Never 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:
- 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.