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Hibernia Forum
Proposing Realistic Policy for Ireland
Budget 2016: Observations
Hibernia Forum
Budget 2016: Observations
October 6th 2015
THE HIBERNIA FORUM
Background: Irish public discourse has a clearly left-wing bias
Public debate is generally dominated by the unspoken assumption that the answer to every
problem is greater “intervention”, “planning” or “co-ordination” by a generally-benign
government. For every problem is it assumed that there must be a collective solution rather than
one rooted in individual behaviour and responsibility. This unspoken assumption dominates
media discussion, academic analysis and judicial decision-making.
There are several think-tanks on the left (Tasc, Social Justice Ireland and the Nevin Institute) but,
apart from the Iona Institute which focusses primarily on promoting marriage and religion, there
is none on the right. And there is no centre-right think-tank with a primarily economic or legal
focus to counter and reverse a drift into a collectivism which is bound to fail. This is despite the
existence of several such think-tanks abroad.
Required: a think-tank for individual freedom, market solutions and prudent government
The Hibernia Forum is an independent advocacy group dedicated to the principles of a free
market, individual liberty and prudent Government. Specifically, the Hibernia Forum calls for a
restraint and accountability in Government spending, reasonable and fair taxation, as well as
support for small business and entrepreneurs. Most of all, the Hibernia Forum calls for honest
and fact-driven debate about our society and economic situation and a balancing of the public
discussion in favour of those who do not believe that a high spending State is the solution to all
our problems.
Established: Hibernia Forum
Hibernia Forum has been established as an independent Irish think-tank and advocacy group
dedicated to the principles of individual freedom, a free market and responsible and prudent
Government. Hibernia Forum has already registered as a charity, established a legal structure
(private company limited by guarantee), set up a website and drafted a number of reports for
publication. We have also made contact and consulted with like-minded groups abroad such as
the Atlas Network and the Americans for Tax Reform (ATR). The key founding members are:



Eamon Delaney – executive director.
Cormac Lucey – chairperson.
Councillor Keith Redmond.
New members are most welcome.
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Hibernia Forum
Budget 2016: Observations
October 6th 2015
THERE IS NO ECONOMIC JUSTIFICATION FOR A GIVEAWAY BUDGET 2016
The Economy is Already Growing Exceptionally Fast
Hibernia Forum is dismayed that the current Government - having done an impressive job in
rescuing the State’s finances and created sustainable growth – looks as if it will try to win votes
by using voters’ own money in a €1.5 billion budget giveaway at a time when the economy is
already growing exceptionally fast.
Other Economic Levers Are Already Locked on Highly Stimulative Growth Settings
Hibernia Forum is disappointed at the government’s expansionary fiscal policy when every other
significant economic lever is already locked on highly stimulative growth settings:
 Currency – in the last two years the Euro has fallen almost 20% against the US dollar and
almost 15% against sterling.
 Energy prices – in the last two years, the global price of oil has fallen by over 50%.
 Interest rates – in the last two years, the European Central Bank base rate has been
reduced from a very low 0.5% to an ultra-low 0.05%.
 Monetary policy – in the last year, the European Central Bank (ECB) has commenced a
massive €1 trillion plus programme of quantitative easing.
 Credit policy – the deleveraging of the Irish banks envisaged by the Central Bank’s March
2011 – 2013 “Financial Measures Programme Report” is now complete.
 Wealth effect – in the last two years, Irish house prices have risen by an average of 12%
(Dublin 26%) while Irish equities have risen by 45%
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Hibernia Forum
Budget 2016: Observations
October 6th 2015
Contrary to What Some May Think, Our Debt and Deficit Problems Have Not Yet Been Fixed
The recent report from the Organisation for Economic Cooperation and Development (OECD)
estimated that, as of 2015, Ireland’s debt would marginally exceed its gross domestic product
(GDP) i.e. exceed €200 billion. The burden of shouldering this debt falls principally on the 1.5
million citizens in full-time employment. They have to bear the burden of debt equivalent to over
€130,000 each.
The OECD estimated that Ireland’s structural fiscal balance for 2015 will be -3.7% GDP. That is
€7.4 billion or the equivalent of nearly €5,000 for every person in full-time employment. Under
EU rules – incorporated into the constitution by referendum in 2013 – the government is
required to reduce the structural deficit by 0.5% of GDP each year until it does not exceed 0.5%
GDP.
In summary, while the government has made significant progress it has not yet fixed Ireland’s
debt or deficit problems.
The Reaction of the Fiscal Advisory Council is Puzzling
The Hibernia Forum is dismayed by the acceptance of the Government’s expansionary plans by
the Irish Fiscal Advisory Council (IFAC), which had hitherto warned against the incautious quality
of the Government’s economic plans. Although IFAC had declared in June that those plans were
in breach of EU and domestic guidelines, it now cites data revisions and updated projections due
on budget day to say the eventual package “may” show compliance.
If the government’s current budgetary plans do not prompt IFAC into open confrontation one
must consider whether there are any conceivable circumstances under which IFAC might ever
bark? That in turn begs the question of whether the Irish taxpayer should sensibly fund a
watchdog that won’t bark whatever the provocation?
Hibernia Forum calls for:
 A reduced budgetary package of just €1 billion, rather than the €1.5 billion (or higher)
preferred by the Government. This budgetary relaxation should be allocated evenly
between spending increases and tax reductions.
 The regular compilation and publication of a Financial Conditions Index for Ireland.
Public debate about fiscal policy in Ireland generally takes places in a vacuum. But if
non-fiscal economic levers are stimulative, the case for stimulative fiscal policy is
weaker. And if non-fiscal economic levers are negative, the case for stimulative fiscal
policy is stronger. By quantifying the degree of non-fiscal stimulus/pressure facing the
Irish economy, a better foundation can be set for determining what should be the
balance of fiscal policy. To facilitate this, the Central Bank of Ireland should compile and
publish a measure of Ireland’s financial conditions on a quarterly basis.
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Hibernia Forum
Budget 2016: Observations
October 6th 2015
GOVERNMENT SPENDING NEEDS FIRMER CONTROL
Successful Spending Discipline Conceals Serious Problems in Health and Social Protection
Recent Exchequer Returns show that Government expenditure overall fell 1.3% in the first nine
months of 2015, which is €502m below expectations. The majority of the this undershoot
(€441m) was due to lower interest costs. In terms of voted expenditure, there was an overshoot
in both Health (+€335m) and Social Protection (€143m). This was offset by underspending in
other areas, but is likely to increase in Q4, with Health expected to be the key problem area.
With unemployment falling rapidly, the overspend at the Department of Social Protection
suggests a lack of budgetary control rather than a department forced by deteriorating
circumstances to spend more than originally envisaged. The Department of Health, and its
Health Services Executive associate, has been the epicentre of out-of-control government
spending for years. A recent IFAC report addressed the question of controlling the health budget.
It found “hospitals and Primary Care Reimbursement Service areas as the largest and most
persistent sources of deviation in recent years.” It also identified “weaknesses in the
organisational and procedural aspects of budget planning and implementation” in both areas.
The Government System of Accounting is Antiquated and Deficient
Government accounting operates on a cash system: an expense is only recognised when it is paid
for. This is in contrast to the Generally Accepted Accounting Principles (GAAP) applied in the
private sector. Accounting in the private sector generally operates on an accruals basis: an
expense is recorded when it is incurred, regardless of when it is eventually paid for. This means
that government agencies can have incurred expenses which, because they haven’t yet been
paid for, haven’t formally been recorded.
Hibernia Forum calls for:
 Use of casemix data to encourage efficient hospital management. Casemix is an
internationally accepted system which allows for the collection, categorisation and
interpretation of hospital patient data related to the types of cases treated, in order to
measure hospital productivity and quality. Hospital efficiency is measured by comparing
outputs (cases successfully managed) to inputs (of manpower and expense). Until 2012,
hospital budgets were adjusted to take this into account. Good performers - who were
able to get more bang for their buck - had their budgets increased at the expense of
poor performers. But the budgetary impact of strong / weak performance was too small.
The total amount transferred from poor performers to good performers was a paltry
€18.6 million, less than 0.15% of the HSE’s entire €12.5 billion budget for the year;
Worse still, since 2013, even these paltry adjustments appear to have ceased. Restore
them and increase them substantially from their previous level.
 A change in public sector accounting from a cash basis to an accruals basis no later than
December 2017.
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Hibernia Forum
Budget 2016: Observations
October 6th 2015
TOO FEW PEOPLE PAY TOO MUCH TAXATION IN A SYSTEM THAT IS OVER-COMPLICATED
Tax and Welfare Systems Don’t Just Shield the Poor, they Shield the Middle Class Too
Citizens may believe that the Irish tax and welfare systems operate in a way where the broad
public contributes to a minority who have low incomes. In fact, the broad public benefits from a
minority who have high incomes. This is the unavoidable conclusion from an examination of data
from Table A2 of the CSO’s most recent (2013) Survey on Income and Living Conditions (SILC).
That shows that it is not just the bottom three deciles (or tenths) of the population that are in
receipt of significant net state transfers but the bottom six deciles. Net state transfers are
defined as social transfers less tax and social contributions.
While the seventh income decile makes a small net contribution to the state’s coffers, it is the
top three income deciles that are effectively paying for the Irish state with the top decile bearing
over half of the net cost of the State. It is right that those on higher incomes should bear a higher
share of the burden of supporting the poor. But is it right that those on middle incomes (deciles
4-6) should be net recipients of significant state transfers? Is it proper that those in the fourth
decile – rather than those in the poorest, first, decile - should be the recipients of the highest net
benefits?
Ireland’s Income Tax System is Extremely Progressive
Ireland has the most progressive income tax system (including employee social insurance
contributions) in the EU. The tax paid by a single person on half average earnings(average
earnings are just under €34,500) is the second lowest in the OECD (out of 34 countries) and is
about one-tenth that in Denmark while the tax paid by a single person on two and a half times
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Hibernia Forum
October 6th 2015
Budget 2016: Observations
average earnings is the 7th highest in the OECD. At average income levels we are the 15th
highest in OECD. A single worker on an average income of about €34,500 pays about €13,000 in
income tax and social insurance contributions in Denmark compared to over €6,000 in Ireland a
difference of over €6,500.
Ireland’s Tax System is Overly Complicated
The 2009 Commission on Taxation reported that there is evidence to suggest that, if economic
growth is the main policy aim to be pursued, a flatter income tax structure is a more appropriate
instrument than one that leans towards greater progressivity, as the latter is likely to act as a
disincentive to further effort. According to an OCED working paper:
A flat tax system with few allowances and tax credits is generally simpler to administer
and probably gives rise to fewer tax-induced distortions than other systems, but it puts
less emphasis on redistribution. By contrast, a highly progressive income tax system
normally reduces incentives to work and to invest in human capital, although ‘in-work
benefits’ can improve work incentives for low wage workers while increasing
progressivity. High progressivity may also increase the incentives for tax avoidance and
tax evasion and contribute to a growing shadow economy that reduces measured GDP,
although it is arguable that the tax level is more important than its progressivity in this
regard. This may reduce tax revenues and undermine the fairness of the system. There is
also a possibility that high top marginal rates will increase the average tax rates paid by
high-skilled and high-income earners so much that they will migrate to countries with
lower rates resulting in a ‘brain drain’.
Internationally, where a flat tax has been introduced, the tax take has tended to increase.
Similarly, the black market has shrunk as the incentive to under-declare personal liabilities is
diminished. And costs of compliance have fallen due to radically more simple nature of the
system.
Country
Lithuania
Romania
Hungary
Estonia
Latvia
Flat Tax
Yes
Yes
Yes
Yes
Yes
Rate Applied
15%
16%
16%
21%
25%
Hibernia Forum calls for:
 A rebalancing of tax and welfare over the next decade to significantly reduce middle
class welfare (i.e. aim to eliminate the net benefit currently enjoyed by deciles 4-6) so
that the burden borne by the top three deciles can be reduced.
 The introduction of a Flat Tax to replace income tax, employees PRSI and USC. We will
prepare and present a detailed report on this proposal in the future.
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