Current Account »

• Your reaction: What do you think of Budget 2010?

  December 9, 2009 @ 5:34 pm | by Laura Slattery

  There were few surprises in the most leaked Budget in history: cuts to public sector pay, the heralding of the carbon tax era, plus lower rates of jobseekers’ payments and Child Benefit. They were “very difficult choices”, according to Minister for Finance Brian Lenihan – but were they right ones? In short, what did you think of Budget 2010?

  A painful but necessary economic correction after October 2008’s missed opportunity, or a galling exercise in picking on the powerless and vulnerable? Can things only get better, or will you have nightmares that we’ll have another emergency Budget inflicted upon us halfway through 2010?

  Should we put the egregious policy errors of the past to the side and judge this Budget solely on its ability to provide an escape route from our alarmingly indebted predicament? Or is this Budget infused with the same “growth before fairness” logic that led us to this mess in the first place? What did the Government get right and what did they get wrong?

  And finally… Is it time to knock back a (now cheaper) bottle of whiskey, cancel Christmas, riot on our streets and/or hold a general election?

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• Budget countdown: a VAT-burning issue

  December 8, 2009 @ 4:10 pm | by Laura Slattery

  “Please cut VAT, please cut VAT,” implore the pre-Budget submissions from Chambers Ireland, Retail Ireland  and The Society for a Lower-VAT Ireland. Last week, Joe Mc Hugh TD, a man who goes by the title Fine Gael Spokesman on North-South Co-operation, joined in. “Let’s be imaginative and let’s be creative [on VAT],” he said. McHugh called for a reversal of last year’s hike in the top rate of VAT from 21 per cent to 21.5 per cent, while Chambers Ireland wants the rate brought down to 20 per cent and Retail Ireland proposes 18 per cent.

  The whole idea is to close the gap with the UK’s VAT rate, which it inconveniently lowered from 17.5 per cent to 15 per cent this time last year. That reduction led to a 6.5 point gap between the Irish and UK VAT rate, which exacerbated the effect of the weak sterling. Result: cross-border shopping. But the UK measure was designed as a temporary economic stimulus and is due to expire at the end of the year: all the indications are that Alistair Darling will confirm that this will go ahead in tomorrow’s UK Pre-Budget Report.

  So can the Irish Government afford to do its bit to close the gap? Or is it a case that they can’t afford not to?

  The revenues the Government collects in VAT are usually a good indicator of consumer confidence, or lack of it. This year, things have got a little more complicated. VAT receipts have been decimated: according to last week’s exchequer figures, they are down 20 per cent on last year and 6.7 per cent (almost €750 million behind target). Consumers are either a) spending up North, b) indulging the black market, c) both or d) not spending at all. Any increase in VAT, rather than raising revenue, could be counter-productive, sending more consumers into their shells or into the sterling zone.

  But the case in favour of a cut in VAT is not clear either. On the one hand, a decrease in VAT would benefit lower-income groups, who spend a higher proportion of their income, and slightly mitigate the devastating effects of cuts to social welfare rates. Retailers in particular would be cock-a-hoop. But VAT receipts account for around a third of total tax receipts – tinkering with the rates is not something that can be done lightly.

  The Department of Finance says in its Pre-Budget Estimates that it expects to receive €10.46 billion in VAT next year, compared to an eventual tally of €10.64 billion this year. The similarity of the figures don’t point to much in the way of imagination or creativity on VAT – or any confidence in a consumer spending revival – but it will still be one to watch out for tomorrow.

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• Budget countdown: poverty and poverty traps

  December 6, 2009 @ 9:30 pm | by Laura Slattery

  It is naturally politically expedient to make admirable-sounding noises about resolving potential long-term problems when doing so eases a short-term issue, but when fixing a long-term problem creates short-term pressures on the State’s coffers, you might as well just forget about any kind of grand intentions and leave it to fester as usual. That’s what struck me reading the Department of Finance report Replacement Rates and Unemployment, which it published without fanfare on Friday.

  The proximity to the Budget suggests that it’s a softening mechanism for some harsh welfare cuts on Wednesday; and that the words “poverty traps” and the avoidance thereof will precede Budget speech references to cuts to jobseeker’s benefit and allowance, a harsher means test for the jobseeker’s allowance and possible changes to rent supplement and one-parent family allowance.

  The report considers replacement rates – the percentage of a person’s take-home pay that they would receive in social welfare benefits if they become unemployed. A replacement rate of more than 70 per cent is considered “excessive”, it noted: in other words, it would make the attractions of working somewhat limited. Result: long-term unemployment. The replacement rate should also fall the more you earn; if it doesn’t, something has gone wrong within the tax and benefits system, generating a poverty trap.

  On the surface, it all sounds very reasonable: there should be some reward for working. Working full-time should result in higher household income than working part-time. And earning two-thirds of average industrial earnings should mean you have more cash in your pocket than you would do if you were on the national minimum wage.

  In practice, however, governments only start talking about the need to avoid poverty traps and “incentivise” participation in the labour market at times when they need to save money, and that tends to happen right about the same point that the labour market is banjaxed. People who depend on welfare payments have their entitlements slashed with the excuse that it’s to encourage them to hunt for jobs that don’t exist (rather than the more honest reason that we’ve completely drained the kitty). It’s like throwing someone into the ocean from a boat with no ropeladder, then puncturing their lifejackets in the apparent hope that it’s the only thing that will make them want to climb back on board.

  The case of single parents and the Community Employment (CE) scheme exemplifies the kind of misery that can be caused by applying pure economic concepts such as replacement rates to real life predicaments. According to the Department of Finance, the high replacement rate for recipients of the one-parent family allowance on the CE scheme needs examination. Essentially, what it says is that because the income of single parents on the benefit-assisted CE scheme is more than 70 per cent of that which they would receive in low-paid employment, there is a disincentive to move from the CE scheme back to the regular labour market.

  No shit. But it’s not always about money. As Karen Kiernan, director of single parent support/lobby group One Family, says, the CE scheme is popular with single parents because it’s often the only kind of part-time / flexible employment that they can find and survive on. It’s not that there is a “lack of incentive” to move back into the benefit-free mainstream labour market because they would only be marginally better off by doing so. It’s that there’s a lack of opportunity within the mainstream labour market to do work part-time / flexible hours - the kind of hours that by definition are the only ones many lone parents can do.

  Even in the good times, this was true. But rather than “incentivise” employers to change this, there now seems to be a strong possibility that the Government will follow the recommendation of the McCarthy report and cancel the entitlement of future CE scheme participants to the one-parent family allowance – it’s a double payment, so goes the argument.

  Isn’t there a risk that rather than encouraging single parents to choose the regular labour market over a CE scheme, such a move would simply force single parents to stop participating in work, education and training programmes completely? Rather than removing a poverty trap, it could leave a group of people stuck in long-term unemployment – long after their children have grown up.

  Mimimising this risk costs rather than saves money in the short term, so it’s not the kind of long-term issue we officially care about. Hey, we’re out of money. But let’s not let any politician or economist away with pretending they’re deeply concerned about potential poverty traps where it suits them to find them right at the same time as they take steps to guarantee actual, immediate and persistent poverty.

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• Budget countdown: a staggering estimate on tax breaks

  December 3, 2009 @ 7:58 pm | by Laura Slattery

  Although the prospect of Brian Lenihan’s Budget day speech being any longer than normal is difficult to contemplate, TASC, the think-tank that devotes itself to arguing for a more progressive Irish economy, has an interesting suggestion in its pre-budget statement today. “Tax breaks are not reported in the Budget. Yet, Government decisions to give tax breaks are the equivalent of spending money,” TASC writes. “Hence, the annual cost of all tax breaks should be fully detailed to the Oireachtas in every Budget.”

  The deeper the Irish economy gets into debt, the more shameful the remaining tax breaks seem. TASC estimates that the State will lose €7.4 billion in potential revenue in 2009 through various forms of tax breaks, including pensions but not including personal tax credits. They caution that although this figure is “based on the best available data”, much more transparency is needed to allow for the annual calculation of the cost of tax breaks. As it is, it’s a staggering figure – almost twice the size of the Budget’s €4 billion package of tax hikes and expenditure cuts.

  The property bubble’s unceremonious bursting has shown how runaway tax breaks are not only inequitable but can actually help destroy an economy: entire sectors now face structural imbalances as a result of irrational investment decisions by those seduced by tax breaks. Eventually, the Irish economy will recover and in certain political circles, the temptation may be there to have another tax break party. How do we avoid repeating the same mistakes?

  One way is to adopt TASC’s suggestion and insist that the burden of proof lies with the Government if it wishes to extend a tax break. According to TASC, the Government should “provide evidence that the tax break promotes equality and is beneficial to the economy”, including how exactly it distributes income and/or wealth, what social policy benefits are up for grabs and why the tax break is more efficient than direct spending.

  All of this sounds like basic common sense and much of it has indeed been said before, by the Commission on Taxation among others. Each tax break should have a “sunset clause”, TASC continues, while the figures given for the value of investment and quantity of employment generated should be net of “deadweight” – in other words they should not be inflated to include the money that would have been poured into those assets and jobs that would have been created anyway.

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• Budget countdown: some known unknowns with one week to go

  December 2, 2009 @ 10:32 am | by Laura Slattery

  With seven days to go before the third budget in 15 months, The Irish Times is ramping up its pre-budget coverage. Read Harry McGee’s report on tax for higher earners in today’s newspaper here, Pat McArdle’s latest analysis here and visit our Budget 2010 microsite here.  Like everyone else who’s in denial, I’ve done my best to ignore the looming doom, but Current Account will be chipping in nevertheless with a week of blogs, starting with this fairly random collection of budget-related thoughts. Please leave yours below.

  1. Speculation about what’s going to happen to Child Benefit in Budget 2010 has seen the mooted cuts take a curious downward trajectory. The first stories, which were largely projecting from an ESRI recommendation, suggested there would be a 20 per cent cut in the payment (currently €166 a month for your first and second child, €203 for your third and subsequent children). Last weekend, Sunday newspapers reported that there would be a 15 per cent cut. Yesterday’s TV3 “leak” said 10 per cent. Well, €150 would be a conveniently round figure, so 10 per cent it may well be.

  2. The pensions industry is up in arms (perish the thought) at the idea that tax relief on pension contributions might be transformed into a single rate, either 30 per cent or 33 per cent depending on whether you were looking at the Programme for Government document before or after a “typo” on the agreed rate was changed. High net worth individuals (HNWIs) – the ones that are still standing – will stop pouring their millions into these fee-generating tax shelters, they say (I might be paraphrasing a bit), leading to mass layoffs in the industry. But according to Mary Hanafin, changes to pensions won’t have any immediate implementation date… which would make any major announcement fairly meaningless in the current political climate.

  3. At a recent briefing in the Department of Finance, one journalist was surprised when Brian Lenihan expressed the notion that taking money out of the economy risked damaging it further – this “you can’t cut your way out of recession” argument was, in her mind, the unions’ position. “It’s a question of degree,” Lenihan replied. His department had calculated that €4 billion in tax raising and expenditure cuts was the magic number that would do enough to get Ireland’s public finances back on track, without “killing the patient”. Some say that figure should be higher, some say lower, but the theory behind each is pretty much the same.

  4. Up until last week, I’d have bet money on the Minister for Finance falling back on what’s rapidly becoming an “old reliable” in his speeches… a blame-shifting reference to Lehman Brothers. Now odds on it’s debt-riddled Dubai that will take its place as the known unknown that will keep the global economy in uncertain territory into the next decade. Anyone for a nice little accumulator bet on references to Lehman, Dubai and the teetering Greek economy in the opening “international context” part of Lenihan’s address?

  5. Today’s big pre-budget press conference comes courtesy of the Irish Congress of Trade Unions, if its executive can manage to extract themselves from various pay negotiations and industrial action rumblings. Round about the same time as ICTU gives its wishlist to the media this afternoon, the Department of Finance will be releasing the latest Exchequer returns data. The November figures are expected to contribute to a doubling in the shortfall in tax revenues (compared to April projections) from €1 billion to €2 billion by the end of the year. This will be largely due to subdued income tax receipts, but also because it’s expected to be another rubbish month for VAT… a subject that will be getting a blog entry all to itself later this week. How exciting.

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