Tuesday 25 October 2016

Core issue is lack of domestic demand

The case for a growth strategy based on targeted tax cuts is now overwhelming, writes Marc Coleman

Published 08/12/2013 | 02:30

BETWEEN the promise of Santa and the Grinch who stole Christmas, a tug of war is going on over the state of the economy.

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The news of property price rises and an extra 58,000 jobs in the year to September added to the season's cheer. Eamon Gilmore and Ruairi Quinn were even talking about tax cuts in our stockings next year. A ruse to keep the boys and girls in Killarney happy, perhaps. Then again, judging by last Wednesday's further fall in the unemployment rate, to 12.5 per cent, it might be more than that.

Pulling the other way in this tug of war is the fact that all this good macro news and feelgood talk is making little difference to our wallets. More jobs in the economy sounds great. But those in jobs can barely make ends meet.

Sources as varied as the ESRI, the Irish League of Credit Unions and the AA tell us that the majority of families are struggling to cope with depressed disposable incomes and ever-rising price levels.

So when we learnt that retail sales fell in October, and that consumer sentiment and service sector sentiment also both fell in November, it wasn't much of a surprise. As the KBC/ESRI consumer sentiment survey put it, consumers are now beginning to separate "macro" news on the economy from their own "micro" financial situation.

When it comes to spending this Christmas, the state of their wallets may have more influence than the state of the labour market. Gilmore put it well last week: the question isn't whether a recovery is happening, but for whom it is happening.

And with the crippling cost of living here, it's hardly surprising if few of us feel ownership of that recovery. Here, another tug of war is going on. Pulling upwards are prices in sectors driven or influenced by the State or State taxation: alcohol and cigarettes are up 5.3 per cent year on year, education costs are up 4.6 per cent, and health sector costs are up 1.3 per cent. This compares with an overall price increase of just 0.1 per cent – and that latter figure is caused by the private sector pulling prices down. Prices are flat for food and non-alcohol beverages and are falling in the communications sector, recreation and culture, and household furniture and equipment.

Rises in transport prices and health insurance, and the introduction of water charges, may intensify the squeeze on consumers.

Directly or indirectly, the State already accounts for 54 per cent of GNP. While export-driven growth is welcome and good – and while the Government's success in making modest growth rates go much farther in terms of job creation is salutary – the core problem of this economy is the lack of

domestic demand. That lack does not come from State spending, but from the fact that those who spend the money most efficiently and in ways best suited to growth and jobs are having too much of it taken from them in taxation.

With Europe's recovery now sadly in doubt, there is little room for complacency about our own. The case for a home-grown growth strategy based on targeted tax cuts is becoming overwhelming. Last Tuesday's Exchequer figures prove such a strategy could work. In categories where taxes were cut or left alone – income tax and corporation tax – growth is healthy. Where tax rates were recently increased or are too high, revenues are barely up above inflation (VAT receipts are up just 2.8 per cent) or have collapsed (capital gains tax is down 32.2 per cent).

At €287m in the year to November, property tax revenue appears to vindicate the introduction of that tax. But look again; the fall in consumer sentiment during November is more than likely strongly linked to the controversy over the early payment of property tax.

What the Government gains on the swings here, it is losing on the roundabouts in anaemic rates of VAT growth and falling retail sales. Incidentally, research from Retail Ireland suggested last week that the sector could create 40,000 jobs between now and 2016. It recommended a range of actions to help the sector.

With one of the highest indirect tax rates in Europe, the key challenge facing Irish consumer spending is disposable income. And the key challenge to getting a domestic – as distinct from solely export-based – recovery going is consumer spending. With among the highest marginal tax rates and with home owners now facing not one but two property taxes, we are clearly overtaxed.

Little surprise that consumer sentiment is down. Little surprise either – given the plethora of charges and price rises driven by the State outside the remit of the Budget – that the absence of more conventional tax increases has failed to boost confidence or spending. Refraining from tax increases is not enough. Eamon Gilmore and Ruairi Quinn have acknowledged the need for tax cuts. The sooner, the better.

Marc Coleman presents 'The Marc Coleman Show' every Sunday at 9pm on Newstalk 106-108fm

Sunday Independent

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