Dan White: Long-term cost of a short-term fix
The Budget raids on health insurance and pensions demonstrate the utter incoherence of cabinet fiscal policy
Published 20/10/2013 | 05:00
WHILE the Budget raids on health insurance policies and pension funds may help the Exchequer to balance the books over the next year or two, they demonstrate the utter incoherence of government fiscal policy with any short-term revenue gains from these measures likely to be only a fraction of the long-term costs.
Although the Government delivered on its pledge not to increase income tax or PRSI rates in last Tuesday's Budget, there is more than one way of skinning a cat and most middle-income earners will still find themselves paying more tax in 2014.
In his Budget speech, Minister for Finance Michael Noonan announced that he was capping the tax relief on health insurance premiums at just €1,000 for an adult and €500 for children. Justifying the move, Noonan claimed that only what he described as "gold-plated" health insurance policies would be hit by the change.
Oh, really? While on a cursory reading of the minister's Budget speech it might appear that the €1,000 cap applied to net premiums (ie, after tax relief at 20 per cent), it now seems as if it will apply to gross premiums instead (ie, including the tax relief).
As the private health insurance companies quote their premiums net of tax relief, a €1,000 premium is actually €1,250 when the 20 per cent tax relief is added back. This means that anyone whose annual health insurance premium is over €800 (€800+€200 tax relief), will find themselves paying more tax next year. If an €801 annual premium qualifies as "gold-plated", then I'm the Pope's grandmother!
While restricting the tax relief on health insurance premiums might seem like a good idea to the social engineers in the Labour Party, it's one that doesn't stand up well to close scrutiny in the real world.
In essence, health insurance is a voluntary tax paid by the middle classes to avoid the queues in the public health service. At a time when funding for the public health service is extremely tight, one would have thought that the powers-that-be would be encouraging more of us to take out private health insurance cover in order to take the pressure off the public service.
But no. Instead government policy has had the effect of making private health insurance ever more expensive. By forcing the health insurance companies to pay for private beds in public hospitals, and now capping tax relief, this Government has further stoked medical price inflation.
With entirely predictable results. The number of people with private health insurance fell by a further 40,000 to 2.059 million in the first half of 2013. This brings to 238,000 the number of people who have given up their private health insurance cover since the end of 2008.
While there is no age breakdown of those who have given up their private health insurance cover, anecdotal evidence suggests that the vast majority are young people in the 25- to 34-year-old age group. These are, of course, the young, healthy customers that the health insurance companies rely upon to subsidise their older, sicker customers.
With over 10 per cent of all customers having given up their cover, the health insurance market is in danger of collapsing as the cost of claims falls back on a decreasing number of older, sicker customers. We are now locked in a vicious circle as falling customer numbers drives up prices, which in turn encourages even more young customers to take their chances in the public health system.
This means that a policy, if one can dignify the current incoherent course of action with such a description, ostensibly designed to raise money for the public health service will, by increasing the number of patients using its facilities, achieve precisely the opposite result.
If the lack of joined-up thinking on health spending had been an isolated incident, then one might be tempted to blame embattled Minister for Health James Reilly. But it wasn't. As Noonan's raid on private pension funds demonstrates, the absence of logical, clear-cut thinking is a cabinet-wide problem.
Successive governments have urged us to save more for our retirements. With only limited success. The most recent CSO figures show that almost half of all workers have made no pension provision. However, this Government was barely a wet day in office when it introduced a "temporary" 0.6 per cent levy on pension funds in its May 2011 "jobs initiative". Noonan added insult to injury last week by introducing a further 0.15 per cent pension levy. This will overlap with the earlier levy for at least one year so that workers will have 0.75 per cent of their retirement savings pickpocketed in 2014.
This is sending exactly the wrong message to the almost half of all workers who have no pensions. Why save for retirement if the Government is going to help itself to your money whenever it needs to balance the books?
Ill-thought out, short-term measures such as capping the tax relief on health insurance premiums and raiding pension funds can have serious long-term costs. We will be paying last week's quick fixes long after Messrs Noonan and Reilly have retired.
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