Analysis

Friday 1 August 2014

Bravery needed, but Budget duo bottled it

In just two short days, Howlin and Noonan put us back to where we were three years ago, writes James Fitzsimons

Published 11/12/2011|05:00

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In nine months, the Government got nothing right. Even the Budget was a failure. While Labour's Brendan Howlin was like Scrooge, Fine Gael's Michael Noonan was Father Christmas.

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He cut stamp duty for commercial property to two per cent. Mortgage interest relief was restored for a chosen few and certain property transactions will be exempt from Capital Gains Tax. He even cut the Universal Social Charge (USC) and extended the range of tax incentives for companies.

Nama hasn't gotten the property market moving as it was supposed to do so, so Noonan intervened to prevent property prices dropping. He should let them fall, and supply and demand will restore balance. It would happen without wasting scarce taxpayers' money. Noonan clearly plans on being around for the long haul, judging by these sinister giveaways.

He claims he won't make the mistakes that the last government did, but that is what he has done. Having carried forward €600m of tax cuts that were planned in the last Budget, he needs €1bn more. He cut what he claimed he needed. Of the billion that is being raised, nearly €700m is expected to come from VAT by changing the standard rate to 23 per cent. The Government may not have touched income tax as promised, but it didn't reverse the tax hikes of the last government. That makes them its own.

The Government should have widened the tax base and made the tax system more progressive. It is pointless giving up €47m from the USC for those on low incomes when we really know very little about the financial position of the main beneficiaries. It wipes out the benefit that was otherwise created by consolidating the USC.

It will cost €57m to provide Noonan's mortgage interest package. Some will benefit but few problems will be solved. Tax incentives such as these waste huge resources to give a small benefit to the needy few. It's a pity that no one has learnt anything from the past. The problem with most impaired homeloans is that the banks are not flexible. They were bailed out to help homeowners but they have

done nothing. The problem isn't going away. The Budget proposals are like putting a plaster on a bullet wound.

More than €10m in relief is planned for new start-up companies. Some need this help, but many don't. It would be better used to help established businesses in difficulty. There are nearly 50,000 companies subject to tax in Ireland, according to the Revenue Commissioners.

The big companies have money but they won't risk it while consumers are afraid. They have resources that could help us out. We may be paying too high a price to keep the 12.5 per cent corporation tax rate.

Less than one per cent of all companies account for 75 per cent of tax collected. While the standard rate of tax is 12.5 per cent, the tax yield is less. The top one per cent of companies can contribute at rates as low as seven per cent. Companies could pay an extra €1.3bn if the effective rate rose to 10 per cent. Everyone has taken pain since global economies collapsed. Companies should pay, too.

Pension plans are on hold, too. There is strong evidence that tax relief to fund pensions is wasted. Most people who save for their retirement would do so anyway. Those who make use of tax relief the most, need it the least. There is €70bn to €80bn under management in private pension funds. The annual cost of tax relief was between €2.5bn and €3bn. This would nearly cover the Budget cuts for 2012. Only a handful of people abused tax relief for pensions. And while they lost it for everyone else, their own benefits are preserved. This might need to be reviewed in the context of the deepening crisis.

The cost of tax relief was estimated to be between €1bn and €1.5bn annually. If the tax saving was redirected to the National Treasury Management Agency for government use, it would make retention of tax relief economically viable. It would be like investing it in a government bond. The State could control 40 per cent of the fund while the pension company would manage 60 per cent.

There is still the matter of public spending. The Government has been held to ransom by a public sector using the Croke Park Agreement to insulate it from the financial crisis. Public servants are hostile to critics but they don't trust the Government either. The Government doesn't have the experience or expertise to solve our economic problems.

They had nine months to get it right. It took only two days to put us back to where we were three years ago. But

this time over €100m has been added to our debts.

There are alternatives to the spending cuts, starting with the Croke Park Agreement. It should stand as a framework that sets out aspirations, but no more than that. Every month the Department of Finance reminds us that average weekly pay in the public sector is 50 per cent higher than it is in the private sector. Well-paid workers in health and education must pay for their security. This warrants cutting pay.

Pay and pensions in the public sector cost nearly €20bn annually. Pensions are about €2bn. Howlin would save nearly €2bn a year if 10 per cent of public sector pay was used to pay pensions. Public servants should realise that there is no money to pay them. Pay and pensions grew out of control over the last six years. It must be cut back now. If public service workers don't take control of this they will have nothing when they retire.

Those who leave should relinquish their pension rights to cut our losses. If they don't act soon, those who stay will lose the most. An overpaid public sector that failed to make provision for pensions cannot expect the private sector to pay for this.

The ministers avoided all the tough decisions in the Budget. Howlin needs to secure a 10 to 20 per cent cut in public sector pay and Noonan needs to place less reliance on tax incentives and pay more attention to direct intervention. This is needed to free up bank credit and cut our debt to the EU.

James Fitzsimons is an independent financial adviser specialising in tax and financial planning

Sunday Independent

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