Perverse Economics and Water Charges

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If you’re into perverse economics, then you’re going to love the debate in the run-up to the budget. Already we have Minister Simon Harris calling for income tax cuts (didn’t the Taoiseach tell Ministers last year to shut-up during pre-budget discussions?). Of course, there is almost no discussion regarding affordable childcare, reducing education costs or introducing universal pre-primary education, providing affordable pay-related pensions to all workers, reducing health costs, reversing the high levels of deprivation and poverty, etc. Almost no discussion at all about how we can improve our living standards.

But of real interest to fans of the perverse is that while Ministers and interest groups line up to demand tax cuts, the Government will be introducing an extremely regressive ‘tax’ on almost all households – and there is no discussion about how this can be avoided. I am referring to the water charge.

While there has been considerable discussion about the costs to the average household (measuring showers, baths, brushing teeth), there has been little reference to the distributional impact of the charges; that is, the impact on different income groups. Let’s see if we can start to fill this gap.

Of course, we don’t have a history of water charges to measure so let’s look at waste collection charges. User charges, like sales taxes (VAT, excise) are generally regressive – they impact more on low/average groups. This is in the nature of the tax as lower income groups consume, whether goods or water or waste, more of their income than high income groups. The CSO Household Budget Survey provides information on waste collection charges from 2009/10.

waste

There are two things worth noting about the above chart.

First, households in the lowest 10 percent income group pay five times more for waste collection than the top 10 percent income group – as measured as a percentage of their disposable income. Even middle income groups pay multiples of the top income group.
Second, the top income groups pay less than the national average. The top ten percent pays less than half.
Waste charges are regressive. Will water charges follow the same pattern? Probably. There is international evidence to show that higher income groups use more water. And higher income groups have larger households (i.e. more children). Nonetheless, this would have been seen in the waste collection cost data as well. There is an absolute minimum of water that all households have to use and this is what makes a user charge regressive.

Further, a crude calculation suggests that the average waste collection household cost is €190 with a total cost of approximately €300 million. Average household water charges are expected to be €278 with a total cost of approximately €340 million (the difference is that not every household will be subscribers to Irish Water such as those with a private water supply). So we should expect similar levels of ‘tax’ on households.

There will be some relief for low-income groups through the €100 increase in the Household Benefits Package. This is expected to cover 400,000 households and will help alleviate the water charge. However, this won’t cover all low-income groups such as low-paid workers or the unemployed.

If the Government proceeds to full economic charging for water (i.e. revenue from charges covers the entire cost of delivering water) then we should expect charges to increase substantially over the next five to seven years. These increases will inevitably exacerbate the regressive features of the system.

The point here is that if the Government wants to claim they are bringing ‘relief’ to households through tax cuts, people should remember that for many households they will end up paying more because of the water charge while for many others any tax cut will only cancel out the water charge leaving the household no better off. And there will be nothing left to address the real issues in our depressed living standards.

Welcome to perverse economics.

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