Budget Perspectives 2004

Opening Address - Brendan Whelan Assessing Ireland's Fiscal Strategy: Recent Experiments and Future Plans Philip Lane of Trinity College Dublin presents a paper reviewing a number of innovations which have been made by the Minister for Finance in the last four or five years. He considers the National Development Finance Agency whose mission is to optimise the financing of public sector investment projects. While Professor Lane believes that this agency could make a contribution by improving the financial engineering of the public investment programme, he also identifies a number of limitations to its operation. He examines the National Pensions Reserve Fund which was set in 2001 in order to partially pre-fund social welfare and public sector pensions. Some issues are raised with regard to the Fund's current investment strategy and its political sustainability. Professor Lane is strongly opposed to investing the Fund in domestic projects such as Public Private Partnership (PPPs) or domestic securities since such exposure would reduce the diversification of the Fund and leave it open to political pressure. The other innovation he considers is the Special Savings Investment Account Scheme. Introduced in 2001, it was designed to raise national savings levels and has proved extremely popular with over 1.14 million individual accounts opened. The principal defect of the scheme appears to be its high cost to the taxpayer which arises from the fact that the level of matching contribution is set too high. However, this level may have been necessary to kick-start the programme. Finally, Professor Lane addresses the Stability and Growth Pact and suggests that net additions to public investment be excluded from the deficit limit. This recalls the discussion at last year's Budget Perspectives Conference which dealt with the UK's twin investment rules: the golden rule which enjoins Government to borrow only to finance investment and not consumption and the sustainable investment rule which aims to keep net public sector debt at a stable and prudent level. Carbon Tax and Climate Change Strategy This paper is presented by Stephen Smith of University College London and deals with the very topical issue of carbon taxation. Professor Smith outlines the key scientific and economic issues underlying international climate change policy and focuses in particular on a question of great salience for Ireland - the implications of carbon taxation for industrial competitiveness. He shows that applying the concept of "competitiveness" to a whole economy is more complex than applying it to an individual enterprise. The impact of a carbon tax is seen as primarily relative: carbon-intensive sectors will suffer while sectors with low carbon intensity will benefit. Even if the revenue raised by a carbon tax is used to reduce other taxes (taxes on labour are frequently suggested), the author points out that tax burden effects can still arise, as will the costs of environmental compliance. Tax Cuts, Tax Reform and Labour Supply Responses In this session, Tim Callan, Arthur van Soest and John Walsh present the results of some recently completed work on labour supply responses to changes in taxation. This is the first time it has been possible to extend the SWITCH model to go beyond static or first round effects and model in some depth the behavioural responses of individuals. Being based on a nationally representative sample of households, the estimates outlined in this paper will provide reliable guidance to the authorities in reforming the direct taxation system. For example, the results indicate that structural reforms of the tax treatment of husbands and wives seem to have a greater impact on labour supply than simple tax cuts, and can achieve this at lower Exchequer cost. Educational Expenditure: Implications for Equality As well as examining taxation policy and the macro-economic aspects of the Budget, we try in the Budget Perspectives Conferences to focus also on an in-depth assessment of a particular area of expenditure. This year Selina McCoy and Emer Smyth of the ESRI examine expenditure on education. The ESRI has conducted a large body of work on equality issues in education and the authors use this to assess the extent to which expenditure has been successful in reducing inequalities. They show that programmes designed to tackle educational disadvantage are fragmented and may not be sufficient to compensate for pre-existing inequalities. They provide evidence that the benefits of education accrue not only to individuals in terms of improved employment and income levels, but also to the wider society in terms of reduced welfare costs and crime levels. For this reason, they believe that increased educational expenditure, particularly on younger age groups, should remain a priority.