The Irish fiscal position was significantly affected by the recent financial crisis. Budgetary surpluses quickly gave way to significant deficits post 2007, culminating into a lengthy excessive deficit procedure and entry into a formal EU/IMF assistance programme in 2010. Much of the deterioration in the public finances was caused by a sharp decline in property-related taxes because the Irish housing market rapidly contracted. In this paper, the authors quantify the extent to which disequilibria in the housing market can affect the tax take, finding significant implications over an extended period.
The authors attempt to quantify the extent of housing-related tax windfall gains and losses in Ireland over a 30-year period as a result of disequilibrium in the housing market. This involves a three-step modelling approach where we relate property-dependent taxes to the housing market while estimating equilibrium in the latter before solving for the tax take consistent with that equilibrium. In so doing, the authors find that the fiscal position compatible with equilibrium in the housing market has at times diverged greatly from actual outturns.
This paper confirms the significant role played by the housing market in influencing both the tax-take and the overall fiscal position. The authors find that there have been a number of instances where excesses in the housing market have spilled over into fiscal aggregates, notably in the housing bubble period between 2003 and 2008. However, with the on-going adjustments in the housing market, it would appear that prices and volumes have overcorrected in recent years. Overall, much greater emphasis should be given to the role of the housing market in forecasting key taxation aggregates.
The recent crisis highlighted how domestic policy mistakes (both in terms of budgetary planning and financial market regulation) can greatly amplify economic shocks. Irish budgetary policy in the run up to the financial crisis of 2008/2009 was clearly based on unsustainable levels of housing-related tax receipts. This paper highlights the need for a much more granular approach in framing tax forecasts and in assessing the public finances by more explicitly factoring in housing market developments.
The authors are Economists at the Central Bank of Ireland (CBI) and the Economic and Social Research Institute (ESRI) respectively. The views expressed are not necessarily those held by the ESRI or the CBI. The authors would like to thank Alan Barrett (ESRI), Thomas Conefrey (Irish Fiscal Advisory Council), Dave Cronin (CBI), two anonymous referees and all those who attended a seminar at the CBI for comments on an earlier draft. Any remaining errors and omissions are the responsibility of the authors. The authors are grateful for assistance from the Revenue Commissioners on data matters.
Smyth, D.A. and McQuinn, K. (2016), "Assessing the sustainable nature of housing-related taxation receipts: the case of Ireland", Journal of European Real Estate Research, Vol. 9 No. 2, pp. 193-214. https://doi.org/10.1108/JERER-01-2016-0004
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