Brian Cowen's Budget was a delicate balancing act, writes Marc Coleman, Economics Editor
Brian Cowen must sometimes feel like the younger brother of a spoilt brat.
When Charlie McCreevy hiked government spending by 17 per cent in 2001, we shrugged our shoulders. When he established SSIAs, the most lavish and inflationary exercise in electoral bribery in recent fiscal memory, we patted him on the back. When he gave tax reliefs to property investors at a time when construction was already booming, we winked. Now prudence and responsibility is all the rage.
Yesterday, and for the third time since McCreevy's departure, Brian Cowen bore those sins on his shoulders. He faces an electorate that expects far more and tolerates far less. With an election six months away and voters' memory of 2001 still fresh, the present Government now needs to avoid the charge of going on a pre-election spree. The Fianna Fáil heartland may not mind, but middle Ireland doesn't like that sort of thing these days.
When he announced yesterday that total Government spending would rise by 11 per cent next year, Brian Cowen was conducting a balancing act. This figure represents some €5.5 billion on top of last year's levels. It follows a 13 per cent rise this year. The annual average rise for the election and pre-election year this time out is 12 per cent. The equivalent average for 2001 and 2002 was 14 per cent.
Moreover, the Government expects to run a general surplus of €2 billion, 1.2 per cent of Gross Domestic Product (GDP). If Brian Cowen is increasing spending, he at least has the taxes to pay for it. From a "trying to buy the electorate" point of view, Cowen's pre-election performance seems better than that which went before.
That said, what went before may not be the best benchmark. A better benchmark for spending growth is the rate at which nominal GDP - real economic output plus inflation - is growing. Government spending will next year rise by three percentage points more than forecast for nominal GDP growth. Of the 8 per cent needed just to keep Government rolling along, half - some €2 billion in all - will feed the Leviathan of public sector pay.
As well as benchmarking pay increases, this reflects the fact that - far from cutting public sector numbers by 5,000 as promised in 2002 - those numbers have grown since then by around 50,000, without any significant improvement in public services. From an efficiency viewpoint, budgetary policy remains a failure.
This only partly explains why, from a level of 31.7 per cent of GDP in 2004, the taxation burden will rise to 33.7 per cent in 2007.
The other explanation for this trend lies in the continued impact of stealth tax. That stealth taxation still remains a significant problem after yesterday's Budget is indisputable, although this is not Brian Cowen's fault.
In his first two budgets, Cowen undid some of his predecessor's penchant for stealth taxation, raising the threshold for stamp duty for first-time buyers (December 2004) and raising the standard threshold of income tax (December 2005).
This year's Budget raises the standard income tax thresholds by around 6 per cent, slightly more than this year's income growth. Compared to 2002, thresholds have now risen to 20 per cent. That this jump falls short of the 25 per cent growth in average incomes since that year is not Cowen's fault. The reversal of this stealth taxation that did occur happened entirely under his watch. Here, as with tax reliefs on property investments, Cowen is a redeemer of past sins.
Also admirable - and quite separate from the waste of current spending on the provision of services - are the extra resources he has provided to the needy.
By increasing the entry point for paying income tax to €17,600, the numbers exempt range from one-third of workers to two-fifths of workers.
And by increasing social welfare spending to €1.4 billion, on top of €13.9 billion last year, Cowen increased social welfare spending by 10 per cent, well ahead of inflation. Compared to the wasted increase in current spending, this is entirely justified.
By giving emphasis to increasing contributory and non-contributory pensions, Cowen has wisely targeted this disproportionately on the elderly, people who suffer disproportionately in times of rising inflation.
In other areas, the Government has paid no attention whatsoever to inflation. The arguments forwarded yesterday by Brian Cowen to justify the absence of any change in stamp duty thresholds hold no water.
His objection to such a change - that stamp duty cuts would be incorporated in price rises and benefit the seller - is nonsense. Of course, such cuts would lead to house price increases, but buyers would still benefit.
Rather than paying stamp duty to the Government with no reform, the price increment arising from reform is retained in housing equity and cashed in on when the house is sold.
And unlike stamp duty, that price increment is easily and more cheaply funded by mortgage finance.
Instead of reforming this tax, the Government will increase mortgage interest relief for first-time buyers. Apart from ignoring second-timers who had to trade up for family or job change reasons, this approach also ignores a hard reality of property markets - seasoned hunters that they are, estate agents can spot a first-time buyer five miles away, and are adept at using ghost bidding to eliminate any benefits that the Government seeks to endow.
But most of all, the failure to countenance reform of stamp duty leaves one of the most inequitable and dangerous taxes in the world on our statute books.
That failure also puts it up to the PDs to pursue the issue at the next election, or face the jeers of Labour and Fine Gael. And here may be the most significant impact of the Budget.
Whether one is for or against reform of stamp duty, a lengthy election debate on the issue could prolong uncertainty in the property market, a market that drives one-quarter of our economy and funds one-quarter of Government revenue.
If that scenario comes to pass, there could be a lot more redemption to come this time next December.