Wednesday 22 October 2014

A Sinn Fein finance minister will be forced to balance the books – just like anyone else

Published 17/06/2014 | 02:30

Sinn Fein leader Gerry Adams at the annual Sinn Fein Wolfe Tone commemoration in Kildare at the weekend.

We need to start taking Sinn Fein's economic policies seriously, in a manner that reflects the party's size and its trajectory.

There's a good chance Sinn Fein will make up part of a future government. If it negotiates a programme for government, the party will have the mandate to push for some of the policies it has championed for some years now. Last week I looked at the proposed wealth tax – 1pc tax on net wealth in excess of €1m with exclusions for working farmland, business assets, 20pc of the family home and pension pots, amongst other things.

Estimates of the wealth tax bringing in €500m-€800m in a full tax year aren't yet fully costed and of course, with enough exemptions, the tax could end up being substantially reduced by people changing the composition of their portfolios to minimise their tax liability under any new wealth tax.

By excluding property and business assets, the proposed wealth tax is effectively taxing people for owning financial assets like stocks and bonds. By pledging to remove the recently introduced local property tax at the earliest opportunity, Sinn Fein is removing the largest pool of wealth from the tax net. The chances of a Sinn Fein Finance Minister saying 'no thanks' to €500m to €600m when the Budget for 2017 must be prepared is effectively nil, so this may not seem like the most credible policy to campaign on. We'll have to wait and see.

Another way to think about taxing property is to put in place a land or site value tax which penalises owners for sitting on land banks and properties doing nothing, encouraging them to sell the property on and get it used by someone for productive purposes.

Any consideration of Sinn Fein in government should take account of two things.

First, it is already in government, in the Northern Ireland Assembly, though, of course, it doesn't have powers to tax and spend there. Second, no matter who is in government, the European Commission's excessive deficit and imbalance procedures will hold until 2018 at the earliest, meaning the government will have to balance its books when it comes to spending and taxes, with zero growth in government spending projected to 2018 under the Commission's macroeconomic forecasts. The next government will just not have to impose austerity on its population.

By the way: my objective here is not to do a hatchet job on Sinn Fein. I just want to understand the policies it would like to pursue if elected to government. It is important to note that all of the other parties have similarly dodgy back-of-the-envelope exercises, and some of Sinn Fein's policies have been individually costed by the Department of Finance, without the results being shared with the parties.

An open bank of costed policies, perhaps done by the Government's economic evaluation service, with a simple validated model, would be a key addition to informed public policy debate in Ireland.

The other headline taxes are increases in the marginal rate of tax – the rate at which you pay the last euro you earn – for really wealthy people on over €100,000 a year to 48pc, and increases in capital gains taxes.

Sinn Fein may be the only truly left-wing party left in Ireland. It wants to push the idea that if you reduce the reward somebody gets for doing something, or increase its cost, they will do it less and less. On the plus side, those at the top save more, so redistributing €365m of their income to those on lower incomes will, without a doubt, help growth, at least in the short run. You could also get the same effect by a targeted VAT reduction. Recent research has shown that Irish VAT is highly regressive, hurting those on lower incomes as they consume almost all of their incomes.

But VAT is a real earner for the State, so the Sinn Fein Finance Minister will face the same problem as deleting the property tax – he or she will still need to balance the books. Over-promising to the electorate is one surefire way to get in trouble when decisions have to be made, as Labour have found out to its cost.

How will the party choose to spend its taxation revenue?

The first really big spend is to move the State's health infrastructure towards universal health insurance. Long term this is certainly the best outcome for patients as free at point of delivery access is the gold standard internationally. The problem with UHI is no one, really, knows how much it will cost to implement and in what timeframe.

Moving the system towards UHI will require a ramping up of the €13.5bn we already spend on health in Ireland, and this will have to be paid for out of current income while the transition takes place. Meanwhile we will see large-scale inequities as those without healthcare but with clear medical need compete with those lucky enough to be in categories which get UHI first – the under-sixes now, for example, who will cost €34m as estimated by Sinn Fein and the Department of Finance.

The party has some really smart, and relatively cheap, increases in funding to carers, for hearing aid implants, and reducing the impact of the universal social charge.

One place I don't see large policy innovation is in the area of pension reform.

No political party has tried, really, to grasp the nettle of our ageing population and the large claims the state pension will have on our finances into the future.

This is one area populism won't trump hard sums, but it would be an area where Sinn Fein could differentiate itself when it comes to policies we can clearly perceive as different.

Stephen Kinsella is Senior Lecturer in Economics at the University of Limerick.

Irish Independent

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