A Return to Boom-and-Bust

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boom_and_bustNever mind the details.  If we are to believe even half of the media leaks, the Government is preparing to return us to the kind of boom and bust fiscal policy that dominated the pre-crash period.

The context is different but the character is the same.  Between 1997 and 2007 corporate tax was slashed, capital gains and inheritance taxes were halved while the effective personal tax rate fell by 25 percent.    During that period budgets rode the wave of property tax revenue but when the crash hit our hollowed-out tax base was exposed. Revenue fell by over 22 percent or €16 billion in the first three years of the crash, resulting in a massive deficit.   The economy was built on the quicksand of unsustainable tax revenue.

Fast-forward to the 2016 budget to be presented tomorrow and a whole number of tax-cut goodies are being dangled in front of us:

  • USC
  • Self-employed
  • Landlords
  • Inheritances
  • Capital gains
  • Corporate tax (knowledge-box) and other business taxes

The Taoiseach has made it clear this is the first of a series of tax-cutting budgets.   We are hurtling back to the future.

Some may argue that increased tax revenue can more than make up for this.  But budget management now determines that excess revenue will have to be used to pay down debt – paying for tax cuts and/or spending increases will require equivalent tax raising and expenditure reduction measures (beyond the fiscal space of €1.5 billion).  The EU fiscal rules put us in a whole different game.

However, this game doesn’t prevent fiscal irresponsibility any more than they wouldhave prevented the pro-cyclical polices prior to the crash.  And this is where the problems arise.

Today, tax cuts will be subsidised, not by property boom revenue but by depressing badly needed public spending increases.  The Government has set aside €750 million for spending increases.  But:

  • A minimal €200 million has already been assigned to capital investment.
  • The Government’s Spring Statement and the Irish Fiscal Advisory Council state that €300 million is needed just to keep pace with changing demographics.
  • And a further €200 million is needed just to inflation-proof non-pay expenditure on public services.

That’s €700 million before we even get out of the starting gates.  And this doesn’t include the Lansdowne Road Agreement or increases in social protection (somewhat offset by declining unemployment payments).  More importantly, this doesn’t factor in the considerable social repair that needs to be undertaken in the wake of austerity.  And as for expanding public services to European norms – that’s not even on the agenda.

While expenditure may exceed this €750 million, it will have to come from somewhere – including cutbacks in other areas of expenditure.  This is not as ominous as it sounds; savings from reducing the prescription medicine bill can be redirected into other areas.  But there is a limit to these savings.

Essentially, tax cuts will be subsidised by continuing effective austerity in public spending.  But this is only the start of our problems.  A tax-cutting agenda could leave the economy dangerously exposed to a number of ‘threats’ in the medium term.  That the Government itself has identified these makes the upcoming budget potentially more negligent.  GDP, GNP and domestic demand growth will decelerate significantly over the next few years from the dizzying heights reached this year – in some case by more than half.  But there is much more.

  • We are benefiting from depressed oil prices as we are an energy importer.  This has reduced business costs.  But how long will this last?  The Government has identified rising oil prices as a threat in the medium-term.
  • We are benefiting from a favourable exchange rate with sterling and the US dollar, as this favours our exports.  However, the Government is assuming these rates won’t change up to 2021 which is heroic.
  • And then there are interest rates.  There appears to be little signs in the short-term of this changing – if anything, deflationary risks means the ECB is now considering a second round of quantitative easing.  However, what will the situation be like in three or four years (in the lifetime of the next Dail)?  The Government estimates that even a 1 percent rise in interest rates will impact substantially on the economy, never mind the impact on households still in substantial debt.

[Just a note:  is it really sound fiscal policy to cut taxes when the economy is growing by 6 percent; especially when those cuts will be going to higher income groups who are already receiving pay increases?]

Unwinding all the money that has flooded the world economy through central bank initiatives (US, ECB, UK, Japan) will have repercussions that we can only guess at – especially as these measures have created asset bubbles in property, finance, and stock exchanges; bubbles likely to burst or bleed heavily when ‘normal’ conditions resume.   Nonetheless, the IMF warns to keep interest rates low or risk another global recession.  But, in turn, central bankers warn that continued low interest rates risk sowing the seeds of another financial crisis.  Can it get any more precarious than this?

The Government admits all this.  They label it ‘considerable uncertainty’ which is an under-statement.  Yet, in all this, they propose to cut taxes, reduce revenue streams and risk the mistakes of pre-crash, vote-buying, policies (and where does one begin with Government Ministers who, after abolishing the development levy, are putting pressure on the Central bank to relax their prudential lending rules aimed at preventing future debt-burdens and asset- bubbles).  Do some believe that Ireland can buck European and global events?

Why is the Government adopting this course?  Vote-buying?  An ideological preference for a small social state?  A belief that personal consumption will drive long-term growth?  Minister Howlin claims there is pressure for Celtic-tiger tax cuts but this begs the question – from whom?  Blaming Joe and Jane Blogs may be convenient but is contradicted by two surveys which show a significant majority in support of spending increases – especially in health and housing – rather than tax cuts.

What should the progressive response be?  Quite simply, use this potentially brief window of relief to start addressing our structural problems and lay the ground for sustainable growth in the future.

  • It begins (and never ends) with investment.  Now is the time to significantly raise public investment – in particular in those areas that will increase productivity and enterprise performance (e.g. advanced broadband) and reduce costs (e.g. water/waste which the Government completely ignored in their Capital Programme).
  • The longer we delay in addressing our housing crisis the worse it will get and the more expensive to repair it in the future.  New models will have to be developed be we must face up to substantially increased social housing build in the short-term.  Unite’s proposal for a special once-off investment programme could kick-start this.
  • We need sustained and substantial investment in childcare which is limiting our labour supply and depressing living standards for households who are likely to be in the danger debt zone.   This should be part of a major investment drive in education and skills which are a significant driver of long-term growth.
  • We need a transformative drive in green energy and technologies, similar to the establishment of the ESB and the electrification drive to modernise our economy.  This will take time but needs to start now, with a coordinated drive between public and private enterprise working cooperatively to reduce dependence on fuel imports.
  • Instead of tinkering with household arrears, we need bold initiatives to write-off or postpone or park debt.   This will be a long-term investment to guard against the negative impact of eventual interest rate increases.
  • Public enterprises should be brought together to work out a coordinated plan for investment and expansion – one that seeks to work with private sector companies that are in scale-up mode.  This is one of the ways to build an indigenous enterprise sector; not tax cuts.  NERI’s proposed Infrastructural Bank could help redirect resources into productive, as opposed to rentier, sectors.
  • We need forensic measures to reduce the high levels of deprivation – including an employer-of-last-resort programme to provide work for the chronically long-term unemployed.  If the tide waters rise in the future, it is those in the basement who will be exposed (again) – not the penthouse dwellers.
  • Raising the wage floor can help drive efficient consumption, reduce spending subsidies to low-paid employers, and help people out of poverty.  The National Minimum Wage increase due to be announced in the budget is a start but needs more radical intervention to achieve decent wages.

And there’s the big uncertainty around the corporate tax changes being pushed by the OECD and the EU Commission.  In this year to September, tax revenue is 6 percent ahead of target; but corporate tax revenue makes up 70 percent of that increase.  Not only is there the question of how changes will impact (and, in truth, no one knows) but there is the issue of whether the Government will line up behind vested multi-national and financial interests to oppose rational reform that reduces global tax avoidance.

Most of all, progressives should launch an open and honest dialogue with people – pointing out the dangers ahead, the initiatives that will see us through and  the investment that is needed and desirable.   We must not only eschew but actively oppose populist demands from whatever quarter they come.

In short, progressives must promote fiscal responsibility and economic acumen.  We rightly argued that austerity was fiscally irresponsible and that an investment-led programme was the superior policy.  That remains the same.  It is investment that will promote growth, enterprise activity and social equity – and put us in a far stronger position to weather future tempests.

It’s either that or what the Government is setting us up for – a return to boom and bust politics.

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