Friday 24 October 2014

Alan McQuaid: IBEC right to call for no tax increases in Budget 2014

Published 08/07/2013 | 11:55

IBEC chief Danny McCoy says focus of Budget needs to be on reducing tax burden
IBEC chief Danny McCoy says focus of Budget needs to be on reducing tax burden

The employers’ organisation, IBEC, has put the marker down in its pre-Budget submission.

At this point in time, the Government is scheduled to implement a further €3.1bn in austerity in Budget 2014, though potentially it has some room to play with given the improved deal on the promissory notes agreed with our international creditors earlier this year.

The problem is the economic growth projections going forward.

The first quarter GDP data released towards the end of June were much weaker than generally expected, with the country now technically back in recession.

Given the weak state of the global economy and Ireland’s dependence on its export sector to generate positive growth, it is hard to see the Government’s current official growth projections of 1.3pc for 2013 and 2.4pc for 2014 being met.

That in turn puts a further strain on the country’s budgetary dynamics. In theory at least, the lower the GDP growth rates, the less tax revenue that will be generated to meet our budgetary targets.

The question then is do we up the level of austerity, keep it as targeted, or as IBEC suggests actually cut it to ease the pain on hard-pressed consumers and boost spending?

IBEC believes that the focus now should be placed on ways to reduce the tax burden and feels the overall budgetary adjustment for next year should be cut by €500m to €2.6bn with no new taxes introduced.

However, at a recent ESRI conference, renowned economists like the Institute’s John FitzGerald, Philip Lane of Trinity, the IMF’s Peter Breuer and former government adviser Alan Ahearne all urged the Government to stick to the €3.1bn adjustment planned on the basis that there are still considerable downside risks to the economy. But it is exactly because of these downside risks, that I would be on the side of IBEC on this one.

Ireland’s export sector has been the main generator of economic growth over the past couple of years, but with clear signs that the sector will not be as strong this year, the onus then for policymakers is to try and come up with initiatives that will boost the domestic side of the economy. In the absence of cutting personal tax rates, keeping them unchanged is probably  the most important positive psychological thing the Government could do, and I would include in that refraining from raising the universal social levy for those earning above €100,000.

These people have been key in preventing retail sales and personal expenditure on goods and services from falling off a cliff completely.  If those so-called “high-earners” are hit, then consumer spending will slump further in my opinion, and risk putting the economy back into a downward spiral.

Recent data from the CSO on the labour market and house prices front have been positive, suggesting that things are getting better in an overall context, albeit very slowly.

An over-austere Budget in October runs the risk of dampening consumer confidence, which will feed through to the property market and in turn result in less jobs. It is clear that Europe’s policy of endless austerity aimed at getting high-debt countries’ budgets back in balance as soon as possible, is not working, and last week’s developments on the political front in Portugal suggest that the politicians themselves in the Euroland “periphery” are losing faith.

The attitude of “core” Europe, and in particular, Germany, will depend on the outcome of that country’s federal elections in September.

Although there is little doubt that Ireland (or the Anglo-Irish bankers to be exact) has offended Germany with the Drumm/Bowe scandal, and that  Europe’s largest economy is unlikely to be rushing in to come to our aid again, that doesn’t mean we have to take a tougher line as regards our budgetary situation.

Personally, I think we have a greater chance of generating the economic growth we need to meet our budgetary targets over the next few years by easing back on the austerity, and so I support the call of IBEC for a more lenient approach from Michael Noonan, particularly on the taxes side, come October.

Alan McQuaid is chief economist at Merrion Stockbrokers.

 

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