The economic crisis: some suggestions

Jim Stewart06/12/2009

Jim Stewart: The economic crisis has revealed failures in many areas:- regulation, industrial policy, tax policy, corporate governance and planning. Recent flooding has underlined the almost total failure of our planning system. In view of these failures, the view of the Government in the pre-budget outlook that “repairing the banking system”, “restoring the public finances” and “fostering sustainable employment through improving competitiveness” would provide conditions for economic recovery is absurd. The paucity of new ideas is perhaps best illustrated by one of the OECD’s proposals to reform the labour market, requiring “voice-over actors, freelance journalists and session musicians” to be subject to competition law (OECD, 2009, p. 122). Proposals such as these indicate, perhaps, an urgent need to review our monetary contribution to the OECD.

A central plank of policy on competitiveness is that wages in the public sector are far higher than those in the private sector. Recent reports by the OECD and IMF have largely repeated these assertions. However, Foley and O’Callaghan, in a recent SSSI paper, convincingly argue that the differences have been exaggerated (for example, more public sector employees have a third level qualification or are managers or professionals than in the private sector).

However, it is also the case that wage levels for certain key sectors are too high. The differential between the lowest paid and the highest paid is also too high in all public and private sector organisations. Reducing this differential in the public sector would not solve the economic crisis by itself. It would contribute to reducing the budget deficit but more importantly, it would make more earnings revisions acceptable to other groups whose earnings are well above average levels in Ireland, or comparable groups in other countries (academics, hospital consultants, elected politicians, judiciary, regulators, etc.).

A well-targeted fiscal stimulus should be a vital part of current strategy. Such a fiscal stimulus should be aimed at job-intensive sectors such as tourism. Well designed incentives could encourage those who are currently in employment, and who have increased their savings rate, to increase consumption. Careful targeting and design could ensure that this increased consumption benefited the Irish exchequer through increased VAT yields, rather than the UK exchequer.

Graduate and youth unemployment should be tackled by subsidising employers to provide work place experience and training. Employers would not be required to pay such individuals; rather, payment could consist of continuing or establishing social security payments. Subsidies to employers of young non-graduate adults should be higher to compensate for the likely greater costs and inputs by employers.

Industrial and innovation policy needs to be seriously rethought, and not just as a cost cutting exercise as in the McCarthy/Department of Finance proposals. For example, there has been strong criticism of McCarthy/D of F proposals in relation to funding of research in universities, but the point not made by McCarthy/D of F, is that other countries have very successful innovation, internationally competitive firms and a strong science base without the presence of world class Universities (Germany has no university in the THES top 50, and just 2 in the top 100). Economic success does not necessarily follow from the presence of ‘world class Universities’. These issues need urgent focus.

There is scope for raising additional taxation through removing tax expenditures. The Commission on Taxation (p. 315) identify 17 tax expenditures not examined because decisions were taken in the budgets of 2006 and 2009 to discontinue them. However, many live on for existing projects and ‘projects in the pipeline’, as in the case of accelerated capital allowances for hotels.

There is considerable scope for reform of tax regime for pensions in order to support existing State pensions and supplementary pension arrangements. For example:- extending taxation on tax-relieved lump sums, in particular those above the limit of €5 million set in 2005, and reducing tax allowances for those who are retired and have earnings well above average earnings.

The renewed programme for Government as originally published planned a uniform tax rate of tax relief on pensions of 30%. This was subsequently republished as 33%. However, as advocated by TASC, relief should be granted at the standard rate

Posted in: Fiscal policyFiscal policyTaxation

Tagged with: tax reliefsfiscal stimulusjobs

Prof Jim Stewart

James Stewart

Dr Jim Stewart is Adjunct Associate Professor at Trinity College Dublin. His research interests include Corporate Finance and Taxation, Pension Funds and financial products, Financial Systems and Economic Development.

He is widely published and his titles include Mutuals and Alternative Banking: A Solution to the Financial and Economic Crisis in Ireland (2013), Choosing Your Future: How to Reform Ireland's Pension System (co-author, 2007) and For Richer, For Poorer: An Investigation of the Irish pension system (2005).


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