Friday 28 October 2016

Beware the election promises that could bankrupt the nation

Published 23/01/2016 | 02:30

Photo: PA
Photo: PA

Watched any 'EastEnders' recently? Everyone on the Square now seems to be a murderer, rapist, thief, adulterer or spouse-beater. So much so that there is talk of bringing the whole 30-year farrago to a close. The reason is simple enough. When a soap opera has been running for decades, the scripts have to become ever more dramatic to maintain audience interest - or perhaps even scriptwriter interest. Something similar seems to be happening to Irish election campaigns.

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Admittedly, this particular soap got off to the most dramatic of starts, with the 1997 Fianna Fáil manifesto promising, among other things, to abolish car tax and domestic property tax. The audience was more than interested, and the party was elected with a thumping majority.

Both car tax and domestic property tax returned in due course but the pattern had been set. Promising to cut taxes is the big draw for the audience and has been central to every election since.

This despite the fact that Fianna Fáil keeping its 1977 promises led to national bankruptcy, while using the property boom to cut taxes while increasing spending in the 2000s led to national bankruptcy again.

It is not that the latest round of wonderful promises to, in John B Keane's words, make everyone better off than everyone else would cause national bankruptcy in themselves. Not even if they were kept, which looks quite impossible in many instances. It is more that the established narrative that elections are about who will put most money in the voters' pockets creates the kind of politics that, when conditions are right, makes national bankruptcy a real danger.

This election already seems to have been dominated by tax like no other, even though full manifestos have not appeared. Tánaiste Joan Burton accused her opponents of engaging in auction politics, and then produced a policy list that included the abolition of the USC tax on the first €70,000 of income, along with the claim that tax reductions are essential for low- and middle-income workers - which means the majority.

The reality is that tax revenues have increased by a third since 2007, which is undoubtedly a political problem. But they still barely cover the cost of day-to-day public spending, and little of the €10bn a year national debt cost.

The Taoiseach spoke about reducing the overall burden of tax below 50pc. That's not exactly what he meant to say: it should have been the marginal tax burden - the rate at which the top rate kicks in. But he was right all the same; the overall tax burden is the key figure.

Except that it is well below 50pc. In fact, it is just 35pc of national income (GNP), which is one of the lowest rates in Europe and only a fraction ahead of Conservative-ruled Britain. Within that burden, income tax is unusually small by international standards and transfers from the State to workers, especially through child benefit, unusually high.

The reality is that the tax burden will have to rise, not fall, as the population ages. Even without that inevitable cost, the income tax system in particular, with its two rates and dramatically rising take as incomes rise, is probably incapable of supporting the kind of society all the parties say they want.

Fianna Fáil might be said to have twigged this, with their accusation that Fine Gael wants a US-style tax system, where the tax burden is just 26pc of national income. But with its preliminary promise to upstage Labour by abolishing USC on the first €80,000, it seems unlikely that it will campaign on a platform of a bigger tax burden.

So far as one can see, only Sinn Féin is saying that the overall tax burden should rise. But it also claims it can make Europe an offer it can't refuse to allow Ireland run bigger deficits. Plus the promise of a new top rate of tax above €100,000 and a wealth tax on assets over a million. Put all that together and they can get rid of property tax, water charges and most of the USC.

These are all "unfair" taxes, and not just according to Sinn Féin. What this seems to mean is that they are taxes we didn't used to pay. Not quite the same thing. Renua, of course, has the flat tax proposal, where everybody would pay 23pc tax. That really would be a revolution - and revolution would require a landslide election victory.

Also, the sums don't quite add up and making the sums add up has become an acid test.

Fianna Fáil will have belt and braces on this one, with both the Department of Finance and accountants PwC running the ruler over its plans. The Coalition parties are sticking with the departmental costings. But this kind of simple arithmetic is not very relevant.

Such costings are a throwback to the 1980s, when promises were plucked out of thin air. In today's promises, there is a lot of small print to help with the costings, with some promises not due to be completed until 2021.

They also do not take account of possible economic developments. The national tax burden may have to increase, but whether individual burdens do will depend on how the economy performs. And no-one can make credible promises on that.

Talk of recession is in the air. Bodies such as the Irish Fiscal Advisory Council and the EU Commission have offered counsels of perfection on how the Government should allow for public spending pressures from both citizens and trade unions, as well as the possibility that the economy will not achieve the projected 3pc annual growth.

Governments are entitled to some latitude come election time, but the question is whether the Coalition has used up all the available room for manoeuvre, even before new promises, thereby making the next government's task a lot more difficult. If it should turn out to be the same government, it may be less 'EastEnders' and more 'Mrs Brown's Boys'.

Irish Independent

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