ECONOMICS: The €500 million-plus annual cost of the SSIAs is not treated as an expenditure item, but as a deduction from income tax receipts - it amounts to a negative DIRT tax, writes Jim O'Leary.
The special savings scheme is expensive and there is no compelling evidence to suggest that it meets its declared objective - to encourage saving.
Two measures of the Government's budgetary position are routinely cited in public reports and commentaries. The one that has the longest track record is the Exchequer Balance. The other, the one that has entered the fiscal lexicon only within the last decade or so, is the General Government Balance (GGB). Of the two measures, it is the newer one that is far and away the more meaningful and relevant.
This is principally for three reasons. First, the GGB is a much more complete measure of the Government's budgetary position in terms of scope - it includes Government entities such as the Social Insurance Fund that are not comprehended by the Exchequer.
Second, the GGB more closely reflects an accruals concept of accounting, and is therefore less susceptible to the kind of "cooking the books" trickery of which successive ministers for finance have been accused down through the years.
Third, it is the GGB that forms the basis for the 3 per cent of GDP ceiling set out in the EU's Stability and Growth Pact.
Indeed, it is probably fair to say that the Exchequer Balance has been rendered entirely meaningless by the once-off accounting manoeuvres of the last couple of years, manoeuvres that were only carried out (and at some cost in terms of thought and imagination) because of the exaggerated symbolism that this measure has acquired for historical reasons.
In other words, it is time to give the Exchequer Balance a decent burial, forget about it and move on.
I have devoted the first three paragraphs of today's article to this seemingly abstruse subject because I think it helps clarify the Government's budgetary options.
First of all, it clarifies the scale of the problem the Government faces. For example, the ESRI's projections of next year's budgetary position see the deficit on Exchequer account rising to more than €3 billion, but the deficit on a general Government basis increasing to less than €800 million or 0.6 per cent of GDP.
The former figure imparts a tremor to George Lee's voice that suggests a dark and dangerous time lies ahead, causing firms to slash their investment plans and consumers to stop spending. The latter figure does not unleash such phenomena.
Second, it illuminates some suggestions made on how the deficit might be reined in. I am thinking in particular about the much-lamented and equally misunderstood Exchequer contribution to the National Pension Reserve Fund.
This is a transfer of money from one arm of government to another. True, it raises the deficit on the Exchequer account, but it creates an equal and offsetting surplus elsewhere, and leaves the balance on general government account unchanged.
This is not to say that the creation of the fund, the size of the Exchequer's contribution to it and the investment policies of those running it are not subjects worthy of vigorous debate, but that abolishing or reducing the contribution to the fund will not make the Government's fiscal problems one whit more tractable.
Another suggestion that has been made is that the Government abolish or scale back its commitment to the SSIAs. This proposal has been advanced on grounds with which I have a good deal of sympathy. The scheme is extremely expensive and is regressive in its distribution of benefits. Moreover, there is no compelling evidence to suggest that it meets its declared objective, namely to encourage saving, or indeed that there was a need to encourage saving at all.
The available data indicate that the personal savings rate remained at a high level throughout the Celtic Tiger era, and increased sharply last year as households responded with caution to the economic slowdown.
What evidence exists for other jurisdictions supports the view that such schemes as the SSIAs merely divert savings from other vehicles, distorting the market for savings but leaving the overall volume of saving unchanged.
So there is a strong case for abolishing or curtailing the SSIAs. But even if the Government was prepared to do this, it would not count towards the sharp reduction in public spending growth that must be a central feature of the 2003 budget.
The reason is that the cost of the SSIAs (over €500 million per annum) is not treated as an expenditure item, but as a deduction from income tax receipts. This treatment has been criticised by some commentators, but I think it has a certain logic. The 25 per cent premium paid to account-holders amounts to a negative DIRT tax, which is what it effectively is.
The point is that, whether the Government decides to retain, abolish or curtail the SSIAs, it will have to do the same work and make the same tough decisions if it wants to restrain public spending growth to 8 per cent next year. A less costly SSIA scheme would (simply) mean that spending growth at this rate would be consistent with a lower deficit than would otherwise be the case, all other things equal.
Finally, and in relation to spending restraint, I was quoted (though not in this newspaper) as saying at last weekend's Kenmare conference that the Government has no option but to pay the awards recommended by the Benchmarking Body. I said no such thing.
What I did say was that repudiation of the body's report did not appear to be an option for Government. That's a very different position. There's a long and difficult process of negotiation to be completed before any pay awards can be implemented.
