Overview

This note examines the funding of state provided bus travel in Dublin and the financial performance of Dublin Bus from 2003 to 2011. Dublin Bus is under continuing pressure to reduce costs as a result of declining passenger revenue and a reduction in subvention. Payroll related costs are the largest single operating cost incurred and as such are the primary focus of cost reduction. Savings to date have been achieved by reducing overall payroll costs through a reduction in employee numbers.

The contract between Dublin Bus and the National Transport Authority is up for renewal in 2014. The NTA is currently considering competitive tendering as a policy option. We provide a brief description of competitive tendering and its potential merits and drawbacks.

Public Service Obligation (PSO) Payments

Each year public funding is provided to Dublin Bus by way of contract with the National Transport Authority (NTA). This funding is based on the premise that Dublin Bus provides a service which is “socially necessary but financially unviable¹. In 2011, Dublin Bus received a PSO payment of €73million which amounts to 41 percent of the company’s revenue for that year. The PSO payment was reduced to €69million in 2012. Table 1 shows the PSO payments and total revenue for Dublin Bus from 2003 to 2011. The PSO payments have declined steadily from 2008 and are set to continue as the Department of Transport, Tourism and Sport confirmed a further PSO reduction of at least six percent in 2013. Company revenue has also declined significantly over this period from €203.7 million in 2008 to €178.3 million in 2011, a reduction of 12.5 percent.

Source: Dublin Bus Annual Reports.

In 2009 Deloitte issued a report which examined cost and efficiency in Dublin Bus. According to Deloitte², the subsidy paid to Dublin Bus is generally lower than public subsidies paid to comparable bus operations in cities outside Ireland . Table 2 compares operational subvention as a percentage of total revenue across six European cities. The bus subvention in Dublin is shown to be the lowest of the six cities which include; Lyon, Brussels, Amsterdam, Zurich, London and Dublin.

Source: Deloitte Cost and Efficiency Review of Dublin Bus and Bus Eireann, 2007.

Notes: Total revenue is customer revenue plus subvention. The figure for Dublin of 29% relates to 2007. However this rate of subvention has remained stable over the period 2007 to 2011.

Passenger Numbers

From 2003 to 2007 demand for Dublin Bus services remained relatively stable. Over this period passenger numbers averaged 147 million per annum. However 2008 marked the beginning of a period of declining demand as the recession began to take its toll on the demand for bus services. Passenger numbers in 2008 of 143.5 million fell below the predicted number of 151 million and by 2011 passenger numbers were 21 percent lower than in 2003.

The decline in passenger numbers has been accompanied by an increase in the PSO per passenger journey (from 60 cents per journey in 2008 to 62 cents per journey in 2011). The PSO per passenger in 2011 was double the figure of 2003. Table 3 below shows total passenger numbers and PSO per passenger from 2003-2011.

Source: Dublin Bus Annual Reports 2003-2011.

Operating Costs

Labour costs are the main costs incurred by Dublin Bus. Payroll and related costs of €181.2 million in 2011 accounted for 67 percent of total operating costs<sup.3. Payroll and related costs are made up of wages and salaries (€154.5 million), social welfare costs (€14.9 million) and other pension costs (€11.6 million). The other major cost category is materials and services. Table 4 shows the full breakdown of total operating costs in 2011.

Since 2008 there has been pressure on Dublin Bus to bring costs in line with lower revenue. Payroll savings have been achieved by reducing staff numbers. The average number of employees in 2011 was 3,345 compared to 3,825 in 2008 (a reduction of 12.5%). Table 5 shows employee numbers, expenditure on wages and salaries and average wage from 2003 to 2011. The total wage and salary cost in 2008 was €179.6 million. This has been reduced by 14 percent to €154.5 million in 2011. Average wage over the same period has remained relatively stable.

Source: Dublin Bus Annual Reports.

An International Comparison of Bus Driver Wages

UBS publish a yearly comparison of prices and earnings for various cities around the world. This includes a comparison of bus driver income and working hours⁴. Table 6 compares the net income per year in USD for bus drivers from various cities across the EU. The income relates to a bus driver employed by the municipal transport operator with 10 years experience. To make the data comparable a PPP adjustment is carried out to account for cross-country differences in the cost of living. The PPP adjusted net income of bus drivers in Dublin is the third highest of 25 EU cities.

Source: UBS Prices and Earnings 2012

PPP adjustments are made using OECD adjustment factors for PPP at the country level.

Competitive Tendering as a Policy Option

In 2009 Dublin Bus entered into a contract with the National Transport Authority (NTA) which involved Public Service Obligation (PSO) payments to Dublin Bus in return for the provision of public bus services. This contract is due for renewal in 2014 and the NTA is currently assessing whether it should “undertake competitive tenders in relation to some or all of the services” . Competitive tendering would introduce competitive pressures into the bus market by requiring Dublin Bus to compete against privately run bus companies on some or all bus routes. The company that can provide the best service at the lowest cost may be awarded the contract. State subvention would still be required in order to maintain an adequate service on bus routes which are not profitable. As part of the public consultation process, competitive tendering has received support from organisations such as The Competition Authority and Chambers Ireland .

The potential cost savings are the main attraction of such an option. When a country introduces competitive tendering cost savings of 20 to 30 percent are typically achieved⁵ . However this has to be weighed up against the potential pitfalls. The process of competitive tendering puts pressure on the participating companies to lower costs and this may be achieved by using cheap, low-quality materials and labour. This can result in poor service provision and potential safety issues if not overseen correctly.

Conclusion

Dublin Bus recorded an €18 million deficit for the year 2011 with an accumulated deficit of €48 million. Declining passenger numbers and a reduction in state subvention mean that cost reduction is necessary to bring operating costs in line with lower revenue. There appears to be two main options for lowering costs. One option is to continue cutting payroll and related costs. In recent years savings have been made by reducing the average number of employees. Average wages have remained stable over this period. An alternative option under consideration by the National Transport Authority is competitive tendering. It is likely that competitive tendering would bring cost savings. However this can be a very slow process and there is a danger that the quality of service may be compromised if the process is not managed effectively.

Notes:

¹ Bus Eireann and Iarnrod Eireann also fall into the category of services which are “socially necessary but financially unviable”. As such, they also receive PSO payments.

² Deloitte: “Cost and Efficiency Review of Dublin Bus and Bus Eireann”. January 2009.

³ From 2003-2011 payroll costs as a percentage of total operating costs have remained virtually unchanged at 67 percent. Source: Dublin Bus annual reports 2003-2011.

⁴ UBS Prices and Earnings, September 2012 edition.

⁵ “Competitive Tendering for Public Bus Services”, Richard G. Scurfield, World Bank

Key Point

Failure to implement EU Directives correctly and in time leads to significant costs. The most recent illustration of this is the Waterford Crystal pensions case. We need to put a process in place to ensure that the transposition of Directives is done competently and in time.

Introduction

The former workers in Waterford Crystal won a very important case about their pension entitlements in the European Court of Justice (25 April, 2013)

The European Court held that in Case C 398/11 that “as soon as the judgment in Robins and Others was delivered, namely on 25 January 2007, the Member States were informed that correct transposition of Article 8 of Directive 2008/94 on the protection of employees in the event of the insolvency of their employer requires an employee to receive, in the event of the insolvency of his employer, at least half of the old-age benefits arising out of the accrued pension rights for which he has paid contributions under a supplementary occupational pension scheme.”.

The deficit in the Waterford pension fund is about €110 million and the case now goes back to the Irish High Court to set the compensation that the employees should receive. No doubt many other pensioners whose schemes are also insolvent will join the queue to sue the State. The taxpayer (and not the companies involved) will have either to fund or otherwise establish a financial assistance scheme covering most of an employee’s expected pension in certain insolvency situations. The ultimate costs may be very substantial.

The reason the State lost the case was because it had not transposed an EC Directive into Irish law. The following questions arise. How did this happen ?, why ?, who is responsible ? and what do we need to do to prevent episodes like this happening again ?.

There is a serious problem here with the transposition of EU Directives . (Transposition means turning EU Directives into Irish law so that EU law becomes Irish law) The pension case is not the only case which Ireland has lost because of failing to transpose directives. In the environmental area with which I am familiar, the State has lost a large number of cases which it should never have lost if somebody had bothered to draft the transposing legislation or ensure that it was compliant with EU requirements¹.

We are one of the few EU Member States fined for not transposing waste law properly and we have paid daily fines for not doing so². Academics and distinguished practitioners who have written about failures of transposition or NGOs who have complained about it in administrative tribunals have been ignored,sup>3. Even when Directives are transposed, the transposition is often inadequate and inept. In Ireland we sometimes try to “improve on” the EU version using different words and phrases to the original version, or we change the logical order of the EU version or add to it not understanding the full implications of what we are doing. Doing this can make the transposing regulations illegal and expose the State to more legal costs and damages. Look what recently happened to the Providence Resources project for exploring in the Irish Sea⁴ . A €1 billion project was grounded because of a failure to transpose a single sentence in the EIA Directive properly! Those who suffer from bad transposition have a right to sue the State for their consequential losses⁵ .

The Civil Service is still wedded to the outdated managerial culture which marginalizes specialist expertise. This applied as regards economics expertise, and the costs of indulging this gap have proved to be huge. But at least an attempt to address the lack of economic expertise has been made by the establishment of the Government Economics Service. Nothing has been done to improve the situation with respect to legal expertise. The Department of the Environment has only one lawyer for the entire department. Its equivalent in the UK has over 100.

Drafting legislation is often very complex. Drafting good legislation requires a wide range of specialist skills as well as a thorough knowledge of EU law and the area of law impacted by it and a capacity to envisage potential difficulties in how it will be applied and interpreted. Words in legislation may have meanings ascribed to them by Interpretation Acts, other Acts, and Court decisions in Ireland, England, and the European Court of Justice or elsewhere. Phrases may have already been interpreted by Courts here and abroad. These special meanings may be known to lawyers (or lawyers have the skills to find them) but they are not known to individuals without a legal training.

Law has a professional language which lawyers use. They have to be trained in how to interpret legislation. It is estimated that it takes 9000 hours work experience in an area before a trained lawyer becomes expert in it. In legislative drafting, apparently insignificant things may be very significant. The placing of commas may be crucial. It is said that Roger Casement was “hanged on a comma” when the English Court interpreted legislation by reference to the position of a comma. Given therefore that drafting legislation is a very complex matter requiring specialist skills, it should not be left to generalists. That is precisely what happens a great deal of the time in Ireland.

Every year hundreds of pieces of legislation are enacted. Many of these transpose EU Directives. Transposing even one EU Directive could involve amending numerous (reportedly over 60 in one case) pieces of existing legislation. The person drafting the legislation needs to appreciate any consequential implications of amending one section in an Act. Most legislation is not consolidated when it is amended so that the person trying to turn EU law into Irish law may have to spend days assembling and cutting and pasting pieces of legislation until they have something which might resemble a coherent text of the existing legislation. Practicing lawyers have also to do these legislative jig saw puzzles at huge costs to their clients. Most of the costs in the environmental area are in finding out what legislation applies, something which takes minutes in other EU countries.

What Should We Do ?

We need to take a page out of the economists’ book, and ensure that the relevant legal and associated drafting skills are in house and mobilized to ensure that EU legislation is properly transposed in a timely fashion. In particular:

•  More legal expertise should be recruited to the civil service focused particularly on those Departments with responsibility for implementing EU Directives.
• The European Affairs Committee of the Oireachtas should be given an explicit mandate to monitor and report on our performance in implementing EU Directives.
• Successful implementation of Directives should be a criterion for promotion. Failure to do so correctly should have career consequences.

This investment will increase costs but the savings in terms of efficient regulation, having to compensate those who suffer from bad transposition, avoided litigation, delay, fines and Court challenges will be very significant.

Notes:

¹  See Scannell Y.,  “The Catastrophic Failure of the Planning System,” Dublin University Law Journal, 33, 2011 pp.396-438

² For example, in C-374/11, European Commission v. Ireland, 19 December 2012  Ireland was fined €2 million plus €12,000 per day for each day the failure to transpose continues for failure to bring in an adequate and timely regime of septic tank inspections, and €1.5 million because of a breach of other EU rules regarding environmental assessment impacts.

³ ee fn.3 above.

⁴ See Irish Times 12 February 2013  and rte news  reporting Providence Resources’s surrender of a foreshore licence because it became clear that elements of an EU directive on environmental impact assessment (EIA) “were not transposed correctly in 1999 by the Irish Government.”

⁵ Commission v Ireland, Case 398/11 at para 48 “Individuals harmed have a right to reparation against a Member State where three conditions are met: the rule of European Union law infringed must be intended to confer rights on them; the breach of that rule must be sufficiently serious; and there must be a direct causal link between the breach and the loss or damage sustained by the individuals (Case C 445/06 Danske Slagterier [2009] ECR I 2119, paragraph 20, and Case C 568/08 Combinatie Spijker Infrabouw-De Jonge Konstruktie and Others [2010] ECR I 12655, paragraph 87 and the case law cited.”

Introduction

This note assesses recent evidence on the incentive to work. It discusses the measures by which economists gauge work incentives and outlines the results of various empirical studies. Despite a relatively generous welfare net and the costs associated with working, most of the evidence suggests that the majority of unemployed people would be better off in a job.

Replacement Rate

A key measure of the financial incentive to work is the ‘replacement rate’ (RR) – the ratio between net income out of work and net income when in work.

For example, if an unemployed person’s income is €100 when unemployed compared with €200 when employed, the replacement rate is simply 50%. The higher this rate, the more likely an unemployment trap can emerge where an individual’s out of work disposable income compares favourably with in work disposable income, undermining the incentive to work.

Table 1 below shows replacement rates at 67% of the average wage for the OECD, with Ireland highlighted. It appears that replacement rates are highest for married couples, both with and without children. These figures suggest the rates in Ireland are significantly below other OECD countries.

Table 1: Replacement rates for six family types in the OECD in 2011

Source: European Commission

Similar statistics are available from the Department of Finance , which reports replacement rates for various levels of in-work income, given in Table 2. These calculations of in-work income take account of income from employment, taxation, PRSI, income levy, spouse’s entitlement to jobseeker’s allowance, family income supplement and one parent family payment. A replacement rate of 70% or above is considered a danger zone (shaded in grey). 2011 figures show disincentives to take up employment at low income levels even where in-work income at these levels may be supplemented by social welfare payments such as the Family Income Supplement and jobseeker’s allowance for the spouse. The bottom panel also points toward a disincentive for the spouse to take up work at the minimum wage when the other half of the couple is in employment.

Such calculations are somewhat simplistic as they rely on hypothetical examples of in-work income. In their 2011 paper, Callan et al seek instead to predict the in-work income of someone who is unemployed based on their characteristics (age, education, marital status, gender). Individual level data is compiled from a large sample of Irish households and compares household disposable incomes under situations of employment and unemployment. Their analysis finds that average potential earnings of the unemployed in Ireland are close to two thirds of average wages. Replacement rates calculated in this paper for single unemployed individuals in 2007 are 46% (at 67% of the average wage) and 33% (at 100% of the average wage). These were among the lowest in the OECD for that year, but one should bear in mind that this is for single persons only. Table 3 shows the distribution of replacement rates for Ireland in 2011 – it gives the percentage of unemployed persons in various replacement rate intervals.

The bulk of individuals face a replacement rate of less than 60% (i.e. 8 in 10 unemployed individuals), while only 3% have a replacement rate of over 100% (that is, they would earn more unemployed than in employment).

The authors also compare 2011 replacement rates with those in 1987, 1994, 2000 and 2008 (adjusted for wage growth/decline in the intervening years). The most striking result is that the number of 2011 replacement rates above 70% are significantly lower than in 1987, 1994 and 2008, while for replacement rates above 90%, 2011 and 2000 are very similar. Over time, the incidence of high replacement rates was highest in 1987 and 1994, and fell between 2008 and 2011. The authors conclude that these results suggest that measures taken between 2008 and 2011 served to maintain a significant incentive to work for most unemployed people.

Costs of Working

One aspect not considered in Callan et al (2011) is the day to day outlays involved in maintaining a job. In their 2012 Working Paper, Callan et al seek to capture the costs such as childcare, transport and meals which are incurred by choosing to work. The authors contend that replacement rates constitute an imperfect measure of work incentives because replacement rates compare gross income levels before subtracting costs of working which may pose a disincentive to work. Similar research undertaken by the Institute for Fiscal Studies in the UK showed that work related expenses have a negative and important effect on work incentives.

The authors estimate the average extra weekly expenditure on food, clothing and transport for a single employed person is €177.82 – about 5 times that of an unemployed person, for which it is €35.39 (in the case where neither person has children). The difference amounts to €142.43 per week and €6,836.64 annually. For an employed principal breadwinner with one child under five, the additional cost is €227.83, which is €185.86 more than for an unemployed principal breadwinner with one child under five. These figures rise as more children under five are in the household, increasing to about €9,000 per year for one child under the age of five. The graph below plots the differences in weekly income when employed against being unemployed.

Figure 1: Difference in Weekly Income When Employed Against Being Unemployed (€)

Source: Callan et al 2012

Figure 1 (taken from the paper) shows that under the baseline scenario 81 (1%) individuals out of the 4,028 included in the sample have higher incomes when unemployed. This compares to 1,554 (25%) individuals when the additional costs are included without childcare and 2,686 (44%) individuals with childcare for one or two children under five years old; the latter of which is just under half of the sample. This number falls to 1,635 (26%) with no children under 5 years old. The authors conclude that costs of working in Ireland are high and this may provoke a significant disincentive to work.

Criticisms of ‘The Costs of Working in Ireland’

In a critique of ‘The Costs of Working in Ireland’, Seamus McGuinness and Philip O’Connell argue that the estimation of income from returning to work is understated because it does not control for the age of an individual, part time and full time workers and type of employment. The estimations of costs, meanwhile, related solely to full time workers. McGuinness and O’Connell re-estimate income by accounting for age, work experience – using a more detailed data set – and focus specifically on full time employed and unemployed persons. Figure 2 shows incentive to work in a full-time position using the costs initially estimated in Callan et al but with re-estimated income

Figure 2: Re-estimated Difference in Weekly Income: Full-Time Employees and Unemployed

Source: McGuinness & O’Connell 2012

Figure 2 shows that the estimated percentage of individuals for whom being in unemployment pays more than the costs of taking employment is different from the earlier estimation (compare with Figure 1) – its pays for only 9% with no children and 19% for individuals with one child under five – substantially lower than the original estimates.

The latest estimates of the incentive to work come from Callan et al 2012 in an update of their 2011 paper referenced above. As in their earlier work, income in and out of work is predicted on the basis of individual characteristics. However, the authors include estimates of the costs associated with working – namely transport and childcare costs – using more detailed and recent data than used in Callan et al. Interestingly, the work-related transport costs are found to be lower than in the Callan et al paper, but the cost of childcare is found to be significantly higher. The authors find that the fraction of people with a young child that are better off not in work is between 12% and 13%, compared to 44% in Callan et al and 19% in McGuinness & O’Connell. For people without a young child, only 4% are found to be better off, as opposed to 15% in Callan et al and 9% in McGuinness & O’Connell. Table 4 shows how the inclusion of estimates of the costs of working impact on the fraction of unemployed people facing high replacement rates.

Looking more generally at the impact of high replacement rates, the authors note that replacement rates in 2005 were higher than they are today, but the unemployment rate was only 4% in 2005 compared to 14% currently. This suggests that Ireland does not have a generalised problem of high replacement rates damaging incentives to work. Moreover, 6 out of 10 people facing high replacement rates (over 70%) in 2011 are found to be in employment. Of those who are estimated to be worse off in employment, 3 out of four have a job.

These results highlight the limited nature of analyses based on the use of replacement rates. Replacement rates only ever capture a snapshot at a point in time, whereas many people endure periods where it may not pay to work in the expectation that their wages will be higher in the future.

Introduction

This note sets out the key facts in relation to the current Irish fiscal position as at May 2013.

Total Government Revenue in 2012 was €41.8bn compared with Total Expenditure of €56.6bn leaving an Exchequer Balance of €14.9bn. The Underlying General Government Deficit (GGD) was €12.5bn or an estimated 7.6% of GDP according to the latest Department of Finance Forecasts. Ireland is committed to reducing the GGD to below 3% of GDP by 2015.

Fiscal consolidation is planned to continue for at least another two years. A further €5.1bn in adjustments is to be implemented in Budget 2014 and Budget 2015.

The latest official forecasts for the period 2013-2015 are set out in the following Table:

1.1 – General Government Balance and Fiscal Consolidation Forecasts 2013-2015

*Source: Stability Programme Update April 2013, Department of Finance
**-as set by ECOFIN Council
***Post-Promissory note transaction i.e. accounts for this manoeuvre

The above table shows that forecasts for the GGD were just within the parameters set out by ECOFIN prior to the promissory note deal. On February 7th and into the early hours of the morning of February 8th the Oireachtas enacted legislation to liquidate the Irish Bank Resolution Corporation (IBRC), winding down the former Anglo Irish Bank and Irish Nationwide Building Society (INBS). Under the deal, the liabilities of Anglo Irish Bank and the scheduled annual promissory note payments of €3.1bn were converted into long-term bonds with a much longer length of maturity. The first principal payment on these bonds will be made in 2038, with the final payment to be made in 2053. The deal results in the NTMA’s borrowing requirement being reduced by €20bn over the next decade.

However, significant fiscal challenges remain with General Government expenditure exceeding General Government revenue for the foreseeable future.

General Government Revenue

Current receipts for 2012 were €39.5bn, comprised of tax revenue of €36.6bn and non-tax revenue of €2.8bn. The biggest component of tax revenue in 2012 was Income Tax, which constituted 41.4% of the tax take. Value Added Tax (VAT) was the second biggest tax heading, constituting 27.8% of the total tax take.

Table 1.2 – Revenue Headings 2011 and 2012

*Rounding of tax headings may affect totals
Source: Department of Finance

Table 1.3 Composition of 2012 Tax Revenue

Source: Department of Finance

The main contributors to the tax take are income tax, VAT, Excise Duty and corporation tax which between them account for 92% of the tax take. Stamp duties now only contribute 4% to total revenue, compared with 8% at the height of the Celtic Tiger period.

General Government Expenditure

General Government expenditure has increased since 2008 despite the implementation of fiscally austere policies. As can be seen from the Table 1.4 below, by far the largest portion of current government expenditure is in the area of Social Protection, which accounts for just under 40% of total gross current spending. Spending on Social Protection has increased 34% since 2007 as a result of the recession – Irish unemployment has effectively tripled from just 4.7% in 2007 to 14.6% in 2011 and remains at remains stubbornly high with the standardized unemployment rate currently at 14%.

The other main areas of government current expenditure are Health, which accounts for 26.6% of total current expenditure, and education, which accounts for 16.4%

Table 1.4 – Summary of Gross Current Expenditure, 2012

Source: Revised Estimates for Public Services 2013

Table 1.5 – Breakdown of current Government Expenditure 2012

Source: Revised Estimates for Public Services 2013
Table 1.6 shows annual capital expenditure by the state from 1997 to 2012. The peak in capital expenditure was in 2008 when €9bn was spent and has fallen to under €4bn in 2012 representing a fall in capital expenditure of 56%. Capital expenditure was reduced by a further €0.55bn in Budget 2013 and an additional €0.1bn in savings via capital expenditure is planned for Budget 2014.

Table 1.6 – Capital Expenditure 1997-2012 and Year-on-Year Increases

Source: Department of Public Expenditure and Reform

The Deficit – General Government Balance

Since 2008, the public finances have come under increased strain due to a collapse of tax revenues and an increase in expenditure on social transfers and debt servicing costs. Table 1.7 depicts the deterioration of the underlying General Government Balance (i.e. excluding once-off bank recapitalisation costs) from a small surplus in 2007 to a large deficit of -11.5% in 2009.

Table 1.7 – Underlying General Government Balance 2007-2016 Forecast*

Source: Department of Finance

As can be seen from the graph above, the deficit has been gradually falling since 2009. Due to a Eurostat ruling, the recorded deficit for 2010 was 32% but the underlying General Government Balance is shown above at -10.7%. The GGB for 2012 was -7.6%, considerably below the ECOFIN target of 8.6%.

Debt/GDP Ratio

Although progress has been made in terms of deficit reduction, due to the running of large fiscal deficits for the last number of years the indebtedness of the Irish sovereign has increased dramatically. The cumulative effect of running large deficits has been a significant increase in the debt burden.

Table 1.8 – Ireland’s General Government Debt 2007-2016 Forecast

Source: Department of Finance

Ireland’s General Government Debt relative to GDP is currently the fourth highest in the EU27. The indebtedness of the Irish sovereign has more than quadrupled since 2006 rising from 24.6% in 2006 to 118% by 2012. The debt-to-GDP ratio is expected to peak in 2013 at 123% and fall gradually in the years thereafter. It is important to note that these numbers represent the gross debt position. When account is taken of the sizeable holdings of cash and other financial assets held by the government, the net debt-to-GDP ratio for 2013 is estimated to be 98%.

The significant debt burden of the Irish sovereign will act as a drag on economic activity in the years ahead, and reduces the government’s capacity to respond to future crises.

Introduction

This note sets out data on the level of domestic water charges in Europe.

Pricing Water in Europe

Given the variety of pricing structures in place across Europe, it is difficult to get a good uniform measure of water pricing. Any approach to compare water pricing is going to be imperfect given the variety of pricing schemes in place. The approach taken in the Global Water Intelligence Report 2011 is to take the costs based on fixed costs and a consumption of 15, 000 litres per person per month (500 litres per person per day) and then divide by 15 to give a price per 1,000 litres. These costs also include wastewater costs.

The average price of water across many European Cities varies from €0.40 up to €5.75 per 1,000 litres. Within countries huge variation can be seen. In Sweden, for example, citizens in Malmo pay just €1.03 while those in Gothenberg pay €4.19 per 1000 litres.

Of the 65 western European cities reported on who charge for water (Dublin, Cork and Belfast being the only ones who do not) only one city (Glasgow) has a decreasing price structure, i.e. the more water you use the less you pay per litre. This can be thought of like a bulk buying discount. 20 cities (mainly located in Greece, Spain, Portugal and Italy) have increasing pricing, so the more you use the more you pay per litre. The remaining 44 cities (Germany, France and UK) have linear charging schemes, so you pay the same price per litre regardless of how much you are using.

Table 1: Water prices across selected cities (per 1000 litres)

Source: Global Water Intelligence Annual Tariff Survey September 2011.

The average price in the 65 Cities that charge for water in Western Europe is €1.91 per 1,000 litre (again based on charges for 15,000 litres of consumption and fixed charges in a month and then dividing by 15).

Even within these three main groups there are a variety of mechanisms for charging people for water. Many counties have a block pricing structure i.e. the first 500 litres are charged at a low price or free, then each subsequent block of water is more costly. It is also noticeable that those that charge on an increasing scale (mainly Mediterranean countries) tend to charge lesson average (€1.25) compared to those who charge in a linear fashion (€2.20), i.e. you pay the same rate for each litre of water.

Estimates of Irish water consumption are approximately 150 litres per person per day. International experience tells us that consumption is likely to decline by about 15% if charges are introduced. This would leave consumption of about 127.5 litres on average. This translates to about 3,825 litres per person per month.

Pricing Water in Ireland

According to the Census 2011 there are 1.39m households connected to the public mains or in a local authority group scheme. Those in private group water schemes will not be charged for their water supply, however some may be charged for discharging waste water into the public system.

The current costs of providing water and maintaining the current infrastructure are about €1.23bn per year. €221m per year is collected from charging firms for water (despite low collection rates) leaving exchequer funding of just over €1bn. The EU/IMF Programme contains a commitment that water services “will become substantially self-funded over time”.

If one were to use the average price of water across Western Europe (€1.91 per 1,000 litres per month) that would give the average consumer a bill of €7.30 per month or €87.67 per year, assuming there is no free allocation. Given that the average household has 2.78 people, the yield would be about €339m (assuming full collection). To generate €500m in revenue the average household charge would be €360 or about €129.31 per person.

Free Allocation

The Programme for Government states that there will be a free allowance and people will only be charged for their use above this allowance¹, This will mean that there will be a higher per litre charge than otherwise would be the case as revenue is only being generated from a smaller pool of chargeable water. The higher the free allowance is, the higher the price on large volumes of water there will have to be.

Regardless of which way this balance is struck an average of €360 would be required from each household to collect €500 million. If the full €1bn of costs were to be recouped, the household charge would be €720 on average. However, costs should fall over time as scale economies are realized.

Notes:

¹ See “Water for Poor People : Lessons from France and Belgium” by Dr Henri Smets for an alternative to a free water allowance for all.

Some years ago, I spent an afternoon in the control room of the Singapore Electronic Road Pricing system with Eddie Lim Sing Loong, Engineer, Electronic Road Pricing. He explained that their system works as follows: you are charged for using the road, and this charge varies depending on the road and the time of day, with the price level designed to give you a smooth and fast journey. This approach has many advantages: before you set out, you know how long your journey will take, and that traffic will flow smoothly –time and energy are saved, stress and pollution are reduced, and much of the revenue generated is recycled to finance public transport; Singapore has a state of the art mass transit system.

But what impressed me in particular was his description of how much time and effort they put into the planning, design and (especially) testing of the system before they went live. Years were devoted to making sure that it worked, and that consumers would get what they had been promised. This attention to detail and the obsession with getting it right is relevant to the debate about introducing water pricing in Ireland, with charges based on use.

We should not have abolished water charges in 1997, but the system we had then – lump sum payment – was very deficient, because it did nothing to encourage efficient use of water and it rewarded the irresponsible and the feckless. By changing to metering, and paying based on use, we get many benefits:

• Cuts wastage of water by encouraging the identification and repair of leaks. 
• Discourages wasteful practices such as running water 24 hours a day in winter to prevent freezing of pipes. 
• Provides greater ability to manage shortages, e.g. in periods of drought by using pricing to manage scarcity without cutting off or rationing supply. 
• Reduces the need to waste scarce capital by premature investment in water supply and waste treatment plant.
• Rewards those who invest money, time and effort to save water and penalises those who don’t bother. 
• It’s fair. Without metering, those who are careful in their management of water are in effect subsidising the feckless. 
• It makes paying more acceptable to many of the public.

But deciding what to do, designing, installing and operating meters successfully requires capital, experience, skill and time, assisted by a degree of luck, modesty and humility. Nobel Prize winner Daniel Kahneman talks about the ‘planning fallacy’ where estimates as to the cost of any major investments, and the time it will take to implement them, are often unrealistic, being based on best case scenarios, rather than on evidence from experience drawn from a range of similar projects. This tendency is typically driven by ‘optimistic bias’. He notes that people often take on risky projects because they are overly optimistic about the odds they face – it probably contributes to an explanation of why people litigate, why they start wars, and why they open small businesses.

The implication for Ireland today is that we should take as much time as necessary to get our water metering system right. But this measured approach seems to be inconsistent with the provisions of our fiscal adjustment programme. The Eighth Review of Ireland’s Programme by the IMF states: “The authorities’ commitment to the European Commission to introduce metered water charging is expected to raise about €0.5 billion in 2015.” Trying to meet this revenue target by either imposing a fixed charge per household, or implementing metering before it has been tested and re-tested, would be a mistake. It would result in a public revolt comparable to that associated with the household charge, and to disillusion. Better to take our time and get it right. And there are more general lessons to be learnt both from our experience and that of others.

• Reform taxes, don’t abolish them –reform, not abolition, is what the State of California did when they had a tax payer revolt against property taxes; once taxes are gone, the political costs of re-introducing them are huge.

• Recognise that abolishing one tax means that others must be raised to make up the difference, and this can damage both fairness and economic performance. The abolition of domestic property tax and water charges are not the main reason we went over an economic cliff, but it did deepen the fall. Those that worry that paying water charges will take money out of local economies ignore the fact that if the money is not raised from water charges, it will have to come from somewhere else.

• If we can reduce any other taxes, this should be timed to coincide with the introduction of water charges. We missed a trick during the boom, when we could relatively easily have reduced other taxes as a quid pro quo to introducing water charges. We should not repeat the mistake.

• Do not ignore the experience of other countries and regions. Henri Smets of the French Water Academy notes that: “In all countries, it is now accepted that water users should pay to a very large extent for the water they use and that the amount of payment be proportionate to water consumption. The Irish model of free water for domestic users was hardly known to the rest of Europe and did not inspire the policy of any country in Western Europe”. When everyone is out of step except our Johnny, we should consider that Johnny may have got it wrong.

At publicpolicy.ie, you can find a range of short papers on water charges that we have put together ourselves (‘Our Analysis’); this includes a note on alternative revenue sources if we have to meet the Troika’s revenue requirement. And under ‘External Analysis’ you will find papers contributed by others, including one by Henri Smets on how best to meet the needs of those of us who cannot afford to pay.

How much debt is too much? The answer to such a simple question would obviously be of great use to policy makers who struggle to make decisions under great uncertainty. But – as with many other questions – economists struggle to find a satisfying answer amid a bewildering array of factors that influence a country’s economic health at any given time and a paucity of reliable data. It was for this reason that a paper published entitled “Growth in a Time of Debt” by Carmen Reinhart and Kenneth Rogoff attracted so much attention. In that paper, the authors provided a simple narrative – higher rates of debt are associated with slower growth. In particular, debt/GDP ratio of over 90% is noted as a turning point, where after growth deteriorates significantly.

Finally, then, the simple question had a simple answer, and the analysis became very widely cited in policy circles, particularly among those in favour of deficit reduction.

However, as in the world of science, the robustness of an empirical result lies in its replicability. A team of researchers – Thomas Herndon, Michael Ash, and Robert Pollin – sought to test this using Reinhart & Rogoff’s data set and code . Through the process of trying to repeat the result of the 2010 paper, the authors discovered three factors that biased the analysis towards the conclusion that high debt limits growth: a coding error, the omission of some data, and an unconventional weighting system. I will not go in to the specifics of these factors (those interested in the nuts and bolts can check out the links below) only to say that Reinhart and Rogoff have acknowledged the coding error whilst pointing out that the data that was omitted was not available to them when they wrote their 2010 paper . The important point is that when these factors are accounted for, high debt is still associated with low growth, but debt/GDP ratio above 90% is no longer a significant turning point. A comparison of the two results is presented below.

Figure 1: Comparison of Results from the Original Paper and the Critique (Click to enlarge)

Beyond these data issues, a more fundamental critique of the Reinhart and Rogoff analysis has emerged. In their original paper, Reinhart and Rogoff merely find that episodes of high debt are correlated with episodes of low growth. This correlation survives, albeit weakened, in the Herndon, Ash and Pollin critique. But correlation does not imply causation, and it is equally as likely that low growth leads to high debt.

Implications for Irish Austerity

So what does this controversy mean for Ireland, both in terms of the austerity undertaken in the recent past and the future path of fiscal policy? First, it should be noted Ireland was already well down the path of fiscal austerity when the Reinhart and Rogoff analysis was originally published, and our debt to GDP was already destined to surpass the 90% limit by the end of 2010. It is unlikely then that “Growth in a Time of Debt” influenced or indeed was relevant for recent Irish fiscal policy when it was released.

Of greater importance is the question of where do we go from here. Ireland is facing into a high-debt future – our debt/GDP ratio is forecast to peak at around 120% before slowly falling. Should fiscal policy seek to reduce this debt to a more palatable level as quickly as possible, or should high levels of debt be tolerated? The 90% limit represented a convenient guide and a tantalising goal for policy which promised future growth in exchange for a tight fiscal policy in the present. It is now apparent that this is far from certain.

In reality, our future fiscal path will be more heavily influenced by our obligations under the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union than by the empirical findings of macroeconomists. These obligations are aimed at reducing the risk posed by high public debt, rather than seeking to maximise economic growth. The Treaty lays down the pace of consolidation that we must adhere to: the gap between current debt/GDP ratio and the target debt/GDP ratio of 60% must be reduced by one twentieth of that gap in a year. Room to manoeuvre in any given year will be dependent on projections of nominal GDP, but at the very least we will have to run something close to a balanced budget over the coming years in order to comply with the Treaty.

Read for yourself:

• This Blogs Review  from the Bruegel think tank provides an expansive reading list of the issues involved.
• Arindrajit Dube seeks to disentangle the direction of causation between high debt and low growth, and finds that low growth tends to precede episodes of high debt.
• Gavyn Davies writes a review in the Financial Times Blog
• Ryan Avent does likewise in The Economist
• In the wake of this debate, Frances Coppola questions the use of debt/GDP as a measure of a country’s indebtedness

Key Point

The gap between current Government spending and revenue as measured by the General Government Deficit in 2012 was over €13 billion (8.2% of GDP). We are committed to reducing this deficit under the EU Excessive Deficit Procedure to below 3% by 2015. The pay and pensions bill accounts for 35% of Government spending. If public sector pay and pensions were to be fully protected, the burden of adjustment would have to fall on non-pay current spending, capital spending or increases in taxation or some combination of these. While these items will have to bear a share of the necessary adjustment, putting the total burden of adjustment on these items would be either more economically damaging or socially regressive than putting some of the burden on pay and pensions. The proposed reductions in incomes over €65,000 are clearly progressive. However it is difficult to assess the impact of the reductions in overtime, premium pay and other allowances as the incidence of these will vary considerably in individual cases.

Pay Adjustments

The Draft Public Service Pay Agreement provides for a reduction in pay for serving public servants on salaries of €65,000 or more. The reductions are as follows:

The reductions in take home pay are less than the reductions in gross pay. This is because tax rates are highest on the top slice of income. For example, the reduction of 6.0 % in gross pay for a married public servant at €100,000 could result in an effective reduction in take home pay of 4.7%. Taking account of the pension related deduction, some public servants take home just under 43 per cent of the top slice of their incomes. 

Pensioners

At the end of 2012 there were almost 140,000 public service pensioners¹. Exchequer spending on pensions was just over €3 billion in 2012. It is clear that the vast majority of public service pensions are below €32,500 per year, which is the figure at which the pension reduction begins to apply

Overtime and Premium Pay

The Draft Agreement provides for payment of overtime at time and a half for those on salaries of up to €35,000 and at time and a quarter for others. The Sunday premium will be at a rate of time and three quarters reduced from double time.

Twilight payments are payments within normal hours for work between 6pm and 8 pm and it is proposed that these will be eliminated.

It is difficult to assess the impact of these measures as there is no data on the incomes of those who earn significant amounts of overtime and premium pay. Major categories of those affected include Gardai and Nurses². Average pay including overtime and allowances net of pension related deduction of those paid from the Garda Vote in 2012 was about €53,000. The basic pay of Staff Nurses begins at just over €30,000 and rises to just over €42,000 at the top of the scale. The impact of the proposals in the draft agreement will vary depending on the incidence of overtime, premium pay and other allowances which could vary considerably in individual cases.

By way of comparison the standard overtime rate in the UK National Health Service is also time and a half with the exception of work on general public holidays which is paid at double time³. Sunday premium pay in the NHS is a double time for the lowest pay levels and reduces in a number of steps to time plus 60% for those in more senior positions.

The Alternatives

The Government’s Medium Term Fiscal Statement sets a target of €5.1 billion in additional savings and revenue-raising measures to be implemented in the next two budgets. If there is no contribution from the public pay and pensions bill, we must get the savings from capital spending, non-pay current spending, or increases in taxation.

Capital Spending

Voted capital spending has been reduced significantly from €9 billion in 2008 to just under €4 billion in 2012. While the high level of capital spending in the boom years reflected a need to eliminate the infrastructural deficit, further sharp reductions in capital spending could seriously undermine the potential for future growth in the economy.

Current Spending

If the pay and pensions bill is to be fully insulated from reductions, cuts in non-pay current expenditure could affect items such as medical cards or social protection spending. These elements of public spending are already under pressure from having to bear their share of the adjustment. Further reductions would affect the most disadvantaged in society who depend disproportionately on public services and social protection payments.

Taxation

Much depends on the taxes that would be increased. Increases in VAT or excises would be more regressive than reductions in public sector pay. One option might be to increase the top rate of income tax by 2 percentage points. This would yield over €400 million in a full year and go some way towards raising the net after tax yield of the public sector pay reductions.

Ireland already has the most progressive income tax system in the EU. This would put Irish marginal tax rates towards the top of the OECD league table. For example, only Belgium has a marginal tax rate of over 60% (60.9%) on a single person on 167 % of the average wage in 2011⁴ . (The OECD average is 40.3 %).

In addition, OECD analysis suggests that increases in income tax are more inimical to job creation and economic growth than increases in property or consumption taxes⁵.

Conclusion

The median pay of all employees across the economy in 2010 was €28,669 (€32,507 for men and €25,334 for women)⁶. Thus the proposed public service pay reductions (other than in relation to overtime and premium pay) begin to take effect at a level which is over twice the median pay level of employees in the public and private sectors. While not wishing to diminish the sacrifices made by public sector workers to date, it is clear that most public sector employees are in the top half of the income distribution. Therefore, most alternative measures to the proposals in the draft public service agreement are likely to be more socially regressive or economically damaging.

Notes:
¹Revised Estimates for Public Services 2012 , Department of Public Expenditure and Reform Table 7 Page 24
²OECD data suggests that nurses’ salaries in Ireland are over 25 % higher than the OECD average after adjusting for changes in purchasing power. Ireland ranks number 4 in OECD countries for nurses’ salaries after Luxembourg, US and Australia. There is no readily available data to show the relative salaries of international police forces.
³NHS Terms and Conditions of Service Handbook 2012
⁴Taxing Wages 2010-2011, OECD 2011, Table 1.18
⁵Taxation and Economic Growth, OECD Working Paper No 620, 2008
⁶Employment Earnings Inequality in Ireland 2006-2010, McCarthy et al for Publicpolicy.ie, November 2011

Introduction

The Minimum Wage was introduced in Ireland by the National Minimum Wage Act 2000 . It states an hourly wage above and equal to which employers must pay employees. Since July 2011, the Minimum Wage guarantees an hourly wage of €8.65 to adult employees over the eighteen with at least two years previous employment experience. For teenagers under the age of eighteen, this wage guarantee is €6.06 per hour. This increases with a first year of employment over the age of eighteen to €6.92, and with two years of employment experience over this age to €7.79. Exceptions exist for both employees who are close relatives to the employer, and those undertaking structured training schemes, such as apprenticeships. In October 2007 it was estimated that 4.9% of employees in Ireland, approximately 83,700 people at the time, were earning the Minimum Wage. This report will discuss how the Minimum Wage has changed within Ireland since its introduction. It will then compare the Minimum Wage in Ireland with both within the European Union and across OECD nations.

Minimum Wage and Inflation

Since its introduction in 2000, we may compare how the Minimum Wage has adjusted compared to inflation. Inflation is the increase in prices over time. If prices were to increase with no change in the Minimum Wage, then individuals earning this wage are relatively worse off, and vice versa. Figure 1 outlines how inflation and the Minimum Wage have changed relative to the first year of available data in 2000. The observation for each individual year shows the price level and Minimum Wage as a proportion of its value for the year 2000. It shows that the Minimum Wage in Ireland has increased greater than the price level. Therefore, an individual earning the Minimum Wage is comparatively better off in 2012 than when the Minimum Wage was introduced in 2000. The divergence of the Minimum Wage from the price level is most drastic from 2004 onwards. If the ratio of the Minimum Wage to the price level were the same in 2012 as when it was introduced in 2000, the Minimum Wage would be approximately €7.42 an hour.

Source: Annual CPI, Central Statistics Office ; Eurostat

Comparison across European Union countries

Twenty of the twenty-seven European Union countries have statutory national legislation that formally sets a Minimum Wage for employees. Notable exceptions include Denmark, Germany, Italy and Sweden . Figure 2 below outlines the Minimum Wage across these twenty countries. The values for countries like Ireland, who set an hourly Minimum Wage as opposed to a monthly amount, have been adjusted to the monthly scale. This adjustment estimates the equivalent of Ireland’s Minimum Wage to equate to approximately €1462 per month . Figure 2 outlines the nominal values of the Minimum Wage for this sample of European Union countries in 2012.

Source: Eurostat, statutory minimum wages¹

It shows that the Minimum Wage in Ireland is the second highest in the European Union, only less than that of Luxembourg. However, this fails to account for differences in price levels between countries. For instance, if wages in one country were double that of another, but the prices of goods were double too, the average earner in each country would have the same standard of living. Hence the Minimum Wage under this measure would be deemed the same. Adjusting for Purchasing Power Parity takes into account the differences in the costs of goods and services across countries. Figure 3 shows this adjustment for the year 2012. It shows that when relative prices are taken into account, the value of the Minimum Wage falls by approximately 14% in Ireland. With this adjustment, Ireland has the fifth highest Minimum Wage in the European Union. This adjustment highlights that prices in the Netherlands, Belgium and France are less expensive than in Ireland.

Source: Eurostat, monthly minimum wages adjusted for purchasing power²

The effect of this price adjustment is notable when comparing Ireland with the United Kingdom. The Minimum Wage before the adjustment is 27% higher in Ireland than the United Kingdom. However, once the adjustment is made for the cost of goods and services, the Minimum Wage differential is relatively lower, at 10%. Therefore, although the nominal values of the Minimum Wages show a significant difference, an individual earning the Minimum Wage in Ireland is only approximately 10% wealthier than a comparative individual in the United Kingdom.

 Minimum Wage and Average Wages

Figure 4 outlines the ratio of median wages across a sample of 24 countries to the Minimum Wage for the year 2011.

Source: OECD, Minimum relative to average wages of full-time workers³

The median wage is the income earned by the middle earner of all individuals. At this wage, half of those employed in a country earn more and half earn less. The greater the value of this ratio, the closer the Minimum Wage is to this average measure. This may act as an approximation for the distribution of income. Ireland has a ratio of approximately 0.48. The graph shows that of the sample of countries available, Ireland is averagely placed. This analysis may be extended over the time period of Minimum Wage legislation in Ireland. Figure 5 compares the Minimum to average ratio in Ireland to that of the United Kingdom, United States and an average of the sample of countries from the OECD.

Source: OECD, Minimum relative to average wages of full-time workers³

It shows that, although higher than comparative economies since its introduction, this ratio has recently converged towards similar values to the United Kingdom and United States.

Notes:
¹Figures assume an average of 39 hours worked per week, for 52 weeks per year
²Eurostat: Monthly minimum wages in euro, Purchasing Power Standards (PPS)
Figures given averaged out over bi-annual data for 2012
³Dataset LFS- Minimum relative to median wages of full-time workers

Introduction

This report examines the Local Property Tax which comes into effect on the 1st of July 2013. It looks into the background to property taxation in Ireland and assesses why the introduction of such a tax is necessary at present. The report also explains the disposition of The Local Property Tax; how it is calculated, how it is paid and possible benefits or drawbacks that may arise as a result.

Background

Up until the end of 1996 Ireland had utilised property tax as a source of revenue. Firstly there were Domestic Rates on residential properties which were abolished in 1978, followed by the Residential Property Tax introduced in 1983 that was in place up until the end of 1996. The Residential Property Tax was due on valuable properties if the income of the owner exceeded a certain limit. The tax base was narrow and revenue yields were insignificant. The amount of households that were liable never exceeded 20,000 until a flat rate (as opposed to a proportion of valuation) was introduced in 1994. Despite the introduction of a flat rate only 1,500 more households paid the tax in 1994, less than 2% of the population, which resulted in roughly €16.5 million in revenue in the last two full years of operation of the tax (195 and 1996).

A tax on second homes was introduced in 2009. The Non-Principal Private Residence Charge is a flat rate charge of €200 levied on the owner of the property.

A new property tax was proposed in the National Recovery Plan in November 2010 as a means of correcting large fiscal imbalances. Since then, two separate taxes have been introduced; an interim Household Charge and the Local Property Tax.

The Household Charge was introduced in 2012 and required homeowners pay a flat rate of €100. Due to its regressive nature, amongst other things, it was not readily accepted and it is believed that at present approximately 700,000 have still failed to pay this fee.

Both the Household Charge and the Non-Principal Private Residence Charge are to be replaced by The Local Property Tax (LPT) which is a tax based on the market value of a property. The LPT is due to come into effect on the 1st of July 2013. The Household Charge was abolished from the 1st of January 2013 and the NPPR will be abolished from the 1st of January 2014. All outstanding balances however will remain attached to the property even after the taxes have been abolished.

Stamp Duty and VAT will remain alongside The Local Property Tax as is the case in the majority of countries that have a property tax. It is important for the government to move away from stamp duty as its main source of income from property taxation. The over reliance on transactional property taxes such as VAT and especially stamp duty greatly contributed to the unsustainable bubble in the governments’ finances that was a major component in the current economic crisis.

Why a Local Property Tax is Being Introduced

Budget 2013 was the third budget delivered under the EU/IMF/ECB recovery programme, and contained a target to raise €1.25 Billion in additional tax revenue. Over the past four years the government has become increasingly reliant on income taxes to raise much needed revenue, so much so that despite the on-going high levels of unemployment, income tax in 2012 made up 42% of the total tax yield compared with 27% in 2006 at the height of the boom. This creates a problem as high rates of income tax act as an impediment to job creation. As a result, Budget 2013 introduced base broadening measures which are considered to be less damaging to economic recovery and job creation than income tax rate increases.

An element of this was the introduction of the Local Property Tax. The Local Property Tax is expected to yield €250 million in 2013 and €500 million from 2104 onwards. €250 million is the equivalent of a 1% increase in the standard rate of income tax.

Features of the Local Property Tax

The Local Property Tax is to be a self-assessed tax based on the market value of the property. As it is being implemented in July, property owners will only be obliged to pay an initial half a year’s tax in 2013. The main features of the Local Property Tax are:

• Homeowner’s are the liable persons. Only in cases of long-term tenancy agreements of twenty years or more are the tenants responsible.
• The amount payable is dependent on the market value of the property. Market value will factor in fundamentals such as property size and features, location, access to amenities, transport links etc.
• It is a self-assessment system. Therefore although people will be provided with a Revenue estimate of the amount of property tax due, households can supply their own estimates which can differ.
• The Revenue Commissioners will be in charge of administering and collecting the tax.
• The full amount of the tax will be payable to local authorities. Most of the tax raised in each area will go towards funding the provision of local services in the area the tax was collected. The balance will go into a central fund for use as an equalisation mechanism for poorer Local Authority Areas where the Property Tax receipts will be low.

Calculating the Tax and Payment Methods

The Local Property Tax will be calculated by first placing a property within a number of market value taxable bands. Tax liability will be determined by applying a tax rate of 0.18% to the mid-point of the respective band. The Society of Chartered Surveyors Ireland (SCSI) has advised the government that they need to put in place very clear guidelines for homeowners when valuing their property so as to assist homeowners in submitting realistic valuations.

For properties valued at over €1 million, the first million will be taxed at a rate of 0.18% and there will be a rate of 0.25% charged on balances in excess of €1 million. For the excess balances no banding will apply, the tax rate will be assessed according to the actual value of the property.

There is a minimum charge of €90 for properties valued at less than €100,000.

It is worth noting that from 2015 onwards the local authorities will be given the option to vary the rate of tax by 15% upward or downward at their discretion. Subsequently, when calculating the tax from 2015 onwards, the rate of tax may differ from one place to another, although it will still be calculated the same way.

There are a number of ways for those liable to pay the Local Property Tax so as to allow ease of payment for all individuals. It can be paid by a once off payment of cash, single debit, or using a credit card. It can also be paid through instalments either by direct debit, cash payments from a number of premises, or also through voluntary deductions from salary and welfare payments. The first payments are to be made on the 1st of July 2013.

The valuations made in May 2013 will hold for three years until revaluation in November 2016 regardless of any improvements made.

Exemptions and Deferrals

There are a few cases in which persons are exempt from paying the tax. These include:

• First time buyers that buy between the 1st of January 2013 and the 31st of December 2013. These will be exempt from the tax until the end of 2016.
• New and previously unused properties bought between 1 January 2013 and 31 October 2016. These will be exempt from the tax until the end of 2016.
• Residential properties that remain unoccupied due to the owner having a long term physical or mental illness.
• Residents of the so called ‘ghost estates’.
• Owners of newly constructed but unsold properties.
• Mobile homes, boats, registered nursing homes and diplomatic properties are not included.
• There is an exemption for homes that have a certifiable level of damage caused by Pyrite.

There are also instances in which the tax can be deferred:

• Single persons whose gross income does not exceed €15,000 or couples whose joint gross income does not exceed €25,000 may defer payment until they have the means to pay.
• Those with an outstanding balance on their mortgage can deduct 80% of their mortgage interest from their gross income to determine if their adjusted gross income limit deems them eligible for deferral.
• Homeowners who are engaged in a personal insolvency arrangement can qualify for a deferral during their insolvency period.
• There is also an option for marginal deferrals in which those accountable can defer 50% of the Local Property tax. To meet these requirements the respective person’s gross income or adjusted gross income must fall within €10,000 of the above limits.

Interest on deferred balances will be charged at 4% per annum.

Advantages and Disadvantages

The following are some of the advantages of a Local Property Tax:

• The economic impact is expected to be relatively small since a recurrent tax on residential property is deemed much less distortionary than a tax on income or capital.
• It is a reliable, sustainable source of revenue. Revenue generated from immobile assets is more stable than from property transaction taxes such as Stamp Duty and Capital Gains Tax.
• It will give local authorities an independent source of revenue, and enable citizens to exercise choice over the amount of public services they receive.
• It is progressive since it is assessed on the market value of the property unlike the flat rate Household Charge.

Below are a few obstacles the Local Property Tax may encounter when introduced in July:

• Some homeowners may under-estimate the value of their property. It has been suggested that random audit checks may address this problem.
• It may be difficult for those in rural areas living in their home for maybe 30 or 40 years to estimate the value of their property when only new builds surround them, and also each build is unique.
• Although ‘fairer’ than a flat rate charge, given that is based on the market value of the property it will not be based on peoples’ incomes.
• Difficulties may arise when assessing the amount of tax due from properties that are close to the edges of the taxable bands.
• Due to a shortage of transactions in the property market it may be difficult to determine the market value of many properties.
• Differences in tax rates among local authorities could create distortions. Specifically, low tax rates on the periphery of urban areas may encourage sprawl.
• It may be perceived as an urban property tax since properties in urban areas are usually more expensive and so liable persons will pay much more than their rural counterparts¹ .
• The only other countries that use a self-assessed property tax are Tunisia, Thailand, Hungary, Bogota in Columbia, and The Philippines.

Notes:
¹See Frank Convery Property Tax-Why Dubliners Should Pay More. Publicpolicy.ie, January 2013