I am grateful for the invitation to speak. I have relatively similar points to make as Mr. McCarthy so I will not repeat what he said, with which I agree wholeheartedly. However, if two economists are in a room, there is not one opinion; there are probably three.
I wish to place where we are now in its international historical context and to discuss things this committee can push for in terms of the budget scrutiny process for the Government. Elva Bova and her IMF colleagues looked at the fiscal impact by crisis type for many different types of crisis, so crises of state-run enterprises, their percentage of GDP costs and subnational governments when they get into trouble. This is a data set from 1970 to today from across the world. Two things are very clear. The average cost of a crisis is about 3% of GDP across all different types. The financial crisis is the most expensive in terms of the fiscal cost - the actual cash cost - to the taxpayer. As Mr. McCarthy rightly said, this did not come because we printed a load of money. We did not get out of it that way; we got out of it by simply borrowing more. The graph shows Ireland at 39% - the total cost of bailing out the banks and everything else. It is the fourth largest bailout of any kind anywhere in the world. That is the first and most important point to recognise. We tend to be relatively insular when it comes to our debate here. I want us to understand that this is the scale of the crisis we wish to avoid.
The same data are than ranked by time rather than by type. In 2008, the dot above Ireland is Iceland. I have done much work comparing the crises in Iceland and Ireland. One would imagine they would be relatively similar, but when one digs into the detail they are very different stories. Iceland in particular is a story of firms that built up too much debt, whereas Ireland is a story of households.
To echo Mr. McCarthy's point, I will look at the volatility of the various tax categories from 1984 to 2017. This comes from the Parliamentary Budget Office, one of the excellent new institutions that have been founded in recent years to increase the amount of economic analysis we can do. This compares the mean rate of growth which is on the vertical axis with volatility. Treating the tax category like a financial asset and comparing its rate of return with its risk - volatility is a way of measuring risk - we see capital taxes are up at the top. Corporation tax and stamp duty are also way out there, but excise duty, income tax, customs duty and VAT are at the bottom. The most predictable, most stable and least volatile categories are down in the bottom left hand corner.
The problem everyone has highlighted is that corporation tax is highly volatile. The problem is that it has been volatile upwards; it has been continually growing. Based on figures from the Department of Finance 2010 to 2013, inclusive, as the rate of tax revenue has come in, the rate of expenditure has levelled up to match it. The concern everyone has is that there will be a shock to corporation tax, but everyone is talking about a negative shock. I think an almost greater risk is with a further increase in corporation tax in the future.
We tend to think in terms of negative or downside risks, but there are also upside risks. If the rate of increase in corporation tax yield continues for the next two, three or four years, Ireland could be in the position we were in 2005, two years ahead of stamp duty receipts reaching an all-time high in 2007. Let us imagine we were there in terms of our corporation tax yield and we were facing into another two years of it growing. With that unsustainable growth, the level of expenditure growth would increase and then the bottom might drop out of it. That is the concern I would have.
The next slide shows our sources of tax revenue over a 30-year time period. Every time we have faced a period of crisis, income tax is used to flex and make the economy work. Successive governments as they have come into periods of growth have weakened the income tax lever and revenue has magically appeared from other areas, for example, stamp duty and then obviously nowadays corporation tax.
The next slide on the uses of revenue shows we essentially spend our money on paying people and current tax transfers. Despite all the noise about the national development plan and everything else, it is essentially a payments system. While that is a pity, it means by definition decreasing Government expenditure automatically hammers transfers, resulting in increasing inequality.
I really like the next chart and not just because it took me ages to make it, but because it puts Ireland in our international perspective. Ireland is shown in the middle. It shows we spend a fair amount of our money on social protection. I stress that there are categorisation issues, as the OECD always has such issues. Ireland spends 32.7% on social protection, a fair amount on health and then there is everything else. We are a traditional northern European state in this sense. However, we do not spend as much on social protection as other states. When we come to talk shortly about automatic stabilisers, I would like members to keep this in mind. We do not spend as much on lower-income households as other wealthy states.
What can this committee do? Essentially this committee exists to increase the amount of budget scrutiny. The Minister for Finance should never stand up and say something where the rest of the Cabinet say, "What? Is that really so?" We should not have that as an outcome. We want a far more stable budgetary process.
In the 1960s Richard Musgrave came up with a framework stating that the public finances should do three things: stabilise the macroeconomy; have an efficient resource allocation; and redistribute resources. The previous slide showed how we redistribute our State's resources relative to the rest of our economy. It is difficult to compute the efficiency of the resource allocation element. We know there will be a macroeconomic stabilisation element to what we have to do in the coming period. We know this will be a problem - Brexit or otherwise. The summer economic statement, which was published a couple of hours ago, makes considerable mention of this.
The next slide has a blue box showing where we are in the budget cycle. We are at the budget preparation stage. However, I would like to see this committee sponsor far more analysis around the budget cycle. This is a really important point. The level of economic analysis we can do now is far greater than in 2005 or 2006 as highlighted in the Wright report. However, we still have not filled out the institutional architecture that countries like the Netherlands and the United States have. We still do not have, for example, dynamic scoring. It is not possible for a political party to propose introducing a wealth tax and be able to know how much it will cost; these things are not done yet.
In particular we do not have a study that shows if corporation tax yield drops by 5% how much it would cost and where will we get the money to fund overruns in education and health.
We cannot do fiscal stress tests. I really believe that this committee should sponsor fiscal stress tests. It would also be useful to sponsor the development of policies around automatic stabilisers. By this I mean that we need to get away from this discussion, that is, talking about the €2.8 billion that is left after we pay for everything or talking about the budgetary envelope around the fiscal space. We need to get away from debate centred on the extra increment. We should be debating the larger issues of the day. This can be done by establishing an institutional architecture that is largely independent of the budget cycle, in other words, the particular process with which the Executive deals. We should find a way to integrate the climate advisory group, the fiscal advisory group, and the national risk assessment. It would be excellent if the knowledge from all three, which talk about aspects of the same function, could be brought together under this committee and if this committee could sponsor that work. It would be excellent because they are, in a way, the same thing. With a bit of extra costing, the development of budgetary strategy into the future could be informed.
Figure 7 presents the picture based on the Irish Fiscal Advisory Council's excellent report. It refers to GDP by volume which, if one looks at the vertical axis, ranges between 120 and 140, with 2015 constituting the base value of 100. The range of outcomes is extremely broad. Communicating that level of uncertainty to the public is the job of this committee and of Members of the Oireachtas. As somebody who, as members might imagine, talks to people about the economy a fair bit, I am not convinced that people really understand the likely downsides of this for them. I firmly believe that people are still waiting for that understanding. Saying that it is going to be bad or that it might be bad is not precise enough for most people. I will stop there. I thank the committee very much.