Brendan Keenan

Wednesday 23 July 2014

Brendan Keenan: Post-Budget tax regime will mirror that of dreaded '80s

Published 29/11/2012|05:00

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EVERY year, third-level students take part in a competition to write a fantasy budget. Most of them are pretty solid pieces of work, although I have a soft spot for flights of fantasy, such as taxing tweets.

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All budgets are fantasies of course, except for the one which Mr Noonan will deliver next week. This month the opposition parties have been producing their fantasy wish lists. The trade unions and other groups have done the same and one has to admit that, by and large, they have tried to keep some grip on reality.

The main value of the draft budgets from Fianna Fail and Sinn Fein is not the content, but what they tell us about how those parties judge the public mood.

The striking thing is that both of them accept, not just the Government's deficit target for 2013, but the general size of the €3.5bn correction planned for next year.

They are no doubt aware of the media firestorm which would descend upon them if they departed significantly from those figures. But one doubts that that would put them off if the parties thought the public would welcome talk of higher deficits.

It may be that the public has been persuaded to fiscal fortitude by the media, but most editors believe that the public mood is basically in favour of balanced public finances, having come to that conclusion in the 1980s.

The arguments come as to how it should be done. There, the public mood is anything but settled. The opposition's flights of fancy concentrate on how, not how much.

One could have lots of debate about whether they are right or wrong, or whether the sums add up, but since they are not in office, it seems a bit pointless.

It is more instructive to look at the difference being in government makes. When it comes to the Fianna Fail document, there is a shift towards tax increases and away from spending cuts. The party wants a 50-50 split between the two instead of the government's promised two-for-one.

Sinn Fein reaches for the taxpayer too, although mainly in the less threatening, to most, idea of a wealth tax.

Its claim that this could raise €800m may cause trouble on the chat shows, and in sections of the Labour Party – but for now it is firmly in the realms of fantasy.

Political trouble

What both parties are doing is reacting to the difficulty of finding more spending cuts which do not cause serious political trouble.

In this they are at one with the Government, which has clearly run into the same difficulty. The indications are that it is being forced towards a heavier reliance on taxation than it would have liked.

Even in a theoretical budget, to make its sums add up, Fianna Fail had to query the payment of public sector increments, at least in present circumstances.

Freezing them would save more than half the new target of €1bn over the next three years but the messier method of job losses and changes to working practices will be tried first.

The real difficulty is the absence of economic growth, which is already some three percentage points of GDP behind the target in the fiscal plan – a slippage which is likely to reach seven percentage points by the end of next year.

It looks as if the universal social charge will take the hit. I had a small bet that the marginal tax and social security rates would approach the levels of the 1980s before this crisis is through.

It looks like I might win. This is not because I am clever but because I have been around long enough to remember the last time. That Fine Gael/ Labour coalition promised to go easy on spending and was obliged to rely heavily on taxation.

Having learnt that lesson, this Coalition promised the opposite, but in terms so stupidly precise that they defy belief. It is now finding the spending/ tax ratio very hard to maintain because of the entrenched nature of public spending, while the tax promises are forcing it to raise taxes in ways that keep within the election promise but may be more damaging to the economy.

The promise means nothing can be done about the curious fact that around two-thirds of workers pay income tax at 20pc or less. The fundamental question, rarely if ever asked, is whether it is possible to pay for a modern social market economy – even a ramshackle one like ours – on this kind of basis.

Agenda

Changing that is still off the agenda. So other fruit must be plucked, with a favourite being an increase in the universal social charge (USC) for higher earners. That will create a marginal take on any extra earnings of around 62pc; which is getting into 1980s territory.

The expected reductions in tax relief on pension contributions runs the risk of finishing off private saving for retirement, thereby adding to the likely future liabilities of the State.

Suggested changes to capital taxes would undo most of the reforms of the 1990s without any proper analysis but merely to raise revenue.

These are all arguments about "how," but there can be no doubt about why. The next two austerity Budgets are designed to close the €6bn gap between tax revenues and basic public spending. After that, money must be found for the costs of the national debt.

The IMF reckons that, even with normal growth, the gap is around €10bn a year. One could argue with that figure, but it is certainly substantial. Even if growth does not pick up next year, it is still imperative that the €6bn be raised.

These iron-hard facts get little place in the Budget debates, largely because no one can see how Irish families are to find these kinds of revenues. But find them they must, unless the size of the State is drastically reduced.

Strangely, that never gets a mention, despite its extraordinary growth in the 2000s. All the austerity so far has succeeded only in keeping public spending at a constant level, even as national income falls.

It is hard to escape the conclusion that the present strategy is simply not revolutionary enough to work. Next week's Budget may hold the line for another year but, if external conditions do not improve, it may not hold much longer .

Bigger shifts of income are required; between taxes to, and transfers from, the State, and between creditors and debtors.

Fantasy? Sure, but it may yet become inescapable reality.

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