News Analysis

Sunday 21 September 2014

Marc Coleman: Modern Labour emerges as real victor in Budget

The split between spending cuts and tax increases is ultimately in Labour's favour,

Published 09/12/2012 | 05:00

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First of all, let's dispense with the biggest myth about Budget 2013 – that Labour was the loser in this budget. Tales of Labour TDs crying into their pints and well-choreographed protests aside, this Budget was a slam-dunk victory for Labour in every way possible. Actually, I should qualify that – it is a victory for modern Labour.

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To see why, consider the Budget's most striking feature. Of every €3 reined in last Wednesday, two were supposed to come from spending cuts and one was supposed to come from tax increases. Roughly in line with the relative size of Fine Gael and Labour parliamentary parties, that split was supposed to represent a 'fair' balance between the options.

Two out of three ain't bad, so the logic went. Except that it is. All the evidence shows that to stimulate growth and reduce debt, budgets should focus solely on cutting spending and on the most wasteful spending of all. Between 1987 and 1989, spending fell by 10 per cent of GDP, resulting in an average growth rate of 5 per cent. In the December 2009 budget, current spending was cut and tax rates were left alone, leading to a recovery in GNP growth and tax revenues. Last but not least, there is the experience of Latvia, which cut spending by 30 per cent in one year. Latvia is now growing faster than any other EU country. Against the overwhelming body of evidence, the case was for focusing fully on spending cuts. But even the 2:1 ratio of cuts to tax increases has not been achieved.

In fact, public spending remains not only far above optimal levels but is actually rising. At €60.8bn, planned gross current spending for next year will be €360m higher than last year. Furthermore, it will eat up 45 per cent of GNP. Of the €3.5bn adjustment in Budget 2013, spending cuts are, officially, worth €1.94bn as against €1.44bn tax increases. But as Constantin Gurdgiev has pointed out, at least €300m of the measures contained in the Government's list of spending cuts are, in fact, increases in charges and fees. Therefore, they more aptly fall under the tax increase category. Adjusting for that gives a balance of roughly €1.6bn in spending cuts and roughly €1.7bn in tax increases. In other words, there are more tax increases in Budget 2013 than spending cuts. What is more, while the tax increases are well detailed and specified, there is no clear summary table – as in previous budgets – of precisely where the spending cuts are coming from.

But as the military genius Sun Tzu remarked, the best generals win wars before they are even fought. Even before Budget 2013 was written, the extension of the Croke Park deal was a decisive strategic victory. As a very senior official confirmed two years ago, a fair benchmarking – imposing average cuts of 10 per cent but on a sliding scale – of public pay levels above the average industrial wage would net approximately €660m a year. Add an equivalent €300m for a corresponding benchmarking of pensions and a billion a year could have been saved, leaving our public sector as still one of the best remunerated in the world. The December 2009 budget was a clear precedent for this.

As well as being consistent with the democratic will – a succession of polls taken over two years have shown a huge majority against the Croke park deal – this approach would have averted many of the following divisive measures; child benefit cuts, back-to-school allowance cuts, maternity benefit cuts, respite care and home help cuts and many more.

Old Labour would never have countenanced such cuts to protect high-paid public sector workers. But since merging with "Democratic" Left – who boasted strong allies in the public sector trade union movement – its priorities have changed drastically.

Despite their clear victory, however, Labour TDs are dismayed at what they see as a failure to curb private sector pensions. They needn't worry. The retention of the marginal rate relief aside, private sector pensions are ultimately funded by the private sector and not a burden on the State as claimed by Tasc and others. By contrast – directly or indirectly – public pension costs are entirely funded by taxpayers. The cap on the Strategic Threshold Fund to €60,000 will affect private pensioners much more than public pensioners. This is for the simple reason that unlike their counterparts in the private sector, public sector pensioners can prevail on the Government to bail them out at taxpayers' expense. On this as in other areas, Labour and the unions will ultimately win out.

But perhaps Labour's ultimate victory is on the property tax. Pat Rabbitte was right to highlight Fianna Fail's agreement to it two years ago. But even the troika would have been happy with cost-cutting measures as an alternative. And as Pat has accepted, property tax is a left wing concept and is supported by both the ESRI and Tasc who believe it to be a tax on "wealth". That is despite Davy's estimating back in August that with half of Irish homeowners in negative equity, it represents negative wealth. Two years ago, the Local Government Efficiency Review Group highlighted €300m a year in savings via possible modest reforms of local government. A source said up to €800m a year could be saved in more ambitious local government reform. Fine Gael's manifesto was not only opposed to a tax on the family home but it has the Environment portfolio which can deliver the kind of reforms that would remove its necessity. But on this, as on most other issues, Labour won the argument.

Marc Coleman presents Coleman at Large each Tuesday and Wednesday from 10pm on Newstalk 106-108fm. @marcpcoleman

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