It is possible to make choices that are rational - and fair
Measures can be taken to boost public finances that do not involve raising income taxes, cutting welfare payments or harming social services, writes FINTAN O'TOOLE
A STRATEGY FOR making the public finances sustainable has three elements.
Firstly, there is the emergency package – stuff that can be done in April’s mini-budget.
Secondly, there are complex measures that should be left to the full budget in December. I would include in this category the question of super-rich tax fugitives, and a property tax, which should be introduced in tandem with, and in order to fund, a comprehensive reform of local government. I would also include my previous suggestion of a short-term reduction in all disposable incomes to a ceiling of, say, €75,000 – through pay cuts in the public sector and taxation in the private sector.
Thirdly, there are the longer-term measures that provide us with a way forward in which the crisis can be the catalyst for a more just, rational and effective allocation of public resources. These include universal health insurance, pension, preschool and education systems. They will take some years to implement, but planning for them should begin now, not least as a way of giving citizens a sense of basic security in scary times.
Pending these last two sets of measures, how can we deal with the immediate crisis in the public finances in a way that is fair and that limits the deflationary damage?
1. Allow all tax reliefs at the standard rate of tax only. This is fairer, because it allows low-income taxpayers to avail of them at the same rate as those on higher incomes. Based on figures given recently in the Dáil by Brian Lenihan, the savings are also huge: €430 million on capital allowances; €79 million on health expenses; €12 million on relief for the interest on borrowings to acquire an interest in a company; €114 million on section 23 rental relief, and so on. Excluding private pension reliefs, which I will deal with separately, the saving is about €535 million a year.
2. Take a hard look at the €3.2 billion gross cost of tax relief on private pensions – money which goes mostly to the top 20 per cent of earners. At the higher end, much of this relief has been used simply to avoid tax.
An internal Department of Finance review of the Approved Retirement Fund scheme found that it was being used not “to fund an income stream in retirement”, but “to build up substantial funds in a tax-free environment over the long term”. At least two individuals are known to have tax-free pension funds of €100 million each.
The object of tax relief on pensions, according to the Green Paper on Pensions, “must be to incentivise and support those less able to make adequate pension provision and not necessarily to subsidise those who are in the strongest position to do so”. This aim is clearly not being met.
Eventually, the best way to tackle this is to move to a single universal pension system. In the short term, the simplest solution is to scrap all the tax reliefs and make €1.5 billion available for the exchequer to top up every payment an employee puts into a PRSA account. This would be fairer, much more transparent, would encourage lower-paid workers to make pension provisions, and would be much cheaper. Saving: €1.5 billion.
3. Abolish all property-based tax incentives, whose only effect was to help inflate a disastrous bubble. The cost of schemes such as relief on multistorey car parks, hotels and student accommodation in 2006 (the last year for which we have figures) was €421 million. Even if this has dropped substantially, there should still be a saving of at least €150 million.
4. Though there are no detailed costings, about €6 billion of the National Development Plan is for the Dublin Metro. This should be postponed indefinitely. Allocate €1 billion of this saving to the much cheaper development of bus services, saving €5 billion over five years. Annual saving: €1 billion.
5. Suspend payments to the National Pensions Reserve Fund. Whether the fund is a good idea, it is, in present conditions, madness to be borrowing money at high interest rates to invest on wildly unstable markets. In the first nine months of last year alone, the fund lost €2.5 billion – more than the entire €1.7 billion we put into it last year – on the stock markets, while fund managers took more than €20 million in fees. Make no payments this year, and the saving will be €1.5 billion.
6. Give the Revenue €100 million to beef up its operations, in part by hiring on two-year contracts 500 of the young accountants, bankers, computer geeks and financial analysts being made redundant. We’ll get back much more than we spend. The cost of running the Revenue is 0.7 per cent of the taxes and levies collected. And there is a lot more to be collected. Random audits of self-assessed tax returns show that between one-quarter and one-third are underdeclaring tax liabilities. More audits mean more money.
With the extra staff, the Revenue should systematically re-audit those who have been found to be underdeclaring in previous years. (Astonishingly, it stopped doing this in 2002, even though at that point 60 per cent of the dodgers were known to be serial offenders.)
It should also do more comprehensive audits – it only does about 3,800 a year, even though they yielded €345 million in 2007. It should pursue the €1.3 billion in taxes that were outstanding in 2008. It should pursue the directors of companies that go into liquidation with large tax debts – an option, it says, that has been “seriously considered” but “rarely undertaken”, and aim to at least halve the €120 million in unpaid taxes it wrote off last year.
Legislation, meanwhile, must be changed to force the courts to impose custodial sentences for serious tax evasion – just one person has gone to jail for it in the past five years. (By contrast, 12 people were jailed in 2007 alone for social welfare fraud.)
A conservative estimate of the yield from more audits, better compliance and serious disincentives to tax evasion is €500 million in extra revenue after the additional costs.
7. Squeeze landlords. The State spends €877 million in tax relief for landlords, €440 million a year on rent supplements for welfare recipients, and €130 million on rental for its own offices. These figures are massively inflated by the property boom, and must be slashed. By ending the tax subsidy, we should save at least €500 million this year. And as a huge player in the rental market, the State should use its muscle to save at least another €100 million.
8. Cut the codology. No first-class travel or hotels. Halve the number of junior Ministers. Stop nonsense like the payment of €62,000 in travel expenses in the past three years to one prison officer, or the continued payment of “Border duty” allowances to gardaí and soldiers a decade after the Troubles ended. End the Horse and Greyhound Racing Fund (€70 million this year). It must be possible to save at least €250 million of unnecessary expenditure.
These eight measures alone would save or raise €6 billion – without raising income tax rates, cutting welfare payments or harming social services. On their own, they won’t fix the long-term problem, but they’ll stop the bleeding. They will also give us the confidence to believe that, along with all we’re losing, we’ve gained something – the ability to make choices that are both rational and fair.