Tuesday 25 October 2016

Renewal of vows by Government parties is necessary but it will also be rather painful

Published 13/05/2014 | 02:30

Finance minister Michael Noonan,TD (right) and Brendan Howlin,TD the Minister for Public expenditure arriving for a news conference following the final bailout review by the Troika.
Finance minister Michael Noonan,TD (right) and Brendan Howlin,TD the Minister for Public expenditure arriving for a news conference following the final bailout review by the Troika.

The Coalition plans a renewal of the vows they swore in early 2011 to love each other, honour the whip, and obey the troika. This is a good thing, as many commentators, including myself, have noted a persistent drift in the Government's approach to policy making since at least before the last budget.

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Once the introduction of the free GP care for under sixes policy was announced it was clear there had been a substantial drift in both the quality of policy making and the ability of the troika to put a stop to the exposure of the taxpayer to potentially massive future liabilities via an untargeted giveaway, at the same time as removing medical cards from the needy.

It is clear both to the chattering classes and everyone else that something has to change. The Coalition would like to draw a line under the unfortunate events of the past three months and move forward. Labour is of course anxious to be seen to be leading this change in order to avoid electoral immolation in the forthcoming elections, and Fine Gael are letting them lead this particular reset.

Senior Labour ministers have been out discussing the shape of the possible reshaping of government policy over the last few days. The shape runs something like this: no more new taxes, and, eh, whatever you're having yourself. Renewal, something, something.

Given that the Government's last Memorandum of Understanding with the troika doesn't actually contain any other new taxes, it is pretty safe to say there won't be any in the near future in any case. So there's that problem sorted easily enough.

Let me suggest some potential economic elements of the Coalition's change of direction.

Go back to the original Programme for Government negotiated in February and March of 2011. On page four they write "We must step back from the edge of national insolvency."

The Programme for Government was essentially a national government dealing with an economic crisis. Concerns around distributive justice or structural reform had to be secondary to the imposition of fiscal targets at the behest of those loaning us the money to keep going.

That crisis, at least in its acute phase, has passed.

So what next? Well, one area which requires urgent reform is the legal and justice system, and public pressure for change should be enough to garner minimal changes in this area.

Look at the 2014 Annual Report which updates the public on the efforts of the Programme. In fairness to the Government, many new initiatives have been created over the last three years, and while very few are properly evaluated, at least some of them will be beneficial.

The annual report sets out three priorities for this post-troika coalition. The first is supporting the domestic economy. The second is to enhance distributive justice, and the third is to continue public service reforms.

On supporting the domestic recovery, taxation policy cannot be changed too much in the short term. Remember Ireland still runs a large primary deficit, and is forecasted to continue to do so for the next three years at least. Any taxation policy that involves a straight giveaway could destabilise the Government's finances, and the economy is still too fragile for this. A rebalancing from income and consumption taxes to property and water taxes over the medium term makes sense, and this is mooted in the Medium Term Economic Strategy, but it won't come quickly enough to save the Coalition's electoral skin.

In order to achieve their first objective, the Coalition is going to have to spend some of the Strategic Investment Fund, as well as implementing something like a targeted VAT drop on selected items related to construction and related sectors to make more projects viable.

I'm rather heroically assuming the Strategic Investment Fund doesn't get nobbled by pork-barrel loving special interests. This large increase in demand would decrease unemployment in the construction sector, increase the viability of firms, and contribute to the need for more housing in the Dublin area. To increase distributive justice, the Coalition needs to look hard at VAT and Excise. In Ireland today, 62pc of households have a gross income of less than €50,000. They pay 52pc tax on all earnings above €32,800 per year. Ireland's taxation system for income is relatively progressive, but its consumption taxes, including VAT and excise, are highly regressive, meaning they hit the poorest harder. Labour should make the case for a targeted VAT drop in the next budget. This will help achieve the second objective of the post-troika Coalition.

The third objective is to keep on keeping on. Which is fine, except many key reforms mooted by the troika way back in 2011 are still on the back burner, including legal services reform and health and pharmaceutical savings, which the troika noted in their autumn assessment. The Government needs to reform the legal and justice elements within our society. The economy requires a rebalancing, and this won't be easy. Renewal may end up being rather painful for the Coalition.

Stephen Kinsella is Senior Lecturer in Economics, University of Limerick.

Irish Independent

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