TASC Budget Analysis: Government may have no choice but to restructure national debt
TASC has just issued its Budget analysis. Short, headline grabbing version: Government may have no choice but to restructure national debt unless radically different economic strategy adopted
“Current fiscal trajectory is unsustainable”
Press release:
Independent think-tank TASC this afternoon issued its analysis of Budget 2011. The main findings are outlined in the summary below, and the full document is available for download here.
Commenting on the think-tank’s findings, TASC Director Paula Clancy said:
“While TASC welcomes certain elements in the Budget announcement - in particular the long-overdue curtailment of some tax breaks - our analysis shows that it will have an overall regressive distributional impact as a result of reducing the Minimum Wage, broadening the tax bands and reducing tax credits, as well as reducing Social Welfare rates. It is particularly noteworthy that self-employed people earning over €200,000 a year will actually pay less after this Budget. It appears that the overall effect of the Budget 2011 measures will be to increase rather than reduce economic inequality.
” This Budget sees a further €3.95 billion taken out of the economy through cuts to the capital budget and current spending. Reduced investment in our physical and social infrastructure and public services will hamper recovery at a time when our productive base needs to be transformed to enable Ireland to compete in an increasingly globalised economy. Government spending is also a key source of economic activity and jobs during these recessionary times when private investment is lacking,
“Of equal concern, however, is TASC’s projection that the income cuts imposed on low and middle income groups will not facilitate economic or fiscal recovery: on the contrary, our research indicates that the Budget will fail to achieve the Government’s deficit reduction targets.
“This is because the imputed growth assumptions underlying the Government’s budgetary strategy are, in TASC’s view, overly optimistic. While the Government assumes that GDP will grow by 1.7 per cent in 2011, and will average 3 per cent per annum from 2012 to 2014, the European Commission predicts growth of just 0.9 per cent in 2011 and under 2 per cent in 2012. TASC’s own projection is for growth of approximately 1.0 per cent in 2011.
“If the Department of Finance’s growth projections are indeed too optimistic, their revenue and public spending projections are also likely to be over-optimistic as a consequence. If so, the deficit and the burden of servicing the national debt, as a percentage of GDP, will be greater than that projected by the Government - with the result that the general government deficit will still be greater than the nominal growth level in 2014, and the debt ratio will continue moving in an unsustainable direction.
“It is TASC’s position that the current fiscal trajectory is unsustainable and, on the balance of probability, the Government may eventually have no choice but to restructure the national debt unless a radically different economic strategy is adopted.”
TASC Analysis of Budget 2011: Summary of main findings
- Budget 2011 is the fourth austerity budget in three years - with this budget representing a move towards extreme austerity by front-loading €6 billion of a €15 billion adjustment on a fragile economy over the next four years, having already taken €14.5 billion out the economy. The previous budgets have had a disproportionate impact on low income and vulnerable groups and they have failed to address the deficit, the jobs crisis and to stimulate growth in the economy. This budget represents more of the same failed policy choices and it will fail in its own terms.
- TASC argues that the underlying growth assumptions set out in Budget 2011 are too optimistic, which means that revenue projections and public spending projections are also too optimistic. Therefore, the exchequer borrowing requirements and the burden of servicing the national debt will be greater, making it virtually impossible to reduce the General Government Deficit to a sustainable level by 2015.
- Budget 2011 sees a further reduction of €1.75 billion in capital spending. Infrastructure is essential for competitiveness and economic growth - and reduced investment will hamper recovery at a time when the productive base needs to be transformed to enable Ireland to compete in an increasingly globalised economy. Capital spending also supports much needed employment in the construction and related areas.
- Current spending has been cut by €2.2 billion in Budget 2011. Three quarters of the spending cuts are concentrated in the areas of Social Protection, Health and Education, which will result in cuts to social transfers and public services. These cuts will impact disproportionately on low income of vulnerable groups by reducing their disposable income, driving more people into poverty and exacerbating inequality.
- TASC agrees that the overall tax take be increased and, while some of the measures are progressive, on balance the proposed tax changes are regressive and will have a devastating impact on low paid workers. TASC’s analysis clearly shows that a combination of the new Universal Social Charge, reductions in tax credits and widening of the tax bands will result in a disproportionate fall in the incomes of low paid workers when compared to middle and higher earners. And the self-employed on high incomes (over €200,000) will pay less tax and social insurance, which illustrates the further growth in inequality after Budget 2011.
- The structure of the tax changes also places too much emphasis on increasing income tax, which is proven to have a more negative impact on economic activity than taxes on property and other assets. TASC proposals include the introduction of a residential property tax that could yield €850 million. The reform of tax expenditures could have been accelerated to a much greater degree and TASC estimates that €1.46 billion in revenue could be raised from this source. Broadening the tax base in this way would have been much more progressive than the taxation choices set out in Budget 2011.
- The existence of a four-year plan was an improvement on this year’s Budget documentation, and should be repeated every year. However, TASC identifies a number of weaknesses in the transparency of information and documentation surrounding the Budget, not least the need to show distribution of income and wealth, and to show the distributional impact of all Budget measures on equality.
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