Stephen Kinsella

Friday 25 July 2014

Think-tank's economic blueprint a step in the right direction

Published 08/07/2014|02:30

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Finance spokesman Michael Noonan
Finance spokesman Michael Noonan

We all enjoy beating up the government. They do a lot of things incredibly badly, and it isn't hard to find incompetence when we look for it, especially when it comes to economic policy (a policy is a course or principle of action adopted or proposed by the government, for example, the policy of repaying all bank-related debts). Policies can be good, they can be bad, and the role of policy in Irish society is often not well understood, even by the people who are supposed to implement these policies. What the government does is important, its decisions affect millions of us, and critiquing aspects of the government's performance is critical to a functioning democracy. The fact that we can criticise, analyse, and even lampoon our leaders is often taken as proof our society is doing well.

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But it is often too easy to overlook moments when the government or its civil service does a good job. One crucial aspect of economic reform is estimating the likely effects of policies on the economy before they happen. Say you want to drop income taxes by 5pc in one year, or introduce a wealth tax, or increase female labour market participation by 10pc over three years. How would this actually work?

Every one of the reports into the economic crisis reflected on the lack of technical ability to do this work within the government and recommended the capacity be built up over time by subsequent governments.

One of the responses to these reports has been to introduce the Irish Government Economic and Evaluation Service to increase the level of technical expertise at hand when policies need to be evaluated.

In a recent paper, IGEES economists Niamh Callaghan, David Hegarty, Terrence Hynes, Matt McGann, Brendan O'Connor and Laura Weymes look at costing some of the reforms suggested in the medium-term economic strategy adopted by government last year.

They use the paper to lay out a sort of blueprint for how policies should be evaluated within government and give several examples around banking and finance, labour market reforms, tax policy, and others.

Think about a disastrous policy like e-voting machines, or decentralisation running through these questions and emerging in the same form afterwards.

First ask: What is the rationale for doing a reform in the first place? 'Because my constituents would benefit hugely' would presumably not be an acceptable response. Second: What channel would the reform work through? Would it work through changing interest rates? Or thirdly: how would the macroeconomy be affected by this policy?

Fourth: how would a few of these reforms work together? What is the aggregate impact of all of these policies on the economy?

You might think: why don't they do this kind of thing already?

Well, they probably do, in some cases, but not in such a detailed way, and they certainly do not consider the aggregate effects of all the policies together.

One example I've talked about before a lot is moving how you get taxed from taking part of your income to taxing your property. There is a lot to recommend a movement in this direction, mainly because property taxes don't affect your productivity that much. Income taxes do.

The authors find that if the government increased the property tax rate to get €1bn extra there, but decreased income taxes by an equivalent amount, we would see an increase in growth of 0.25pc, and a decrease in unemployment rate of 0.5pc by 2020. Right now our unemployment rate is 11.6pc.

If the policy worked to reduce this rate by 0.5pc, that's 20,000 people. It's easy to see why these policies really, really matter, and why analysing how these policies work together matters.

What happens when labour market activation programmes get better and more targeted, which decreases the unemployment rate, and at the same time you change income and property taxes?

The economists have a stab at answering that too.

This is good stuff folks, done by the Departments of Finance and Expenditure and Reform. It is not only encouraging, and well done, but it provides a framework for other departmental activities and should give the IGEES a big boost in terms of seeing high quality output coming from their ranks. It is also publicly available, for wonks like me to comment, critique, and obviously in this case say 'well done'.

The paper isn't perfect – all the reforms are supply side, meaning the government is spending much more money or changing how people invest and save, and so forth.

There's more work to be done here, a lot more, but this is a large step in the right direction.

Economic commentators bash the government too easily sometimes, and when we see good work with potential, that should be highlighted too. More work like this, please, from our new economists.

Stephen Kinsella

Stephen Kinsella is a senior lecturer in economics at the University of Limerick

Irish Independent

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