ECONOMICS:While tough decisions were admirably executed, it is curious the Minister ruled out any taxation hikes, writes JIM O'LEARY
LAST WEEKS Budget merits a joyless welcome: welcome because it is an important, perhaps pivotal, step on the road to restoring order to the public finances; joyless because there is no pleasure, even for the most gung-ho advocates of fiscal rectitude, in cutting social welfare payments or the pay of low-ranking public servants.
The Budget was remarkable in several respects, not the least of which being that it contained precisely what the Minister promised it would by way of a consolidation package.
Since April the commitment to make an adjustment of €4 billion in 2010 had been flagged, and by September had hardened into the intention to secure the €4 billion exclusively through spending cuts. Not so long ago, this would have been seen as an insuperable challenge. The fact that it has been overcome sends out a powerful signal to several key audiences – international investors, the social partners and the wider electorate.
Although consistent with repeated pre-budget declarations, the fact that there was no net increase in tax on Budget day was surprising. (When it comes to political promises, where taxes are concerned, ones instinct always is to assume that the ambiguities of language will be exploited fully and taxes will be raised some way or another.)
An obvious measure would have been to index the income tax system and reduce credits, allowances and the standard rate band by say 4 per cent. This would have yielded about €400 million. It would have involved applying exactly the same logic to income tax as was applied to social welfare. Moreover, it would have gone some, albeit very modest, distance towards addressing what is increasingly recognised as a major structural weakness: namely the large proportion of income earners who have no tax liability. This proportion can only increase further as the parameters of the income tax system remain unchanged in the face of falling wages and salaries.
The Government has exhibited a curious, inconsistent and, at times, perplexing attitude towards tax over the past 12 months or so. For example, the Commission on Taxation’s report was eagerly anticipated by Cabinet members as a likely source of valuable ideas on taxation. But when the report was published in September, it was dismissed as something of an anachronism and shelved for reference at some point in the distant future.
At around the same time, and without explanation, the previously declared intention of April to secure €1.75 billion of the €4 billion adjustment package for 2010 through taxation measures was scrapped in favour of a strategy based exclusively on spending cuts.
I’m not suggesting that the change in strategy was necessarily wrong (although I don’t believe tax increases should be ruled out as a means of achieving the outstanding adjustment), but I’m still puzzled as to what could have happened in the space of just a few months to bring about a change of this magnitude.
Aside from the question of what the overall tax burden should be, there is the question of how any given burden should be distributed across tax categories and taxpayers. Most analysts take the view that the existing distribution is not best designed to meet efficiency or equity objectives and that there is a compelling case for serious reform.
The Fine Gael pre-Budget document set out one such set of reform proposals, which involves broadening the tax base in order to cut employers’ PRSI and seems like a worthwhile response to the current employment crisis. One criticism that can be reasonably levelled at last week’s Budget is that it attempted nothing along these lines, even if it did suggest that measures to reform the tax system would be brought forward next year.
An aspect of Brian Lenihan’s Budget speech that many commentators latched on to was his declaration that the worst is over. Is it? Well, nobody knows for sure and, in any case, it depends on what one is focusing on. As far as the overall economy is concerned, the latest signs are encouraging: gross domestic product (GDP) managed to grow a little in the third quarter of the year (Q3) and the unemployment rate has stabilised, at least for the time being, according to data released this week by the CSO. On the other hand, the pace of employment loss continues unabated and the main reason unemployment is no longer rising is that emigration has resumed on a significant scale – in the 12 months to Q3, it looks like net outward migration may have reached 30,000.
As for the public finances, the official projections published last week suggest the worst is over in that the annual adjustments pencilled in for 2011 and 2012, at €3 billion, are smaller than the €4 billion adjustment planned for 2010. The previous set of projections envisaged a €4 billion adjustment package being necessary in both 2011 and 2012 as well. However, smaller doesn’t necessarily mean easier: the more spending is reduced, the more difficult it is likely to be to effect incremental savings.
Moreover, there is an element of smoke and mirrors about the forward-looking arithmetic. The main reason the projected adjustments in 2011 and 2012 are smaller than previously envisaged is that the overall consolidation timetable has been lengthened by a year and extends now to 2014 rather than 2013.
Indeed, the cumulative adjustment required in the period beyond 2010 is now estimated to be significantly greater than before, because the structural budget deficit in 2010, even after the Herculean efforts behind the Budget, is now forecast to amount to 9.4 per cent of GDP, compared with the 7.5 per cent that was projected in April, and up from the 9.3 per cent estimated for 2009. A case of having to run very hard indeed just to stay still.
