Saturday 29 April 2017

New Government's programme is caught in the crossfire between Right and Left

After the laborious process of forming a new Government, the real difficulty – agreeing on policies to suit all – will come thick and fast. Photo: PA
After the laborious process of forming a new Government, the real difficulty – agreeing on policies to suit all – will come thick and fast. Photo: PA
Richard Curran

Richard Curran

Michael Noonan wanted to assure everyone this week that the new programme for government would not cause any fiscal or budgetary problems.

In other words it won't cost substantially more than has already been budgeted for. Yet when you read it, the 154-page document is like a utopian vision of a better Ireland in which everybody gets something and nobody seems to be paying any price for it.

Inevitably, there are issues with the document and some of its policies, which have yet to be worked out in any detail, or even costed.

The use of language is particularly interesting as in places it says its "ambition" is something or it simply commits to "examine" or "review" or "support" what is already happening.

There are clear new policy directions in the document but there is a sense in which many of them probably won't actually happen at all.

Here are some policy initiatives that raise questions:

1. The spending figures. The programme commits to spending €6.75bn more by 2021. According to Mr Noonan, this is equal to the figure built into Fine Gael's manifesto. He also said that new EU rules give wriggle room of up to half a per cent of GDP for balancing our books, which means Ireland could have an extra €1.8bn per year to spend after 2018.

Given that so many of the new policy initiatives rely on reviews and policy formation through consultation with the Oireachtas, it will probably take that long to implement many of the new policies. But will the Government last that long?

2. An extra €500m for regional jobs. This looks like an impressive investment in jobs around the country. But it was actually included in Fine Gael's manifesto. The programme for government breaks it into an extra €300m for Enterprise Ireland and Údarás na Gaeltachta to be administered through the likes of local enterprise offices etc.

Then there is another €200m to IDA Ireland, some of which will go on building "advanced facilities" in regional towns. The question is whether these will be "advance facilities" or "advanced facilities". IDA Ireland is already committed to building 11 advanced facilities which are being rolled out. Is this a case of build it in advance, and they will come, or will they be advanced facilities aimed at providing space for a pent up demand that already exists in these towns?

The latter sounds more plausible. IDA Ireland would need to be careful not to spend too much creating empty factories in towns, because we already have a few of those. We don't need more.

3. The Housing Package: Solving the housing crisis won't be easy and there a many new policy measures in the document. Having analysed the problem to death in the last year, it is ironic that the new Government wants to develop a new policy document on it, within the first 100 days. Most people know what needs to be done.

The problem is who pays a price for it - landlords through rent controls, developers through legislative changes or taxpayers through a raft of new incentives aimed at facilitating the landlords and developers.

Again, the focus seems to be on the latter. Rent supplement will go up. There is the possibility of a cut to Vat on certain new houses. There is only a monitoring arrangement for the new vacant site levy, which hasn't even started yet.

It commits to a "root and branch" review of the planning system. That kicks the issue further down the road.

On the taxpayer side there is a Help to Buy scheme proposed which basically means subsidising people to save deposits. Put together, the Government wants to crack the housing crisis without breaking any eggs.

You cannot solve the crisis without somebody taking a hit. Nobody does in this document.

4. The Banks: Banking policy in the document is vague, scattergun and somewhat contradictory. The Government wants to ensure people get the best out of the State-owned banks. Yet it also wants more competition among banks.

It talks about a new mortgage arrears resolution service, a new court which somehow will keep more people in their homes, taking away the bank's veto on switching people over to renting their home where they can't pay the mortgage.

All of these are nods towards a fairer operation of the arrears problem. However, it also reduces the underlying security that banks have on mortgage debt - namely the house itself. This will in turn make banking in Ireland less attractive for new entrants, could increase banks' cost of funds, neither of which is going to enhance competition.

Yet the document specifically states that it wants more banking competition. The proposed initiatives reduced the value of AIB and PTSB on Friday when the new measures emerged.

The document also commits to tackling the high variable interest rates charged by banks on mortgages. The Government has no powers to force banks to lower them. It can only apply pressure to state controlled banks, which undermines their value, or it can introduce new legislation, which would further reduce the chances of new entrants competing for business. Yet the document states: "We support the need to develop an overall banking policy that encourages more entrants and a vibrant sector with real competition in order to provide more choice to mortgage holders." Go figure.

5. Public Sector Pay: Enormous pressure will come on Public Expenditure minister Paschal Donohoe in the next 24 months to make various pay concessions across the public sector. There is a commitment in the programme to set up commission to look into this. The commission is one area of policy review that will not be allowed to stay in the slow lane. Setting up commissions and reviews often buys governments time and the programme is full of them. But public sector pay will be front and centre.

Many public servants deserve a better deal than they currently have, especially those on low pay. However, the new programme commits to hiring more Gardai, teachers, social workers and other health professionals. One way of reducing the future cost of those new public servants is to have different pay rates, allowances and pension entitlements for new entrants. Yet the public sector unions have this approach firmly in their sights. They want full pay restoration, equal conditions on pay, allowances and pensions for all, and they want them asap.

No pay commission will recommend that anybody gets paid less. The Government will struggle to ensure it doesn't become a new public sector ATM machine.

6. Tax: The situation with income tax is very peculiar in the document. Any cuts to the USC are to be paid for by not indexing personal tax credits and bands, higher tax on smokes and a new sugar drinks tax.

The only other measure to claw back revenue for the State to fund all these giveaways is to remove the PAYE tax credit for high earners. Yet, when it comes to the jobs section, the document says: "High personal tax rates in Ireland discourage work and jobs."

It wants to reduce excessive tax rates for middle and low earners, which seems fair, but actually make things worse for high earners. These high earners are the very ones IDA Ireland is trying to encourage to live in Ireland by working for multi-nationals.

So we will build all these advanced advance facilities in regional towns but cripple any well-paid professional who wants to work there with higher income taxes. Staying competitive means making some sacrifices, including making it more attractive, not less attractive, for well paid executives to base themselves in Ireland.

It also commits to increasing the tax credit for the self-employed from €550 to €1,650. A fair idea but just for the record it will cost around €410m per year. Where will the money come from?

Leaving aside the enormous scope within the new Government make-up for regional biases towards those constituencies with representatives holding up the Government, this document is caught in the crossfire between the Right and the Left, and is very unsure of where it is going.

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