Monday 16 September 2019

Those pushing the property tax would lead us over a cliff

We should be able to punish the economists who give bad advice to public servants, writes Marc Coleman

WHEN SIX Italian scientists were jailed for failing to predict an earthquake in the town of L'Aquila -- one that that killed over 300 people -- some felt it was a little harsh. Others took inspiration from it: Why, they asked, not arrest economists who failed to predict Ireland's economic crisis?

Having warned about the cliff the economy was headed for since July 2005, while stressing Ireland's amazing long term potential, this economist is not afraid of such a trial. But others should be.

Phil Hogan and the entire Government should realise that those now peddling the myth that we need a property tax are -- however well-intentioned -- pushing us down a road of economic and political disaster.

As CSO last week showed, a nascent recovery began during the summer. A recovery that advocates of a second property tax will kill stone dead if they are listened to.

Between June and September -- that time when the Dail is in recess and no one is thinking about the Budget -- was a time for consumers and home buyers to act as they would normally act if the Government were entirely focused on reducing the wasteful levels of current spending.

They pushed retail sales up by 2.4 per cent and house prices up by 1.4 per cent. Not bad for just three months. But destructive speculation about property taxes has caused the ESRI/KBC consumer sentiment index to plunge in September. Unless quashed, this risks reversing the summer's welcome breakthrough.

Advocates of property tax peddle the myth that local government is "starved of funds". With a €6bn annual spend and more employees (32,000) than the EU Commission, this is nonsense.

Sure, local services are starved of funds. But that is because the lion's share of the €6bn spent on local government is ring-fenced by the Croke Park Agreement, or wasted on bureaucracy, duplication and expenses for councillors. While front line local government staff earn modest incomes -- and should be protected by Croke Park -- the salaries for the considerable number of administrative and managerial staff head count are simply an affront to taxpayers: Up to €83,000 a year for an arts officer, €89,000 for a chief fire officer and €142,000 for a county or city manager are the salary levels for many in local government. So are expense claims such as the €10,000 claimed by one councillor for doing an MBA!

Phil Hogan plans to save €420m a year by reforming local government and that is a highly welcome start. And it should be said that in just two years as minister, Phil has done more to reform local government than all the ministers before him. But out of a total spend of €6bn a year, at least €1bn is being wasted by duplication and overpay.

Still, in a stroke of genius, Phil has put into his plans a brilliant idea that could not only save the fragile recovery from a disastrously ill timed tax: It could also save the government parties from a meltdown at the local elections.

Facing the threat of unemployment, negative equity and debts incurred to pay stamp duty, voters are right to decisively reject of a second property tax and to call for revisiting the Croke Park Agreement and a more robust approach to cutting spending.

Economists advising government to "do both at the same time" are like the scientists who failed to warn L'Aquila about the earthquake: Cutting wasteful spending and overpay does not harm the economy or recovery. Taxing those in fear of job joss does.

Any economist worth his or her salt knows that tax increases on vulnerable low income workers should be a last resort pursued only after every last drop of waste has been squeezed out of local government spending.

At €6bn a year there is still much fruit left to pick: Careless procurement practices for local authority contracts, wasteful expenses; duplication of local government structures and functions and, the highest rates of local government pay and pensions anywhere in the eurozone.

Pouring water into a leaking bucket while trying to fix it at the same time, the advice of some economists, is nothing more than a recipe for wasting more resources. The hole in the bucket should be fixed first. Then, and only then, should more resources be put into it.

Phil Hogan could also be much more ambitious in merging local authority structures. Local bureaucracy and local democracy are very different things. Local bureaucracy lumbers job creators, rate payers and home owners with the cost of expensive council buildings filled with administrative staff. Local democracy involves listening to and responding to local citizens. Reducing the former is not in conflict with the latter, it's consistent with it.

Another fallacy is that a property tax will "broaden" the tax base. With one property tax already -- stamp duty -- it will do no such thing. What's more, when rates were abolished in 1977, VAT was cut by 5 per cent. Unless there is a corresponding reduction in some tax rate that accompanies a second property tax, it will just serve to raise the tax burden. And strangle a recovery at birth.

Phil Hogan should avoid the advice of insiders and listen instead to the good sense of the electorate, two-thirds of whom reject a property tax and want to see the Croke Park deal revisited. He has wisely endorsed the principle that local taxes should be set by local authorities.

He should avoid introducing the property tax until reforms and cost cutting have been fully implemented -- 2016 at the earliest. Then the reformed authorities can introduce the local taxes their citizens want. Economic and political earthquakes should be avoided at all costs.

Marc Coleman presents 'Coleman at Large' each Tuesday and Wednesday from 10pm to midnight. @marcpcoleman

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