Green Party Fiscal Policy Statement National Economic Dialogue July 2015 Summary of expenditure proposals: million Education 350 Public Transport 150 Health 400 Welfare Spending 200 Public Sector Pay 300 Overseas Development Aid 100 Total: 1500 Off-balance sheet capital investment The spending proposals above could be complemented by significant off-books investment in social housing, energy efficiency and water infrastructure. In this submission we outline how future income streams from rent from new social housing renting models along with savings on energy bills can be matched with long term pension and European Investment funds to provide a badly needed boost to capital investment. Promoting a new local enterprise economy We support the introduction of a new regional public banking model which will lend to small and medium business in regions using the same professional not for profit banking model that operates in Germany. We advocate the revision of the current property tax to a site value model which would encourage the building of new housing. Allocating the future income to local authorities could allow for reductions in commercial rates to further support local business.
Green Party Vision The Green Party believes that we need to learn from mistakes in fiscal policy that led to our economic crisis. While the economy is starting to grow again, we do not believe a business as usual approach to budgeting and economic strategy will serve our country well. The delivery of public services is vital for an effective modern economy. If we are to bring emigrants back to Ireland, we must provide the same standards in health and education here as in Canada and Australia. Rather than providing for immediate tax reductions, we believe available revenue should be used to both improve the quality of those public services and to cater for demographic pressures. The productive capacity of our economy equally depends on having the right capital infrastructure in place. The government s further planned reductions in capital spending will create bottlenecks in our country which will hamper recovery. We believe there is space to raise additional offbalance sheet spending in housing, energy retrofit and water infrastructure which can both stimulate economic growth and improve our competitiveness. The key strategic economic task for the state in the next five years is to promote the development of a local enterprise economy rather than maintaining our overreliance on foreign direct investment. We believe the introduction of a new public banking model can assist new small enterprises, especially in rural Ireland. We also argue that the introduction of a site value tax system could lessen the reliance on commercial rates and householders, spreading the burden and encouraging local enterprise. It would also discourage property speculation. Public Spending in Ireland: Current Trajectory Ireland is returning to economic growth. There are positive trends in the economy with lower unemployment and positive growth forecasts. However, it is now necessary to wisely invest our available resources to support long term prosperity and to provide basic public services to all citizens. This can only be achieved by increasing public spending and investment and avoiding the short term benefits offered to a small section of society through income tax reductions. There are a range of comparisons with our European counterparts which offer a useful perspective on economic and public expenditure trends in Ireland. The spending and revenue projections published by the government show how these will evolve in the near future. In comparison with other EU member states, Ireland spends less on public service provision and investment in capital infrastructure. Ireland s GDP to public spending ratio is the second lowest in the EU, just above Lithuania. According to research by the IMF, public spending will fall by almost 5% of GDP by 2020, by which point it will the lowest of all Eurozone countries. This has obvious consequences for public service provision. It will not be possible to maintain current standards in health and education or to provide for vulnerable members of society while reducing public spending to these levels. Critical infrastructure deficits will become obvious as a
result of low capital spending. A recent report from IBEC stated that without this investment future prosperity will be greatly constrained. Fig.1. shows the recent dramatic collapse in capital spending in Ireland (source: IFAC) Demographic pressure on public services will exacerbate this situation. Ireland s population is both ageing and growing but, as pointed out by the Irish Fiscal Advisory Council in a recent report, the government s process of expenditure reviews and forecasting takes no account of demographic pressures. According to research by the Nevin Economic Research Institute, spending per capita will fall by nearly 10% in the period to 2020. An ageing population requires increased funding for the health service to, at best, maintain standards but this will be impossible if promised tax cuts are delivered. Finally, Ireland has a high proportion of very young children whose education must be adequately funded. Research by IFAC shows that increased public spending is required to meet demographic and cost pressures. Fig. 2 (Scenario 2) shows what the GDP to public expenditure ratio would look like if these factors were considered. This would require approximately 1.2 billion of extra public spending per annum just to maintain public services at their current level.
EU rules, namely the Fiscal Compact, impose strict limits on public spending in Ireland. It is sufficiently challenging to maintain adequate services while remaining within these parameters. However, current government projections indicate that Ireland will go beyond EU requirements and significantly underspend relative to what is allowable. Research demonstrates that spending could grow at a modest rate of approximately 1-1.5 billion per annum without breaching EU rules. However, this will be undermined by planned tax reductions; each time taxes are cut allowable spending is further limited. Thereby the current government s shortsighted policies risk imposing a toxic legacy of underinvestment and locking Ireland into a low tax and low spend model. We note a recent survey commissioned by the NGO TASC, where 70% of respondents believed that the government should prioritise improvements in public services ahead of reductions in income taxes. We believe that support is available for a balanced approach because of the unacceptable quality of services in certain key areas. There is a limit to the efficiencies that can be gained from tighter budget management. We believe we have reached the point where further reductions in the budget for frontline services do not make sense.
Section 1. Taxation 1. Local Property Tax Reform: Site Value Tax: Site Value Taxation (SVT) is different from the current local property tax system because it is charged based on the value of the site rather than that of the property. This results in several major benefits (Source: Smarttaxes.ie). SVT does not disincentivise improvements to the property. Under the current LPT system, improvements to a property, for example increasing energy efficiency, result in higher charges. SVT does not discriminate between developed and undeveloped land. All land zoned residential could be made subject at the same rate as developed land. As a result SVT disincentivises land hoarding and speculation and can help minimise property bubbles and crashes. It should apply to a much wider area of land, including land banks and undeveloped land. All revenues should accrue directly to the local authority rather than to the central exchequer. Additional revenues could be used to reduce commercial rates that apply to local businesses, thus providing an incentive to small and medium enterprises. The reduction in commercial rates could be set at a level so that the overall effect of the introduction of SVT is revenue neutral. SVT has been successfully implemented in Pennsylvania in the US. It Pittsburgh it has resulted in fewer vacant sites in the city centre (England, Land Economics, 2003) Since the introduction of the local property tax in 2011, several circumstances have changed such that SVT is more attractive than ever: The local property tax was adopted during the height of the economic crisis in the context of an urgent need to raise revenues for the state. Avoiding delays and ease of implementation was the primary argument in favour of the LPT model (Commission for Taxation, REF). This need has been met and the state should now transfer to the best property taxation model available. A tax on vacant or vacant sites has recently been suggested. It it would be more efficient and administratively simple to achieve this through site value taxation, rather than introducing two separate tax systems. In 2014, the Home Renovation Incentive was introduced to encourage homeowners to upgrade their properties and stimulate construction activity at an estimated annual cost of 62m (Budget 2014). This objective could be achieved at a lower cost by removing the perverse incentive to property improvements provided by the LPT system.
Section 2. Off-balance sheet investment 2.1. Strategic Investment Fund Given the large spending pressures faced by Ireland to maintain public services and avoid increasing poverty and deprivation and the constraints on increased spending imposed by the Fiscal Compact, the Green Party supports using off-books investment to fund socially desirable projects which have a commercial return. These include renewable energy, energy efficiency improvements and the provision of water services. Currently borrowing costs are exceptionally low. This represents an opportunity to meet some critical infrastructure requirements without breaching the terms of the Fiscal Compact. Financing investment can be centralised and leveraged through an independent strategic investment fund or bank with a remit to invest in specific sectors. An off-books fund of this nature could reasonably invest up to one billion euro in Ireland annually (NERI, 2015). Such funding could be leveraged with funds available from the pensions industry and the European Fund for Strategic Investment. Improving the energy efficiency of buildings has significant benefits both for householders and society. According to the SEAI, one million houses could be upgraded to BER C2 rating with an average investment of 7,600, or 7.6 billion in total. For each householder this investment would result in average annual savings of 690 over a payback period of 11 years. However, a shortage of upfront finance is a significant barrier to uptake. The Green Party supports the SEAI s proposal for a Pay-As-You-Save (PAYS) model of retrofitting finance which allows householders to secure upfront financing for energy efficiency upgrades. The aggregation of loans at low borrowing costs could make this a viable investment. The precise level of funding required would be determined by the number of applicants. A comprehensive marketing campaign is required to ensure householders are aware of the benefits of efficiency upgrades. Research on the British experience of a PAYS model has demonstrated that the current model of grant supports for home retrofits should be maintained during the transition to a PAYS model. 2.2. Innovative Solutions to Ireland s Housing Crisis (Pension Investment/Social Dividend Fund) The Green Party supports using an off-balance sheet funding programme to significantly increase social housing development. We support the proposals outlined by the National Economic and Social Council (NESC) for the introduction of a cost rental model of social housing which could attract such funding. To provide the necessary capital to support a new building programme, we believe the government needs to go beyond the measures already outlined including the use of funding from NAMA and from the Strategic Investment Fund. We are proposing an alternative off-balance sheet mechanism called a Social Dividend Fund (SDF) which could be used to fund investment in affordable housing. This would involve mandating a
small percentage of capital invested in pension funds towards housing projects in Ireland by requiring pension funds to purchase bonds issued by the Irish Strategic Investment Fund for this purpose. Bonds would have a similar risk/return profile to current investments. We estimate that approximately 200m per annum over a five year period could feasibly be raised using this mechanism. The SDF would sell or lease completed houses to Housing Associations or Local Authorities. 2.3. New Public Banking Model The necessary contraction in the size of the balance sheets of the main Irish clearing banks has left a gap in the lending market which has a particular effect on Irish SMEs. We support the introduction of a new not-for-profit public banking model in Ireland along the lines of the Sparkhausen public banking system which exists in Germany. Ten new regional banks could be established in the next five years operating with a central management and information system. The ownership of these banks could rest with a combination of local authorities and state support agencies. The bank branches would operate on a fully professional basis specialising in loan sizes to small business above those given by credit unions and below the standard loans issued by commercial and investment banks. We believe the Dept. of Finance and the Central Bank should outline the mechanism for the introduction of this banking model over the next year with the gradual introduction of the new regional banks over the remaining years of this five year economic plan. The not-for-profit nature of the institutions would allow commercial loans to be made at more attractive rates for the customer and would build up a cadre of bank officials with specialised skills in local enterprise lending. It would of particular benefit to the development of a new economy in regional areas which are not benefiting from the large scale investment that our larger cities can attract. A key attribute of the public banking model is that deposits raised in a regional area would be lent in the same area thus ensuring more balanced regional development. 2.4 Water Infrastructure We argue that the state should retain a direct funding role for Irish Water into the future which would provide for the necessary investment in water infrastructure while at the same time allowing a free allocation for each individual which meets their basic needs. Such state funding could be complemented by an application for European funding for major water and wastewater treatment projects. We support the concept of a charge applying on water use above that basic allocation but believe that it should be based on a rate that incentivises conservation rather than the current flat rate charging system.
The government s existing budget projections, outlined in the Stability Programme Update, assume the continued direct funding of the company. Therefore, additional resources are not required. Section 3. Meeting Spending Pressures 3.1. Third Level and Further Education Third level education is an area of critical need for public investment. Further, it is an area that provides important direct returns to the economy and supports long term growth. During the economic crisis public investment in third level education decreased dramatically, falling from 78% to 64% of the total revenue of higher education institutions, comparing unfavourably to an OECD average of 68% (Expert Group Report LINK). Of particular relevance is the level of expenditure per student. In the case of first and second level education, real expenditure per student increased through the economic crisis. In contrast, over the period 2003-2012, at third level there was a decrease of a fifth (20.1%) in real expenditure per student (CSO.ie). It is difficult to directly compare the level of state funding per student across EU, due to lack of up to date data available. Comparing the figures for 2012, the most recent year for which Eurostat data is available, shows that Ireland s level of funding for third level was above European averages. However, figures provided in the Report of the Expert Group on Funding of Higher Education demonstrate that the situation in 2015 is dramatically different as illustrated in Fig.3 below: Graph?: evolution in spending levels on third level education per student in Ireland and Europe
Benefits of investing in Third Level Third level education makes an important and quantifiable contribution to economic growth. As recently documented by the Report of the Expert Group (LINK), the economic benefits of higher education are simultaneously public as reflected in overall prosperity, and private as reflected in individual careers and earnings. In Ireland there is a cumulative large positive return to the state on covering the costs of third level education. Ensuring a continuing supply of highly educated graduates is particularly important in this country, given the growth in knowledge-driven sectors of the economy. Less easily quantifiable but no less important is the huge contribution to social and cultural development made by the sector. Funding Requirements: The Green Party recommends that the state should increase funding for third level towards average European levels of funding per student of 5,500. This would involve increasing direct state grants for third level from 860m to 1.16 billion, or a total investment of approximately 300m in 2016. This level of support should be maintained as a minimum in the future. Investment in the sector should be targeted towards: - Preventing further increases in third level registration fees - Facilitating greater participation in Further Education, especially among disadvantaged communities - Increasing the standards and scope of post-leaving certificate and vocational training to provide an alternative to university - Establishing a specialised centre of excellence for research in renewable energy technology Adequate funding is one aspect of ensuring quality third level education. The Green Party s Education Policy outlines the party s vision for the future of the sector. 3.2. Other Education Funding Requirements Budget 2012 reduced the funding available to schools to provide guidance counselling to students. Since these cuts, there has been a 24-25% reduction in guidance provision and a 59% reduction in 1:1 counselling. Guidance counselling supports the mental health of students. In addition, according to the ESRI s Leaving School in Ireland report, guidance counsellors are an essential support for young people from disadvantaged and immigrant backgrounds. The Green Party supports reintroducing ex-quota status of guidance provision in secondary schools. The full-year cost associated with reintroducing full time guidance provision is approximately 32m (Source: Dept of Education submission to Comprehensive Review of Expenditure 2014)
3.3. Health Current government policy does not recognise that demographic and cost pressures have implications for public service provision, not least the health service. There has been no attempt to reconcile bottom up spending demands, including an ageing population and rising costs, with medium term fiscal policy (IFAC, June 2015). This is particularly relevant to healthcare provision as demographic pressures are two-fold, relating to both an increase in overall population and an increase in average age; by 2041 22% of the population will be over 65 compared to 11% in 2006. In general terms, current health care spending in Ireland is low. The OECD s Health Statistics 2014 report found that Ireland s expenditure on health as a percentage of GDP is lower than the OECD average and lower than that of any other Western European country. The Green Party supports increased spending to deliver an improved health service in terms of levels of service and efficiency in the long term. The Green Party vision is for a publicly funded single tier health care system. We note the comments by Minister for Health Leo Varadkar that satisfying unmet needs in the health service would cost between 700m and 1 billion on top of the annual natural increase needed yearly to cope with the rising and ageing population. No form of universal healthcare is possible unless we are willing to find the resources needed to make it work, either from the exchequer or from an insurance-based system. The Green Party s preference is to meet that universal healthcare need from the exchequer rather than through an insurance system. For Budget 2016, there is a need to dramatically increase funding levels to meet cost pressures and demographic pressures. When depreciation in the value of spending and the effect of an ageing population, based on CSO population projections, are considered, this demonstrates that an additional 400m is required to maintain current standards of healthcare provision.
3.4. Transport The transport sector presents an opportunity to reduce carbon emissions while maximising the efficiency of transport systems in cities with associated economic benefits. To achieve this it is necessary to fund policies which encourage people to walk, cycle and use public transport. Public Transport Two recent reports, the Deloitte Report, Cost and Efficiency Review of Dublin Bus and Bus Éireann (2009) and the NTA s economic analysis of Direct Award Bus Contract in the Dublin Market (2013), concluded that, depending on the methodology applied, levels of state support for bus operators are low or at best average by European standards. Fig. 4 outlines the evolution of the PSO subvention to public transport in recent years. These cuts have led directly to price increases for users, disincentivising public transport use and contradicting policy targets which aspire to encourage public transport use. Reduced state support for operators has also resulted in the removal of services from some rural areas. 2015 was the first year in which subventions to public transport operators remained static rather than being cut. However, given the pressing need to transfer to greater use of public transport, it is necessary to increase subventions levels. The Green Party supports increasing the annual subvention to public transport operators to facilitate price reductions for public transport users. A 5% reduction in fares could be achieved by increasing the subvention to operators by 40m (based on CIE s fare revenue for 2015). In addition to this increase which should be linked to fare reductions, PSO contract payments should be increased to 2013 levels to facilitate service improvements, at a total cost of 17m.
Cycling and walking in cities Reaching Smarter Travel targets for cycling requires creating an integrated network in the Greater Dublin Area. The NTA has produced the Greater Dublin Area Cycle Network Plan and a new city centre traffic plan which must now be funded and implemented. However, as outlined in Fig.5, over the period 2013-2018 capital funding allocated to the NTA for cycling, walking and other safety measures has declined significantly. Fig. Evolution of capital funding for sustainable transport, integration and safety (Source: NTA Integrated Implementation Plan 2013-2018) The Green Party supports doubling the allocation for sustainable transport in 2016, requiring a total additional investment of 40m in order to deliver the core components of the Dublin Cycle Network Plan. It is also necessary to implement improvements to cycling and walking networks in urban centres outside Dublin. The NTA should carry out cycling and walking network studies in all regional cities in Ireland. National Cycle Network Capital investment to improve transport infrastructure in rural areas is a priority for the Green Party. The party supports the objectives of the National Cycle Network to create a network of high quality continuous cycling routes reaching all significant urban centres. This offers the potential to encourage tourism outside urban areas and thus contribute to the development of the rural economy. It would have the added benefit of providing a major new amenity for walkers over most its length.
The National Cycle Network Scoping Study, published in 2010, indicated the extent of a potential network with a total length of approximately 2,000km. Since then, 13.5 has been allocated to develop 473km of new cycling routes. However, the new routes are of variable quality and the majority are on-road. Additionally, a large number of greenway projects have been denied funding due to low overall allocations. The Green Party supports providing sufficient funding to complete the overall network. This would require approximately an additional 40m (cost calculated on per km basis) to be made available for new cycle and walking route projects proposed by local groups and authorities which align with the objectives of the National Cycle Network. Active Travel Towns The Active Travel Towns programme was introduced in 2012 with the objective of encouraging a shift from car use to to either walking, cycling or public transport. It aims to deliver this objective in a planned and coordinated manner within a given urban centre. Over the period 2012-16 13m was allocated on a competitive basis to local authorities to implement improvements in the sustainable transport infrastructure of towns outside the GDA. However, only eleven towns benefitted from the programme and funding is no longer available. The Green Party supports issuing a new call for applications in 2016, matching previous funding of 13m, to continue the development of sustainable transport infrastructure outside the Dublin area.
3.5. Overseas Development Assistance The Green Party believes that maintaining and increasing Ireland s contribution to international development is a moral obligation. Taking a leading stance in international development also contributes to Ireland s global influence. In 2000, Ireland, along with other members of the UN, made a commitment to contributing.7% of GNP to overseas development aid (ODA). However, this target has been consistently deferred and no deadline has been set to reach it. The most recent OECD statistics are for 2013. In that year public expenditure on ODA was 637m or 0.46% of GNP. For 2015, a figure of just over 600m has been allocated to ODA (PQ). This represents a reduction both in absolute terms and a considerable reduction in ODA as a percentage of GNP to approximately.37% of GNP, if growth rates included in the SPU are accurate. The Green Party supports setting a firm deadline to meet the 0.7% threshold by 2020. For Budget 2016 this would involve increasing the overall figure allocated to ODA by 100m to a total of 700m. 3.6. Welfare Spending To avoid increasing levels of deprivation and poverty, it is necessary to consider the implications of inflation for welfare spending. Given low levels of inflation, this is less onerous than in other circumstances but still requires significant investment. As an illustration, a 1% rate of inflation requires an approximate increase in welfare spending of 182m (NERI, 2015). Although not advocating a policy of continuous indexation of welfare spending to inflation, the Green Party supports increasing welfare spending by the above amount in Budget 2016. We believe that recent misguided cuts to one parent family payments should be reversed which will require an estimated 12m increase in the budget for next year. Green Party continues to support the integration of the social welfare and tax systems in a manner which provides income support in recognition of the importance and value of unpaid work. This process of integration should begin with the introduction of a refundable tax credit for those people who do not take up their full tax allowance. 3.7. Public Service Pay Agreement We support the restoration of pay and conditions to some public servants with an estimated cost of approximately 300m as indicated by the Minister for Public Expenditure.