Marc Coleman: Failed policy of tax hikes and cuts in spending will only bleed us dry
Despite having 2010 as a template for recovery, the Coalition is steering a safe, middle course
As the Government says, the economy is undergoing a recovery of sorts. However, it is not the first recovery since the recession. After falling 10 per cent in 2008 and 2009, GNP began recovering in 2010, growing by 0.9 per cent. It was a modest recovery. But it was also a real one, matched by jobs growth, rising confidence and modest growth in retail sales.
But what was most impressive about the 2010 recovery was the performance of tax returns – after collapsing in the two preceding years (by 17 per cent and 19 per cent in 2008 and 2009 respectively) tax revenues began to recover and finished the year an impressive €700m ahead of target.
So no, this is not the first year of recovery since the recession began. It is, however, hopefully the first year of uninterrupted recovery. What caused the recovery of 2010? The failure of economic policy in 2008 and 2009 was because the Government relied on tax-sterity rather than austerity.
In October 2008 and April 2009, the failed strategy of ratcheting up tax rates while leaving spending fundamentally untouched – had exactly the same effect as in the mid-1980s under Garret FitzGerald, aggravating the recession and worsening the tax take.
Starting in January 2009 with the public sector pension levy and culminating in December 2009 with spending cuts, this policy was reversed. The result: Growth and recovery in both employment and tax revenues. And what brought the recovery of 2010 to an end? Put simply, a relapse in policy, namely the return in the December 2010 Budget to the failed policies of tax hikes. By late 2010 GNP was in freefall, employment was declining, consumer confidence receding and tax revenues were over half a billion behind target.
As evident from the latest exchequer figures, the Government is trying to steer a middle path between failure and success on the tax policy front. According to the programme for government, fiscal adjustment is supposed to be achieved by saving two euro in spending cuts for every euro in tax increases.
In reality, about €400m in designated "spending" cuts in the last Budget were in fact increases in various charges and fees. Therefore, they really count as tax increases.
Adjusting for that, the last Budget was a 50/50 balancing act between spending cuts and tax hikes. What's more, the spending being cut is of the most productive and job-enhancing variety: Capital spending.
Of the €7.7bn in spending cuts between 2011 and 2012, the vast bulk is accounted for by a decline in capital spending. And that puts Brendan Howlin's announcement last week – of an extra €150m in capital spending – into perspective: Compared with what has been cut from the capital budget, a mere fraction is being put back.
The fact that capital spending in the year to May is also below target raises the question of whether this is really additional spending, or just a deferred usage of what was already earmarked. The overall exchequer returns are also flattered by lower than expected debt interest and higher than expected Central Bank profits.
But the real concerns are on the tax side. The indications are that the 50/50 approach is producing results that are, well, 50/50. In the first five months of the year for which we have data, stamp duty returns are up 111 per cent year on year. But as anyone in that area knows well, this has nothing to with the property market which continues to flounder. Rather it reflects the allocation into that category last autumn of health levy receipts, a temporary boost that will disappear from year-on-year comparisons.
For all other tax categories, the picture is of weak or negative growth.
Perhaps the most important bellwether tax is VAT. In 2010, VAT returns were consistently ahead of target. By refraining not just from income tax hikes but from any kind of tax hikes, direct or indirect, the government boosted consumer confidence and got people spending again.
This year the accumulation of various indirect taxes, fees and charges has cast a pall over consumer spending and VAT returns continue to underperform against target. Yes, they are up slightly on the year before. But the margin – a mere 2.5 per cent – is mostly the impact of price increases. As retail sales figures show, growth in actual sales volumes is weak to the point of being non-existent.
Income taxes are behind target also if modestly (2 per cent) ahead of last year. Given what the latest employment survey tells us about jobs growth it is, however welcome, mostly coming from low-paid temporary employment. Little scope here then for growth in the foreseeable future.
Corporation tax receipts are ahead of expectations but remain, despite a boost in the month of May, 5.5 per cent lower than the first five months of last year. Capital acquisitions tax returns are barely growing at all (just 0.8 per cent) and capital gains tax returns are, despite, and perhaps partly because of, the last Budget's rate hike, 51 per cent lower than a year before.
Customs duties are down 6.2 per cent and excise duties are up 3 per cent which, taking the budget into account, indicates barely any growth in consumption.
On the whole, tax returns are broadly on target. But growth is weak and results from tax increases whose longer-term impact may be adverse and self-defeating. In 2010, revenue recovery was – far from being due to tax increases – due to an absence of them. And it was faster, broadly based and durable.
As dictated by coalition mathematics, the Government is trying to steer a middle course on the economy. But a comparison of tax returns in 2010 and 2013 gives a very clear verdict on what it should be doing: Eliminate the negative. Latch on to the affirmative. And don't mess with Mr In-between.
Marc Coleman is Economics Editor of Newstalk 106-108fm @marcpcoleman