Over the last few months we have seen massive public indignation over the introduction of the water charge. Although it has subdued since it zenith, protests still go on coupled with promises of non-payment.
The idea that water is free is frankly ridiculous. This is not a right wing free market view, rather it is a simple fact of living in a world of finite resources. Nothing is free! Although water is relatively plentiful in Ireland there are large fixed costs associated with sanitation and supply of water. When we think of paying for water, in reality this is what we are paying for.
Nonetheless water is a prime example of what is known in economics as a ‘merit good’. In other words something which is beneficial for society that would be under-consumed if provided by market forces. It is not as some protesters have tried to claim a ‘public good’ which could not be provided at all by the free market. This is semantics however as the result is the same, water must be provided by the government.
Thus the question we are left with is how the government’s provision of water should be funded. Right2water.ie, a website dedicated to organising opposition to the charge argue that water is already covered by general taxation. If only this were the case. With government expenditure currently standing at €72.7bn, while revenue is only €63.8bn it is clear that general taxation is not covering all of government expenditure. This deficit is then funded by government borrowing, a perfectly normal activity in the Western world.
While borrowing in itself is not a problem for governments the current level of public debt and especially the repayments required to service that debt is very worrying. The Irish government currently has debts equivalent to 111% of GDP. If the country was to slip into another recession, it could prove impossible to match the fall in tax receipts with increased borrowing this mandating huge cuts to government expenditure further depressing demand and hampering growth. Servicing this level of public debt alone costs €8.25bn per year. To put this into perspective, if every household in Ireland paid the maximum water charge it would only cover roughly 0.03% of a figure which is the equivalent of the day to day running costs of the education system.
With borrowing out of the question, the government is thus left with only two realistic options. Either they can raise revenue or cut expenditure. As part of austerity measures enforced by the Troika the government has already slashed the public budget. Any further cuts would be the worst possible outcome for the poorest and most disadvantaged in our society, who benefit the most from government services. With ‘efficiency savings’ already coming in the first rounds of cuts the only option would be to slash frontline services such as teachers and social workers. This outcome should be avoided at all costs.
With lowering expenditure clearly out of the question, the government must raise its revenue. This is exactly what it has done by charging for water. I would agree with the protesters that to charge for use is a particularly regressive system. Especially with a fixed upper limit the amount of usage will not vary significantly with income, yet the proportion of income that goes towards paying for water will of course decrease with increasing wealth. That being said it is still a preferable option to decimating other public services that are already at breaking point. Public expenditure also has a powerful multiplier effect meaning the benefits to the economy are greater than the losses associated with the charge.
Need to raise revenue
Due to the large fixed costs, the marginal cost to produce an extra litre of drinkable water is actually decreasing. For efficiency sake society should be using more water up until the point where new production facilities are required. With high fixed costs and as a good which is not particularly responsive to changes in income it makes sense for the government to foot the bill.
So far it would appear that I am in agreement with the water protesters, apart from a view issues of definition and semantics. The crucial difference is that I accept that there is a problem with public sector funding, with the deficit and public debt at its current level it is absolutely necessary to raise revenue. Thus what I propose would be even more unpopular than the water charge: a comprehensive increase in taxes.
Low tax returns coupled with high public spending has led to the massive level of public debt that has proved so crippling. I support a large public sector, and, in fact, I would like to see the government do more to create a more equal society. I believe this is a view shared by most of the electorate. Unfortunately there is not a similar willingness to foot the bill. Tax increase, particularly to income taxes are universally unpopular and a guaranteed vote loser. This has led to politicians increasing spending without the required tax increases to go with it.
Sweden is always held up as the ideal social democracy with low income inequality and high levels of development due to their wide ranging social welfare programmes. What is never mentioned is that they have the tax rates to go with it. The difference between revenue and expenditure is just €1bn and this is made up with grants from international organisations. This has led to a staggeringly low public debt of just 33% of GDP. Why? Their returns from taxation are considerably higher than Ireland’s.
Although the protesters and associated political parties have demanded tax increases on the rich, such increases would not go far enough. The middle class would also have to pay their proportional share of the bill, which would bring even more people on to the streets and create an even greater backlash at the ballot box. Nevertheless the reality is that if we want the government to provide the services it does we need to pay for it. Either we can do it through regressive means such as the water charge or taxes such as VAT or through fairer, progressive taxes like that on income and the profits of corporations.
The economic rationale for higher income taxes
On the face of it governments across the world have justified current income tax levels through economic means, particularly the idea that taxes on income reduce the incentive to work. The Laffer curve is also important as it argues that at a certain tax rate this disincentive will actually reduce government revenue. However no one actually knows what this tax rate is, any attempts to study seem to suggest that it has not been reached and that governments should raise taxes to maximise revenue.
Companies are also shielded from paying their fair share for the protection society provides by arguments that an increase in corporation tax will depress economic activity, distorting competitive markets. If we return to the example of Sweden we can see that this is a fallacy. The Swedish economy is the fourth most competitive in the world and estimates suggest that no other Western European country will sustain comparable growth rates over the next few years.
Then what is the real reason behind government’s refusal to raise progressive income taxes and instead focus on regressive ways of enhancing revenue? They’re terrified of the political consequences. Changes to income tax are far more noticeable for voters than other forms of taxation, making them feel poorer than if the equivalent was taken by other means. Hence rather than blaming politicians we must take responsibility for this ourselves, it is unreasonable to demand an unsustainable level of public services without paying for it. The water protests are a perfect example of this immaturity. The more reasonable approach would be to offer an alternative. The only fair option is to increase revenue through a rise in progressive taxation across the board. Unfortunately, that wouldn’t be a very popular campaign slogan.