In spite of tight budgetary situation there are still a number of options for the economy
A group of Fine Gael backbenchers set out their position on taxes and spending in the budget
Money could be invested in projects that would pay dividends for employment in the future.
There are always options at budget time, even when you are part of a financial bailout programme that has policy strings attached. The big question at the moment is how much we should reduce the annual deficit in 2014, and how.
We believe that it is vitally important to continue to reduce the budget deficit from levels which are still unsustainable. We also believe it is important that reduction targets continue to be exceeded as they have been over recent years. However, to cushion the blow in 2014, a slower reduction in the deficit in a bid to invest in a job creating capital spending programme is recommended.
Why do we propose this?
Our annual deficit – the gap between what we earn and what we spend – is too high. This year, government expenditure will amount to €71 billion, while revenues amount to just €59 billion. We have to borrow to bridge that gap and at the moment that gap amounts to €12.5 billion every year. That is akin to borrowing to build a national children’s hospital every fortnight.
We must reduce this figure to a more sustainable level. The higher the deficit, the more exposed we are to international financial events beyond our control. Recent history has taught us that we cannot borrow indefinitely. Moreover, always spending more than you earn, and using new borrowing to pay off past borrowing (as we are doing now), is not a responsible way to run the country.
So, what are our choices?
The medium term fiscal plan requires that we implement tax-raising and spending cuts of €3.1 billion in 2014. However, the original projection was that this would reduce our annual deficit as a percentage of Gross Domestic Product to 5.1 per cent (which would mean we would then be borrowing 5.1 per cent of our annual output each year). A number of important steps taken by the Government over the course of 2012 and 2013 mean that a €3.1 billion correction next year would in fact bring our deficit-to-GDP ratio closer to 4.3 per cent.
Thanks to the efforts of the Government, there is a better than expected outturn and this gives us options.
The first option would be to push on in 2014 with the planned fiscal correction of €3.1 billion and bring the deficit ratio down to 4.3 per cent. This would mean another difficult budget, but the benefit is that it would bring us closer to balancing our national finances, thus making us more in control of our own recovery.
The second option would be to target a deficit of 5.1 per cent, in line with troika targets. This would mean less than €3.1 billion in deficit-cutting and so fewer cuts or fewer tax increases (or both) for 2014. Just how much would be open to discussion. The problem with this option is that the cuts would probably still have to come the following year and thus delay the return of the public finances to stability.
Related to this, a third option involves a reduction in the planned austerity in 2014, but for a specific purpose. That purpose would be to invest in stimulus that would have immediate employment benefits. Therefore, we are not advocating an easing in spending reduction targets and tax measures; underlying deficit reduction targets must still be achieved.
Instead, this money would be invested in areas like home improvement grants, or shovel-ready projects in transport and education – the kind of capital investment that delivers economic gains for decades after the original investment. A fourth option would be a blend of options two and three (a mix of reduced cuts and stimulus) and may well be the only option that builds consensus in the Coalition.
Our preference is for option three: to move towards a more sustainable national financial position while using this improved position to borrow for investment in a stimulus programme.
Considering what cuts to make in achieving the €3.1 billion correction is made more difficult by the absence of detailed, impartial information and a dedicated forum in which to debate the specifics of budgetary policy. We renew our call for a new budgetary scrutiny committee, similar to the non-partisan Congressional Budget Office in the US, to assist Dáil members in considering budgetary matters on a year-round basis. We hope to see this implemented by the Government as part of its Dáil reform.
We also believe it is important that we, as members of the Government, further the principles of tax transparency and provide a cost effective mechanism whereby taxpayers can receive an indicative breakdown of how the Government spends their taxes, each year.
With regard to the central issue of taxation, it is our belief that there should be no new taxes or tax increases for the employed in 2014. The property tax will have its first full year of payment next year with water charges not far behind. Taxes on earnings have reached their ceiling and the burden on taxpayers is now too high.
Ireland has the most progressive (ie fairest) tax system in the OECD, excluding Israel – the top 5 per cent of earners pay 44 per cent of taxes, despite earning only 24 per cent of overall gross income. ESRI analysis shows that over the period of austerity from 2009 to 2013, tax and spending measures have been progressive, with those on higher incomes shouldering the greater burden of the adjustment. There is no argument for higher taxes.
We put this position out now in this way because we believe that open and honest debate around the options that face us is preferable to closed party meetings and ministerial kite-flying.
This article was written by Sean Conlan TD, Paul Connaughton TD, Pat Deering TD, Brendan Griffin TD, Noel Harrington TD, Sean Kyne TD, Anthony Lawlor TD, Eoghan Murphy TD, all of Fine Gael.