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Saturday, 20th April 2024 |
| Developing a medium term economic framework is key |
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| Dominick Sutton believes that constructing a medium term economic framework is the key to a successful budget. |
Over the past decade the Irish economy has made remarkable progress in catching up with income levels prevalent in other rich OECD economies. In a sense this process reached maturity in the growth spurt of 2000. The challenge for the government - and successor administrations - is to move from this catch-up phase to a new medium-term framework for setting national economic policy setting.
In this it has two clear options. One is to follow the US and adopt a high growth rate-oriented policy. This would involve greater economic flexibility, lower taxes and limited government service provision but at the cost of greater inequality and potential social tensions. The other options is to follow a Continental European model that stresses greater equality and social safety nets but at a cost of lower economic growth and higher taxes than in the alternative approach.
For a country that has achieved low unemployment and a high per capita income level either policy choice is legitimate. However, a choice must be made. Attempting to develop economic policy without a medium term framework runs the risk of a hybrid policy that ends up producing low growth and high inequality. This choice is essentially political and in a democratic society the citizenry should be given the opportunity to select its preference. To do so would involve the exploration of the cost and benefit of both approaches and may need the mandate of a general election. Nonetheless, the Minister could use the budget in order to kick-start this process, if even by only including an aspiration statement to indicate the medium term framework from which the specific policy recommendations flow.
Control public finances
Control public finances - especially payroll growth. Whatever the medium term framework choice made, a vital part will have to be a strict control of government finances. With public sector pay comprising some two thirds of real government expenditure as reported in the national accounts (or, put another way, approximately 8 per cent of GDP, larger than the contribution of the Agriculture (4.6 per cent) sector) this must, by necessity, involve strict payroll control. This is not synonymous with low pay - the economy needs to attract and retain highly motivated public sector employees. What it does mean is that the government must be careful not to spread its staff and financial resources too thin by ensuring that they are concentrated on the most pressing public needs.
Although the budget does not directly address these policy choices it could concern itself with setting the limits on pay as well as setting out a framework within which the benefit-cost relationship can be explored. This is a legitimate area for the Minister of Finance, who should be concerned with ensuring that the maximum benefit is gained from the public’s funds as well as guaranteeing that the overall spending totals do not exceed a given maximum.
Infrastructure
Continue the process of upgrading the nation’s infrastructure. Part of the overall government budgetary stance must be the continuation of work on improving infrastructure. However, 2002 is likely to prove to be a difficult year for planning large-scale capital expenditure. Nonetheless, the continuation of this investment will reap rewards in the future by generating higher productivity and reducing the stresses of fast economic growth. Given the budgetary pressures the minister is likely to be facing this year it would be more appropriate for funds to be used for continuing infrastructure projects than for further tax cuts, particularly for high earners. However, tax concessions of some degree are likely to be forthcoming and rather than compromising the infrastructure investment plans the authorities should extend the development of public-private partnerships.
There is also a macroeconomic benefit to this in what is likely to be a time of continued economic uncertainty. Such infrastructure is not only needed for future economic growth but is also a much better form of economic stimulation than tax cuts or increased current expenditure. With signs of weakness in the construction sector it may also prove to be good value for money for the state to maintain its ambitious infrastructure plans.
PRSI
Absorb PRSI into the overall taxation system. One specific microeconomic step the Minister should take is to negate the anti-employment impact of his removal of the ceiling on employer PRSI at the last budget. The timing of that step may prove to have been unfortunate, in that it increased the cost of employment for multi-national firms in Ireland at a time when they were coming under financial pressure to shed capacity and employees. The optimum approach would be to absorb PRSI into other forms of taxation and totally remove this tax on employment. Short of that the Minister should recap employers PRSI so as to reduce the cost of citing high earning employees within the state and preferably reduce its rate as well.
This may be costly for the exchequer but the Minister should be mindful to avoid putting the needs of reaching fiscal ratio targets in front of the health of the economy. In the uncertainties the economy is likely to be facing towards the end of the year a restrictive policy in order to meet a given fiscal surplus target may be a luxury too expensive to afford. Fortunately the proximity of the next general election is likely to rule out that particular risk.
Training
Reward training and boost the national skills set. One other thing the Minister can do to increase the economy’s potential growth rate is to boost in-work education and training. Ireland is justifiably proud of its educational system but this system ceases for the most part once full time employment is entered. And yet, that is the time when often further academic or vocational training can be the most valuable. Many employees finance their part-time studies themselves, often with the aid of employers. Many employers finance further training courses for their staff. However, the state - which potentially has as much to gain from the further education in term of greater economic and productivity growth potential as the individuals concerned - does little to finance this endeavour. I would like to see the Minister introducing a specific tax credit or relief for education and training courses undertaken by employees. This tax relief can be to the employer, in the case of employer-provided schemes, or to the employee for part-time etc studies. The amounts are likely to be relatively modest in the overall scheme of things but could make a significant difference to the skills level of the workforce. |
Dominick Sutton is director and chief economist of Investec Ireland Ltd.
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| Article appeared in the September 2001 issue.
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