The country has been grossly misled into a false economy of low taxation
THE KEY task of this Budget was to achieve an optimum balance between two imperatives: the need to reassure financial markets that we are tackling our financial deficit vigorously enough, and the need to minimise the negative impact of such action on the economy. I feel that in Tuesday’s Budget this balance was on the whole well drawn.
The reaction in the markets has been moderate, despite the fact that they had foolishly been encouraged some weeks ago to expect that the Budget would be about €2 billion tougher than that presented by the Minister for Finance last Tuesday.
The premature, and as it has turned out quite unwarranted, public announcement several weeks ago that the Budget borrowing target would be 9.5 per cent, reflecting a general Government deficit of just over €18 billion, must have raised unrealistic expectations in financial markets. We have been lucky that, despite this foolish raising of market expectations, the reaction abroad to the Budget was relatively positive – assisted, perhaps, by the European Commission’s helpful initial comments.
The second key question is whether the balance between tax increases and spending cuts in the Budget was well judged. Now, I know that economists distinguish between the different effects on the economy of various kinds of tax changes and spending measures, but none of the public discussion of this issue has been at that technical level. The fact is that most of the public debate on this issue has been frankly ideological, with business-oriented and generally right-wing commentators clearly favouring spending cuts, and socially-conscious or left-wing people preferring tax increases.
In fact the Minister’s announcement of likely budgetary action next December in relation to child benefit has exposed the fact that in some respects the distinction between these two approaches to balancing a budget is quite artificial. If in the event that he decides to effect this saving by taxing child benefit, this will naturally be seen – and may well be criticised by right-wing commentators – as yet another tax increase. But if instead he decides to achieve this saving by means-testing child benefit, this will be seen, and may be criticised by some, as a spending cut!
I agree, of course, that unduly high taxation can have negative economic effects, and I recognise that in the 1980s it might have been better for my government to have put more emphasis upon spending cuts than on raising taxes.
But while it is valid in this Budget to tackle the excessive spending seen earlier in this decade (much of it, as was the case also in the late 1970s, due to the Government having increased already excessive public service pay to a level well above that of the private sector), our immediate problem today arises more from a shortfall of revenue.
As a result of spending cuts made earlier in this crisis and in this Budget, public spending has now been reduced to a figure that is actually €1.5 billion below what the Government had planned to spend in the current year at the time when the 2007 budget was introduced 2½ years ago. But despite the earlier levy, now to be increased, and the additional revenue-raising measures just announced, the drop in national output and the loss of exceptional housing boom receipts means that revenue for the current year is forecast to fall short of its 2007 projected level by the colossal figure of €17 billion – or one-third.
Our problem is thus largely due to a revenue shortage. In 2007 revenue was 25.5 per cent of GDP, but even after the levy and other tax changes in this Budget, this figure today is only 19 per cent.
Having said that, we clearly also need to prune excessive public spending so as to minimise the impact of tax increases upon a public that in recent years has been grossly misled. An irresponsible Government has persuaded us to believe that our country could be run with a level of taxation which, when temporary housing boom tax revenue was excluded, was far below that of any other European state.
There remains, however, some merit in the criticism that this Budget, while cutting back some social services – thus penalising the less well-off for the Government’s past blunders – has proposed public service economies of only €150 million this year – a minuscule figure of less than 1 per cent of the current cost of the public service.
Moreover, despite the freeze on public service numbers and pay, and the early retirement measures for civil servants, as well as the expected 4 per cent drop in the level of prices, the Budget documentation tells us that the Government is planning an increase of no less than €5.5 billion, or 12 per cent, in current public spending over the next two years.
Even allowing for the need for additional unemployment payments in respect of a further four percentage point rise in unemployment to 15 per cent, that seems excessive.