FOR MANY, the prevailing mood in the aftermath of Tuesday’s Budget was disappointment at the lack of Government conviction to address the public finances and the economy in a progressive manner.
It’s not that the Budget was too harsh. Harsh was needed. But the lack of real conviction to tackle the excesses in voted current expenditure over the next five years sent a signal to many business people of a continued prioritisation of party politics over the national interest.
The Minister’s primary focus was to increase tax rates instead of broadening the tax base and insufficient emphasis was given to promoting enterprise and creating jobs.
If there is one lesson we can take from the Celtic Tiger years, it is that a vibrant enterprise-based economy lifts all ships.
There are very few who wouldn’t trade today’s depressed economic environment for the heady years of the last decade which saw entrepreneurial confidence, fuelled by lower taxes, create jobs and prosperity for so many.
An increasing lack of competitiveness and the narrowness of the tax base rendered this unsustainable and these issues must be addressed meaningfully if a return to prosperity and jobs is to be achieved.
But it’s not too late. The Minister’s stated objectives for 2010 and 2011 could and should be recast after the local elections, to grasp the nettle on:
reviewing downward the full-year tax increases proposed for each of 2010 and 2011 substituting this with a further €2.1 billion of targeted current expenditure savings;
rebasing the personal tax and PAYE credits and standard rate bands at 2006 levels in line with private sector salary reductions, to raise about €1.5 billion and broaden the tax base; and
ensuring that the proposed property and carbon taxes have broad application and, together with the Minister’s suggestion that children’s allowance is likely to be taxed and other non-income based taxes such as a surcharge on the disposal of certain carbon credits, contribute about €2.3 billion annually to broadening the tax base.
These measures would also add greater stability to the public finances than merely increasing marginal tax rates and could be viewed as pro-enterprise.
They would also allow for a reversal of the decision to double the income levy from, say, 2011, rendering it a temporary recovery measure and reducing marginal tax rates for all taxpayers by 1 per cent, 2 per cent or 3 per cent, as the case may be, from their current excessively high level. This should serve to stem the likely flight of talent from Ireland to find work overseas.
Precise details of the revised multi-annual plan for achieving current expenditure cuts of €2.6 million in each of the next two years need to be clearly articulated within the next three to four months to give adequate time to ensure that the savings can be implemented and fully realised in 2010.
The Minister’s embrace of the important role that private finance, PPP and other innovative means of financing can play in funding public infrastructure is welcome. The introduction of domestic water charges could afford a significant opportunity in this regard. Apart from reducing water consumption, the introduction of a water charge to raise, say, €400 million per year has the capacity to support near-term investment of almost € 4 billion in labour-intensive water infrastructure projects.
Despite the very difficult public finances, the Minister needs to stand up to Opposition assertions that tax reliefs are inherently rogue. Our economic wellbeing over the last 60 years could scarcely be more positively linked to tax policy. Properly targeted and designed tax incentives, incorporating appropriate anti-avoidance safeguards, can have an important role in getting the economy going again.
For example, extending an RD-type tax credit at an annual rate of, say, 4 per cent for seven years on certain capital investments could be funded from the tax buoyancy inherent in these projects during their development and could be targeted at projects in the renewable energy, private education, healthcare and infrastructure sectors.
As a targeted means of encouraging SMEs to hire additional employees, a temporary relaxation of the minimum wage legislation and a three- to four-year tapering remission of employers’ PRSI on new hires could, with a will, be designed to be neutral from a public finance perspective. This would considerably enhance our competitiveness and further promote enterprise.
David Kennedy is a tax partner and head of advisory in KPMG
