Tax take needs to increase to fund badly needed infrastructure

With Ireland’s population and economy growing rapidly, we need continual investment in infrastructure. Much of this crucial investment, such as in transport, water and energy, mainly falls to the State.

The State may provide the infrastructure directly, or via commercial or non-commercial State bodies. In some cases private companies, as with toll roads, put up the money. A lot of the State’s investment is funded primarily through taxation, but most commercial State bodies fund their investments through user charges.

The ESB is one of the longest-standing commercial State bodies, and for almost a century has generated electricity and operated the power lines that bring that electricity to homes and businesses. Today, the ESB no longer holds a monopoly in electricity generation, but EirGrid as a State company runs the national grid.

Although the ESB is State-owned, it is the ESB management and board that decides on the level of investment, without interference by government in these decisions, and the costs of this investment are paid by consumers so that it is fully financed from charges to its customers. As a result, the investment undertaken by the ESB is not regarded as government expenditure by the European Union, and its borrowings are not counted as part of the national debt.

This independence of the ESB in pursuing its commercial remit means that its investment in electricity infrastructure is not constrained by any limitations on government spending. After the financial crash of 2008, investment in the electricity system could thus continue, whereas other types of public investments were cut back, given the need to tackle excessive national debt and bring the public finances under control. Not only was the ESB permitted by the troika to continue to invest, the financial sector was also prepared to lend it the money, at a time when government was severely constrained in raising finance.

Uisce Éireann, formerly Irish Water, was originally set up to operate on a similar basis, to raise most of its income through charging its customers. However, following the anti-water charges campaign, and the subsequent government decision to abandon domestic water charges, it was ruled that, as its revenues would not be independent of government, its borrowings are now considered to form part of the national debt. That means that investment in our public water and wastewater systems is constrained by the available national budget.

While windfall levels of corporation tax over recent years have eased some of the problems, there remain constraints on how much the Government can borrow. We have been underinvesting in water and sewage systems as a result. Dublin’s water supply remains on a knife edge, we still have some supplies that are not fit to drink and we still have some discharges of untreated sewage to our watercourses.

Northern Ireland Water is a public utility that faces similar challenges. Like the Republic, major investment is needed and, like the Republic, the political system has shied away from water charges that could fund this. While across the rest of the UK, water charges are levied, in the North the cost of running the water system has to come from the funds provided by London to the Northern Ireland government. The transfers from London are calculated on the assumption that Northern Ireland has water charges, like the rest of the UK. Thus the absence of water charges has real consequences for the North’s budget.

In mainland Britain the private water companies can borrow independently to fund new investment; however, for Northern Ireland Water this investment comes out of the limited pot of funds provided by London. In other words, the decision not to charge for water means there is a lot less funding available for all the North’s other public services.

In many EU countries, social housing is provided by arms-length bodies that set their rents independently at levels that service their borrowings, and thus are not limited by EU fiscal rules. However, in Ireland most social housing provided by local authorities or not-for-profit approved housing bodies, is counted as part of the State sector, as rental income falls well short of what’s needed to fund the cost. So borrowing limits pose a real constraint on providing the scale of public housing we need.

As the Commission on Taxation and Welfare has pointed out, in the future Ireland will need a higher tax share if we are to fund the ambitious investment needed for our growing population, to tackle climate change and address the costs of an ageing population.