Commentary: Fianna Fáil and the Progressive Democrats were elected in 1997 on a broad tax-cutting programme and have delivered the goods, particularly to the business community and the better off, writes Denis Coghlan
There has been a transformation of the taxation system during the past five years, with capital and corporate taxes being cut dramatically, income taxes greatly reduced and a system of tax credits instituted.
In terms of "pay-back time", it was as much as the Coalition Government's backers could have hoped for, given the uncertain economic climate of the time. While the ESRI had predicted 5 per cent growth rates in 1997, most economists were far more cautious. There was also concern about excessive spending in the event of a possible slowdown.
Going into the election, all political parties offered separate taxation packages with particular attractions but, as happens when coalition arrangements are negotiated, some promises got lost in transition. Fianna Fáil's offer to immediately introduce a 20 per cent tax rate bit the dust, as did the Progressive Democrats proposal to cut back on spending by reducing the number of public servants by 25,000.
Fianna Fáil's promise of a £2,000 allowance for stay-at-home wives looked really sick when Charlie McCreevy introduced tax individualisation in 1999.
Back then, things were different. Deficit budgeting had become a way of life and government surpluses were things that finance ministers only dreamed about.
Because of that, offers to cut taxes were balanced with commitments to rein in public spending. Fianna Fáil and the Progressive Democrats promised much tighter control while the Rainbow Coalition argued for increases in spending in order to spread the fruits of growth.
The programme for government eventually agreed between Fianna Fáil and the Progressive Democrats envisaged reductions in personal income tax rates from 26 to 20 per cent on the standard rate and from 48 to 42 per cent (40 if possible) on the higher rate. It also committed Mr McCreevy to limiting spending increases to 4 per cent a year.
The Celtic Tiger was still a cub but, as the economy grew by an average of 10 per cent for the first three years of the Government's life, its roars reflected surging profits, higher investment and increasing wealth. With a cap on spending in place, money that might otherwise have gone into social services was used to reduce capital and business taxes. Government spending as a percentage of GDP fell to the lowest level in the EU. It took two years for the Coalition to wake up to the fact it was drowning in revenue. The purse strings were gradually relaxed and, as projections for further growth remained rosy, a six-year National Development Plan, running to 2006, was unveiled.
Infrastructural spending projections were huge, designed to address growing bottlenecks in the economy and to facilitate a population surge, but basic planning decisions, like the identification of growth towns, were dodged. Government policy - or at least that of Mr McCreevy and Mary Harney - centred on maximising growth by encouraging business and investment.
In the first budget, the top and standard income tax rates were reduced by 2 per cent and the Minister for Finance cut capital gains tax from 40 to 20 per cent. This determination to favour business and the better off has run through his budgets. Corporation tax will have fallen from 36 to 12.5 per cent from next year. Inheritance tax was halved from 40 to 20 per cent. Probate tax was abolished. And, in spite of ESRI advice that business did not need further State help, the tap was kept wide open.
Two budgets concentrated resources on the lower-paid. In 1998, as a curtain-raiser to the Programme for Prosperity and Fairness and in return for trade union commitments, social concerns took precedence.
ALONG with tax cuts, a tax-credit system was introduced which spread benefits more equitably. Old-age contributory pensions increased by almost 50 per cent over five years and social welfare payments rose substantially. Those increases were eroded by inflation of about 5 per cent, double the EU rate. In spite of that, the number of families living in poverty fell dramatically.
That development was driven by an increase of 300,000 in the numbers at work as the economy boomed. Unemployment fell from 10 per cent to 4 per cent and, in an attempt to keep surplus cash from generating excessive wage demands, money was pushed into a National Pensions Fund.
The Government took the lead from our main competitor, Britain, in developing a low-tax low-spend economy along US lines. However, just as Tony Blair has begun to address the deteriorating quality of British social services, so the Government has promised increased investment in health, education and general deprivation. Money has already been spent, but the benefits have been slow to materialise.
The most vociferous criticism of the Government has come from social justice organisations which point out that while Ireland is now one of the richest States in the EU, it has one of the most unequal societies. Social spending had fallen as a percentage of GDP over its five years while redistribution had been in favour of higher earners.
As Government revenue shrinks and spending threatens to overshoot Mr McCreevy's revised target of 14.5 per cent for 2002, he has begun to talk of reforming the public service with the same zeal that he tackled the tax system. It's a promise that was made by all governments for the past 30 years. However, as the benchmarking process threatens to ignite new pay demands in the public service when it reports in June, there is a particular urgency on this occasion.
Denis Coghlan is Chief Political Correspondent of The Irish Times