John FitzGerald: Budget 2018 contains missed opportunities

Action on carbon tax and tourism VAT rate would have resulted in a more effective budget

Minister for Finance  Paschal Donohoe at RTÉ Radio 1 for Today with Sean O’Rourke. Photograph: Dara Mac Dónaill/The Irish Times

Minister for Finance Paschal Donohoe at RTÉ Radio 1 for Today with Sean O’Rourke. Photograph: Dara Mac Dónaill/The Irish Times

 

Up to the early 1980s, the production of the budget was a major logistical exercise for the Department of Finance. Any change in the draft meant that a typist had to retype the whole budget speech from scratch. Given this, it was not physically possible to produce more than two or three drafts of the speech prior to budget day. That concentrated civil service and political minds.

Once the speech was agreed, a large number of department staff had to run around tables to assemble the hundreds of copies that needed to be distributed.

When word processors arrived, some of us working in the department hoped they would ease the burden of preparing for budget day.

However, the initial results were rather different. New technology allowed endless drafting changes, most of limited significance, which meant that there were more likely to be 33 than three drafts of the speech.

Today, modern technology has greatly reduced the burden of physically producing the budget. Instead, we have become used to a full range of well-formatted documents being released on the internet as soon as the Minister finishes speaking.

This year there are some 30 documents published alongside the budget speech, including some useful reviews from the Irish Government Economic and Evaluation Service.

For this year’s budget, most of the decisions were clearly taken well in advance of budget day – and widely leaked to the media, as has now become the custom. While, at official level, most issues bar minor details were resolved early on, some political discussions continued right up to the last minute.

The political process of reaching agreement has become more complex under our minority Government arrangements.

A crucial factor in preparing the budget was that the economy is growing very strongly. If anything, money should have been taken out of the economy to reduce pressures and make space for more resources to be devoted to housing.

In the end, the budget did not act to reduce demand, but its fiscal stance was broadly neutral. Ministers of finance should adopt the doctors’ motto of “do no harm”, and this budget largely delivered on that.

The cuts in taxes on income were, appropriately, very limited. Higher wages will mean that the average tax take will rise slightly. By contrast, welfare payments will rise slightly faster than inflation.

Generally speaking, economists are against taxes on economic transactions, as these deter the most efficient use of resources. Normally it would be better to increase property taxes, such as rates, rather than raise stamp duty on commercial property transactions.

However, the Department of Finance has made a strong argument that higher stamp duty is more likely to disincentivise investment in commercial property, and free construction resources to build homes.

Carbon tax

The decision not to raise carbon tax and diesel tax substantially, something which would help reduce Ireland’s greenhouse gas emissions and move us to a more sustainable growth path, was a missed opportunity. If the Government had done that, it would have sent a clear message on the need to decarbonise our economy. Better air quality would also result, especially in urban areas, bringing significant health benefits.

Instead, the Government is commissioning yet another study on carbon taxes. Since 1991, the ESRI has published an average of one such study a year. All have delivered the same message: raising the tax on carbon is a crucial policy instrument to tackle climate change. We need action, not further studies.

A second lost opportunity was the failure to raise the 9 per cent VAT rate on tourism accommodation and eating out. This sector is booming, in spite of complaints about Brexit. The early effects of Brexit are being offset by growth in the EU and the US. Employment in the first six months of 2017 was up 5.5 per cent on 2016.

Restoring the VAT rate would have brought in €500 million more in revenue, which could have been used partly to cool an economy in danger of overheating, and partly to fund additional worthwhile public spending on health or housing.

The one major increase in expenditure in the budget is in investment – up by more than €800 million, or 16 per cent. This reflects the fact that the stated overriding budgetary objective is to tackle the housing crisis, a priority that has been broadly welcomed.

A tighter budget would have been more prudent, given the uncertainties ahead: by slowing the economy, it would have given more headroom to expand our housing output without overheating the economy.

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