Do not be too ready to ditch current economic model

Parallel, or often at an angle, to the political battlefronts are the battles of ideas

Parallel, or often at an angle, to the political battlefronts are the battles of ideas. The main participants are voluntary groups, forums and institutes, writers and broadcasters.

Central to many political arguments is the question, what is the essence of the Irish economic model? And whether it is delivering? Whether it should be fine-tuned or fundamentally altered? Some emphasise the role of social partnership and inclusion; others, low taxes, competition and deregulation. Some criticise what they claim is the excessive pursuit of growth. No one disputes the transformation of employment opportunities and the spectacular reversal of migration trends.

While the public mostly acknowledge and appreciate improvements, there is considerable frustration at delays in clearing up the many inadequacies in public service provision constantly being exposed.

There is a widespread belief that we could do more even within the current budgetary framework through greater efficiencies.

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In the early 1990s, there was much discussion of the apparent problem of jobless growth. It turned out that employers were simply using up spare capacity, before hiring more people. Today, our public services and infrastructure may be capable of absorbing quite large increases in resources, before they really begin to show major improvement. The more radical argument, made sometimes even by Government Ministers, is that, if we want first-class services, or, for example, adequate pensions, we have to be prepared to pay higher contributions to fund them.

Twenty years ago, Ireland would not have pretended to compete with the social services of France, Germany or Scandinavia. We were a poorer peripheral region.

Today, with some exceptions, it is the peripheral countries of the European Union that are prospering, while parts of the continental core are languishing.

The full-blown European social model in many countries is not financially sustainable. The new post-referendum French government has stated plainly that France is living beyond its means. A new German government will, like Ireland in 1987, have to take decisive action to reduce costs.

For Ireland, all of this suggests some prudence before taking on extra social commitments in quantum leaps and rushing towards a position from which others are trying to extricate themselves.

Forget, it is said, the big countries. Look at Scandinavia, efficient, progressive, caring, high tax, full employment economies.

No thought has been given, however, as to how one gets from here to there, or the likely effects on economic activity of such a policy shift, while it is under way.

The justification usually cited is to tackle growing inequality, on most statistical measures higher here. Taxing the wealthy more vigorously will, it is argued, both increase resources and reduce inequality. There is, of course, a strong case for tight tax compliance, and reducing wasteful tax expenditures, by ending schemes that have outlived their original purpose.

However, in a world where people and capital are mobile, care needs to be taken. We need to attract people to work and invest in Ireland.

People with money have choices. They can invest abroad, and live abroad. There are plenty of countries and warmer climates which will make few demands on them.

It is likely that some construction-related tax incentive schemes due to expire will be replaced by more useful ones. They are also a way of sugaring the pill of a progressive 42 per cent higher tax rate, where it falls on a large income.

Much moral indignation is generated by wholesale tax evasion in the 1980s. The hard reality is, as the famous Indian industrialist JRD Tata said in 1981, "in any country where you have high taxes, tax evasion is inevitable". That is one attraction of the flat-rate tax system with few exemptions, not too far removed from what the Commission on Taxation recommended.

A nearly insoluble problem of a progressive tax system is that few multi-millionaires are willing or have to reside under an unlimited liability to a high rate of tax. There is at least an income ceiling on employee PRSI contributions.

It is sometimes argued that residency rules should be tightened up, though change has been ruled out by the Minister for Finance. But, say nights allowed to be spent in the country were reduced from 183 to 40. The amount of money spent here by so-called tax exiles would most likely be correspondingly reduced, including the tax indirectly paid through employing people and high spending.

The Guardian Ireland correspondent writing about the tax holiday enjoyed by writers and artists described Ireland as "the world's smallest cultural superpower".

Similar claims could be made about Ireland's prowess as an equestrian country. If inherently risky activity-based rather than individual-based tax-free schemes are abandoned, and principal beneficiaries move abroad, where is the national benefit? In a recent interview, Edmund Stoiber, premier of Bavaria, was asked if a CDU/CSU government in Germany would consider like the SDP imposing a 'super tax' of 3 per cent on the wealthy to close the deficit. He gave a blunt "No", because that would harm investment and jobs and, then, where would the resources be to improve services? Tackling poverty and poor services is important. So is a sense of fairness and justice and social solidarity and cohesion.

Ensuring economic success, while continually raising the floor beneath the least advantaged, without imposing a ceiling, is not an easy juggling act for government and public authorities, who have at least to be thinking socialists.

Given the economic and social progress that is being made and the underlying fragility of confidence, even in the best-run countries, we should not be too easily persuaded that our current model is all wrong.