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Monday 22 September 2014

Marc Coleman: Free us from shackles of high tax

The sight of tax cuts around the corner is just one sign of newfound freedom

Published 15/12/2013 | 13:00

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Former European Central Bank President Trichet attends a session at the World Economic Forum (WEF) in Davos
Former European Central Bank President Trichet attends a session at the World Economic Forum (WEF) in Davos

I'M NOT saying that the exit from the bailout is hyped up or anything. But if you told me Neil Jordan had been asked to do a film borrowing the theme music from Gladiator and the slogan "Now we are free" -- with shots of a firm-jawed Enda Kenny looking confidently into the future -- it wouldn't surprise me.

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Like stale mince pies, the hype will all look at a little jaded in a few weeks. But viewed close up, the "now we are free" narrative mightn't be so hyped after all.

Take tax cuts. A fortnight ago, no minister would even whisper the words "tax" and "cut" in the same sentence. Then two Labour ministers did. In the space of two days. Then on Friday Michael Noonan said he was seriously considering tax cuts. The wrapping is barely off the bailout exit bonanza but the boys want to take this toy for a spin to see what it can do. In theory, the Government can even scrap the second property tax introduced this year. Now there's an intriguing thought.

A former schoolteacher, Michael Noonan last week gave the air of a Leaving Cert pupil on the last day of class complaining about teachers -- unnamed "technocrats" and their lack of nous -- that he knows he's seen the back of. Then there was that old headmaster Trichet. Not at all as nice as the new man Draghi.

But as ministers compete to distance themselves from an austerity they want us to believe was caused by technocrats, we know different. We know that had technocrats been in charge during the good times, the crisis may never have happened. We also know that in their 2007 election manifestos, Labour and Fine Gael spending plans were just as generous (and their economic forecasts just as optimistic) as Fianna Fail's.

But that was then. This is now. The sight of tax cuts

'The wrapping is barely off the bailout exit bonanza but the boys want to take this toy for a spin'

around the corner is just one sign of newfound freedom. There are others.

Although the Independent Fiscal Advisory Council (IFAC) advised against it, the Government decided to jump without the safety net of a credit line. Sinn Fein has criticised this. But this is a case where fortune favours the brave, and where the home of the brave is also the home of the free.

With greater responsibility -- standing on your own two feet when funding your debt -- comes greater access to bond markets, and after consistent falls in spreads between Irish and German debt, the decision to exit without training wheels is likely to help rating agencies upgrade our debt early next year. The result -- cheaper debt and easier borrowing conditions -- can only be good. In fact, with bond investors queueing up to buy Irish debt, it looks like the NTMA has done an excellent job managing our bond markets as we exit the bailout

And as interest rates fall -- and that nice new headmaster Mr Draghi is likely to make sure the ECB keeps interest rates lower for longer -- investor confidence will gather pace. That, in turn, will help lift asset and property prices and improve the problem of negative household net worth, which has been a real drag on consumer sentiment. Throw in an improving labour market and the only remaining question that then remains is fiscal policy.

In October, fears of looming Budget tax increases paralysed retail sales. In November, controversy about the property tax did the same. Tax rises and fear of tax rises are always and everywhere bad during a recessionary period. Bad for growth. Bad for jobs. And bad for Exchequer revenues.

One of the contributors to the successful bailout exit is the profile of tax receipts, which are up year-on-year and slightly ahead of expectations. But a breakdown of that profile into detailed tax categories strongly suggests that had the Government not hiked taxes, its revenue position would be even stronger. Income taxes and corporation taxes, where rates were reduced or kept low, are growing. Where rates were increased or remain high, revenue is stagnant or collapsing.

As the Government has been freed from the Troika's shackles, it now needs to free us from the shackles of high taxation if it wants to secure recovery.

So, yes, tomorrow we will be free. Well, at least freer than we were last Monday. Will that freedom be abused?

With six months to local and European elections and two years to a general election (and time will fly), the pressure on the Government is going to intensify to win back the half of the electorate that finds itself in the "Don't Know" or "Independent" voting camp, not to mention those plumping for Opposition parties.

Perhaps with one eye on this, both the EU Commission and IFAC have urged the Government to stay the course on the remaining two years of fiscal consolidation and to avoid adjusting -- as it did this year -- by less than agreed.

Fat chance.

If the Government didn't abide by the Troika's €3.1bn adjustment in the 2014 Budget, it is certainly not going to pay heed to strictures once out of the traps. Nor should it: in June 2012 the EU summit gave Ireland an implicit but clear promise to use the ESM to help recapitalise our banks retrospectively. Until that promise is honoured, all bets are off as far as Troika diktats are concerned.

Irish Independent

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