Unrealistic Timelines: Water Charges and the Fiscal Deficit

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During a recent debate on water charges, Minister Alan Kelly had this to say about Government policy:

‘I would go so far as to say that the timelines operating to date have been somewhat unrealistic, squeezing many years of work into too fine a condensed period of months.’

To which a reasonable policy response would be abandon the current timeline; in particular, the introduction of water charges.  If the timelines are unrealistic then, clearly, it is realistic to proceed with the charges.

However, an argument that has arisen in the last week is that if water charges were abolished, suspended, postponed, put in cryogenic freeze, whatever, it would have a negative impact on our deficit.  This arises because Irish Water is now ‘off-the-books’ for the purposes of calculating our deficit.  This means that, unlike in the past, expenditure in water services is not counted as government expenditure since more than 50 percent of its revenue comes from non-government services (i.e. household and business charges).   There is an exception to this which is discussed below.

So how much would it cost the state to get rid of the charges?  I have heard claims that it would cost an extra €600 million, €800 million, €1 billion and more.  Would it?

FF’s Micheal McGrath asked the Minister of Finance a pretty straight-forward question:

‘To ask the Minister for Finance the deficit in nominal and percentage terms which would exist in 2015 if domestic water charges were not applied, and the costs associated with water provision if brought fully back on to the State’s books.’

The Minister refused to answer the question or even offer an estimate.   So when you hear Ministers, backbench TDs and commentators going on about how much it would cost the state to get rid of water charges, just remember:  the Minister for Finance refused to tell the Dail how much.

[Also, SF’s Angus Ó Snodaigh also asked the same Minister Kelly ‘the amount it will cost to provide water and sewerage services in 2015’.  Again, no answer.  What does it take to get a direct answer to a direct question?]

Given the official silence on this issue, I went in search for the answer.  The PwC report on water services published in late 2011 stated that the cost of water services, which includes investment, was €1.1 billion in 2010.  Let’s assume some growth in spending, though during this period it could have easily been cut (Eurostat numbers show a steady reduction of expenditure since 2010 but they have a different method of categorising water expenditure so we can’t be sure if we’re comparing like-with-like).

If the cost of providing water services in 2015 is €1.2 billion, and the €533 million is ‘on-the-books’, then the Government will benefit by €667 million.  Therefore, if there were no water charges, then the deficit would rise by €667 million.

However, the Minister also stated that €233 million in revenue from non-domestic sources (does this refer to businesses?) counts as Government revenue which wouldn’t be the case with households.  I can’t say conclusively how this impacts but if given that off-the-books revenue must be at least 50 percent, and the Government has trimmed this to be as low as possible, we could be looking at a saving of only €300 million for the Government.

And the cost of the child-free water allowances will also count as government expenditure.  If the charges were abolished, so would this expenditure.

Is this clear?  No, but the Government has refused to answer straight-forward questions.  To complicate matters further the Government is intending to spend €223 million in an equity investment in Irish Water.  But if we just freeze the situation, this €223 million wouldn’t arise, so we shouldn’t allow this to be thrown into the pile.

So what have we got?  On a static basis:

  • If the savings to the Government were €667 million, then the deficit would rise by 0.3 percent.  The Government would still hit its 3 percent deficit target.
  • If the savings were €300 million, then the deficit would rise by only 0.1 percent – meaning the Government would come in comfortably below target (at 2.8 percent).

However, this is on a static basis.  One has to estimate three things:  first, with the removal of the water charges, consumer spending will rise, thus increasing GDP (for most people, every €1 not spent on water charges is likely to be spent in the domestic economy).  A higher GDP means a reduced deficit (as a percentage of GDP).

Second, tax revenue rises from the increased spending; this has a downward pressure on the deficit.

Third, social protection costs may fall if employment arises from this increased spending; again, putting downward pressure on the deficit.

Therefore, the Government would come in below their targets.  And that’s for 2015.  When you estimate the impact on the deficit for 2016 and beyond, it makes little difference to the deficit as it will be falling substantially.

If my estimates of costs hold then the Government will hit its fiscal targets next year and the following years.  I am open to correction – but the only ones who can do that are the Government and they aren’t telling.

The Government should call a halt to this mess called Irish Water.  It is a toxic brand that no amount of re-branding will save.  If the Government, as part of a panic measure to mollify the opposition, caps water charges until 2016, this could actually threaten the ability of the Government to keep expenditure off the books (never mind the whole conservation mojo). The Government would be imposing charges, but be unable to keep the spending off the books.  All economic pain, no fiscal gain.

Stop the mess.  Put the numbers out into the public domain.  Go back to the drawing board.

There are other, better ways to finance water investment, dis-incentivise wasteful consumption and fund a modern, state-of-the-art water and waste system.

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One Response

  1. Eoin Reeves

    October 29, 2014 8:22 pm

    Hi Michael,

    Thanks for the post.

    You state:
    If the cost of providing water services in 2015 is €1.2 billion, and the €533 million is ‘on-the-books’, then the Government will benefit by €667 million. Therefore, if there were no water charges, then the deficit would rise by €667 million.

    What is the basis for the split of €533m and €667m?
    Thanks
    Eoin