Cliff Taylor: Budget battle should be about dividing the pie

Welcome to the season of budget madness, where everyone is scrambling for a share of the €1.5 billion that the Government tells us will be available for tax cuts and spending increases.

The State will spend close to €50 billion on services this year and take in just a bit less in taxes and charges.

But all the budget debate will be about the €1.5 billion in additional cash available, and none of it will be about the €50 billion and how it is raised and spent.

The budget debate is not so much a case of dividing up the pie as arguing about a few cherries sitting on top.

This is always the way at budget time, but it becomes almost absurd with a general election in the offing.

The Government will do nothing to upset any interest group or ruffle any feathers. Minister for Finance Michael Noonan and Minister for Public Expenditure Brendan Howlin will be able to create extra room for manoeuvre through a bit of money shuffling and revenue raising – perhaps €1.5 billion will become €2 billion – but this would still represent just €2 out of every €100 raised or spent by the exchequer.

This is the way Irish budgets have always operated. A borrowing target is set, and reaching it involves giving away money in good years and taking it back when times are tight.

This way of thinking is now so ingrained in our psyche that we are going to find it difficult to adapt to the new world, governed by EU budget rules, where we will be forced to confront the trade-off between tax and spending.

We avoided this reality in the long period up to the bust because of the tax revenues created first by growth and then by an enormous property bubble, which fuelled huge spending rises.

Those days are gone. Government spending more than doubled in real terms during the Tiger years between 1995 and 2007.

It rose by more than 10 per cent per annum in both 2007 and 2008. We have a system used to running on more money in the good years, but the tap is now being turned off.

The Government’s own forecasts envisage day-to-day spending in 2020 being less than 3 per cent higher than it is this year. That is 3 per cent in total, not 3 per cent a year. Strong growth may give a bit more leeway, but not a lot.

In reply to a parliamentary question tabled this week by Fianna Fáil’s Michael McGrath, the Minister for Finance said EU rules meant that the total amount spent by the Government next year could only be 0.1 per cent above this year’s levels in real terms (in other words, after allowing for inflation), or 1.5 per cent higher in cash terms.

This is a glimpse of the future, in which spending can only rise gradually, in line with economic growth, unless the government of the day decides to pay for it through higher taxes.

It would be encouraging to think that we might see a real debate about this in the general election campaign.

But with even parties on the left opposing any increase in residential property tax, and everyone wanting cuts in the universal service charge, it is hard to see any party going to the electorate on the basis that taxpayers in general should be hit for more.

Some, such as Sinn Féin, will call for higher earners to pay up, but that will be it.

Conundrum

There is a real conundrum here for the political parties. If you look at the Irish Times/Ipsos MRBI poll, you see that by far the biggest budget priority for voters is the health service.

But will extra government cash automatically be reflected in better services? Look at the extraordinary tactics of the Health Service Executive (HSE), which has banged in a request for €1.9 billion in extra spending on its €12 billion budget next year, more than all the additional cash the Government has to spend.

Health may need more spending, but it surely also needs reform. Yet in the world of “what we have, we hold”, the HSE is taking its entire existing budget as read, and simply looking for a load more.

Fearful that higher spending will not be seen to “deliver”, politicians from most, if not all, parties are choosing to play the tax card. Dublin local councils, for example, have been voting to maintain cuts in residential property tax levels despite warnings that there is not enough cash to pay for local services.

Meanwhile, at a national level we are chipping away at the widening of the tax base in the past few years, while holding out hope to voters that we can get back to the good old days of low personal taxes.

This may all look plausible when the economy is growing by 5 per cent or more, but it will not work when growth returns to more normal levels.

New EU rules, put in place during the crisis, will, sooner rather than later, force the next government to confront the choices in a more upfront way.

The only ways of improving the quality of public services will be to reform how they are delivered or to pay more for them through higher taxes.

We will all enjoy the budget speculation, and most people will be a bit better off after the big day. Nor can we dismiss the budget as some kind of sideshow.

But the premise underlying much of our political debate – that we can somehow again return to the days of lower taxes and higher spending – is a false one.