Friday, March 20, 2015

Paying twice for water? Not really.

This chestnut is rolled out over and over again.  But saying it repeatedly does not make it true.  Some even go so far as to call it a “quadruple water tax” – Income Tax, VAT, Motor Tax and Water Charges.

For a start money is fungible so it is a fallacious argument.  The only way we can pay twice for water is if we pay the providers of the service twice what they are owed.  This would require paying public sector workers who work in water twice, paying for infrastructure twice and paying twice for the chemicals and other consumables used in the water purification and treatment processes. 

No evidence of such double payments have been presented.  We may pay more money to the Exchequer but if the Exchequer does not use that to pay twice for water then we are not paying twice for water.  If the State collects more money (even under the heading of ‘Water Charges’) and spends the same amount to provide water services then there simply is more money to spend on something else.

However, this reasoning has not stopped the “we are not paying twice” argument being rolled out.  Usually it goes something like this:

Now, the facts: We already pay for water through central taxation. Water charges have been introduced and abolished multiple times. The first time it was abolished was in 1977 before it was re-implemented in 1983 before abolished again in 1997 by the Rainbow Coalition (after much protest and just before a General Election).

So, how was water being paid for? In 1977, it was decided by the Fianna Fáil Government that an increase in income tax, VAT and borrowing would pay for our water usage and maintenance. When water charges were re-introduced, people rightly felt they were being double taxed as there was no reduction in neither income tax or VAT. After the second abolition of water charges in 1997, it was decided by then Minister for Environment Brendan Howlin that water would be paid for by motor tax collected in each area. The increase in motor tax was 5%. Since then there has also been an increase in VAT of 2% (every time VAT has risen, so has the provision for water).

The thing is – most of these tax increases didn’t actually happen.  Here is George Colley delivering the first Fianna Fail budget after the 1977 General Election (if you want a reminder of what they promised see this):

I now come to my proposals for changes in the personal income tax. I have already indicated that the increase in the main personal income tax allowances proposed in the manifesto would be sufficient to improve real disposable incomes significantly, taken in conjunction with the Government target of a wage increase of about 5 per cent. I propose to increase the single allowance by £200, from £665 to £865, and to increase the married allowance by £630, from £1,100 to £1,730.

The abolition of rates on domestic dwellings and the abolition of motor vehicle duties for all but large cars will also mean a good deal more cash in the pocket for the average family in 1978. Savings in motor vehicle duties for a modest family saloon should work out at about £1 a week. Rates savings will, of course, depend on the type of accommodation which a family has. The average savings here should be about £2 a week for a local authority tenant: for a family purchasing a three-bedroomed semi-detached house in the Dublin area the saving could be £4 a week or more.

All in all, therefore, the average family can expect to be at least £9 to £10 a week better-off in terms of disposable income by virtue of these particular measures.

The cost of all these increases in personal allowances will be £63.4 million this year.

Domestic rates were abolished and Income Tax was reduced.  Here is the Minister on VAT.  All we need to say is there were no increases in VAT.  What we can definitely say is that the budget increased borrowing and the outturn over the next following years was even greater borrowing than envisaged:

I opened with a current deficit of £265 million. On the expenditure side I have added about £69 million, allowing for the social welfare savings. From this, however, I am deducting £20 million for unspent balances in the hands of Departments at the end of 1977. This leaves me with a net addition of about £49 million. On the revenue side of the account I have given tax reliefs costing a total of about £91 million. In all, therefore, I am adding £140 million to my opening current deficit, bringing it to £405 million.

To this must be added the Exchequer borrowing requirement for capital purposes of £416 million, leaving me with an Exchequer borrowing requirement of £821 million for 1978, or 13 per cent of GNP—no higher than that envisaged in the manifesto.

If we now roll forward to 1997 when the water charges introduced in 1983 were abolished.  In his speech for the 1997 budget Ruairi Quinn said:

Last month, the Minister for the Environment announced a radical reform of our local government system. His proposals, which I strongly supported, include a new system for the financing of local government. The new funding system involves the abolition of local authority charges to domestic consumers for water and sewerage facilities.

The proposals also involve the assignment of motor tax revenue to local authorities, partly offset by the abolition of the Rates Support Grant.

Local authorities will receive in 1997 at least the same amount through Motor Vehicle Duties and the reduced Rate Support Grant as they would have got with the original Grant.

The cost to the Exchequer in 1997 will be £60.5 million.

There was no increase in Motor Tax when it was assigned to the local government in 1997.  There was changes to Motor Tax as part of the 1997 Local Government Act.  Here is then Minister for the Environment, Brendan Howlin discussing the Second Stage of the bill in the Seanad.  First he emphasises that there was no increase in Motor Tax when the funding model for local government changed:

Under section 3, the full proceeds of motor tax income are assigned to local authorities to replace the income lost through the abolition of domestic water and sewerage charges and the rate support grant. I wish to clarify that these proposals do not involve any new tax but a redirection of existing taxation, which will remain local rather than being paid to the Exchequer. This will provide local authorities with full ownership of the proceeds of a single buoyant tax fully protected by law. They will have full control over this resource and it will be a matter for them to decide how to distribute it.

He then goes on to discuss a discretion given to local authorities to increase motor tax within certain bands if they so wish:

The national rates of motor tax are set by central Government and there has been no increase in these rates since 1992 when the Labour Party came into Government. However, is it right that central Government should have such total control over the system of local government funding? It will be recalled that, under the Local Government (Financial Provisions) (No 2) Act, 1983, local authorities had complete discretion over whether to levy domestic service charges and their amount. Such local discretion is essential for the concept of local democracy. If we are to have real, effective local government capable of responding to local needs, it must have some discretion over how it raises the finance necessary to fund its activities.

This is now being provided for under section 9 which provides motor tax authorities with the power from next year to increase the national rates of motor tax on cars and motor cycles by up to 6 per cent, subject to a maximum of 3 per cent next year. Local authorities, at their own discretion, will be entitled to increase motor tax rates for cars and motorcycles by 3 per cent next year and by 3 per cent the following year. After that, they will not be entitled to any further increase unless the base is moved by central Government. This is designed to strike the right balance between the need to give local authorities discretion in raising finance on the one hand and, on the other, the requirement not to impose any significant new form of taxation. Some 6 per cent is the limit to the increase above the national base.

It would take a bit of digging to find out how this discretion was used by local authorities.  The recent experience of the Local Property Tax would suggest they would not use it to raise additional revenue.  It is also the case that this discretion was short-lived and we have returned to a uniform rate of motor tax.  But there was no increase to pay for water.

The third strand of the “paying twice” argument is something to do with “an increase of VAT of 2 per cent”.  The claim is “since then” so presumable this means after 1997.  Here is a table of VAT rates back to 1972.

In Budget 2012 the standard rate of VAT was increased from 21 per cent to 23 per cent so we do have a 2 per cent increase – but there is no mention of water in the entire budget speech.  VAT was increased but not with the stated intention of paying for water. 

With this “paying twice” approach you could take any tax increase and say it was to pay for water.  The fact that money is fungible means this is baseless.  We collect taxes to pay for public services; assigning particular taxes to particular services is rarely useful.  Increasing taxes does not mean we are paying twice for a particular service; it means there is money to spend  on additional services.

We have previously looked at how much we actually spend on water.  It is around €1.5 billion per annum.  Let’s look at the “paying twice” approach to see how far we get in finding the €1.5 billion we spend on water.

We start with the Income Tax and VAT increases of 1977 but as these didn’t actually happen their contribution is zero.  The next is the link between water and Motor Tax and a 5 per cent increase that also did not happen.  But if 5 per cent of motor tax revenue was allocated to water it would be around €55 million.  Finally, there is the 2 percentage point increase in the standard rate of VAT in 2012.  Again this was not linked to water but lets say it was.  The increase was expected to raise €670 million in a full year.

That means we have €725 million available or about half the total spend.  Commercial water charges raise about €300 million so we’re just over the billion mark.  By the logic of the “paying twice” argument we’re not even paying once! – we’re half a billion short.

Where does that come from?  Increased borrowing – about the only source of funding for water the “paying twice” argument gets right.  Borrowing to invest in water infrastructure can be a sound approach.  So why not have a water utility outside the general government sector that can avail of historically low interest rates?  Why not indeed.

So let’s create a water utility with a €1 billion income stream: 

  • €300 million commercial charges
  • €200 million domestic charges
  • €500 million Exchequer subvention

With that revenue stream the utility can borrow €0.5 billion and we can spend €1.5 billion on water, and maybe more.  Enough of this “paying twice” nonsense; let’s pay once but at least try to do it right.  Actually having water charges linked to water use should be the first step. At the moment we just have a mess.

4 comments:

  1. Interesting viewpoint. Great blog, always worth a read.

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  2. >> So why not have a water utility outside the general government sector that can avail of historically low interest rates? <<
    Ah, now. Corporate bonds yields are almost always higher than sovereign bonds yields, so it's cheaper for government to borrow. The reason they don't (see PPP in UK) is usually given as "offloading risk to the private sector", which is clearly stupid since risk carries a premium. The real reason is accounting tricks, to move public liabilities off balance sheet. In Gordo's case it was an attempt to mask massive pro-cyclical govt overspend, in the case of water charges it is to "fool" the Troika. Expensive accounting tricks are not in the long-term interest of the Irish people. Debt secured against water charges represents a claim against future productivity of the Irish people which will compete with tax collection, and therefore SHOULD be counted as a public liability. There are good reasons for water charges, and there may be good reasons for private sector involvement, but in a number of ways Irish Water looks like an expensive mess. We do those rather well.

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  3. Good informative read with positive addition by John.

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