Budget 2016: Populist budget aimed at the political sweet spot

Emphasis is on providing a return to taxpayers who funded recovery effort

What does Budget 2016 mean for you: Cliff Taylor and Arthur Beesley of The Irish Times discuss the economic and political implications of Michael Noonan's fifth budget. Video: Bryan O'Brien

 

This is a populist budget - and two themes dominate. At the macro level, it’s all about the mantra of recovery and stability. At the level of individuals and families, it’s all about providing a little something for everyone.

During 2016, the aim is to provide the equivalent of one week’s extra pay to every worker via tax cuts.

Amid a huge shortage of new homes, Nama will spend €4.5 billion to deliver 80 new homes per week for the rest of the decade.

After €29 billion in retrenchment in the wake of the crash, this is the second expansionary budget in succession. The €1.5 billion package might well have been the most leaked in history, starting with the spring statement six months ago in which the fiscal parameters for the plan were set.

But it is designed to deliver a real increase in disposable income to every home in the State - and that is the prism through which it will be assessed by the people.

“It is essential to ensure the benefits of a growing economy are felt inside the door of every family in the country ,” said Minister for Finance Michael Noonan as he unveiled his fifth budget.

Recall that the first three of those were cast amid crisis as the State doled out ever-increasing austerity under the EU-IMF bailout.

The fourth, this time last year, came months after an electoral bruising in local and European polls. Today’s plan is set against the backdrop of intensive preparations for the general election to come.

All the emphasis is on providing some kind of a return to the taxpayers who funded the recovery effort. So cuts to the universal social charge take centre-stage in the drive to take the marginal or net tax rate on “middle” earnings - ie income of up to €70,000 - below 50 per cent for the first time since 2009.

Revenue calculations suggest this step will benefit more than one million workers, a huge consideration with an election on the way.

The 7 per cent USC rate will drop by 1.5 percentage points, and the two lower rates will each drop by 0.5 percentage points to 3 per cent and 1 per cent, respectively.

There is more. Further measures aimed at parents, working mothers, the elderly, carers and welfare recipients point to an effort to tackle pent-up political strain.

The same goes for an inheritance tax cut, the postponement of property tax increases and other measures aimed at farmers .The phased introduction of a tax credit for the self-employed - and a capital gains tax cut - can be seen in the same light. Such steps are cast to benefit small retailers, publicans and tradespeople.

Although the gains are modest enough, the key point is the largesse is spread around to the greatest extent possible to maximise political impact.

The same goes for the extension for five years of the €150 million annual bank levy, which will raise enough money to build the new national children’s hospital. The might be controversial among bankers, but controversy is unlikely to go further than that.

At the heart of the package is a double balancing act. With the economy growing at the fastest rate in Europe, the Government must demonstrate to the people that they are receiving an appreciable benefit from recovery. That is an immutable political necessity.

At the same time, however, it must demonstrate to the guardians of fiscal probity - and to financial markets - restraint has not been lost as the heavily indebted State comes out of crisis.

True, there is some anxiety among economists about the rollover of €1.5 billion in supplementary estimates this year into spending allocations for 2016. This is on top of concern that the advancing economy has no need for further stimulus.

But Mr Noonan is having none of this, saying too many people are still without work and that the budget deficit will still decrease next year - to 1.2 per cent of GDP from 2.1 per cent. He added that gross expenditure increases are running well behind the rate of growth in the economy and the rate at which tax and PRSI receipts are growing .

“Against this background, talk of an excessively expansionary budget is well off the mark.”

Economists would prefer him to go further on the deficit front. but political calculations prevail here: money in the pocket means more than a lower deficit.

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