Tuesday 25 June 2019

Dr Sean Healy: 'We must increase tax take now to protect services and supports during next slump'

Budget architect: Finance Minister Paschal Donohoe working on Budget 2020. Photo: Gerry Mooney
Budget architect: Finance Minister Paschal Donohoe working on Budget 2020. Photo: Gerry Mooney

Dr Sean Healy

Budget 2020 should be designed so it is both economically sound and socially fair. These twin objectives are realistic and achievable. However, they need to be underpinned by a clear policy commitment to achieving both.

While doing well on some fronts with high economic growth and close to full employment, Ireland is facing major challenges: a housing crisis with rising levels of homelessness, a two-tier healthcare system with long waiting lists, and an approach to sustainability that fails to appreciate the urgency of climate change.

These are just some of the facts that tell a different story about Ireland's dramatic "recovery" from the economic crash of a decade ago.

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Further challenges are likely to emerge given the possible problems for Ireland flowing from international developments ranging from Brexit to the US/China trade war. In this context it is essential we do not repeat the mistakes of a decade ago in our response to the crash of 2008.

We prioritised banks over vulnerable people and job protection, with an austerity approach that led to much greater long-term problems in areas such as unemployment, housing provision and rural development.

Other challenges Ireland is facing will put further pressure on the Government's approach to Budget 2020 and the decade ahead. The approach to corporate taxation is not likely to survive much longer.

Concentrating on climate-damaging approaches to agriculture, no matter how efficient, as key elements of generating economic growth will not promote climate justice but lead to growing stress on the viability of rural Ireland.

In the economic upheaval that may well emerge in the period ahead, it is essential priority be given to protecting the vulnerable and ensuring we use available resources to protect jobs and reduce the infrastructure gaps Ireland faces vis-à-vis the EU-15. This may well require an adjustment to the EU's fiscal rules.

The design of the overall Budget package is influenced by EU-wide Stability and Growth Pact rules and the Fiscal Compact. The net size of the Budget is limited by the available 'fiscal space' - simply the money available for Budget decisions after account is taken of demographic pressures on public spending, capital plans, the indexation of income taxation structures and other pre-committed polices.

As the fiscal space measure is a net one, Government has the freedom - and in any future budget - to generate additional taxation revenue, from raising taxes in one area and then spending or investing this money elsewhere. Similarly, it has the ability to ignore some of the assumptions involved in the calculation of the fiscal space and, for example, decide not to index the income taxation system.

This is particularly relevant as the calculations for Budget 2020 assume this will happen at an estimated cost of €660m (based on Revenue Commissioners' Post-Budget 2019 Ready Reckoner). Deciding not to do this, as has been the case in all other budgets, increases the size of the possible 2020 package.

The overall scale of the available resources is likely to be large on this occasion as the annual budget is now considered to be "technically balanced".

While the Department of Finance has been unwilling to publish estimates of the fiscal space (unlike in recent years), estimates are available from last year's Summer Economic Statement. These suggest a space of €2.8bn for Budget 2020 and imply an overall package, prior to any revenue raising measures, of between €3.3bn and €3.5bn.

Over the next few years, policy should focus on increasing Ireland's total tax-take. An increase in Ireland's overall level of taxation is unavoidable in the years ahead; even to maintain current levels of public services and supports more revenue will need to be collected; although we must be careful not to regard recent windfall taxes from multinational corporations as sustainable revenue.

Consequently, an increase in the tax take is a question of how rather than if, and it should be of a scale appropriate to maintain current public service provisions while providing the resources to build a better society.

If international developments produce a serious downturn, then we should ensure we learn from past mistakes. Priority should be given to protecting the vulnerable and maintaining jobs. Investment should be focused on tackling the infrastructural deficits that persist in areas such as housing, water, public transport and rural transport, as well as tackling urgent issues such as climate change.

John Maynard Keynes got it right in 1937 when he argued "the boom, not the slump, is the right time for austerity at the Treasury". Since then many governments have proved Keynes right by trying austerity during a slump and failing to rejuvenate their economies. Our own leaders made this mistake a decade ago and had the same dreadful results.

Over the years Ireland has tried to protect the vulnerable in some policy areas. This has been the case on poverty where social welfare and income tax policy have been used to alleviate the substantial pre-tax levels of poverty. But fundamental change that would genuinely reduce pre-tax poverty has not been on the agenda. This situation should be addressed now.

Irrespective of the scale of the final package announced by Government, it is essential we recognise fair choices are feasible and possible in Budget 2020.

Irish Independent

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