George Osborne tax move should give Ireland pause for thought

UK cut to corporation tax hardly a positive development but benefits of low Irish rate already being eroded

Irish policymakers will need to be both nimble and flexible. And very cautious when it comes to taxes and spending.

Irish policymakers will need to be both nimble and flexible. And very cautious when it comes to taxes and spending.

 

George Osborne, the UK chancellor of the exchequer, is a man with a plan. Sort of. Many Brexit promises and forecasts have been instantly and prominently ditched and Osborne’s pledge to introduce an austerity budget has met with a similar fate. Instead, he now seems to be making things up as he goes along, unsure of his and the economy’s future. In the latest bout of thinking out loud, he has proposed cutting corporation tax to 15 per cent from its current level of 20 per cent.

The chancellor has been driven by a single idea ever since first taking office: shrink the size of the state. The only thing that seems to change is the speed of the journey, with its direction never in doubt.

But in the wake of Brexit he has noticed a change in the political air: austerity is no longer popular within his own party. The target for eliminating the budget deficit by the end of the decade has been dropped. There are even mutterings about increased spending on infrastructure. Brexit is already producing weird and unexpected developments. There will be plenty more. It is vital that we recognise this.

Survival

When Homer Simpson famously ran for office, he campaigned on a platform with the slogan, “Let Someone Else Do It”. David Cameron, Boris Johnson and Nigel Farage (and who knows who else) quite obviously sympathise with that policy stance. But not George Osborne – not yet anyway.

In what may be a simple fight for personal political survival, he is displaying a degree of pragmatism that not even the great financial crisis could squeeze out of him.

I suspect it will prove to be a futile struggle and that his political career is too entwined with David Cameron’s. But he is, for now, still chancellor. And he is sticking to his pre-referendum forecast that there are huge sort term risks to the UK economy. Recession may have started already.

The recent comments offered by Mark Carney, were chilling: the governor of the Bank of England is probably the best informed about the current state of the economy and he is clearly extremely concerned. Carney has signalled that the economy is in trouble.

As chancellor, Osborne still has responsibilities. Doing what he can to limit the immediate economic damage appears to be at the top of his priorities. I suspect he also shares the fatalism displayed by Carney: there is only so much that policymakers can do. The recessionary die has probably been cast.

Threat

Would a 15 per cent UK corporation tax rate represent a serious threat to the Irish economy? A few years ago, and in very different circumstances, the answer to that question would have been an unambiguous “Yes”. Today, it is less clear, although it is hardly a positive development.

Arguably, some of the benefits of our low corporation tax regime have already been eroded by various international regulatory changes. The writing is on the wall for how this will play out in future years: our partners in the EU will continue to exert huge pressure on our tax arrangements. This was all happening anyway.

A broader lesson is that we must expect the unexpected: while the negotiations to leave the EU could drag on for years, UK policymakers are not going to sit on their hands. Things are going to change, particularly when the country gets its new prime minister. Irish policymakers will need to be both nimble and flexible. And very cautious when it comes to taxes and spending.

Corporation tax receipts have been unexpectedly buoyant in recent months. This has helped the overall fiscal position and has been a big part of all the talk around future fiscal space. The risk, of course, is that we are spending money that we don’t have yet. In fact, it could be worse than that.

Recession

Just before we entered the recession caused by the financial crisis, our fiscal position was strong with the budget broadly in balance. But that balance (or occasional surplus) was being driven by tax revenues that disappeared almost overnight when our housing bubble burst.

It is common to hear people describe our own fiscal woes as being driven exclusively by the bank bailout. That simply isn’t true: the housebuilding boom generated taxes which, in turn, prompted successive governments to enter into permanent spending commitments. When the taxes stopped flowing in, those spending commitments remained.

It’s thankfully on a much smaller scale now but we are in danger of making a similar mistake, treating a temporary surge in corporation tax receipts as if they are permanent. It would be much better to treat them with deep and abiding suspicion. One way or another they are under threat, whether from the UK or from our masters in Brussels.

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