Jim Power: Value for money has to be the tax mantra
Using taxpayers' money to deliver a better level of public services will be easier said than done, writes Jim Power
Despite the mysticism that many economists seek to shroud economics in, it really is quite a simple discipline. It basically seeks to examine how scarce resources can be allocated to meet needs that are basically insatiable, in the best manner possible. The government is a key player in the economic system, as one of its main roles is to gather revenues and allocate those revenues to achieve the best possible outcome.
That is easier said than done, as everybody has a different definition of the best possible outcome. It is nigh on impossible to allocate resources in a manner that will satisfy everybody. We all want better roads, better flood defence systems, a better health service with more front-line staff, more teachers and more courses in the education system, a better and safer environment and so on.
The list of desires could go on for pages, but the problem is that we simply do not have sufficient resources to satisfy all of the requirements that society has. Choices have to be made, but it is also essential to ensure that every cent spent is done so in the most efficient manner possible.
At a basic level, the first thing we have to remember is that if a government wants to spend more money on public services, it will have to collect more revenue. Of course collecting more revenue means increasing taxes, and this is where a government tends to come up against a brick wall.
The Irish simply do not want to pay more taxes and over the coming weeks the parties who commit to reducing the personal tax burden will most likely do better in the election booth. That seems to be a political reality.
Ahead of General Election 2016, there has been a lot of discussion about the incompatibility of delivering better public services and at the same time reducing the personal tax burden. There is some truth in this assertion, but the whole debate would be better focusing on the manner in which the money is spent rather than the amount of money that is spent.
For years we have heard successive governments point out for example how much extra money they have allocated to the health service, but we have heard a lot less about the results that have been achieved from the increased spending. In other words, we tend to focus more on inputs than outputs. If one throws more money into a flawed system that is fundamentally inefficient, the inefficiency just tends to be reinforced and becomes even more deeply ingrained in the system.
In an environment of very scarce resources, which certainly describes Ireland at the moment, value for money has to be the guiding principle. In other words, a high degree of cost-benefit analysis needs to be undertaken in relation to every euro of taxpayers' money the government spends.
Rightly or wrongly, there is a popular perception amongst workers and others who pay taxes that they pay a lot of tax, and that they do not get proper returns in terms of public services. Over recent years we have seen the standard of delivery in the health system deteriorate, unless one has high level public health insurance; non-fee paying second level schools have been forced to drop subjects and certain disciplines such as career guidance; the quality of the road network has deteriorated significantly, particularly in rural areas; crime rates are rising and personal security is diminishing; and public amenities such as post offices and Garda stations have been shut down all over the country.
In a nutshell, people are justifiably struggling to connect the increased taxes they are paying with the quality of public services they are getting in return.
The following is a rather brief examination of the taxation system, and the way in which the government spends the money.
There is an old saying that the only certainties in life are death and taxes. It is hard to argue with that, particularly over the past six years, when the tax burden on working people has increased significantly. Since 2009, the total amount of taxation paid in the economy has increased from €33bn to €45.6bn in 2015 and a projected €47.2bn in 2017.
The €45.6bn collected in tax revenues last year represents an increase of 38pc on 2009. It has to be pointed out that in 2009, tax revenues were 30pc lower than the construction-induced peak of €47.2bn in 2007. Of course government spending had mistakenly expanded in a manner consistent with the growth in tax revenues, so it was always going to be extremely difficult to maintain the quantity of spending on public services following such a calamitous collapse in tax revenues.
Of the €45.6bn collected in 2015, income tax at €18.4bn accounted for 40pc of the total; VAT at €11.9bn accounted for 26.2pc; excise duties at €5.3bn accounted for 11.6pc; and corporation tax at €6.9bn accounted for 15pc. It is interesting to note that in 2007, income tax accounted for 28.7pc of total tax revenues, and by 2015 this had jumped to 40pc. Little wonder that people who work and pay income tax and USC are feeling somewhat aggrieved and are justifiably questioning what they are actually getting in return.
So how does the government spend this revenue? In 2015, net voted expenditure totalled €42.9bn, with expenditure on current services accounting for 91.8pc of the total, and capital expenditure accounting for just 8.2pc.
Three areas of net voted expenditure account for 75pc of total expenditure. Health at €12.8bn accounts for 30pc of the total; social protection at €11.3bn accounts for 26pc; and education & skills at €8.2bn accounts for 19pc. In other words, in 2015 these three areas gobbled up almost 71pc of total taxes collected.
The perennial question of course is if taxpayers actually get value for money from the taxes that they pay. This is a very difficult and subjective question to answer.
At one level it would appear that there is an inverse relationship between health expenditure and the quality of health service provided to the public. However, it is not that simple. The reality is that the population is growing and ageing, which will automatically increase the demand for health services.
Over the next couple of decades these trends will gather momentum and so there will obviously be a requirement to increase expenditure in this area. This will obviously necessitate more taxes, which will inevitably be paid in the main by those who work, but not exclusively.
France is generally regarded as country that has one of the best health services in the world, but it necessitates a very high level of taxes and it too, like virtually every health service in the world, is now under pressure. The latest data from Eurostat, relating to 2013, shows that total taxation in France, including direct and indirect taxation and social security contributions, accounted for 47.3pc of GDP. The equivalent in Ireland was 30.3pc of GDP or 35.8pc of GNP (which is a better measure for Ireland).
It is clear that if one wants better public services, then one will have to pay more taxes to provide them. However, here in Ireland there is a widely held view that paying more taxes will not guarantee better public services, and there is certainly some evidence to back up that assertion.
I believe that most thinking sensible people in this country would be prepared to pay higher taxes across the board if they believed that it would result in an improvement in the quantity and quality of public services, rather than just going into an unaccountable black hole that is totally lacking in transparency.
Over the coming years, the demand for vital public services such as health will increase and the resources to pay for those services will by definition be limited. Consequently, it will be incumbent on the government to ensure that the money is spent in the best and most efficient way possible, and that it does not just get swallowed up in a bureaucratic system instead of making it to frontline areas such as hospital beds, nurses and guards on the streets.
Value for money in a real sense will have to be the mantra over the coming years and vested interest groups cannot be allowed divert taxpayers' money away from delivering a better level of public services. Easier said than done, I suspect.