Deal fairly and immediately with the fiscal crises

Slí Eile: The fiscal deficit mirrors at least two other deficits -a deficit in non-Government investment and spending and a deficit in social infrastructure to meet the fundamental human needs and rights of all members of society. The key to fixing the fiscal deficit is to address all of these deficits at the same time. In fact, I can't see another way.

Fixing the fiscal deficit by means of a massive and prolonged deflation (=€12bn over three years by current plans) will takes its toll humanly and economically over time - even if it is done purportedly with a 'human face' (more anon in a later blog). Leaving the public sector deficit stand at its current level is not an option either for all sorts or good reasons including the cost of repaying debt for future generations. The public sector deficit needs to be tackled now and not later but it needs to be tackled in a way that is credible, fair and workable from the point of view of maintaining social cohesion and democratic norms of debate and cooperation. In essence it needs to be tackled by a three prong approach:
A Using Public enterprise holding companies to borrow 'off balance sheet' to invest in new technologies, broadband and infrastructure upgrade (transport, early childhood care, primary health care...) - this is the capital portion of the public sector deficit;
B Using the current account to undertake a forensic, targeted stimulus to raise public and private consumption in sectors such as health, education, tourism (where the multipliers are higher than elsewhere) - the contra-cyclical response to a cyclical deficit;
C Close the structural deficit by raising taxes through a combination of measures on asset-rich and income rich groups coupled with broadening of the tax net.
Very approximately (estimates will vary) A, B and C account for about one third of the current annual borrowing level. There is scope to increase these with a view to generating recover in tax revenues. What is striking about the difference in estimates of tax between the Pre-Budget Outlook document for 2010 and the April Supplementary Budget macro-economic outlook is the collapse in revenues and GDP.

There is a job of work to be done in convincing the EU institutions. However, the schedule is already slipping and there is mounting evidence that we are deflating ourselves into a fiscal deficit trap by neglecting the non-government investment and consumption deficit.
We are confronted with a rapidly evolving situation and one in which could seriously undermine social cohesion, democracy and any prospects of a rapid recovery. A number of critical steps are involved under C:
- Fast-track reform of taxation through an emergency budget by immediately ending all tax breaks and non-standardised tax relief except where there is an immediate administrative or economic imperative to do otherwise;
- Raise the top income tax rate to at least 48%;
- Stop postponing carbon taxes - phase in a significant shift to consumption energy-using taxes over a three year period beginning now;
- Raise Corporate taxes to 15%;
- Introduce property taxes on second homes as well as property over €1million;
- Fast-track local revenue raising and linking these explicitly to local services where people can see where their tax money is going (early childhood care, local health centres, community facilities);
- Introduce a higher super tax rate to apply to salaries over €250,000;
Under A
- Fast-track those elements of the Capital Programme that are labour-intensive and that will yield quick gains in terms of schools, hospital facilities and social housing.
Ideas and objections welcome.

Posted in: Economics

Tagged with: recovery