Government’s new tax reform plan could form first draft of election manifesto

Opinion: Labour’s summertime clamour to discuss public and private sector wage increases have met with a frosty Fine Gael response

‘Before they went away last month, Taoiseach Enda Kenny and newly-installed Tánaiste Joan Burton pledged to publish a tax reform plan in the coming budget “to be delivered over a number of budgets”.’  Photograph: Alan Betson / THE IRISH TIMES

‘Before they went away last month, Taoiseach Enda Kenny and newly-installed Tánaiste Joan Burton pledged to publish a tax reform plan in the coming budget “to be delivered over a number of budgets”.’ Photograph: Alan Betson / THE IRISH TIMES

Sat, Aug 30, 2014, 00:01

Forget the centenary of the Great War. The jaw-jaw around Merrion Street these days centres on the unlikely figure of Winston Churchill. Why? Churchill suffered a landslide defeat the 1945 election only weeks after Germany’s capitulation in the second World War. British voters spurned the war hero. As the Irish economy picks up after a devastating crash, Fine Gael and Labour are increasingly wary of the same death trap. They feel they’ve done herculean work but fear they won’t get the credit.

The Cabinet returns to work next Wednesday. The summer break may have dimmed memories of the stinging electoral rebuke last May but cold political reality remains the same. A general election is due by the spring of 2016. If the Government is to win it will need to deliver some kind of a recovery dividend to the people after a long line of cutbacks and ever- increasing taxes.

This explains the rush to ease income tax in the October budget and talk of wage increases down the line. Fine Gael and Labour must still settle on the detail, never easy when money is tight. It is also clear that any net gain in the immediate sense would be minimal, for the new water charge must be paid next year for the first time. But the grand plan is clear enough.

Emasculating the USC Before they went away last month, Taoiseach Enda Kenny and newly- installed Tánaiste Joan Burton pledged to publish a tax reform plan in the coming budget “to be delivered over a number of budgets”. There are whispers of a four- year plan, with emphasis in the first two years on “emasculating” the unpopular universal social charge. The low threshold at which the higher tax rate kicks in would be raised before any

rate decrease.

The essential aim will be to provide a detailed roadmap to deliver the benefits of recovery in the period leading into the election and beyond. It’s not too big stretch to cast this as the first draft of the election manifesto.

Then there is the question of pay. Labour’s summertime clamour to discuss public and private sector wage increases have met with a frosty Fine Gael response, but Kenny and Burton have also pledged to establish a statutory commission on low pay to make recommendations on the minimum wage. The Haddington Road pact runs until mid-2016 but there would be talks late next year on a successor agreement to begin reversing pay cuts.

All of this, however, raises the rather pertinent question of where the money comes from. The Government is still obliged to bring the budget deficit below 3 per cent of economic output next year, something that will require yet another round of retrenchment. On the basis of accelerating economic growth, Coalition figures believe the deficit target might well be met next year with a “sub-€1 billion” package. This would not be to the liking of erstwhile troika supervisors, who would prefer the Government to maintain the original €2 billion target.

There can be little certainty without tax returns for September. Yet public interventions over many months by an assortment of Ministers have heightened public expectation of an early move to tackle income tax. Confidence on this front is grounded in sense that the public finances are now taking the benefit of the growth in employment, even if the rate at which jobs are being created has slowed down.

Other economic factors are playing in the Government’s favour but the sense remains that the public finances will still need a further fillip if tax cuts are to be undertaken in earnest in 2015.

The obvious answer lies in early repayment of Ireland’s rescue loans from the International Monetary Fund, which carry a relatively high interest rate. Because the Government can borrow on the open market at a much lower rate, it can draw down cheaper loans to pay off more expensive debt from the IMF. Minister for Finance Michael Noonan has said this could yield annual savings of up to €375 million, no small thing.

The snag is that Ireland would be obliged under the 2010 bailout deal to repay European loans at the same time as the IMF is paid off. Only by unanimous agreement in the euro zone can that be changed, and parliamentary approval might be required in some countries.

This presents a political challenge for Noonan, although the difficulty would not appear to be insurmountable. After all, such a manoeuvre would be without up-front financial cost for other countries. Noonan has said he would raise the matter with his counterparts in September – and political logic points to an effort to settle the matter at that point. He needs a deal in time for budget day.

A question arises as to how any agreement is presented. A further round of bank debt relief seems as elusive as ever, so this may well be the only real prospect of a new deal for Ireland. It would be important, therefore, that people receive something tangible from the endeavour. Pat Rabbitte memorably observed last year that low bond yields don’t butter parsnips. It is as true today as it was then.

Equally true is the fact that the entire plan is predicated on a strengthening recovery.

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