Harsh realities of Budget 2017 will wake up Irish politics

The next 10 weeks will be the first test of ‘new politics’ following its summer slumber

 Leo Varadkar TD with Fine Gael Dublin Bay South candidate Kate O’Connell in Dublin, as  the party announced their plans to abolish the USC by 2020. File photograph: Dara Mac Dónaill/The Irish Times

Leo Varadkar TD with Fine Gael Dublin Bay South candidate Kate O’Connell in Dublin, as the party announced their plans to abolish the USC by 2020. File photograph: Dara Mac Dónaill/The Irish Times

 

Yesterday’s front-page Irish Times story by Sarah Bardon marks the end of the political silly season. It revealed that, in a briefing document prepared last February for incoming ministers, the Department of Finance felt it necessary to itemise in stark terms the implications of abolishing or phasing out the universal social charge (USC).

In seeking these documents under the Freedom of Information Act and persisting over objections to their publication, Sinn Féin finance spokesman Pearse Doherty has done a service to the quality of pre-budget political debate.

It is worth remembering that the competing proposals around reducing or eliminating the universal social charge were a central focus of the election campaign.

A commitment to abolish the charge was Fine Gael’s big-ticket item in the election. If you scroll back through the online photographic archives of that campaign, you will find many shots of Fine Gael TDs and activists proudly waving placards blaring this “Abolish the USC” promise. More often than not it appeared on posters alongside the now infamous and orphaned “Keep the recovery going’ slogan.

Extravagant promise

It was apparent even in the first week of the election campaign that Fine Gael’s extravagant promise to abolish the USC was undermining Michael Noonan’s reputation for prudence. One of the reasons Fine Gael lost so many seats was that voters could see that the promised tax cuts would threaten funding for public services.

Department of Finance officials were clearly watching this election debate about the USC with horror and frustration. Even before the election was over and long before the composition of the new Government was finalised, they wrote this briefing document. They were anxious to emphasise to whoever would be deciding budget policy that the USC was a very progressive tax.

They also took the time in the document to set out in some detail the shocking range of tax increases in other areas which would be required if the USC was to be abolished or phased out.

It is instructive to go back eight years to the internal deliberations between the then minister for finance Brian Lenihan and his officials, which shaped the introduction of the charge.

Lenihan’s political adviser Cathy Herbert has since written about the political and economic considerations which informed those deliberations. She tells of how “shortly after he went into the department Lenihan was genuinely shocked by a paper written by one of his senior officials, which documented the cumulative impacts on the tax system of the reduction and reliefs that had been introduced over the previous decade. The erosion of the base and the imbalance in the source of taxation had left the economy mercilessly exposed when the property bubble burst.”

A theme of the debate on budget policy in response to the economic crash was the principle that everybody should pay some direct taxation. This, Herbert wrote, went against the orthodoxy prevalent then – and now – that low-income earners should be kept out of the tax net. It was Lenihan’s belief that “citizens only feel they have a stake in the State if they pay, according to their means, for the services it provides”.

Lenihan was strongly of the view that a broadly-based tax at a low rate should be applied to all incomes. It was, of course, also fiscally efficient because a flat-rate levy across all incomes was the quickest and least complicated way to achieve the increase take from direct taxation which he urgently needed.

In the 2009 budget he had started the process by introducing a levy on all income earners starting at 1 per cent up to €100,000 and 2 per cent on income earners above that level. In the 2011 budget that income level and the health levy were converted into the universal social charge which was applied to all gross income above €4,000.

The threshold has since been increased but the USC now raises €4 billion for the Government and accounts for a fifth of all income taxes.

Public services

Phasing it out over the next few years will dramatically shrink the tax base and will dangerously expose the funding of public services to an over-reliance on bloated corporate tax receipts. It would also be very regressive since, as this briefing document makes clear, cuts would provide most benefit to those of highest incomes.

Politics has aestivated over the summer months but it has now been roused from its slumber to the harsh realities of budgetary choices. In seeking to be popular, politicians sometimes like to forget that there is no such thing as a free tax cut. All economic decisions have an opportunity cost.

The next 10 weeks will be the first real test of “new politics”. The ultimate decisions on whether and how the universal social charge is reduced in this budget will reveal whether the Government gets the fairness message delivered by the electorate last February.

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