WHEN YOU ARE living amid events, it is difficult to have cold historical analysis of them. During the property boom we all knew that house prices were going up too fast, as was government spending, but few were able to take a cold and detached view of the craziness until after it had all ended.
After the 1977 election, when government spending as a percentage of national income rose precipitously, it was clear that we were running unsustainable deficits. It took the whole of the 1980s to unravel the mess. This is clear to us now, but it wasn’t so clear in the heat of debate of the day; when political parties fought for their seats at the table at any expense.
It may be difficult for us in the here and the now to look coldly upon the formation of our government after the last General Election for what it is: A wholesale undermining, once again, of the fiscal foundations of our state.
The most hated tax
Water charges are a hated tax. They have moved the people to protest in a way not previously seen during years of austerity. It’s funny, when you look at the relatively small amount of cash raised from the tax versus the Universal Social Charge, the 23% rate of VAT or other measures taken since the 2008 downturn.
But we have a long and storied history of water charges being introduced and thrown out by Irish governments. We also have a storied history of collapsing our government revenues and our economy, related to our fetish for a narrow tax base.
Jack Lynch was the last man to win an overall majority in a general election. Fianna Fail was not reckoning on a win in 1977, and so they promised the sun, moon and stars to the Irish people in their manifesto. Among the promises was the abolition of domestic rates, which included water charges.
The economic story of the post-77 election was a drive to near bankruptcy for Ireland, when an eroded tax base and increasing government spending to pay for things like a better health service met unexpected economic headwinds. In order to later pay for the abolishment of rates, income taxes and VAT had to be raised. When the 1980s was a time of major boom in other places, Ireland languished in permanent austerity.
Others could see we had a glaring problem
We are setting ourselves up for another such fall. The reason water charges was a condition of the Troika bailout, along with property taxes, was because the outsiders who had to come and fix our economy saw a big and glaring problem: We relied for a massive amount of our government revenues on a narrow slice of the economy. Taxes on the one-off building and selling of property were used to pay for perpetual spending commitments, such as maintaining (and pensioning) a force of thousands of nurses, gardaí and other public workers.
By proposing to once again narrow the tax base, by abolishing water charges, we are returning to the old way of doing things.
Troika observers reading our newspapers must be banging their heads against their desks and screaming at their monitors: “You’re. Screwing. It. Up. Again.”
To fund sustainable public services, you need sustainable taxes spread thinly but broadly across the entirety of the economy and society. If you don’t, and you rely solely on VAT and income taxes and the like, your revenues will collapse the minute the economy hits a headwind. When that happens, you need to either quickly introduce even more destructive but quick-effect taxes; or you cut the arse out of public services. Or, as in the 2008-2013 period, you do both.
Playing a dangerous game
Political parties are also playing a dangerous game by undermining the revenue collecting ability of the state in future. There has almost been a bank run on Irish Water since the election, with suggestions that the charge be scrapped leading those who have been paying to cancel their payments. A mini-war will now be fought over refunds.
This populist move might look good as a gambit in the game to form a government, but in the long run it might well be recognised as the point that the Irish state lost the ability to levy any kind of tax other than one on your income or one lobbed atop the price of things you already pay for, ala VAT.
It just so happens that these two forms of tax are some of the most destructive in terms of their effect on economic activity. Usage and asset based taxes, like water and property, are far more stable in terms of the cash they bring in and also have less of a negative impact on economic activity.
We are now saying that a “Can’t Pay, Won’t Pay” campaign on these and any future type of tax like them will have a better than not chance of succeeding. This will limit policy options and is the equivalent of cutting off our noses to spite our faces.
Ireland is still running a deficit. We live in an uncertain time for the global economy. We are, at any rate, an open economy that will always be susceptible to global uncertainty. The idea that parties, the same parties who led us into and through this most calamitous mess, would swing immediately back to the old bad habits around promising more spending for less taxes after an election is depressing.
The Irish people ought to know better at this stage, and so should our leaders.
Water charges are roundly hated. But their abolishment and the dismantling of the sound economic foundations of our state will just mean that we’ll be re-introducing them at some time in the future, after we’ve collapsed the whole house of cards once again for short sighted economic stupidity.
Whoever gets into government will get themselves a guaranteed pension for life afterwards. You and me, the ordinary taxpayers, will end up replacing our €130 a head water bills with some future USC down the line. Would it be so difficult to put our long term interests ahead of our short term, Ireland?
Aaron McKenna is a businessman and columnist for TheJournal.ie. You can follow him on Twitter here.