Sunday 25 August 2019

Marc Coleman: 'Politicians must weigh up cost of plans for pay rises and tax cuts'

There are dangers in any policy that delivers for public and corporate sectors and not the majority, says Marc Coleman

NATIONAL CHILDREN’S HOSPITAL: The soar-away spend has not been an encouraging use of public funds
NATIONAL CHILDREN’S HOSPITAL: The soar-away spend has not been an encouraging use of public funds

Marc Coleman

'The financial emergency is long over, and our members played no small part in ensuring that our economic recovery was secured." In The run-up to May's European elections, Ciaran Rohan of the Association of Higher Civil and Public Servants (AHCPS) used those words to make a convincing case for restoring public pay to pre-crisis levels.

Few will begrudge his call. Since 2008, the economy - even by the most conservative measure of gross national income (GNI) - has expanded by more than one third, the budget is balanced for the first time since the crisis and more than 400,000 new jobs have been created. So the case for this call is strong. But what about the equally strong case for restoring private sector after-tax pay to pre-crisis levels?

Under the Public Service Stability Agreement, public pay will be restored for the majority of public servants at least (the 90pc earning below €70,000 per annum) by the end of 2020. But the key word here is "stability". Private sector workers have far less of it. And with CSO data showing a 35pc positive differential between average public and private pay, not to mention far better pension conditions in the public sector, a restoration of public sector pay involves not just a net transfer from private to public sector workers; it also requires a far greater share of the fiscal recovery.

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In its 2016 election manifesto, Fine Gael promised to end the USC (and even wanted a 5pc income levy introduced for income portions over €100,000 in its wake). It also promised to raise the top income tax threshold to €50,000. But under the terms of the Confidence and Supply agreement with Fianna Fail, Fine Gael is obliged to implement €2 in spending increases for every €1 in tax cuts. So public pay rises are more consistent with this policy than Fine Gael's promises.

What's more, public sector workers are - thanks to the professionalism of Ciaran Rohan - well organised. Private sector workers - as distinct from private sector corporations - have no one batting for them. Last week, the Tax Strategy Group was merely doing its job when it pointed out the cost of Fine Gael's tax-cutting proposals. Even bringing the higher rate income threshold to €50,000 will cost €2.3bn. A lot of money to be sure. Then again compared with the cost of some recent capital overruns, may be not so large after all. There is the cost of Brexit. But as Brexit considerations did not prevent a restoration of public sector pay - and why should they? - the question will be asked as to why they can be invoked to deny tax cuts that many expect and actually need.

Ireland is a country where for a growing number of people government takes half of every euro earned and more than half of the remainder goes on mortgage or childcare costs. In opposing tax cuts, some called on Government to reduce these living costs. But this is something Government cannot do in the short term. Yes, capital spending can reduce housing costs over the medium to long term. But in relation to childcare, Government cannot reduce the cost of this. Neither the recent news from the HSE, nor the National Children's Hospital, is encouraging any use of public funds on major State-run projects right now. Nor do they validate the view- held by some economists - that State spending increases are less "inflationary" than tax cuts.

Another key point in the tax cuts debate is this: compared to Germany, where it is negligible, the gap between the marginal income tax rate and corporation tax rate is nearly 40 percentage points. Our competitiveness challenge requires us to preserve as much of our corporation tax regime and also try to reduce our capital gains tax. But as seen in a growing number of countries, voters who traditionally backed pro-business policies have turned against them and against a globalisation which they feel has abandoned them. A policy system which delivers for the public sector and corporate sector but leaves the majority out in the cold is risking trouble. Perhaps big trouble.

To see why, just look at France. There, the original enthusiasm for Emanuel Macron's carbon tax agenda turned to riots and paralysis. Now we Irish do not riot like the French. But as former finance minister, Ruairi Quinn, observed after the 2016 election, we do express our anger in devastating fashion at the ballot box.

Sixty pc of voters either did not vote at last May's European elections or voted for Independents. If replicated at the next general election, it could be an inflexion point in our democracy. Between pay rises for the public sector and tax breaks for the corporate sector on one hand, and tax cuts for private sector workers on the other, Budget 2020 will need to show 20/20 vision.

Marc Coleman advises Ibec and other organisations

Sunday Independent

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