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Brendan Keenan: Great Four-Year Plan has to be believable to citizen taxpayer

THE speculation has begun, and the rage will soon follow. Not financial speculation this time, but the media kind; about what will be in the Budget.

The speculation centres on a big bang Budget, with perhaps more than €4bn of adjustments. Fear of the markets by the authorities, and rage among the citizens affected, may make it impossible to have cool and calm consideration of the options.

Such consideration runs into an immediate paradox: that it is easier to increase existing taxes than start new ones. People complain less, and there is more certainty about the revenue.

Governments know that higher income taxes, excise, and VAT bring money in on the dot. Getting ready for the complexities of property tax and water charges would not.

One still cannot quite believe that the Great Four- Year Plan will reveal what the Government and the Department of Finance intend to do with specific taxes like income tax or a property tax. But it had better.

Specific sums being raised in vague ways will not wash. They will not be believed in the markets and, worse, it will not be possible to gauge the public reaction.

That is what lenders want to know, and what the community must confront.

If such details are included in the Budget plan, it might be acceptable to have the existing, quick-result taxes provide most of the extra revenue in 2011, with new taxes and charges taking more of the share in later years.

There could, of course, be immediate flat charges on water and property until more sophisticated levies based on usage and value are ready. It is not at all acceptable to think of the revenue gap being closed entirely by higher, wider income tax, and by bigger consumption taxes.

Mystery

It has always been a bit of a mystery why Mr Cowen and Mr Lenihan began to say that tax increases would not be part of the overall solution.

The original plans, it should be remembered, show almost €10bn extra in tax revenues by 2014. Presumably, the high growth assumptions in those plans meant their model showed most of the revenue coming from the proceeds of growth.

The new plan is necessary because those growth assumptions have to be reduced. There is a need for both spending cuts and more tax revenue. Just how much more tax is needed is, however, open to considerable debate.

At this week's ESRI conference on Budget issues, economist Jim O'Leary -- who is now bringing his expertise to the Department of Finance -- suggested that as little as three percentage points of national income might be enough extra tax.

This was on the basis of the fiscally solvent days of 1999, when tax revenues were a modest 30pc of national income.

But government spending was even more modest. It inflated with the bubble, but of course cannot deflate as rapidly as the economy has done. As a result, it has ended up at a hefty 40pc of national income.

Some part of this gap will have to be covered by extra taxation. However, it is not too soon to think of the desired size of the public sector and the kind of taxation system that could pay for it, while balancing income equality with incentives to work and enterprise.

Balance

Deciding on this balance has never been the explicit policy of any political party. As the ESRI conference showed, these objectives pull in different directions. In government or out, parties tend to move where the pull is strongest.

Government politicians may say that a national emergency is not the time to worry about such political niceties.

The analogy of putting out a house fire has been used. Too late to think of house insurance then, the argument goes, and too early to think of the rebuilding.

They are not niceties and the analogy is false. Even though matters are extremely urgent, we are not putting out a fire. We are endeavouring to rebuild an economy that has been shattered, and it needs to be placed on sound foundations. That requires more than just reducing the budget deficit.

Someone among our leaders is going to have to find a way to separate the issues of bank rescue; the impacts on short-term growth and long-term potential; and the issue of the desired size of a public sector fully funded from taxation.

This last one -- tax and public spending -- is the one which causes most trouble in countries wrestling with fiscal deficits. Yet it ought to be the one most amenable to consensus. Opinions do vary as to the desirable size of the government sector as between, say, the UK and France.

But it should be possible to construct majority support for the idea that it is too late to go back to UK proportions relative to the economy, but that Ireland is not rich enough to devote French levels of income to its public sector.

A consensus on taxation will be more difficult. First, there must be recognition that the same amount raised by, say, income taxes versus water charges or a property tax will have different effects on the economy.

Objectives

There are some objectives we can usefully target. The main one should perhaps be the difference between the total cost of employing a person and their take home pay. This "tax wedge" does have some claim to being the best guide to how friendly or hostile a tax system is to employment.

The second is the difference between income from work and income from welfare. The ESRI analysed the effect of the suggested universal social charge on different income groups.

It will now look at the effect on this social welfare "replacement ratio" for workers on low incomes. One needs both sets of data to make informed choices on the policy.

The other thing about the early 2000s was not just the size of the tax take but that, with much toil and tears, the tax system had been cleaned up and breaks and distortions eliminated, so that it raised the maximum revenue with minimum damage.

Now it has all to be done again, but 2000 offers a pretty good template.

Irish Independent