Sunday 23 October 2016

Noonan loves his fiscal policy buzzwords - but voters should be wary

Published 26/01/2016 | 02:30

Finance Minister Michael Noonan (centre) visiting the constituency office of Dublin South East TD Eoghan Murphy (right) and FG candidate Kate O’Connell (left). Photo: Naoise Culhane
Finance Minister Michael Noonan (centre) visiting the constituency office of Dublin South East TD Eoghan Murphy (right) and FG candidate Kate O’Connell (left). Photo: Naoise Culhane

At the weekend, Finance Minister Michael Noonan said the fiscal space available for tax cuts and spending increases over the next five years was more than €12bn - which is strange, because his own department put the figure at €8.6bn a few short months ago.

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Every so often, a new buzzword enters the political lexicon and begins peppering politicians' speeches with bewildering regularity. The latest illustration of this phenomenon is "fiscal space", which recently became ubiquitous.

As far as jargon goes, fiscal space is perfect for politicians because it sounds relatively erudite but no one really knows what it means. This allows TDs to throw the term around, in response to awkward questions, with no one interrogating the bona fides of what they're saying because they're too bamboozled by the phraseology.

Take, for example, this response by Mr Noonan at the weekend when asked on RTÉ radio to explain how the State could afford the €4bn cost of abolishing a sustainable tax like the USC.

"We have over €12bn of fiscal space from 2017 to 2021 … as well as that we don't index taxes in Ireland so that gives us extra fiscal space when you apply the European rules. So, what we are promising on USC is over five years we'll abolish it and it will take less than 30pc of the available fiscal space. The remaining fiscal space will be used for expenditure," he said.

Clearly, "fiscal space", as an expression, is now as beloved by politicians as 'going forward' once was, but what does it actually mean and how is it calculated?

Most people have a crude understanding of fiscal space as being the amount of money available to politicians to secure the next election by slashing taxes and increasing spending.

It's based on calculations about annual GDP growth and tax revenue forecasts, coupled with calculations about future spending constraints, with the balance giving the next government room to either reduce taxes or increase spending.

However, while Mr Noonan spent the weekend telling everyone the fiscal space was more than €12bn, other political parties were under the impression the figure was just €8.6bn up to two weeks ago.

Speaking on January 13, Fianna Fáil finance spokesman Michael McGrath said the party accepted the Department of Finance's assessment of the available fiscal space as being €8.6bn. Sinn Féin has also been using the €8.6bn amount, with that figure cited when it published its health policy proposal recently.

The reason those parties were relying on that number is because it was published by the Department of Finance in its budgetary report in October.

That document listed a gross fiscal space figure for the next five years of €10.9bn and a net figure - taking into account future spending commitments like higher public service salaries under the Landsdowne Road agreement and demographic changes - of €8.6bn.

Asked to explain where the €12bn figure came from, a Fine Gael spokesperson told me yesterday that non-indexation of tax bands for the next five years could increase the fiscal space by €2bn.

In layman's terms, tax bands have not been increased in line with inflation since 2008 and if the next government continues this policy it will save around €2bn - which amounts to an effective tax on workers, whose real income is reduced as the cost of living increases.

The spokesperson also pointed to the possibility of a relaxation of EU fiscal targets in the coming years, which could net the State between €1bn and €1.5bn - although he stated the party wasn't counting that figure as it was not definitive.

So, to clarify, the "more than €12bn" figure bandied about by Mr Noonan is composed of the €10.9bn gross fiscal space figure in last year's budget document plus the €2bn that may arise due to non-indexation of taxes - €12.9bn in total.

A number of problems arise. First, Fine Gael, to date, has made no public statement on whether it will index taxes or not, although given Mr Noonan's comments we can maybe assume it does not intend to index tax bands for another five years.

Additionally, the gross fiscal space figure does not take into account spending commitments the next government will have to honour, like the extra €300m per annum on public service salaries and the €400m a year in additional costs from an ageing population.

Further, it should also be noted that much of the delirium about increased tax revenues last year is related to huge hikes in corporation taxes, which comprise 50pc of the overall increase.

Last year, the department estimated corporate taxes would be €5bn but the ultimate figure was €7bn - up from just €3.5bn in 2011.

The department seems to think this increase in revenue is sustainable, but the IMF, the European Commission and the Irish Fiscal Advisory Council (IFAC) are not convinced, warning these revenues are highly volatile because they are based on corporations' annual profits.

The tax deal struck by the UK with Google over the weekend is instructive with analysts stating the company paying more tax in the UK will lead to a reduced tax burden in this country, where the profits of its UK operation have previously been funnelled.

Fine Gael has insisted abolishing the USC will drive job creation, which will in turn enrich State coffers and fund public services, but it should be remembered that this nirvana of full employment and low personal taxation existed in 2007 - just before the country's economy imploded.

Asked about its estimation of the fiscal space yesterday, a Fianna Fáil spokesman said the exact figure would be in its manifesto but it would be "allowing for considerable headroom below the €12bn maximum" while also using windfall corporation taxes for a "rainy day fund". Sinn Féin said the figure would be released in its manifesto.

If Fine Gael really is the party of fiscal rectitude, urging the electorate to vote for it to keep the recovery going, then it may soon have to explain why its determination of the available fiscal space is much higher than its opponents.

Irish Independent

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