What was the point? Two documents with over 100 pages between them. Hours spent in the Dail. Many more hours of commentary in the media. And the whole thing boiled down to only one substantive policy statement: the Government will have between €1.2 and €1.5 billion available for tax cuts and spending increases, which they intend to disperse on a 50/50 split. That’s it. Would have taken a Minister a few seconds to stand up and say that. Instead, we got bells and whistles and the Spring Statement.
While we were led to believe the Government would outline their plans for the next five years, they did no such thing. Tables feature budgetary projections up to 2020 but after 2016 they are, in policy terms, meaningless. All they show is what would happen to revenue and expenditure if there were no policy change; in other words, no spending or tax changes. So we have to take the Government’s intentions in 2016 and extrapolate from that based on Ministerial nods and hinds. Let’s go through a few points.
We are now entering Phase Two of austerity. The first phase involved Ministers announcing actual cuts in government spending. The second phase will see public spending cut in real terms; that is, after inflation. Public spending will struggle to maintain pace with inflation. And this at a time when we have (a) a massive social repair job after the damage of years of recession and austerity; and (b) growing demographic pressures. And none of this considers trying to move to a modern European social state.
In 2016, we can see this pattern starting.
Primary spending (which excludes interest payments) will rise by approximately €400 million in net terms. This no doubt includes €200 million in reductions in unemployment-related payments. However, using the GDP deflator as a proxy for inflation, we see an actual cut in spending – because spending would have to double just to keep pace with inflation.
Austerity is dead. Long live austerity.
Playing the Fianna Fail Card
Prior to the crash, Fianna Fail slashed all manner of taxes. They got away with this because the coffers were filling up with revenue from the speculative boom. When boom turned to bust, the weakened revenue base was exposed and public finances collapsed.
By 2008 Irish personal taxation rate fell to unsustainable low levels, as benchmarked against the EU-15 average. Since then, the effective tax rate has increased – but this was an irrational policy as it occurred at the same time as falling real wages and cuts in income support (e.g. Child Benefit).
Now the Government is starting to cut taxes again – even though we are still below the EU-15 average (being slightly below that average is appropriate as we have don’t have to pay out as much in pensions). If they unleash – and watch out for the tax-cut auction that will be the next election – it could drive our revenue base back down to unsustainable levels.
The ghost of Fianna Fail past haunts Government policy.
Dude, Where’s My Tax Cut?
Do you feel any better off this year? You might if you are fortunate to get a job or a pay rise. But if you had to rely on the tax cuts in the last budget, probably not. Because when it comes to tax cuts, we run just to stand still.
The Government proposes to cut taxes by €600 to €750 million. We shouldn’t assume this will all be income taxes and USC. It would be surprising if there weren’t reductions – mainly through tax reliefs – to corporate, capital and farmers’ taxation. But let’s assume it all comes via income taxes.
The reduction is equivalent to three to four percent of the estimated tax yield. Assuming all income taxpayers get the same percentage reduction, it would – for a single person on an average income of €36,000 – mean a tax cut of between €5 and €6 per week, though this could change depending on how the Government targets the cuts.
Ok, better than nothing. But the Government estimates that inflation would wipe this out. You are running to stand still. And if your budget contains an item that is likely to rise above the rate of inflation, you will be well out of pocket. Last year, single bedroom rents rose by more than €13 per week. Your tax cut would subsidise half of that. This holds for childcare fees, medical insurance, public transport fees, prescription medicine, etc.
The Government will cut our taxes, delivering a few Euros a week in our pockets. But taxes on our living standards, never mind inflation, will cancel that out, leaving us little better off.
Driving Down Our Economy
Again, we don’t know what the medium-term will hold but we know that next year, investment will grow by a fractional €10 million. With inflation, this constitutes a real cut of 1 percent.
Irish public investment is in a crisis. We would have to increase public investment by over €2 billion just to reach the EU average – and that average itself has been depressed by European-wide austerity.
We have deficits in telecommunications (broadband), public transport, green energy, building conservation, water & waste, rural roads; so bad is it that our infrastructure is ranked 13th in the EU-15, ahead of only Italy and Greece.
Investment is the key to long-term sustainable growth. It increases the productive capacity of the economy, increases employment and incomes. Imagine if every business and house had access to state-of-the-art Next Generation Broadband, or new public transport solutions to traffic in Galway and Cork cities, or commercialising ocean energy, or not having to boil our water or have sewage dumped in the local river.
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The Spring Statement is not a policy. It is not a platform for a modern European state. It conjures a future that condemns us to a low-tax, low-investment economy still pursuing austerity in real terms. This is, by any definition, a toxic combination.
If there is only one reason why this Government should not be re-elected, it is contained in the Spring Statement.