|
|
Wednesday, 24th April 2024 |
| Allocation of scarce resources |
Back |
| Oliver Mangan calls on the Minister to practice the true art of economics in the upcoming Budget: the allocation of scare resources. |
The first thing the Minister must do is recognise that the changed economic circumstances have major implications for budgetary policy. As the Minister found out this year, the slowdown in economic growth implies that he can no longer rely on the buoyancy of tax revenue to finance large increases in government spending and deliver big tax cuts. The Minister must now practise the true art of economics - the allocation of scarce resources.
In this regard, capital spending remains a high priority given the shortcomings in the physical infrastructures of the economy. The emphasis must be on capital spending on transport in particular, as well as on measures to improve the capital infrastructure of the BMW region to remove impediments to inward investment.
Cut spending
Curtail the rapid growth of current spending. Total gross spending on current supply services has increased by 32 per cent in the last two years and by 54 per cent since the government took office in 1997. The government had promised to keep the rise in current spending to 4 per cent per annum. With growth in tax revenue now decelerating well into single digit territory, the growth rate of current government spending needs to be reined in to maintain order in the public finances. Note this is not a call for a cut in current spending, even in real terms, but rather for more moderate growth in spending.
In this regard, there is considerable pressure on the government to increase health spending. However, government spending on health has almost doubled in the past four years with little sign of much improvment in the service.
Poor administration, vested interests and inefficient allocation of resources characterise the health service - just ask those who know best , namely nurses.
Certainly provide more resources for health spending but the Minister needs to ensure that the taxpayer starts getting a bang for his buck in this area.
Housing
Row back on intervention in the housing market. The housing market is now characterised by falling prices, slower sales, declining starts and yet, sky high rents. Thus it’s time to begin unwinding many of the interventionist measures put in place in recent years to calm the housing market. Mortgage interest relief should be restored for investors, certainly in the case of high density developments at a minimum. The current penal rates of stamp duty should be cut right across the board. Meanwhile, the 20 per cent social housing criterion and two year guillotine on planning premissions should be re-examined as they appear to be impeding supply.
Tax bands
Focus income tax cuts on allowances and bands. With limited resources available, the Minister should leave the current 20 per cent and 42 per cent rates unchanged and concentrate tax cuts instead on increasing allowances and bands. Income tax rates have been cut substantially in recent years and the focus should now switch to getting more people out of the tax net or onto the lower tax rate. He should increase the PAYE allowance, in particular, as this is a good means of providing tax relief for low paid workers. In reality, it partly individualises the personal(tax free) allowance.
The Minister should also remove the anomoly that has arisen with the individualisation of the standard tax band whereby couples with the same total income may face significantly different tax bills because of the non-transferability of part of this allowanceband. The transfer of all of this allowanceband should be permitted between spouses. Furthermore, the sound economic idea of the individualisation of the standard tax band might become more politically acceptable if the Minister allowed non-working spouses retain part of this allowance band, e.g. give them a third or half of the band that applies to taxpayers.
PRSI
Reform the PRSIhealth levy system. The PRSI and Health Levy system has become a complex structure of different allowances, thresholds, rates and income ceilings. The Minister has indicated that he will try and rationalise it in this budget. The PRSI and Health Levy for employees should be integrated into one system with two rates and no income ceiling. The lower rate would apply on earnings above a certain income threshold of say ?30,000. At present, there is an income ceiling of ?28,250 and 4 per cent rate for PRSI contributions and no income ceiling and a 2 per cent rate for the Health Levy.
The removal of the income ceiling of ?39,000 on the employer’s 12 per cent PRSI contribution rate in last years budget represented a big increase in labour costs for many companies. It also eroded some of Ireland’s competitive tax advantage in attracting foreign companies. The Minister is unlikely to reverse the move completely. However, he should consider introducing a second, much lower PRSI rate to apply to income above a certain threshold of say ?50,000, especially given the need to attract new industry following the recent spate of closures in the high-tech sector. |
Oliver Mangan is chief Bond Economist at AIB Group Treasury.
|
| Article appeared in the September 2001 issue.
|
|
|
