not) to Do Public Policy: Water Charges and Local Property Tax, sought to address how good policy ideas were generated in practice, and how policies were designed, implemented, communicated and subsequently reviewed. It also asked how the process of making policy could be improved.

His study examined a recent policy success, the local property tax (LPT), and a recent policy failure, water charges.

O’Leary believes the introduction of the LPT was successful because its design anticipated implementation challenges. In part this was a consequence of the failure of an earlier version, the residential property tax, which was introduced in the 1980s. The 2009 budget had also seen the successful — from a revenue-raising perspective — introduction of the non-principal private residence charge. Its success was partly down to its low level — €200 a dwelling — and the fact that it targeted the generally law-abiding and tax-paying constituents of the community.

The 2009 Taxation Commission, chaired by Frank Daly, head of the Revenue Commissioners at the time, gave considerable thought to the design of a workable property tax, and this template was largely followed.

The commission proposed an annual recurring property tax to be applied to all residences — with the broad exceptions of local authority and social housing — to be based on the property’s value on the open market and to be payable by its owner. It also proposed that regard had to be given to ability to pay through the provision of a general waiver for homeowners with incomes below a certain threshold, as well as an option to defer payment in certain circumstances.

The commission considered, but didn’t endorse, an idea often advanced by economists: a site value tax. It accepted the economic rationale of such a tax but concluded that it was not practical, given the challenges in constructing the requisite site value database and system, and the difficulties in explaining such a tax to the public.

The decision to introduce LPT was formally announced in the national recovery programme, published in November 2010. At that stage the state’s finances were under acute pressure, but the troika of the EU, European Central Bank and International Monetary Fund had yet to arrive. It is therefore not correct to suggest that property tax was imposed on Ireland by the troika even if its implementation, once committed to by government, was closely monitored.

The LPT is now counted a success, even if the annual revenues it brings in — expected to equal €980bn this year — are less than 5% of the income tax take and LPT’s introduction has had no real discernible impact in reducing the income tax. O’Leary warns the success of the LPT may be “provisional” in one aspect: the political system has yet to demonstrate its capacity to defend and champion the levy.

Property revaluation for the purposes of updating liability has been postponed once and may be postponed again. At the last general election, Sinn Fein’s manifesto contained an unambiguous commitment to abolish LPT.

But at least LPT is still up and running. A number of aspects relating to water charges made their introduction very difficult. A decision to introduce charging for water could have been made, yet the overarching goal of public policy was to establish a utility that could borrow independently to finance a heavy programme of investment in water infrastructure.

The water utility had to be classified outside the general government sector by passing the so-called Eurostat test. This was a much more complex test than originally expected. And, in practice, it meant that the average household charge had to be higher than it would have been otherwise.

The design of the initial tariff structure was also constrained by the decision to grant a “free” water allowance to all households. This meant the general charge per unit of water had to be higher, which in turn meant the range of annual household bills was increased. O’Leary believes a more incrementalist approach would have offered a much better chance of success.

Such an approach was proposed by the Taxation Commission in its 2009 report. It recommended that charges be gradually raised from an initial modest fixed amount to a full cost recovery level based, eventually, on volumetric billing. O’Leary reckons that the introduction of water charges was driven by a vision that would have been more appropriate for a seven- to 10-year time frame than a three- to five-year period.

Are there areas of public policy where we are blinded by the pursuit of a short-term goal — such as getting water investment off the books of the public finances — from other, more valid goals — such as slowly winning acceptance for water charges?

I fear an understandable desire not to see any controls at all on the border is blinding us to the dangers of alienating unionists in Northern Ireland and pro-Brexit voters in Britain and potentially emerging as a Brexit deal-breaker for the rest of the EU.

Is the likely cost of minimal border controls greater than the costs of inflexibly insisting on no controls whatsoever? Is it not strange that this question has not been publicly considered? We live in a republic that is more reflexive than reflective.