The key elements of the ESRI's Medium-Term Review were well highlighted by the press last week. However, some of this coverage, including a paragraph of my own article, misunderstood the Review's references to pension pre-funding, writes Garret FitzGerald
The institute's concern with this issue relates to the impact of this scheme on inter-generational equity, rather than to current infrastructural investment needs.
On the issue of inter-generational equity, the Review points out first of all that the members of the present generation are already contributing towards their own future pensions as well as paying out of current revenue the pensions of the previous generation.
It is true that, when they were young back in the middle of the last century, today's generation of pensioners had their numbers literally halved by a combination of a very high death rate from infant mortality and TB, and emigration.
But the Review points out that is more than offset by the fact that the present generation is paying through taxation a far greater amount more than their contemporaries elsewhere in Europe for the purpose of catching up on our infrastructural backlog, and they are also suffering from the disruption brought about by a whole range of construction projects - all of which are going to benefit future generations.
It is also worth adding that, because of the priority currently rightly being given to infrastructural investment, this generation is also suffering from grossly inadequate public services, especially in the health sector.
The ESRI believes that, on top of all this, to require the present generation also to pre-fund distant future pension requirements is grossly unfair - as well as being premature. Whilst, under the constraints of the EU Stability and Growth Pact as at present worded, the removal of this burden from today's taxpayers would not open the way immediately either to more spending on public services or to tax cuts; nevertheless, as budgetary pressures start to ease, possibly in the latter part of next year, the cancellation of this arrangement would facilitate better financing of health, social welfare, and education at that stage.
Because of the right-wing stance of our Minister for Finance, supported by the PDs in Government, we are at present committed to the lowest level of taxation in the EU, and this, together with the EU Stability and Growth Pact, is constraining spending to a much greater extent than is either necessary or desirable for a country with a very low level of public debt, and at our stage of development.
The ESRI argues that, as at present worded, this pact "is not firmly grounded in economic logic, making it an ineffective instrument for achieving the necessary co-ordination of fiscal policy within the euro area".
And it adds that, "while this may not be the optimal time to change it radically, just when it is coming under pressure, due to unwise fiscal policies pursued in a number of member-states, delay could be even more damaging".
It suggests two reforms. First that the pact's 3 per cent limitation on borrowing should apply only where a state's accumulated public debt exceeds a threshold of, for example 60 per cent, of its GNP - and/or that borrowing should be allowed for the purpose of funding investment net of depreciation - although for this latter provision to benefit us, a change in the treaty limit of 3 per cent borrowing would be needed.
The truth is that the present EU rules are too mechanistic, and in practice do not operate, as was the original intention, to control inflation. The ESRI suggests that particular objective might best be tackled by a more flexible arrangement, for example one under which the Commission would act to constrain only those countries which are pursuing unduly stimulatory policies.
The ESRI believes that the best prospect of affecting changes in the Stability and Growth Pact along these lines lies in Ireland's impending EU Presidency. Although we would eventually be a beneficiary of such changes, because we are likely next year to be still in broad compliance with the existing terms of the Stability and Growth Pact, in initiating such a reform we would have more credibility than would a number of other states which are currently breaching it.
And in preparing such a proposal the Government could draw on considerable resources of monetary expertise both inside and outside the public sector.
As the European country that has furthest exceeded its Kyoto quota of emissions, we will be seeking from the start of 2005 to avoid some of the penalties arising from our method of producing electricity and from some energy-intensive sectors of manufacturing, by "buying" emission permits from other member-states that have kept within their limits.
The Review points out that in order to deal with the emissions problems of other sectors such as transport, which accounts for two-fifths of all our energy demands, we will also need to introduce carbon taxes at the same time - as envisaged by the last Budget.
As it expects the emission permit price to be around €20 per tonne, it believes that a carbon tax would be around the same level, which will yield about €850 million.
Because of the impact such necessary energy price increases will have on the less-well-off, the ESRI says that some €250 million of this will need to be used to increase social benefits, and it suggests that the impact of these new taxes on the remainder of the community might be offset by reductions in social welfare contributions.
The ESRI does not rule out a very modest increase in taxation, amounting to only about 1 per cent of GNP, over the next seven years, but it foresees as much again being raised by increased user charges for such services as rubbish disposal and water supplies, and by various kinds of charges to deal with problems of road congestion.
Failure to charge for such services leads to wasteful use of water, high waste disposal costs, and road congestion at peak periods which prevents public transport from operating efficiently and thus pushes up commuting costs.
With our competitiveness already eroded by wage increases well above those in competing economies, as well as by the rise in the euro vis-a-vis the dollar and sterling, we simply cannot afford the further damage to our competitiveness arising from a persistent unwillingness to charge for some of these services - as is done in other member-states.
Resistance to such charges by populist politicians, trading on the short-sighted selfishness of some elements among the electorate, must not be allowed any longer to prejudice future employment in our State.