Budgetary reform needs more radical action

Economics:  Successive ministers for finance have promised budgetary reform but delivered little. If anything, the process has become even more complex. The result is that it is still a maze to the uninitiated.

Perhaps one should not complain too much, for this complexity gives an advantage to those who are familiar with its Byzantine ways.

On the whole, however, it is bad that economists, journalists and others cannot readily understand the fiscal process and that surprise is the order of the day where the Budget is concerned.

Why things should be so is not entirely clear, but there is no doubt that it has a long history. Bureaucrats and others have a vested interest in complexity.

I recall hearing that when farm tax - who remembers it now - was introduced, it was a relatively simple tax. However, within a few years it had been "complexified". At the time the blame was laid, perhaps unfairly, on a combination of the Revenue Commissioners and the tax accountants. One can see how such bodies might have an interest in a complex system that left them "masters of their domain".

What can be done? VAT is a good example. When it was conceived, it was meant to be a lowish, single-digit, rate that applied to virtually all spending. Now, we have several rates and exemptions and a standard rate that is much higher than it was ever intended to be.

While our direct tax system has been hammered into shape, largely by Minister Cowen's predecessor, our indirect taxes are still amongst the world's highest. If he wants to leave his mark on the system, Mr Cowen would do well to look at this area.

The problem lies not just with the individual taxes. The system, too, is unnaturally complex. Following a recent innovation, the Budgetary cycle now starts with a new document, the Pre-Budget Outlook, published on October 19th, but containing tax estimates which were revised radically a few weeks later.

Then there was the Estimates Volume, published on November 16th, which contained a mixture of new and old programmes and was further changed on Budget Day.

This was followed by the White Paper on Receipts and Expenditure, a document which I think is referred to in the Constitution and which, traditionally, is released at midnight on the Friday before the Budget. Another innovation this year saw the embargo brought forward to nine o'clock, just in time for the RTÉ news.

It was this document that caused all the fuss, for the tax estimates in it were more than €2 billion different from those in the Pre-Budget Outlook, issued just a few weeks earlier.

Next, we had the Budget itself. The Budget, for all the attention it got, was only the tip of the iceberg. The €2.75 billion package unveiled on Wednesday was less than 3 per cent of total spending and revenue.

The story is not yet over. Next October we are due to get the 2008 Pre-Budget Outlook with a revised forecast outturn for 2007 spending and revenue. This will be followed by the Estimates, which will further revise the 2007 spending figures, and the White Paper, which, in all likelihood, will again change the tax figures.

Though the 2007 Budget will be based on this, we still won't know the true 2007 outcome until the second working day of January 2008 when the end-year Exchequer Returns are published. By this stage, most of us are exhausted from over-indulgence and pay little attention, causing us to miss some very significant underspends on both current and capital which the departments usually keep up their sleeves until the very last moment. This is truly a marathon process.

Reform means scrapping this system, not tinkering with it. My suggestions include supplementing the monthly Exchequer Returns with formal revised budgetary aggregates on a quarterly basis - this is no more than would be expected in any private company, indeed, most do it monthly.

Then, I would ensure that all pre-Budget estimates were included in one document, published at a reasonable hour, and based on unchanged policies.

The tax estimates in this document would be indexed, ie all income tax bands and allowances would be automatically raised in line with wage inflation, just as the PRSI ceiling is, and all excises would rise in line with the Consumer Price Index.

This would eliminate the Budget Day charade whereby the Minister gives income tax "concessions" which frequently are no more than what we are entitled to anyway if the tax burden is not to increase. It would also mean that all ministerial announcements on Budget Day would be genuine policy changes.

The compass of the Budget is too narrow, focusing as it does on the Exchequer rather than the broader general government that includes the Social Insurance Fund and the local authorities.

Until such time as we have a proper system of local taxation and accountability, there is a need to ensure that other arms of Government do not spring nasty surprises in the form of charges and levies outside of the Budget proper.

What is the sense, for example, in having the Minister for the Environment announce increases in motor tax on the morning after the Budget?

PRSI and health levies are treated separately but are, in reality, income taxes. PRSI is paid into the Social Insurance Fund and used to fund contributory social welfare payments. However, when the fund is short, the general taxpayer foots the bill and when it was in surplus a few years ago, the Exchequer raided it for funds.

The true marginal rate of income tax is not, therefore, 41 per cent but either 43 per or 46 per cent, depending on whether one's earnings are above or below the PRSI ceiling.

This is a nonsense which is costly to administer given the different PRSI rates, ceilings and exemptions. Much better to recognise reality and amalgamate the three of them.

Another tenet would be that major changes should be signalled well in advance to allow for informed debate.

How often have we seen Budget Day tax measures having to be amended just a few weeks later? Some secrecy is necessary, but much of what we have is unnecessary.

Mr Cowen has initiated his own reform process. The first fruits of this were seen this year in the form of the Pre-Budget Outlook which had an unfortunate baptism.

It will be followed next year by "Output Statements" which will include Departmental performance targets and actual outcomes.

This is good stuff but needs to be supplemented with more radical action.

Pat McArdle is chief economist at Ulster Bank