John FitzGerald: Budget should tax emissions and property – not incomes

The budget performs a number of important roles. It provides for the financing of the public services in the coming year and it is also a key instrument to manage economic growth.

In addition, the budget should also lay the groundwork for longer-term objectives, guarding against the risk of unpleasant surprises, and providing for the implementation of necessary investment.

A major concern coming into this year’s budget is the continuing cost of over-runs in health. The 2018 unbudgeted over-run, along with the new baseline it implies for 2019, poses significant risks.

Continuing unplanned over-runs makes it difficult to budget for the future health needs of a growing and ageing population, let alone to improve quality and tackle queues for care.

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There is very limited scope for improving public services, unless there is an increase in taxation

In other spending areas, a better match between planned and actual spending has been achieved, making it easier to focus on getting good value for money. Because health spending has consistently outpaced its budget, it would be prudent to budget for a surplus elsewhere to keep total exchequer spending in check.

The Government has already determined the major priority for Budget 2019 is to steadily increase public investment to around 4 per cent of national income in the early 2020s. This is necessary to deal with the economy's growing pains, most acutely seen in the current housing crisis.

Given this priority, there is very limited scope for improving public services, unless there is an increase in taxation.

Population change has implications not just for health and social care, but also for spending on education and particularly State pensions. With pension spend scheduled to rise steadily as a share of national income, and as present low interest rates will not persist indefinitely, it would be prudent to gradually reduce our national debt and open up some needed fiscal space.

The experience of the financial crash in 2008 shows the importance of using the budget to maintain balanced growth – to take the steam out of a very rapidly growing economy and provide a government stimulus when the next recession comes.

It is the change in the surplus or deficit that reins in or stimulates the economy. With our economy growing rapidly and almost at full employment, now is the time to run a significant budget surplus, and if rapid growth persists next year despite Brexit, an even bigger surplus would be the right stance for 2020.

Many other small EU countries that are also experiencing significant growth have already moved into surplus and are creating the space to address any future downturn.

As the Department of Finance's debt report shows, the National Treasury Management Agency has gradually refinanced our national debt with new long-term borrowing, locking in the current very low interest rates for the next decade.

The resulting interest savings have freed up additional resources to expand expenditure. While some continuing savings in interest will materialise this year and next, this will come to an end as monetary policy gradually tightens and interest rates move off their current floor.

To run a counter-cyclical government surplus next year, we will need to look to additional taxation to accommodate our growing population, invest in infrastructure and provide limited improvements in the level of public services.

Increase taxes

In choosing where to increase taxation there are a number of considerations. First, as 2008 so painfully showed, core public spending should not be dependent on a volatile tax base.

Secondly, given that where taxation falls has knock-on effects on the rest of the economy, it is better to tax activity that has a low or negative social value rather than to discourage activities that have positive spin-offs.

Finally, tax changes should be progressive.

Therefore, it makes much more sense to increase the tax on greenhouse gas emissions than to raise taxes such as PRSI – ones that impact on employment. There is scope to raise an additional €250 million through extra carbon taxes – though some offsetting spending would be required, for example on welfare payments, to soften the impact for those who could least afford it.

Taxes on property, which cannot move, are preferable to higher taxes on income, which can affect employment and migration flows.

Department of Finance research shows the impact of withdrawing the low VAT rate on hotels and restaurants, worth €500 million, would impact profits more than prices. When these sectors are booming, it is a good time to act.

Finally, as in last year’s budget, there is further scope to increase some taxes to promote a more appropriate balance between building homes and other construction projects.