By Cormac Lucey
Three questions arise from budget 2018. The first is whether there is a fair balance between proposed spending increases and tax cuts, and in my view there isn’t.
Government spending has been allowed to keep growing even in areas where it is already excessive. The health budget has risen by 4.6 per cent though spending per head in Ireland is already well in excess of that in countries such as the UK, France and Italy.
Income tax payers have been the silent heroes that ensured the state remained solvent; just look at the revenues the government expects to take next year from VAT, and from income tax including USC. The take from VAT is budgeted at 3 per cent less than in its boom-time in 2007, but revenues from income will be 57 per cent above the 2007 level.
Paschal Donohoe talked at length about the problem of moderate earners forced too early onto the top rate of income tax but he didn’t have enough money to stop the problem getting worse. The government projects that incomes will rise by 3.1 per cent next year. To index tax bands and rates to prevent somebody now earning just under the threshold from paying higher rates next year would have required a package of €1.3 billion in a full year.
Unfortunately, the government allocated only €335 million to the concessions, far short of what was required even to avoid further deterioration.
When you examine the budget document more closely, you find that the finance minister aims to raise an additional €495 million in taxes next year and spend an extra €1.08 billion. There is a profound disconnect between Leo Varadkar’s ostentatiously right-of-centre image as a supporter of those who get up early in the morning, and his government’s essentially social democratic and statist budget.
The second question is whether the budget will deliver a surplus in 2018. In theory the government should spend more than it takes when the economy is performing poorly and spend less than it takes in when the economy is strong. In practice, we should be running a surplus when times are good to replenish our borrowing capacity in case things turn bad.
Right now, the Irish economy is running unevenly, with some areas performing strongly. Dublin and Cork are booming. Rush-hour traffic and rent are worse than in 2007. Nationally, unemployment has fallen close to the levels of the boom. On the other hand, small-town Ireland is not recovering as quickly. On balance, this is why we should be running a budgetary surplus.
Yet the detailed budget documentation — Table 10 of the Macroeconomic and Fiscal Outlook for those of you excited by such things — doesn’t anticipate this even by 2021. Even more alarming is Mr Donohoe’s nonchalance about Ireland’s off-balance-sheet pensions liabilities.
At the recent Wexford meeting of the Dublin Economics Workshop, your columnist asked the finance minister whether he considered it acceptable that the state does not formally record in the national debt liabilities it owes to past and present PRSI contributors and public servants. I got a waffly, evasive, non-committal answer. The amounts are frightening.
The sum owed to PRSI contributors was estimated at €324 billion in 2010, and that owed to public servants was €98 billion as of 2012. Put together, the undeclared liability of €422 billion dwarfs the official national debt of €200 billion.
When we add all this up we arrive at a figure of more than €600 billion, which is equivalent to more than €300,000 for every person at work, or an extra mortgage. It is a major argument for budgetary conservatism over the “if I have it, I spend it” philosophy. The threat of a Brexit car-crash is such another, but what do we get from a government led by a party supposedly the most conservative in Dáil Éireann? Budget deficits planned as far the eye can see.
Finally, did the budget deliver a long-term response to the attacks from abroad on our corporation tax regime? Disappointingly, the answer is no. It did acknowledge attacks and it did indicate a willingness to implement key recommendations of the Coffey Report, which proposed reforms.
This is evidence of an adroit response to external threats, but those threats are so great that we don’t only need to defend the current regime, we must prepare for the eventuality that doing so won’t be enough.
In short, we need an alternative strategy as effective as the low corporation tax policy.
The Institute for Taxation (ITI) published a report this year titled A future tax strategy to grow Irish indigenous exports. It highlighted alarming statistics that show Ireland is a tale of two economies: a burgeoning foreign direct investment sector and a beleaguered indigenous sector.
Twenty per cent of indigenous manufacturing companies export only one product and close to half export fewer than five. Nine out of the top ten products exported by Irish-owned firms are food products.
The Irish indigenous sector is also focused on a narrow range of export markets, with 27 per cent exporting to only one market, in most cases the UK. The ITI report also warned that Ireland’s 33 per cent capital gains tax rate is the fourth highest in the OECD, and 10 percentage points above the median OECD rate.
Ireland needs a reimagined system of income and capital tax to entice entrepreneurs, much as the low corporation tax has attracted companies. I’m not saying we should surrender to those who would emasculate our regime — I’m saying we need to prepare an alternative. Yesterday’s budget contained no hint that Mr Donohoe gave even a thought to that notion.
Published in The Times (Ireland edition)
October 11th 2017