independent

Tuesday 27 September 2016

Stephen Donnelly: Let's heed the warnings before we lose another decade

While cutting taxes goes down well with the electorate, the EC is warning us of the dangers - just as we were warned in 2008, writes Stephen Donnelly

Stephen Donnelly

Published 17/01/2016 | 02:30

Stephen Donnelly
Stephen Donnelly

This week, the European Commission joined the growing number of Irish commentators warning Ireland of the dangers of cutting the tax base and failing to invest.

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The draft Post-Programme Surveillance Report made its way into the public domain, and points to a raft of risks for the recovery. If we ignore them and blindly repeat the disastrous mistakes of Fianna Fail, we'll be playing a very dangerous game of chicken with the future.

The similarities to the early noughties are uncanny. Then as now, our economy was growing faster than other countries, unexpected tax revenues were appearing, home ownership was becoming impossible and commercial rents were soaring.

Then as now, government investment in productive infrastructure like broadband and transport was too low. Then as now, the sitting government decreed large tax cuts while international organisations - and a small number of Irish analysts and commentators - warned of the risks. And back then, just as now, the government pointed to the good news, while point blank refusing to recognise, or govern for, the mounting risks.

In the early noughties unexpected tax returns came from stamp duty, with these one-off payments used to fund long-term tax cuts and spending hikes. The bank bailout accounts for about a third of public debt incurred since 2008. The deficit, caused largely by this irresponsible fiscal approach, accounts for the other two-thirds, and now costs billions a year to service the interest on.

This time, over half the unexpected revenue comes from what the report describes as "generally volatile corporation tax". They explain that the surge in private sector investment (one of the things driving high growth) "is mostly explained by some multinationals re-domiciling patents to Ireland". Not exactly the most stable of future revenue streams.

They are this decade's stamp duty, and are being used to justify a substantial and long-term erosion of the tax base. The promise to remove USC, for example, would wipe €4-5bn off the revenue base annually - money that should be used to invest in infrastructure to support enterprise, and in public services like healthcare and education.

While there are many economic similarities between pre-crash Ireland and today, there is one very big difference - the lack of safety nets we now have. When the crash hit in 2008, many households were able to cut back, as were businesses and voluntary sector organisations.

With public debt so low, we were able to borrow huge sums of money to keep public services going and social protections in place. None of those conditions hold today.

Households, businesses and the voluntary sector have nothing left to give. Public services are already over-stretched and the State can't borrow additional funds at any scale (the NTMA sales of government bonds are just rolling over existing debt).

The report points out "the substantial activities of multinationals expose Ireland to potential adverse revenue shocks that could arise from changes to international tax standards and practices."

It states "external risks are increasingly tilted to the downside as the slowdown in China and other emerging markets could affect global trade more widely. The high levels of private and public debt continue to make Ireland vulnerable to potential increases in interest rates and other shocks."

A friend of mine describes it like this - the car is accelerating again, but this time we're driving on bald tyres, the ABS is shot, the airbags haven't been replaced and the seatbelts are missing. So how likely is the car to crash?

Hopefully we won't see anything of the scale of the global credit crunch for many years, but our vulnerability means that smaller events could do just as much damage.

China's economy is slowing, as are emerging markets generally. Growth in our two biggest trading partners, the UK and US, is also slowing. At some point, the ECB will stop printing cheap money and the euro will begin to strengthen, damaging our balance of payments. And we don't yet know what the international changes to corporation tax rules will do to taxes paid here by multinationals. Ireland falls into the 'small open economy' category of economics. But we're not just small and open - we have about half the population of London and one of the most open economies on earth.

The advantage is we gain disproportionately from positive global economic activity. But it's a double-edged sword. Pre-2008 we were growing faster than other European countries, and we fell much further. Well, we're growing faster than other European countries again…

Given our recent experiences, and the growing number of people and organisations calling for a stable tax base and targeted investment, many are asking why the Government is doing the opposite.

The Commission technocrats phrased it somewhat delicately, observing that "recent fiscal policy decisions are influenced by the current political context". A political correspondent I spoke with during the week put it more succinctly, observing that Fine Gael/Labour are "chasing the Bert".

To a point, it's hard to blame them - the pre-election, tax-cutting doctrine worked a treat for Fianna Fail for years. To a point. But when it comes to running a country, increasing longer term risks to satisfy short term gains will, ultimately, catch up with you.

The good economic news here gives us a little breathing space - to replace the tyres, fix the brakes, and put in new airbags and seat belts. We should leave the revenue base alone - total taxes paid in Ireland are already well below the European average. Instead of stripping out billions, we should be doing things like creating a modern healthcare system, putting in place the infrastructure needed to support business, sorting out the housing market, rebuilding communities and supporting parents in areas like affordable childcare.

The Commission's warnings are in line with what analysts here are beginning to say on an almost daily basis. If we are to avoid another lost decade, we need to listen.

Stephen Donnelly is joint leader of the Social Democrats and TD for Wicklow and East Carlow

Sunday Independent

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