Economists often speak about the concept of opportunity costs. When doing so they argue that when assessing the true value or cost of something one has to consider not only the actual outlay involved but also the value of the alternative use of resources. Money or resources spent or used on something constitutes money or resources which could be spent on something else, writes Noel Whelan.
In politics, the need to consider oppor- tunity costs is more important. The choices made about how to spend public money exert real influence on both the standards and quality of living for thousands of people.
The money about which politicians are making spending decisions is all money taken from the pocket of taxpayers.
Every €100 million they propose to spend on some initiative is not only €100 million which could be spent in some other way, it is also €100 million which could be left with the taxpayers to spend themselves.
Politics involves tough choices, even in good economic times. The resources avail-able to the exchequer are now greater than ever but they are still finite. On the other hand, the demands on these limited public resources are infinite. Indeed in times of plenty, public expectations are higher. It is the Government which still must decide which of the many competing needs and demands should be met from the public purse.
This has been a confusing week in Irish politics which saw a left-wing party, the Labour Party, proposing radical tax reductions and a right-wing party, the Progressive Democrats, promising dramatic welfare increases. The concept of opportunity cost can be a useful aid in considering the merits of the offers being made by the various parties.
At Labour's conference last weekend Pat Rabbitte promised that within two years of going into government the Labour Party would reduce the standard tax rate from 20 per cent to 18 per cent. Later in media interviews Rabbitte himself estimated that the cost of the tax reduction when fully implemented would be more than €1 billion a year.
The question has been raised whether the exchequer can afford this tax reduction. The answer is yes. It took in €5 billion more than was budgeted for in 2006. It follows therefore that, assuming that our economy continues to grow as strongly as expected, if Labour in government wants to use €1 billion each year to give this tax cut it will be able to do so. However, the more important question is whether, even if we can afford it, €1 billion should be used for this purpose.
The tax reduction promised by Rabbitte is focused on those who pay tax at the lower rate and is therefore more equitable than the reduction in the top rate proposed by the current Government. However, as well as helping those who pay tax only at the lower rate, it will give an additional few hundred euro per annum even to the wealthiest tax payers - many of whom don't need it.
By comparison, Rabbitte's tax cut will be of absolutely no benefit to those on the minimum wage since those workers currently pay no tax. Neither will it be of any benefit to those who live on welfare since they also pay no income tax. When considering whether Labour's tax cut proposal is a good idea, regard must be had to whether the €1 billion forgone as a result might better be used to target relief at the lower paid. Would it be better to use the money for welfare increases? Would it be better to spend it on additional health services or more facilities for those with special needs?
On Tuesday, the Progressive Democrats published their promise that if returned to government they will increase the old-age pension to €300 a week within five years. The cost of this, Michael McDowell said in interviews, would be more than €300 million a year when fully implemented.
Assuming our economic growth continues at its current rate, the State can afford such pension increases. Again however, the opportunity cost question needs to be asked. Is this increase in the old-age pensions the best use of €1 billion, or should the money instead be used for tax reductions?
The concept of opportunity cost is also relevant to the row about tribunals which has dominated political coverage in the last couple of days.
When deciding whether a price can be set on the pursuit of truth we also have to factor in the opportunity cost. Establishing the truth about corruption or bad practices in politics or policing or other aspects of our society is important, but is it more important than meeting current or future social needs?
The tribunals have made a valuable contribution but we must ask would continuing to spend so much money on them be the most effective use of public resources?
Irrespective of whether the final cost of the Mahon tribunal, there is no doubt that the costs of the various tribunals combined will reach at least €500 million and may even be well beyond €1 billion.
The cost of investigating the past through the tribunals has been and will be high, but the opportunity cost being paid by present or future taxpayers will be higher.
The resources being eaten up in tribunals has to be considered in light of the reality that this renders them unavailable for something else. If the hundreds of millions of euro the tribunals are costing were instead available for alternative uses then, if elected to government, Pat Rabbitte could introduce his tax cut a year earlier or, if returned to government, Michael McDowell could introduce his €300 a week old-age pension several years sooner.