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Dublin: 6 °C Thursday 13 December, 2018
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'Ireland is an expensive country - so what can the government do about it in this year's Budget?'

With the Budget coming up, it’s a good time to look at this subject, writes Rory Hearne.

Rory Hearne

IRELAND IS AN expensive country to live in. Goods and services here cost a whopping 25% more than the EU average.

Rents in Dublin have increased by 50% since 2012 – rising from an average of €1,038 to €1,527 per month, while wages increased by just 4.4%. Childcare costs are also amongst the highest in Europe with average monthly bills of €620.

So with the Budget coming up it’s a good time to ask: what can the government do?

Reasons for costs

Firstly, we need to understand why we have to spend so much in Ireland on these basic services like housing, childcare, healthcare, and transport.

The main reason is because there is much less state provision of these services. So we rely much more on private ‘market’ commercial providers. Think about childcare – most provision is done by ‘for-profit’ private creches. Similarly in health: we have to pay to access private GPs, dentists, physiotherapists etc.

As a result, it is more expensive for the public to buy these services– which are provided at more affordable rates in other countries, either by the State or as State subsidised. This is a key factor in our very high cost of living which also affects our economic competitiveness.

Also, because the state doesn’t provide as much, it is also reliant on private providers – for example in housing the government isn’t building social housing so it is buying it from the private market, via subsidising landlords and developers. This is a much more expensive way to provide services and infrastructure.

Ireland has one of the lowest levels of public investment as a proportion of our economy in Europe. Ireland’s expenditure as a proportion of GNI is just 37%. In Denmark, for example, it is much higher at 49%. Furthermore, this situation is set to worsen as our expenditure rate is forecast to drop to just 35% of GNI in 2021.

Unfortunately the requirement for a major increase in public investment to address these social crises (and other areas affected by low investment such as education, research and development, climate, and technology infrastructure) has been a missing component in the current debate on fiscal strategy for the Budget.

Lost decade of austerity

The need to catch up on the ‘lost decade’ of austerity cuts to public investment has been ignored. The dominant view is there is ‘little room’ for a significant increase in investment in the Budget and that instead any additional finance (‘fiscal space’) should be put into paying down the debt faster, putting money aside into a ‘rainy day’ fund, and further tax cuts.

The downside risks that inadequate public investment poses to Ireland are as real and significant as Brexit and a global financial downturn. Take housing where the inadequate provision of public affordable housing has resulted in a crisis that is now having major impacts on the economy and society.

Indeed it has the potential to burst the recovery, again. It is already devastating people – leaving a generation locked out of affordable homes. While the lack of affordable childcare restricts employment, inadequate public transport restricts mobility, and inadequate broadband affects business.

Intelligent and cost efficient public investment in these key areas can ensure affordable services, reduce our cost of living, meet people’s key needs and ensure a more competitive and sustainable economy – a key ‘buffer’ against future shocks.

Public investment also provides multipliers of return (through improved human capital, productivity and the State can even gain an income from public housing rents and public childcare fees which can then be re-reinvested back into additional services rather than ‘losing’ it to profit extraction by private providers).

As the Fiscal Advisory Council itself notes there is a “significant social return…expected on high-quality public investment (that) pays off over many decades”.

In the coming Budget there actually greater ‘room’ (fiscal space) for investment. The government is planning to be more cautious than the EU Fiscal Rules allow.

 

An additional €1 billion

If we postponed the rainy day fund idea (there is a ‘flood’ in housing need here now, and the fund could end up as just another bank bailout fund) and used it, and the full fiscal space, for sensible public investment, then we would have an additional €1bn to spend on building public housing.

And if government postponed the planned tax cuts (to cost around €500m) and raised revenue in a progressive way (eg a wealth tax raising €300m, hotel VAT back to 13% raising €500m, reduce high earners pension reliefs raising €200m), it could have €500m to seed-fund a new house building agency and have another €1 billion to provide universal affordable public childcare.

It is illogical to be cutting taxes when there is such a dire need for these tax revenues to invest in solving the housing, health and childcare crises. Ireland actually has one of the lowest overall tax takes in the EU (at 37.2% of GNI, and is forecast to fall to 36.5% by 2021). Tax cuts benefit most those on higher incomes. As taxes have been reduced in recent decades the wealthy have seen their income grow more. The majority get much more back when the State uses the finance it has to invest in providing public affordable housing and childcare – in comparison to getting a few euro in their pocket via tax cuts.

Adequate public investment and provision of services and infrastructure are essential to create an economy that is resilient and one that serves society. The health of the economy is interdependent upon the health of the society that underpins and drives it – so we have to ensure that society is functioning to ensure a functioning economy.

What is the point of having a ‘rainy day’ fund and a lower debt ratio while our society is being devastated by a housing crisis, and the long-term productive capacity of our economy is undermined, by inadequate investment in child and health care?

This Budget should be about a real increase in public investment – we have the fiscal space to do it – but do we have the political courage?

Dr Rory Hearne is a Lecturer in Social Policy, Maynooth University and author of Public Private Partnerships in Ireland.

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