Water charges (or levies or taxes) will come up the agenda and no doubt there will be considerable confusion as to what they are intended for: incentivise ‘efficient use of water’ or cover the cost of water provision. These are not necessarily intertwined; one may incentivise efficient use and not recover costs and vice-versa.
What is not in dispute is that Minister John Gormley wants €1 billion from water charges (which suggests recovery costs are the prime motivation). There are a number of issues regarding this revenue-raising target. Let’s deal with one here - namely, the economic impact.
Water charges will act like a tax. This could be a very high tax. The 2006 CSO Census shows that there are approximately 1.47 million households (of which nearly half have children). A flat-rate tax which would ‘raise €1 billion’ would equal €680 a year per household. To the extent that certain households will be exempt or partially exempt – those on social welfare/low incomes – this tax will increase on the remainder. If, for example, 10 percent were exempt, the charge on the remaining houses would be over €750.
Of course, there may be a long-term agenda – in line with the Commission on Taxation’s recommendations – of installing meters and taxing water on the basis of usage. However, since this could take up to four to five years, the Commission also called for an interim flat-rate tax phased in over a number of years.
Let’s use the ESRI’s simulation of the impact of a rise in income taxes as a proxy for water charges. This could be the economic impact in the first year of introducing water charges:
- GDP: -0.2 percent (approximately -€338 million)
- Consumer spending: -0.7 percent (nearly -€700 million)
- Employment: -0.1 (nearly -2,000 jobs)
The introduction of water charges will have a deflationary impact. The fall in growth and consumer spending will not only result in lower employment, it will result in a fall of services output. In short, water charges will mean more job losses, more enterprises put under pressure, while contributing to a low-growth scenario.
The problem is that the situation grows worse. By the fourth year, the loss of economic growth doubles (-0.4 percent), consumer spending falls by nearly -1 percent, while employment losses quadruple – at -0.4 percent, or nearly 8,000 less jobs.
Of course, this is if the Government introduced the charges in one year. More realistically, they will phase it in. However, all this does is spread out the deflation. The long-term impact will be the same.
Just as interesting is the fiscal impact. Minister Gormley may well
refer to raising €1 billion through charges. However, when account is
taken of the impact on growth, spending and jobs on the general tax
base, the ‘net gain’ is substantially less.
For instance, the ESRI simulation for a tax increase designed
to raise revenue of €1 billion, would in the first year only yield a
net gain of €764 million. However, this gain dissipates as the
deflationary impact accelerates over the years, so that by the 4th
year, net gain would be €627 million. So while Minister Gormley talks
about a headline rate of €1 billion raised from charges, the real gain
will be less than two-thirds of that.
But there is one critical difference. The ESRI’s simulation uses income tax rises. Whatever the defects in the income tax systems (too many tax reliefs that primarily benefit high income groups), a rise in income tax rates is, at least, somewhat progressive: the higher your income, the higher the tax payment.
Water charges – at least in the first phase – is a flat-rate, regressive levy (something I will look into in a later post). Therefore, the impact on consumer spending and employment is likely to be more severe as the charge would disproportionately burden the ‘spenders’ – low and average income groups. This, in turn, would reduce the net gain to the Exchequer even more.
This is not an argument in principle against water charges. This is, however, an argument that the debate over such charges be grounded in an honest assessment of its impact – not only on the economy and public finances, but on the real problems underlying water consumption; in particular the woeful state of our investment-starved water infrastructure.
On past record, it is doubtful this will happen.
Notes on the Front 
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