News Brendan Keenan

Wednesday 17 September 2014

New Cabinet will struggle to keep grand promises we can't afford

Published 12/07/2014 | 02:30

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Joan Burton. Photo: Clodagh Kilcoyne
Joan Burton. Photo: Clodagh Kilcoyne

YOU can't make bricks without straw, the old saying goes. Yesterday the refurbished Government promised a splendid edifice, but it is not at all clear where the straw for such a construction will be found.

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Tax changes are to be the cornerstone, although it would seem only the foundations will be laid before the next general election. October's Budget – the last before polling day – will announce a tax reform plan to be delivered over a number of Budgets, which means most of the task will fall to the next government.

Something will be done in October to start reducing the 52pc marginal tax rate on earnings above €40,000 a year (after credits).

The Government likes to call this group, "low and middle income earners", which is perhaps how it looks from the vantage of a Ministerial salary. Like others, it also gives the vague impression that the tax is paid on all earnings, whereas someone earning €50,000 a year actually has an overall tax bill of 30pc.

That is less than the EU average, but the 52pc on the last €10,000 is one of the highest. Such an odd arrangement – a tax rate which leaps from 20pc to 41pc, with levies on top – is expensive to fix; even more so if one leaves the lower-paid alone.

So it will take several Budgets. The most expensive way is to increase the entry point to the higher band. It is cheaper to cut the top rate, but that has a bad reputation from the excesses of the 1990s.

Some of the cost could be recouped by introducing a new tax rate for six-figure salaries. That would drive away talent, critics will say. There are reported to have been disagreements between the Taoiseach and Tanaiste, pictured, over the plan and one can see many areas where they might have fallen out.

Pay may have been a difficult area as well. In her statement, Minister for Social Protection Joan Burton (pictured) flagged the creation of a Low Pay Commission which would make annual recommendations on the minimum wage. She reminded everyone that it was she who restored cuts in the minimum wage, to bring it back to €8.65 per hour.

Low pay could well turn out to be a key political issue over the next 12 months. The trade unions have identified €11.45 per hour as a "living wage". Employers will be horrified at the idea of a possible statutory annual increase in the minimum wage, with €11 as a kind of early target.

These two issues indicate the Government's difficulties in keeping what already seem grand promises. The Tanaiste pledged to improve living standards for "every person, every family and every community". Brave words indeed. The public finances remain in a highly dangerous state. Every tax cut or spending relief, unless paid for someone else, makes the situation more fragile. This is the first year since the crash that tax revenues will match spending, and that still leaves €8bn to be borrowed to cover interest on the national debt.

One implication is that most growth for several years must come from foreign earnings. That creates difficulties with the pay question. Arguments about competitiveness are endless, and always inexact, but there is no doubt about its importance in the present situation.

There is also the horrifying statistic highlighted recently that a quarter of Irish households have no one in a job. The relationships between pay, welfare and employment need more than grand promises – especially promises based on old political slogans.

For obvious reasons, the Government stresses the positive. But yesterday's clear message that the future is bright, and it is now a question of who gets what, is shared by few economic analysts.

It is true that the first three months of the year recorded good growth. Tax revenues for the first six months suggest the growth continued. Unemployment has fallen sooner and faster than anyone expected.

But this year is the first sign of any stirring in the domestic economy. It is very early days to declare the battle won. Ms Burton may turn out to be right when she says recovery is "firmly under way" but it is impossible to be sure of that just yet.

An unpopular Government has little choice, having got no electoral reward for averting catastrophe. To have any chance of the promises being kept, the economy will have to post the 5pc annual money growth forecast for the next five years in official documents. The Government, however, needs only to get through this year and next. If nothing goes wrong between now and October – and plenty could still go wrong – it will be able to bring in the softest Budget since the crash.

Then it must hope for similar results in 2015. "Fortune favours the brave," another old saying goes. As far as the relaunched Coalition is concerned, it will have to.

 

Brendan Keenan

Irish Independent

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