To save Ireland we need to turn the fiscal clock back

It’s a commonplace that the Celtic Tiger died in the early noughties, when real growth was replaced by false growth based on inappropriately low interest rates, an over-stimulated construction sector, and excessive pay increases for all sectors.  At the same time, the public sector and its various agencies grew stale and bloated.  Proper management skills withered on the vine, as the solution to every problem became the throwing of money at it.  Those who shouted loudest, or who had an inside track, got an even greater share of the spoils.  Welfare benefits began to outstrip those available almost anywhere else.

And now that the tide has gone out, we see that the State’s finances are in ruins because we have an inflated public sector cost base and welfare budget, but our tax revenues have shrunk dramatically (the bank bailout is not the main reason we are bust).  The fiscal gap will have to be closed by higher taxes, lower public sector costs and decreased welfare benefits, and the process has started.  It is a condition of the bailout deal that we travel down this road, but most of what we are going to do would have to have happened even without the bailout.

We need to look back to a time before things went pear-shaped, to a time when tax rates and yields were sensible, when we got reasonable value for money from our public sector, and when welfare benefit levels were appropriate to our real standard of living as a country.

Realistically, this would be sometime around 2002.  At that time, we hadn’t yet experienced a prolonged period of low Euro interest rates which was to prove such a part of our problem; we hadn’t seen the worst of the crazy pro-cyclical property incentives and unnecessary tax cuts; and the three-card-trick of public sector bench-marking lay in the future.

Did we feel poor as a country in 2002?  Were welfare recipients marching in the streets at the low level of benefits available?  Were civil servants and politicians noticeably underpaid?  Were there PAYE marches as there were in the 1970s?

No, no, no and no.

So let us turn back the clock, fiscally speaking, and revert to a position that is acceptably fair and is affordable.  This will involve further big cuts in pay, pensions and benefits, combined with additional tax increases for all taxpayers, including a substantial annual property tax.  Let’s do it, and do it quickly.   While we are at it, we need to get smart with our policy on the statutory minimum wage by re-setting it every 6 or 12 months at the average of the currently prevailing minimum wage in a “basket” of competitor countries.

And let us be prepared to resist the shouts and roars from politicians, the media, NGOs and commentators that we are being savage in our treatment of this sector or that sector.  After all, all we are doing is trying to reconstitute the sort of economic and fiscal conditions that applied in 2002.  We thought we were doing all right then, and we were.  The social fabric was certainly not collapsing then, in fact we had a bright future ahead of us and, in contrast to the present national mood, optimism was the order of the day.

New Property Tax proposal includes some offset of stamp duty recently paid – but probably not enough to avoid problems

Back in June, when I made this earlier post in my blog, it was clear that if an annual property tax (APT) were to be introduced, some sort of offset was needed, so that those who had recently bought a house and paid stamp duty would not effectively be paying on the double.     “Perhaps stamp duty payments already made could be allowed as an offset against property tax liability for up to 5 years…..Less important than the precise mechanism is that the Government recognises that some announcement on the principle of an allowance is needed at an early date, to avoid a potential buyers’ strike.”

The good news is that the Commission on Taxation has recognised this in section 4.13: 

FF get windy about property tax …. now it’s time to get worried.

All serious economists agree that Ireland needs an annual property tax on private residences, and not just because extra revenue needs to be raised to reduce our vast public spending deficit.  An annual property tax has merit in its own right, as an alternative to transaction based stamp duties or extra taxes on income.  Ireland is possibly unique in the developed world in not asking owners of private residences to make a realistic contribution to local services (other than bin charges).

The Commission on Taxation report, due within weeks, is almost certain to recommend a property tax.

So we can be confident therefore that the Government will do the right thing, and at the same time get rid of any lingering suspicions that Fianna Fáil will always jump to the  builders’ tune, by following through and implementing a sensible annual tax on residential property.  We can be confident also that FF will put aside any petty party political considerations and do the right thing in this country’s hour of need.

Not.

The front page of today’s Sunday Tribune has a heart-warming story that offers one reassurance that some old certainties remain, that in a crazy and generally unpredictable world there is still the occasional cast-iron verity: that Fianna Fáil will put party before country.

Property Tax / Stamp Duty interaction

Many people will make the reasonable assumption that if there is to be an annual property tax on residential property (and there certainly should be), then the current high rates of Stamp Duty on purchases of such property will be reduced at the same time.  This highlights a potential transitional problem.  In particular, unless