Thursday 21 March 2019

So we're not Greece - but it can still end in tragedy

Voters won't be duped by the promises of tax cuts, which must come soon to have any political or economic benefit, writes Marc Coleman

Anti-austerity protests in Greece last year
Anti-austerity protests in Greece last year

Marc Coleman

In two weeks' time Greeks elect a new government, and if a far left government is voted in, we will hear warnings about possible Greek chaos or a Euro exit; should Irish voters intend to follow suit in the polls, we will hear similar warnings. Having grown cynical, our electorate is unlikely to heed those warnings. Action, on the other hand, might convince voters.

The Government is right to point out that in reducing deficits, restoring growth, creating jobs and protecting living standards and welfare we have done far better than Greece. Not even the most sceptical economist denies this. So why is Greece's governing New Democracy party supported (according to a poll in the Greek newspaper To Pontiki) by 29pc of voters, while Fine Gael and Labour combined can't reach this level?

If punters could detect a difference between the Greek and Irish stories, the Government parties might be doing better. But as Exchequer figures last week showed, the recovery is benefiting the State and no one else. A whopping €1.24bn above target, the State's tax take contrasts with the meagre 0.2pc growth in November spending recorded in Thursday's retail sales data. In fact, the State is now taking in even more tax than it did in some of the boom years. Compared with the €37.5bn in taxes taken in 2005, for instance, (of which €11.1bn was in income taxes) the tax take was €40bn, or €2.5bn higher. Next year should see that tax take approach the 2006 level of €45.5bn. And despite disposable incomes being down by one-tenth on 2005 levels, the State's income tax take last year was €17bn - up €6bn on 2005; €4.6bn on 2006; and €3.4bn up on the previous all-time high of 2007. In other words, we are taxing workers far too much. And here is what sticks in the craw: in 2006 - the last full year of the boom - we spent €40bn in total voted expenditure. Despite all the talk of "right-wing austerity" that is now up to €42.2bn.

After rising by 55pc between 2004 and 2009, spending fell since 2009 by just 5.5pc and remains higher than during any of the boom years. By contrast, income tax on the average industrial wage has risen by one-third. And there has been the household charge and the water charge. So given the left favours tax rises over spending cuts, austerity has been far more left-wing in character than right-wing, as the preferences of the left - retaining public spending - have trumped tax cuts.

All this puts last year's €1.24bn tax overshoot in perspective. That overshoot means that the Government has over a billion more than it needs to meet its Troika targets. And that means it should give that money back to taxpayers. ASAP.

At the start of the crisis, the Government took some bad advice on hiking tax before cutting spending or implementing reforms. Now, the time has come to reverse the impact of that bad advice. Some will object to tax cuts on the grounds that they "erode" the tax-revenue-raising capacity of the State. Let them. Such objections are plain wrong. They fail to understand how the State's "tax-revenue-raising capacity" is exactly what is holding back the Irish (and EU) domestic economy. The nutty obsession with preserving the highest rates of tax in the eurozone (which are among the highest in the world) is not helping our debt reduction, but harming it.

As the last year proved, lower taxes have stimulated higher growth rates so that GDP is rising faster than the rate at which we are adding to debt. As long as this happens and even with modest deficits, our debt burden will keep falling. High taxes are also alienating voters to the point where our political system threatens to implode.

If that happens, those objecting to tax cuts will have shot themselves, and us, in the feet. If tax cuts aren't implemented now, when needed, the result could be the collapse of any party structure in the Dail and a series of budgets where fiscal discipline comes under pressure from an army of Independent TDs and small parties.

Like the Bourbons in 1788, objectors to tax cuts need to catch themselves on and see the bigger picture before heads start to roll. They also need to grasp the rudiments of real fiscal economics. Far from helping matters, "preserving the tax-raising capacity of the state" merely encourages wasteful entities like the HSE and Irish Water to demand more public money.

By contrast, switching resources from wasteful state spending to tax cuts, benefits mostly private sector workers, whose low financial security and current fear of job losses are key factors holding back spending. Those workers need tax cuts far more than many Government agencies and quangos need their budgets. And mere promises of tax cuts won't work. The public has unfortunately lost all faith in political promises.

If they are to work economically, never mind politically, tax cuts are needed as soon as possible. The fiscal compact treaty requires a fiscal update next April and if legally possible, the Government should consider a mini-budget then. October may be too late.

The ancient Greeks invented the idea of symmetry as a good omen. So if a mini-budget (October 2008) was the "Alpha" of our crisis then another one next April should be its Omega. And as for benefiting the Government politically, if it is right for a government to implement unpopular measures at the start of a crisis doesn't it symmetrically follow that it can also be right to implement popular measures to secure a recovery? So long as tax cuts benefit growth and reduce debt - and they do - we shouldn't worry about political effects, good or bad. Another Greek idea, but one to be avoided, is a Greek tragedy: Greek tragedies usually occur when the right action is taken too late.

Marc Coleman presents 'The Marc Coleman Show' each Sunday from 9pm on Newstalk 106-108fm

Sunday Independent

Today's news headlines, directly to your inbox every morning.

Don't Miss