Stephen Collins: Budget battles await honeymooning Varadkar

Taoiseach should use summer respite to steel himself for tough decisions ahead

Taoiseach Leo Varadkar. “While there have been some cringe-inducing moments, they haven’t damaged his standing and if anything probably enhanced his appeal to younger voters.” Photograph: Colin Keegan/Collins

Taoiseach Leo Varadkar. “While there have been some cringe-inducing moments, they haven’t damaged his standing and if anything probably enhanced his appeal to younger voters.” Photograph: Colin Keegan/Collins

 

The common refrain in the corridors of Leinster House this week is that politics has got so boring since Leo Varadkar took over as Taoiseach. That is a sure sign that he has settled into the job more quickly and comfortably than many expected.

He has generally handled himself well in his Dáil performances, showing an ability to think on his feet while putting a bit of needle into his responses to Opposition leaders.

These are precisely the qualities his supporters expected of him and are why he had such a commanding lead among TDs and senators in the leadership contest.

While there have also been some cringe-inducing moments, such as his reference to Love Actually during his first visit to Downing Street and his display of funky socks, to match those of Justin Trudeau, they haven’t damaged his standing and if anything probably enhanced his appeal to younger voters.

With the two-month Dáil recess about to kick in there is every chance that the political honeymoon will continue over the summer months.

Budget battles

Varadkar would be well advised to enjoy the breather and gather himself for the budget battles ahead in the autumn which will be the real test of his abilities and could well define his entire period as Taoiseach.

He would do well to remember that Brian Cowen started off in a blur of optimism in May 2008 but by the autumn of that year things had already started to go pear-shaped, economically and politically.

Money for significant changes to the tax system and increased social spending can be found if bold decisions are made

There is no immediate danger of anything similar happening in the immediate future as Enda Kenny and Michael Noonan have left the economy in an incomparably better shape than the one inherited by Cowen.

However, it is worth recalling the recent past as it shows how an apparently stable economic situation can spin out of control when an unexpected shock is administered to the system.

Back in 2008 it was the collapse of tax revenues and the vulnerability of the banking system that pushed the country from having one of the lowest debt levels in the European Union to one of the highest in only two years.

In 2017 the looming storm clouds of Brexit are still on the horizon and it is still impossible to judge whether they will amount to a hurricane or a containable storm. One way or another a challenge with the capacity to transform the economic outlook is on the way and the country needs to be prepared.

Noonan had committed himself to building up a “rainy-day fund” as an insurance policy to deal with the potential shock of Brexit but Varadkar in his pitch for the leadership opted to spend at least some of the money instead on much-needed infrastructural investment.

Of course there is a strong argument for extra spending on infrastructure, which was slashed during the financial crisis, but the risks of committing resources that will then not be available in an emergency need to be assessed carefully.

The Taoiseach has also committed himself publicly to reducing the tax burden on middle-income earners. Again it is a worthy ambition but the question is where the money is going to come from.

Fiscal space

The so-called fiscal space available for extra spending is only in the region of €500 million and that sum certainly won’t be enough to meet the kind of ambitions that have been articulated.

Varadkar has made the valid point that considerably more than €500 million for tax adjustments and social spending could be found if decisions were taken to cut or eliminate some current programmes or tax breaks.

Out of a total Government budget of more than €60 billion this is undoubtedly true but governments always struggle in the face of public pressure and lobbying by interest groups to put an end to programmes that have clearly outlived their usefulness.

The 9 per cent VAT rate for the hospitality sector is a case in point. This low rate of VAT was one of Noonan’s initiatives designed to inject some life into a battered jobs market in 2012 by providing a boost to tourism.

It was funded by a levy on private-sector pensions and it worked spectacularly well. Unemployment has been slashed since then and tourism has boomed. There is no longer a strong argument for keeping the lower VAT rate but the industry is lobbying furiously for its retention.

The abolition of the low rate would raise an extra €500 million and immediately give Minister for Finance Paschal Donohoe more room for manoeuvre on tax cuts.

There are a range of other decisions that could be made to further expand the fiscal space. For instance the lower VAT and excise rate on diesel was introduced to reduce carbon emissions but there is mounting evidence that the use of diesel is doing serious damage to public health and particularly to children.

There is no longer any case for keeping the lower rate compared to petrol but again there will be fierce lobbying in opposition to reform.

Money for significant changes to the tax system and increased social spending can be found if bold decisions are made. Whether Varadkar and Donohoe have the nerve to take them is the question.

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