On Monday it came from the European Commission, on Tuesday from none other than the Department of Finance itself, on Wednesday from George Lee and on Thursday and Friday, from Michael O'Leary and the CSO, respectively.
very day last week the Government got more reasons to abandon its policy of using misguided forecasts and of increasing taxes and public spending. As Monday's EU Commission forecasts and Tuesday's exchequer figures showed, government forecasts remain beyond an acceptable boundary of error. On Wednesday the public reaction to George Lee showed just how much the public has lost faith in the Government. Not that George or Fine Gael can offer anything better, but more on that anon. And on Thursday a more long standing foe of government, Michael O'Leary, explained how travel taxes and government monopolies are destroying the tourist trade.
But for my money, what happened on Monday and Tuesday was even more serious than George's jump into politics. The EU Commission predicted that our government deficit would be higher than expected this year and much higher than expected next year. Following a predictable excuse of the 'Dog ate my homework' variety from Brian Lenihan, his department's own website proved the Commission to be right by publishing exchequer returns for April.
The tax-take was down 24 per cent in the year to April and they showed that, before accounting for the tax hikes about to hit us all, the Government's tax take would just be €31bn this year. That compares to a pre-Budget forecast of €34bn. As the post Budget tax take forecast -- ie, the take including the impact of tax increases -- is based on pre-Budget forecasts, a shortfall in one means a similar shortfall in the other. The Government, in short, is screwed. In a worst case scenario, its tax take this year could be €3bn lower than expected. And whereas the difference between government and EU Commission forecasts on growth can be forgiven, this was a mistake that could have been avoided. Exchequer returns for March showed a 23 per cent annual fall in the first quarter. By pencilling in this figure for the full year fall, the Government would have ensured that April's tax hikes -- however painful -- were at least the last we'd see this year. Now we must fear even more increases in tax rates.
And of course, like April's tax hikes, they won't work. For in the world of real economics -- as against the economics beloved of university professors currying favour with social partners -- raising rates of taxation does not guarantee higher tax revenues. Once they pass a critical point -- referred to as the optimal rate of taxation -- high tax rates start undermining confidence and disincentivising effort to the point where tax revenues actually fall.
In fact the mere fear of higher taxes is now damaging the economy. Thanks to a chorus of public sector economists arguing for higher taxes, retail sales plunged by 20 per cent in the first two months of this year. Up to December the decline in sales was a more modest seven per cent and attributable to a reasonable and desirable unwinding of excessive spending related to SSIAs and the credit boom. But as consumer confidence data from KBC bank and the ESRI prove, public calls for tax increases -- combined with fear of job losses -- resulted in all-time lows for consumer confidence in January and February. Incidentally this is another reason why the Government should cut spending rather than raising taxes, because those affected have secure jobs, cutting public sector salaries has less impact on confidence and spending than raising taxes.
Any residual doubts about how higher taxes are affecting our chances of recovery were then dispelled by another critic of the Government, Michael O'Leary. OK the man, he has a perpetual beef about the Government, but that doesn't mean he's wrong.
On Thursday he explained how, thanks significantly to the combined impact of a €10 travel tax and monopolistic charges by the Dublin Airport Authority, traffic in Dublin airport for the first quarter was 11 per cent down on last year. And the publication of overseas travel numbers for the whole country the day after showed it wasn't confined to Dublin.
To sum up -- as this economist has worn his fingers to the bone trying to point out and as the experiences between 1982 and 1987 proves beyond doubt -- tax rises are the wrong way to solve a budgetary crisis. Not only do they wreck economic growth, but in doing so, they also emaciate tax revenues. When a tax like stamp duty experiences a 64 per cent annual fall -- as it did in the year to April -- it's time to abolish or drastically reduce that tax. With their theoretical backgrounds and lack of real world forecasting experience, many PhD economists sadly don't grasp these realities.
Worse still, they have tremendous influence. Last January a bevy of them tried to prove that our tax burden was too low. By measuring our tax revenues as a share of GDP -- which is about one fifth higher than GNP -- they made the tax share of the economy look one fifth smaller than it actually is. This is because the bit of GDP that isn't included in GNP -- multinational activity -- generates relatively little taxes and shouldn't be included. Their point wasn't just illiterate. They have been a major contributor to the disastrous mistake the Government has made, a mistake that will create tens of thousands of job losses. It is a good reason why the suggestion of recruiting PhD economists to the Department of Finance -- made unsurprisingly by PhD economists -- is at best wrong-headed (in John McGuinness's case) and at worst self-serving (in the case of PhD economists who want taxpayers to feather their nests).
In fact, the best forecasters in Ireland are John FitzGerald of the ESRI, Pat McArdle of Ulster Bank and Rossa White of Davy stockbrokers, none of whom have PhDs. If we need more economists in government -- and we do -- we need economists of this type.
Finally a comment on George Lee's arrival in politics. It would be more convincing if George offered to take a cut in his €150,000 salary if he has to return to RTE. He should also explain why he is joining a party which based its last election manifesto on the same misguided economic forecasts as Fianna Fail. Finally he will have to explain just how he can rectify the country's finances without breaking ranks with his new party on the issue of public sector pay (Fine Gael has pointedly refused to cut public sector salaries below €100,000 a year). I challenge George to debate me on these issues, either on Newstalk or his former station.
Marc Coleman is Economics Editor of Newstalk 106 to 108fm.
