Axe the facts and max the tax. If anyone advising the Government on economic policy has a mission statement, that is my best guess as to what it is. In 2004, the last year when Charlie McCreevy was Minister of Finance, total net government spending was 31 per cent of GNP. As of Budget day, this is expected to rise to around 37 per cent by 2010.
y stimulating the economy, low tax rates led to a trebling of actual tax revenues between 1997 and 2007, making a nonsense of claims that we have been cutting tax over the last decade.
For some, the 2004 level looked way too low. But, as respected economists Pat McArdle and Donal de Butleir pointed out at that year's annual gathering of economists in Kenmare, Ireland spends little on defence, has low servicing costs for its national debt and, thanks to a young population, is relatively unburdened by huge health and welfare spending -- unlike France or Germany. Where other EU countries need 40 per cent of GNP or more to provide decent public services, young, neutral and low-debt Ireland shouldn't need much more than 30 per cent.
Ignoring this logic, some people in the Economic and Social Research Institute and National Economic and Social Council, and various university professors, are urging us to accept the proposition that we are a "low-tax economy". Even the venerable Dr Garret FitzGerald has joined the chorus.
Pointing to the EU as their benchmark, they argue that we should target some ideal level of taxation as a percentage of GNP. Regardless of what value for money we are getting for our existing levels of taxation. Regardless of how public services could be improved. Regardless of the fact that most spending increases go not to public services but to an ever-rising public sector pay bill.
The argument that some Stalinist spending target will put us where we need to be in terms of public spending has gained root. With State spending going through the roof and an ever-widening deficit, it's a message that's music to the Government's ears.
It should be careful. Among those carrying that message, Garret FitzGerald is one of the few coming from a position which commands respect -- namely, an honourable, if in my view outdated, social democratic one.
Others are coming from very different motives. As Vladimir Illyich Lenin said, if you want to know why a particular policy is being proposed, ask who benefits from it. Faced with a long overdue rationalisation of public spending, many with an interest in keeping State spending as high as possible are desperate to avoid making a contribution to our economic recovery.
The deficit facing the Government next year, €13bn, is mainly caused by a combination of a €12bn hike in spending during 2006 and 2007, and a tax base that was heavily over-reliant on property taxes.
Under these circumstances, were the public sector a model of efficiency and if public services were still in short supply, there might be a case for increasing taxation to provide them. But, except for making a serious misinterpretation of a recent Organisation for Economic Co-operation and Development (OECD) report on our public service, the proponents of higher taxes have said nothing about the efficiency of our public service.
That report noted that, as a share of GDP, our State spend looks low by OECD standards. But it also noted that GNP is a more appropriate base. Given that it's about 17 per cent lower than GDP, measuring State spending as a share of GNP results in a spending that's about one-fifth higher than the GDP measure.
What the OECD strangely failed to consider was that, if you take our lower commitments on age, debt and defence-related spending into account, you can slap another five percentage points on top of that.
In other words, the amount of government money available for real public services -- ie, not pertaining to debt or defence, and in proportion to our demographic profile -- is adequate by OECD standards. In fact, by the standards of emerging economies snapping at our competitive heels, it may well be too high.
And yet the Government has increased taxation significantly in this Budget. Why? On the basis of the analysis above, there is no compelling economic case for doing so. The likely cause is not the economy per se, but rather the political economy.
Government spending has traditionally been relatively easy to increase, politically. That was because, up to now, taxes have been relatively easy to increase as well and, even when they weren't, one could borrow. After all, the taxpayers who will repay the debt in years to come are not usually thinking that far ahead. So increases in tax and debt are the easy ways out.
As of two weeks ago, the rules of the game may be changing. Spending cuts on the medical card produced a furious reaction and subsequent climbdown. It would be tempting to conclude that this reinforces the case for tax increases rather than tax cuts. But the other side of the medical card saga is the expensive nature of the current healthcare system. And the other side of the increase in class sizes at primary school level is the huge amount of money spent on university research -- much of which is of questionable value to third-level students or the economy.
To divert attention from this, spurious statistics are being quoted about Ireland's supposedly low levels of taxation. The truth is very different. Above the average industrial wage, half of one's income goes to the State. Irish consumers pay among the highest rates of indirect tax in Europe. And nowhere is there a tax code which asks growing families with negative equity to pay the State for trading up in the housing market.
What is an issue -- as Garret FitzGerald has pointed out -- is the dysfunctional base of our tax system. The Commission on Taxation will this month begin cleaning out the stables. It should start by urging an abolition of stamp duty, automatic indexation of tax bands, and a reversal of the income levy as soon as appropriate savings are made in Government spending. Some bad old taxes have to be abolished or reformed, and this will create a further gap in the public finances. The way to fill that gap is not to pile more taxes on workers and consumers, but to begin the task of public sector reform.
Just on cue, Brian Lenihan is due to announce a reform plan this month. A nation waits with bated breath.
Marc Coleman is Economics Editor of Newstalk 106 to 108FM
