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Presentation at Labour Party Pre-Budget Forum Professor Karl Whelan University College Dublin November 27, 2010

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Presentation at Labour Party Pre-Budget Forum Professor Karl Whelan University College Dublin November 27, 2010 Nominal GDP Growth 2.5% 4.2% 4.3% 4.6% 2011 2012 2013 2014 Debt/GDP 100% 101% 102% 100% Deficit/GDP 9.1% 7.0% 5.5% 2.0%

TRANSCRIPT

Page 1: Karl Presentation for Labour Party

Presentation at Labour Party Pre-Budget Forum

Professor Karl Whelan

University College Dublin

November 27, 2010

Page 2: Karl Presentation for Labour Party

The Four Year Plan

2011 2012 2013 2014

Deficit/GDP 9.1% 7.0% 5.5% 2.0%

Debt/GDP 100% 101% 102% 100%

Real GDP Growth 1.75% 3.25% 3% 2.75%

Nominal GDP Growth 2.5% 4.2% 4.3% 4.6%

Page 3: Karl Presentation for Labour Party

In 2014

• Debt-GDP ratio will be 100% (Debt-GNP ratio will be 128%) before additional costs of bank bailout if adjustment in four-year plan occurs.

• Add banking costs (and high interest on EFSF loan?) and the debt-GDP ratio is likely to be over 110%.

• We’ve come back from this before.

• But in 2014, sovereign bond markets will be worried about default and the interest rate on future bond market borrowings could be high.

• Default\restructuring cannot be dismissed.

Page 4: Karl Presentation for Labour Party

Don’t Shoot the Messengers

• We will see lots of complaints over the next few years about nasty outsiders from Europe and the IMF imposing harsh cuts and tax increases.

• But without EU\IMF, the deficit would need to be reduced to zero immediately.

• And a sovereign default would restrict our ability to run deficits again for a long time and raise the cost of borrowing.

• Reducing the deficit quickly simply must be done.

Page 5: Karl Presentation for Labour Party

So Is There Anything Left to Debate?

• Yes.

• EU\IMF mainly care about the macro aggregates.

• Plenty of room for doing adjustment in a better fairer way than in the government plan.

• However, this requires looking at all policy options and instruments.

• Focusing on making the income tax system more progressive—raising taxes mainly on the rich—simply isn’t going to work.

Page 6: Karl Presentation for Labour Party

Employee Tax and PRSI Contributions

Page 7: Karl Presentation for Labour Party

Employee Plus Employers Tax Burden

Page 8: Karl Presentation for Labour Party

Employee Tax Burden Minus Cash Benefits

Page 9: Karl Presentation for Labour Party

Tax System is Highly Progressive

• Income plus PRSI tax rates for single people at selected percentages of average wage:

67% 100% 167%

Ireland 14.2 20.9 32.5

EU-15 24.2 29.2 36.1

OECD 21.1 25.6 31.4

Page 10: Karl Presentation for Labour Party

Adding in Child Benefit

• Income plus PRSI tax rates minus cash benefits for married couple, two kids, one earner on average wage and second earner at selected percentages of average wage:

0% 33% 67%

Ireland 2.2 4.9 11.1

EU-15 16.7 18.4 22.2

OECD 13.3 16.0 19.5

Page 11: Karl Presentation for Labour Party

High Marginal Tax Rates

• Income plus PRSI tax rates for single people at selected percentages of average wage:

67% 100% 167%

Ireland 35.9 54.8 54.8

EU-15 50.1 52.1 54.5

OECD 43.0 45.9 48.0

Page 12: Karl Presentation for Labour Party

A More Progressive Approach?

1. More emphasis on wealth taxes: A larger and more graduated property tax (Plan’s proposal only raises €530 million).

2. Oppose the universal social contribution: Keep poorest workers out of tax net. Higher basic rate a better approach.

3. Taxing child benefit.

4. More focus on revenue raising, less on cutting program expenditure in health and education.

Page 13: Karl Presentation for Labour Party

A New Approach to Budgeting

• The four-year plan needs to herald a new approach to budgeting.

• A new budget process:

– Detailed multi-year budgets.

– Budget proposals brought to the Dail for debate months prior to budget day.

– Distributional analysis should be provided throughout the budgetary process: We should know who wins and who loses?

Page 14: Karl Presentation for Labour Party

The Banks: Non-NAMA Loan Books

Page 15: Karl Presentation for Labour Party

Almost No Provisioning on Mortgages

Page 16: Karl Presentation for Labour Party

Reducing Cost of the Bank Bailout?

• Don’t know what will emerge from IMF-EU deal in relation to the banks.

• Honohan speech this week referred to stress test exercise to be conduced early next year.

• This needs to be tough and rigorous.

• If banks are found to be insolvent, then subordinated bond holders need to lose out.

• If deeply insolvent, question of haircuts for senior debt becomes relevant.