Ógra Fianna Fáil Budget Submission 2010 by Ógra Fianna Fáil

Reform for Growth Ógra Fianna Fáil Budget Submission November 2010 Prepared by Conor King & Declan Harmon

Introduction At this stage, no citizen needs to be reminded of how difficult the current economic situation is. We have all become far too familiar with the many frightening statistics that bombard us on a daily basis. The scale of our present difficulties is particularly worrying for young people. Not only are we the generation that are embarking on our careers in an incredibly tough jobs market, but we are also the people who will have to carry the heavy burden of paying tomorrow for the borrowed money being spent today. Our core principle is one shared by the vast majority of citizens and political opinion – that the gap between exchequer income and expenditure is far too great and must be reduced. We agree with the government’s strategy to reduce the deficit to 3% of GDP by 2014. We believe that the primary means to achieve this should be through large-‐scale reductions in spending coupled with targeted measures to introduce new forms of indirect taxation. We believe that the scope for increases in employment related taxes to be extremely limited. However, we argue that on both economic and societal grounds the tax base must be widened significantly. This submission is practical in its focus. It does not shy away from proposing reforming ideas. The time for soft-‐option politics has gone. Politics today and into the future ought to be about a competition of ideas. Ógra Fianna Fáil is determined to show that it has the capacity to put forward challenging and substantial ideas and has the courage to lead reform. The generation we represent simply can’t afford more of the same.

Summary of Recommendations Taxation: • Introduction of Universal Social Contribution to bring more income earners into tax net • Positioning of Ireland as European hub for customs and trade related tax clearance – with major potential for revenue raising and job creation • Continue preparations necessary for speedy introduction of residential property tax and water rates Expenditure: • Emphasise and encourage the McCarthy report recommendations as starting point for expenditure reductions • Introduction of optional pension pause for public servants • Review rate of jobseekers payments in order to ensure that disincentives to work do not arise • Standardisation of the rate of child benefit so that the rate paid to each child is the same Public Service Reform: • An increased emphasis on private sector involvement in the provision of administrative and processing services • A review of the role of the Department of Social Protection so that it becomes a policy driven department • A stronger link between a reformed and renamed State training agency and the Department of Social Protection • Greater sharing of services and pooling of resources by local authorities, including involvement of the private sector Employment and Job Creation: • The introduction of a structured public sector work experience programme • The introduction of a scheme for jobseekers to utilise their skills by contributing to community and voluntary projects, with penalties for those who refuse to make themselves available for suitable work

Taxation

The primary role of a tax system is to raise revenue to fund government expenditure. This should be done on a basis that is: • Equitable and progressive • Flexible to the needs of the economy • Able to provide a stable revenue base • Easy to understand • Not distorting to the economy. As has been seen since the onset of the economic crisis, the tax system that was built up during the boom years was over reliant on ‘fair-‐weather taxes’ related to consumer spending and construction and could be said to have failed to meet at least two of the above criteria. Income taxes There have been significant increases in the levels of taxation in recent budgets with the introduction of the income levy, health levy and changes to the rates. This has contributed to a significant increase in Ireland’s overall marginal rate of tax to such an extent that it is very close to reaching the tipping point. It is likely that any further increases in the marginal rates of taxation will lead to a disincentive to work and will negatively impact on entrepreneurship and job creation. While the wisdom of how other sections of the taxation system were designed during the boom is open to debate, nobody could credibly accuse the government of failing to meet the equitability test in personal taxation. However, this has been pursued to such an extent that the tax base has narrowed significantly and the personal taxation burden is now disproportionately loaded onto those on higher incomes. For example, a person earning €100,000 a year pays 46 times more tax than someone on just above the minimum wage despite earning just over 5 times that workers salary. Ógra Fianna Fáil does not believe in high rates of personal taxation. We believe that we share this view with the vast majority of Irish people. Fundamentally, most citizens believe that they can do a far better job of spending their own money than the government can. In 2010, it is estimated that the top 6 per cent of earners will contribute approximately 48 per cent of all income tax takings. To raise an additional €1bn in tax from people earning in excess of €150,000, the marginal rate of tax would have to be increased to 67 per cent. This is simply not possible or desirable. By contrast, over one-‐third of income earners will pay no income tax at all in 2010. While it is important that low-‐income earners and their families continue to be supported, it is no longer economically feasible or socially desirable for so 3

many workers to pay no income tax. It is now clear that in order to fight our way out of our current difficulties we need everyone to make a make a contribution to the cost of running the state. In light of this, Ógra believes in the introduction of a new universal social contribution (USC). The USC would significantly simplify what is currently a very complex PRSI system and would merge PRSI, the health levy and income levy into one overall contribution. This could then be used to widen the tax base and bring everyone into the tax net. The full introduction of the Universal Social Charge from 2011 would be a considerable achievement given the size and complexity of the task. However, it is possible that the reform could be phased in with initial changes announced in Budget 2011. Opportunities for Ireland in Customs and Trade Related Taxes Ógra Fianna Fáil believes that there are major opportunities for Ireland to become the European hub for the centralised clearance of customs formalities. These opportunities arise as a result of changes to the EU Community Customs Code, which allow companies to benefit from simplifications in customs rules if they meet certain criteria, resulting in the awarding of Authorised Economic Operator (AEO) status. In practical terms, these simplifications allow companies to complete all their customs obligations in one Member State and then import directly into any other Member State. This is a significant change from the status quo, where companies must complete separate customs procedures in each Member State, each with differing levels of bureaucracy and efficiency. In 2007, 183 million customs declarations were completed in the EU -‐ 5.5 every second. With so many declarations taking place across so many different jurisdictions, each with their own individual rules, errors and omissions are frequent, resulting in higher costs for businesses. The economic advantages for Ireland positioning itself as Europe’s customs hub are two-‐fold. Firstly, it helps our competitiveness by reducing the costs of customs compliance for multi-‐national companies by completing all their customs obligations in Ireland rather than under 27 separate processes. Secondly, having companies complete their customs obligations through the Irish authorities can have significant advantages for the exchequer. Ógra estimates that a minimum of 500 high value jobs could be directly created and an additional 250 jobs secured in ancillary service provision, such as export licensing and VAT services. The State would also benefit from an additional €25 million in customs taxes and duties. The total benefit to the exchequer, between customs duties and employment taxes, could be €38 million. The opportunities in this area are also being explored by other Member States, particularly the Netherlands, and so it is imperative that Ireland move quickly to 4

put the administrative framework in place to exploit these advantages.

Residential property tax Ógra believes in, and endorses, residential property taxes, as a general principle. To aid the introduction of this scheme, Ógra believes that local government should be empowered to levy property taxes as they deem appropriate. This would not only give local authorities greater autonomy, but would also allow the direct transfers from the Department of the Environment, Heritage and Local Government to be reduced. Residential water charges Ógra welcomes the endorsement of residential water charges by the two main opposition parties. Ógra believes that the government should move forward to immediately install residential water meters and begin charging as soon as possible.

Expenditure

Ógra Fianna Fáil believes that reductions in spending should be the primary means used to close the gap in the public finances. The sad reality is that politicians of all parties have, for many years, peddled the myth that spending can keep on increasing without corresponding measures to increase revenue. Our party must take its fair share of the blame for that myth. However, we readily acknowledge that in order to keep taxes down, expenditure must be kept to a moderate and affordable level. McCarthy Report In seeking to identify areas where expenditure can be feasibly reduced, we believe that the government should again examine the report of the Special Group on Public Service Numbers and Expenditure Programmes (‘the McCarthy group’). Ógra is dismayed that so little progress has been made in implementing the recommendations of the report. Indeed, various members of both the government and the parliamentary party appear to have gone out of their way to criticise and dismiss various elements of the report. The McCarthy report presents a menu of options available to government in the quest to reduce spending. Clearly, the menu is not exhaustive and it is possible to identify alternative areas to cut. However, having commissioned the report and attached such a high level of importance to it, Ógra believes that the government should, at the very least, explain why options presented in the report have not been selected for implementation. Pension Pause for Public Servants Public servants should be given the option of undertaking a ‘pension pause’ as an alternative to paying the pension levy. Under this scenario, the worker would no longer pay the levy and the State would not put in any pension contributions for that worker for however long they opted to partake in the ‘pause’. Service years would be reduced as a result, which would be reflected in the level of pension the worker eventually retires on. This would be beneficial to workers who have found themselves in financial difficulties due to the effective cut in pay that the pension levy represents. Workers partaking in the pause would trade an effective 7.5% gross ‘increase’ in pay for a reduced return in their final pension. The pause is also attractive for the State as it reduces both the immediate cost of pension contributions and future pension spending. 6

Welfare spending Social Welfare accounts for over one third of current government spending. Social Welfare rates have increased by over 60% in real terms in the last decade. Given both the situation in the public finances and the clear evidence that overall labour costs in the economy have gone down, there is a clear case for social welfare rates to be reduced. This should also be seen in the context of decreases in the cost of living. ‪In particular, consideration needs to be given to the rate of job seekers payments so that it reflects the fact the greater proportion of income earners will be brought into the tax net so as to ensure disincentives to work do not arise‬. Given the very high cost of child benefit, and the difficulties in means testing or taxing the benefit, Ógra recommends that the rate should be standardised so that the rate paid for each child is the same.

Reform of the Public Service In proposing public service reforms, Ógra Fianna Fáil is guided by the principles set out by the Delivering Better Government Report, published 10 years ago, which was based on the need for civil servants to do a number of tasks better, namely: • To support the government in achieving its objectives in relation to national development • To make more effective use of resources • To provide a high quality service to all customers Ógra Fianna Fáil wishes to concentrate on the last of those objectives in this submission. A customer centered approach Ógra Fianna Fáil feels that the key element in delivering public sector reform is to generate a culture where the taxpayer is viewed as a customer. The mission of the Civil Service is “the achievement of an excellent service for government and the other institutions of State as well as for the public as citizens and users of public services, based on principles of integrity, impartiality, effectiveness, equity and accountability” ( The Civil Service Code of Standards and Behaviour ). Public service is a noble calling and Ógra wishes to acknowledge the civic minded commitment of many public servants. However, it is impossible to ignore the deep sense of unease among a large number of the general public with the recent disputes in the public service and, in particular, the manner in which such disputes have the capacity to cause disruption to important public services. The public service needs to become more flexible and adaptive to changing needs. A recent example of inexplicable inflexibility arose when significant delays arose in the transfer of staff from the Department of Agriculture to the Department of Social Protection in order to deal with the increase in applications for jobseekers benefits. Such delays result in significant difficulties for the customers concerned, ill-‐will building between management and staff representatives and contribute to a negative image of the public service in the public debate. It should be noted that the vast majority of public servants simply wish to be treated fairly and work to the best of their ability – they represent the silent majority of public servants for whom disputes run against the grain. Structure and staff allocation in the Department of Social Protection This should become primarily a policy-‐focused department with a small number of staff to perform core administrative functions. There is significant scope for application and payment processing to be put out to tender, with incentives for the successful bidder to reduce fraud and penalties for delayed payments or processing. Consideration could also be given to other areas of the public service with significant processing or administrative functions to be put out to private tender, 8

for example grant processing in the Department of Agriculture and the functions of the Passport Office. Linking the State training agency and the Department of Social Protection Ógra Fianna Fáil feels that there is an urgent need to link the functions of the State training agency and the Department of Social Protection. There is significant scope to merge local offices of the training agency with local social welfare offices so that the link from welfare back to work is more closely integrated. This also has the potential for cost savings, however it should be done regardless, on the grounds that it makes good policy sense. Local Councils Internationally there is a trend towards a greater provision of shared services involving two or more local authorities. The logic behind this is to take advantage of efficiencies and economies of scale as well as making better use of scarce or expensive expertise. There are many examples in the United States, France, Britain and New Zealand where this has been carried out very successfully. There is particular scope for greater collaboration, between some of the back-‐ office functions among local authorities, these include: • Payroll • Financial services, such as accounts payable • Procurement • HR functions and personnel administration • Facilities and asset management • Records management • Legal services • Grants and payments processing

Job creation

The debate on the issue of job creation in this country has tended to be disingenuous. The idea that has been propagated by many is that the State can create significant numbers of jobs without an expensive stimulus plan. This unfortunately is untrue. Given the fiscal position of the country, it is not the role of government to provide mass employment but rather to encourage business, support people through retraining and education programmes and allows them to gain experience where possible. A recent survey carried out by the Association of Higher Education Careers Services (AHECS), indicated that 45pc of 2009 graduates went into employment, with another 44pc going on to further study and 6pc seeking employment. The AHECS survey also found that in a recessionary environment some graduates are opting to undertake unpaid internships. For new graduates, these internships can be an opportunity to develop employability skills and gain a foothold into the world of work. Ógra Fianna Fáil believes there are a number of opportunities for unemployed young people • Third Level loans to allow them to fund further education • Reform of employment and training supports • Public Sector Work Experience Program • Work Experience and Placement • Society, Community and Voluntary Experience Third Level loans If recent graduates cannot find employment, it is essential that they return to or continue with further education. The Department of Education should establish a graduate and part-‐time student loan scheme, which would allow students to borrow at a low rate of interest. This could possibly be financed using the National Pension Reserve Fund. Pressure should also be brought to bear on the banks to ensure that they are catering for this market. Reform of employment and training supports In the past we spent over €1 billion on skills training and development through FÁS. Despite this large expenditure, major concerns have been raised as to the suitability of some of the training courses on offer. Ógra Fianna Fail recommends that there should be one single State training agency, replacing the current FÁS and the VECs. As we have stated earlier, this agency should have a strong link to the welfare system.

Public Sector Work Experience Programme It is quite clear that graduates need to gain experience. Ógra Fianna Fáil is proposing a new public sector work experience programme to support college graduates and unemployed young people. This programme aims to be more than just an internship in the public service, and is aimed at the personal and professional development of Irish graduates who want to gain experience in the public sector. Participants can be placed across the civil and public service to gain firsthand experience at the work of government departments or public service bodies. This intensive programme would aim to equip the participants with team working and leadership skills, as well as work experience in their chosen area. The participants will be teamed up with senior staff within each department or body. They will work independently and undertake job sharing. Participants would also work in teams with other participants on a group project, which would form an integral part of the Scheme. Work Experience and Placement Ógra Fianna Fáil has made two previous submissions to the Department of Enterprise, Trade and Innovation regarding work placement schemes in the past. We believe that there is still significant scope to increase and expand the current scheme and make it more widely accessible. Work placement and internships are the cheapest and most effective way of providing real experience to graduates who would otherwise be idle while seeking work. Society, Community and Voluntary Experience Ógra Fianna Fáil strongly believes that the skills and talents of many unemployed and under-‐employed young people could and should be used for the betterment of the community through community groups and schemes. We strongly endorse the proposals of the Minister for Social Protection in this regard and hope to see them implemented without delay. We also believe that where unemployed people refuse to take opportunities to work with schemes or projects where their skills could be usefully employed that their entitlement to benefits should be examined and reviewed. Supporting Private Enterprise It is the view of Ógra Fianna Fáil that cutting business costs and the associated costs of doing business in Ireland is the best way to support private enterprise. The best solution to unemployment is sustained economic growth and more competitive industries. The only basis for long-‐term job creation can be a strong 11

economy. The creation of a climate in which economic and employment growth will occur must remain the government’s highest priority. Steps taken by the Government over the past year to promote investment, to enhance Ireland’s competitiveness, and to improve the fiscal position of the public sector are welcome steps forward. Success in achieving these objectives is the best guarantee of future jobs in Ireland. Ógra Fianna Fáil supports the National Assets Management Agency, the Bank Guarantee Scheme and bank re-‐capitalisation. Getting our banks lending to private enterprise must remain a priority for the Government. The government has initiated the Employment Subsidy Scheme to support the retention of full time and part time jobs in viable enterprises that might otherwise be made redundant as a result of the impact of the global and financial economic crises. Employment subsidies of up to €200 per week per full time employee and €120 per week per part time employee are available for the first 26 weeks and then on a reducing scale. Ógra Fianna Fáil recommend that this scheme be broadened to include other specific sectors of the Irish economy, including those engaged in supply to exporting firms and those with a highly trained workforce. Ógra Fianna Fáil welcomes the proposals made by the Commission on Taxation regarding the R&D tax credit. We believe businesses should be allowed to offset the credit against their corporation tax or employers’ PRSI. The lack of flexibility regarding the tax credit should be addressed. Job Sharing Scheme Ógra Fianna Fáil proposes job-‐sharing scheme, similar to WorkShare, which exists across the US and in Germany. Under this scheme, an employer could opt to hire existing workers on a reduced hours basis to meet the needs of the business rather than introduce redundancies. This reduction in hours would take the form of shorter working weeks or longer holidays. This would allow the employer to retain an experienced skills set within the business and avoid training costs. Employees who have hours and wages reduced would receive a top-‐up using their social insurance (PRSI) contributions. Employers who reduce workers’ hours rather than laying them off could also receive a financial incentive. Such a job-‐sharing scheme could be adapted to allow for business employing new staff as businesses expand. We believe that the social costs of making one in five workers in a firm unemployed is greater than having all workers being underemployed by 20%. The total gross wage being received by the employee would not exceed €450 under this scheme, and taxes would be paid on the total amount of pay (wage & contributions top up). The businesses would be required to prove they are facing a difficult environment and capable of surviving the downturn in business. 12

Benefits would last for 12 months, and be reviewed every 3 months. Employees would not have to file a claim or report to an unemployment office each week to show they’ve been looking for work, since they are still employed.