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Inflation Growth Big Challenge for Government
Read more about: Economy, Fine Gael, Government, Labour Party
The precise causes of the rise in inflation to 4.9% today (3% excluding mortgage hikes) are debateable. Interesting responses from the opposition today, with Labour and Fine Gael focussing on the state-sanctioned price hikes in electricity as well as the decline in manfuacturing.
The government will surely point to macroeconomic factors such as high oil prices and the ECBs policy on interest rates and they won’t be without support in this point. The exposure of the Irish situation to the wider global factors means we are likely to be at the forefront of a tightening.
Richard Bruton makes an interesting point on that front;
“Comparing Ireland to other eurozone countries also reveals some startling facts (see Table 2). Whereas the rest of Europe has managed to ensure that price increases in regulated and sheltered sectors have moved in line with the rest of the economy, the FF/PD Government has spectacularly failed to do so. Price increases in Ireland’s regulated and sheltered sectors are growing 2½ times faster than price increases in equivalent sectors in the rest of Europe.”
It seems to me that a core factor in all this is government tax policy. The ability of the state to stretch its tax take across its service commmitments can be quite weak. Increasnig VAT and ‘consumption/stealth’ taxes are contributing to a weaker competitiveness picture.
What can be done? Many times here taxation is discussed but as inflation rises and competitiveness slows, the time is coming where the ability of the low-tax narrow-tax regime to finance the governments spending falls through. This means less services or reforming taxation to finance service provision. Any rise in taxation will also require reform of delivery.
Our situation is not quite a binary opposition between tax or spend. Our tax system focusses on middle income earners especially without balance in wealth/property aspects along the lines of other EU countries.
Charges, it seems, are a replacement for the provision of services from government coffers.
The opposition are correct in pointing that government has sanctioned many rises but whether the answer is less service provision or a redistribution of the tax base will be the interesting question in coming weeks (since the outlook of Fine Gael and Labour may be quite opposed).
It is also interesting to note that the inflation news has contributed to developing Labour’s critique of the economy, which many have called for as an essential part of a successful campaign;
“The real story of the Irish economy is not the uniformly rosy picture that the Government presented in December’s Budget. Yes, we still have good growth in employment although that is heavily reliant on an overheated building industry. But there has been a major weakening of the manufacturing sector - important for exports. Moreover rising inflation and high electricity prices continue to hurt industry badly, resulting in frequent factory closures.
In reality the government has no plan for the economy other than to keep the building boom going. We need a Government that will introduce a coherent medium term plan for the economy to ensure balanced growth in employment and living standards for all sectors of the economy and sections of society.”
I may be wrong, but I don’t recall too may “Irish Election” posts on Inflation!
Odd, given that it is such a critical aspect for the future prosperity of this country.
During the period 1930 to 1955, compound inflation in Ireland was about 3%. I don’t posit this
as an absolute, but the rent on our house was the same throughout that period; a box of matches and a postage stamp remained much the same. I can’t remember anyone staving and many people managed to save - for a holiday perhaps. I am not saying that this period represented a panacea and there was a European war that boosted employment, both when it started and - for rather more disagreeable reasons - when it ended.
The first major contributor to inflation was Turnover Tax (TOT), brought in by Fianna Fail TD Dr. James Ryan. It was deemed so successful that he doubled it the following year.
The second major factor was Decimalisation, which was a bonanza for shopkeepers and the purveyors of goods under the value of a shilling.
The suggestion, by economists and accountants, that the penny remain the basic unit and 100 pennies would equal one dollar - or such name as would be acceptable - was rejected by governments, both here and in the UK.
It was to prove a catalyst for an explosion in prices, carefully orchestrated by crafty merchandisers, who exploited the weaknesses of the consumer watchdogs. Changes in pack sizes; special offers; added ingredients etc. were introduced to muddy the waters of comparing prices between two significant dates.
These factors operated in the narrow price range between an old halfpenny and about five pounds.
Metrication moved the overcharging process forward and VAT, which had replaced TOT, added the final coup de grace.
Meanwhile, government was busy wasting as much of these new taxes, as quickly as they could bank it.
In parallel, vast energies, to say nothing of additional public services employees, were being expended on collection; identifying evasion; and the several schemes being devised by accountants to avoid the vast arrays of taxes being imposed by a greedy, avaricious government.
VAT, of its nature, is inflationary.
When one says “Value Added”, one is referring to Invoice Value, not to an increase in the underlying worth of the goods or services!
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And so to the cost of goods and services above five pounds in value. And this is where the real explosion has occurred.
Everyone who can read must be aware of the cost of land; the massive increases in the price of housing; the deals; the brown envelopes; the Tribunals on corruption in government; the Fianna Fail tent at Galway Races annually etc…
Land is where inflation becomes a National Crisis.
The government take from every house being built today is enormous. Experts will be able to tell you how much, but it must be well in excess of 50% of the ultimate selling price - the Invoice Price.
Is there any solution?
YES.
It must lie in, of all things, taxation.
Not the confiscatory systems operating to maximise the Government coffers for the Big Spenders in Health; Education & Welfare, but a control mechanism to reduce house price speculation.
If the component parts of a house sale price were divided - into the house on the one part - and the plot upon which it is built on the other part - there is a case for taxing the increase in the value of the plot.
In other words, the reinstatement cost of the house would be the absolute for calculating the tax free element in the selling price.
The increase in the value of the plot, being speculative, and outside the control of the seller, would be taxed, at appropriate rates. This would stop the frequent trading up of private housing.
Empty houses and land banks, often fallow, would also be taxed until utilised productively.
The proceeds of these taxes would not go to Central Revenue.
They would be applied to replace the old Local Authority Rates, which were abolished as an “Irish Election” ploy, in 1977, by a cynical Fianna Fail government.
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A final, further inflationary, activity is the so-called “Benchmarking” a wholly unnecessary public relationship exercise, controlled by non-elected quangos of trade union activists; religious and charitable organisations; Employers Groups beholden to Big Business (IBEC & ors.)etc…
And for what?
To sweeten the beards & sandals in the Public Service Unions, Bertie Ahern’s best buddies; the Moaning Minnies, Begg; O’Connor; Halpenny etc… who want to keep their enormous cake and eat it.
If one were to be cynical, it might be suggested that these Public Service employees take a “cut” in earnings — to come “down” to the level being paid to their counterparts in the private, non-sheltered, sector.
That would certainly be a factor in reducing Inflation.
Whatever about the domestic fallout from the 4.9% increase, the threat to our competitiveness, already under pressure, will be critical and could be terminal.
IT SHOULD BE THE MAJOR IRISH ELECTION ISSUE.
I am interested myself in the idea of tax on rent on the land, with proper implementation it would radically overhaul the manner of taxation but also provide for an exponential growth in the tax take.
I also agree on competitiveness but the delivery of certain services is as key to that as taxation. The government has attempted to have its cake and eat it too as far as i can tell and it is that attempt which has delivered large inflation levels.
I was not suggesting a tax on the RENT on land. Nor was I advocating an exponential growth in the tax take.
Taxation is already far too high.
Sean McEntee reduced the Income Tax in the 1930’s!
No government since has considered repaying the excessive tax take to the taxpayers.
The tax I am suggesting is designed to be productive.
To the extent that land hoarding is counter-productive, as is empty house property, this suggested tax should produce a positive yield, in contradistinction to Income Tax, which is a tax on productive effort.
And I refer here to productive effort in the non-sheltered sector of the work force, the motor for the so-called Celtic Tiger.
That positive tax yield, if it to be made to work, rather than enter the Minister of Finance’s Pot, where it will be dissipated in wasteful social spending, must be returned to productive uses.
Local Authority spending can be as wasteful as that of Central Government, largely due to incompetent management.
Some of these people have squatted on the same Local Councils seats for 40-plus years! Until recently there was a dual-mandate - effectively doubling the incompetence.
But spending is necessary, if proper services to the community are to continue. Presently,
Since Fianna Fail abolished Rates in 1977, Local Authorities have required large annual subventions from Government to deliver essential services.
A new tax - on fallow land or property, and on the excess profit arising from speculative private property sales - can be used to fund Total Local Government spending.
However, such a tax regime must be augmented by Total Local Authority reform.
County Councillors’ tenure must be restricted to a maximum of three consecutive years. Ideally, elections should be divorced from Political Party structures.
County Council will need to be accountable; to produce annual audited accounts. Some of the old practices - of so-called Fact-Finding overseas travel (Junkets)- need to be restricted to cost-effective exercises - or completely abolished.
BUT — PLEASE DO NOT SUGGEST AN EXPONENTIAL GROWTH IN THE TAX TAKE.
THAT WOULD AMOUNT TO AN EXPONENTIAL STEP BACKWARDS AND ENCOURAGE EVEN MORE WASTE THAN THAT WE ARE WITNESSING DAILY.
TAX NEEDS TO BE APPLIED TO INCREASED PRODUCTIVITY. IF THERE IS NO AVENUE TO INCREASED PRODUCTIVITY, TAX SHOULD BE REDUCED.