Cliff Taylor: Why we should learn to love the USC

It is a big ugly, progressive collector of money that is hard to avoid and we will need it in the future

Cliff Taylor

The USC needs a PR campaign. We needs to see posters saying “The Universal Social Charge - It’s progressive.” Or “ The Gardai and the Army - the USC pays for it, with a bit left over.” Or you could try “ What pays all the income supports for the unemployed - the USC does.”

It was interesting to see the charge - introduced in 2011 - being made the key focus of Budget 2016. The vast bulk of the changes in take home pay next year result from USC cuts . And Minister for Finance Michael Noonan said towards the end of his speech that, if re-elected, the Government’s policy would be to “ progressively abolish” the charge in the years ahead, presumably over the five year term of the next Government.

We are talking about a lot of money here. The USC will raise some €4 billion this year, not far off €1 in every€10 of state revenue collection. It is enough to meet the entire budgets of the departments of justice and defence combined, or pay for all the income supports to people of working age , of which the largest is the jobseekers’ allownance. USC revenue would also pay for all the HSE services in the South and West of the country, or meet two thirds of the cost of servicing the national debt.


Hidden under all this is what I think is the key issue of Budget 2016. It is not the argument about whether it is too expansionary or not. The bigger issue is how we are going to manage the public finances in future and pay for the improved public services and investment that the country needs. The €1.5 billion in additional spending needed this year - and announced just before the Budget – shows that as things stand the system needs more cash just to stand still. Yet from next year, under EU rules, we face a stricter ceiling on spending - linked to potential economic growth - and the inability to do the kind of major supplementary changes we saw this year. Mid year adjustments in one area will have to be paid for by cuts, or extra revenues, elsewhere.

And here we come back to our old friend the USC - and to a general approach across the political spectrum that we can somehow turn the clock back to the pre-crisis years, cutting tax revenues, getting rid of unpopular charges, narrowing the tax base and still delivering better public services.

This Government and its predecessor have done a remarkable job in holding down spending growth. As Moody’s point out in a note this week, government spending rose by 12 per cent a year between 2000 and 2007, but next year will still only be 2 per cent ahead of its 2014 level. The vicious cycle of annual increases which was a part in our bankruptcy as a nation has been broken. But now the question is how to organise, deliver and pay for better services in future.

While the Budget has landed well for the Government, I wonder what questions they will face on the doorsteps early next year? The TDs will go on the huistings with their crib sheets on how much better everyone is after the Budget. No doubt the electorate will welcome the extra cash. But they will face a host of questions on how we rebuild our public services – people on trolleys and waiting lists, a vicious crime trend in some areas, a lack of primary school and childcare places, soaring rents,a shortage of housing and on and on.

Planning to cut overall tax levels year on year and still deliver better services would require a continuation of the super-charged growth in tax levels we are now seeing. With much of the froth in tax now coming from corporation tax - which can be volatile as much depends on a few big multinationals - and the economy unlikely to continue growing at 5 per cent plus a year, this looks unlikely.And with the EU rules in place, the game has changed and the link between tax and spending will have to be faced head on by the next government.

Remember, too, that it costs a lot of money to stand still, as the supplementary estimates suggested. The Irish Fiscal Advisory Council has said that existing official spending forecasts for the years ahead do not take enough account of a rising and ageing population. Meanwhile the ESRI estimates that it will cost around €700 million a year to effectively index link the tax system with wages rising by around 2.5 per cent.

Yet as we head in to the general election campaign much of the debate will involve parties talking about what taxes or charges they would cut or reduce. Even the parties of the left do not like the residential property tax - a key measure introduced to widen the tax base, which the Government has “neutered” as an election issue by saying valuations will not change until 2019. Nobody will go near any plan to raise extra money from water charges, or any other new source.

The USC is a big,ugly collector of money. Already its burden has been reduced, particularly for the very lowest earners. It is progressive – in other words the better off pay more. It is hard to avoid, catching earnings not liable to income tax and not subject to the allowances and reliefs which allow the better off to cut their bills. And it pays for a lot of things. Maybe we should learn to love it.