Government wrong to delay tax increases

 

THE TRADE unions have a legitimate grievance about the fact that it was not until 1am on the final night of the crisis talks that they were presented with the Government’s proposals for the levy on pensions.

They may, however, have been relieved to have been given this excuse to break off the negotiations at that stage, leaving the Government to impose the levy without the unions having to defend to their members a move many of them clearly resent.

One puzzling aspect of the way this levy proposal was presented was the failure to make it clear on Tuesday to the Dáil that the impact of the levy on public servants’ take-home pay is to be substantially reduced by the application of normal pension contribution tax relief to the levy.

Was this mitigating element explained to the unions? If so, how was it that it did not seem to emerge to those affected and to the general public until Eamon Gilmore raised a query about it later that night on television?

If the unions were not told about this at the time when the levy scheme was presented to them, might this have contributed to their negative reaction?

Part of the problem of securing public service acceptance of the levy arises from the fact that it became isolated from other necessary components of a rescue package, and so came to be seen as a partisan attack on the public service. The Government has thus far felt unable to go beyond a general quantification of the scale and approximate phasing of the reduction in borrowing that the Department of Finance believes to be necessary. There is still no sign of any medium-term plan: no indication of how sectors of the economy other than the public service will be expected to make their contribution to recovery.

A major factor in this failure of vision has been the Government’s reluctance to face up to the fact that most of the contribution to be made by other sectors of our society can come only through changes to our too-narrowly- based, and in important respects inequitable, taxation system.

For, apart from the public service pay element, which has now been addressed by the pension levy and the suspension of the proposed 2009-2010 pay round, there are only two other ways to bridge the still yawning gap between revenue and expenditure. Either we make massive further cuts in public and/or social expenditure, or else we fill the huge revenue gap left by the disappearance of receipts from the asset-based taxes upon which this Government so stupidly made itself dependent.

Now, the total amount that can be found by rational cuts in our already inadequate public and social services is bound to fall hugely short of the billions in borrowing reductions that we now need to make. And we simply cannot continue to ignore the fact that the present exchequer borrowing crisis is in no way due to spending more than had been provided for, but is entirely the outcome of the collapse of our tax revenue. On this point the figures are unambiguous. Thus, the 2008 budget forecast current spending in 2009 at €42.5 billion. After last Wednesday’s announcement this figure is now down to €40 billion. By contrast, 2009 tax revenue was forecast to be almost €43 billion. But a couple of weeks ago the Government told the European Commission that it now expects this year’s tax revenue to be below €37 billion.

This figure now looks optimistic; the recently published January 2009 data has shown a further 19 per cent drop in receipts – over twice the average rate of revenue decline forecast by the Department of Finance for the year 2009. With current public spending for 2009 already well below the level earlier projected, it makes no sense for the Government to employ further massive spending cuts to deal with a crisis that has been caused by a collapse in revenue.

I simply cannot fathom the Minister for Finance’s earlier refusal to face this reality. It is only very recently that he has admitted that tax measures will in fact be needed – but, he still says, not until next year.

As a result of this postponement, the unions have found it impossible to agree that so much of the burden of this year’s additional measures be imposed upon public sector workers. In my view the Government should not have distorted burden-sharing through the postponement of decisions on taxation by seeking to transfer to a commission its own responsibility for such action.

When, several weeks ago, the Department of Finance told the European Commission that it expected Irish output to fall by 4.5 per cent this year, it projected our growth during a subsequent 2010-2013 recovery period at little over 2.5 per cent a year.

However, when, with remarkable foresight, the ESRI December 2005 Medium-Term Review projected the likely consequences for Ireland of a possible combined global credit crunch and Irish housing boom collapse, it foresaw a very much higher growth rate than this for our economy during the subsequent recovery period: 5.5 per cent a year. This suggests that, if the global economy does survive this crisis, we could end up better placed to resolve our borrowing problem than the Department of Finance expects.

Of course, this does not suggest that we can afford to the slightest degree to relax our efforts to cut borrowing – but there is at least a possibility that, if in this way we can now restore to some degree our lost competitiveness, our situation might ease somewhat as we move into the next decade.