Warning that extra spending in conflict with tax cuts

Demands for “considerable” extra spending were not matched by proposals to increase taxes to pay for them, the chairman of the national economic dialogue has warned.

"We need to discuss what level of public services we want in combination with a discussion on what the overall tax take should be," said Prof Alan Barrett, incoming chief of the Economic and Social Research Institute

Of plans to cut income tax, he said few if any delegates supported the Government argument that such reductions would support economic growth.

Two arguments were made, noted Prof Barrett. “First, as taxes had increased over the crisis it seemed reasonable to some that they should now be reduced. Second, some delegates argued that marginal tax rates are now sufficiently high that they act as a disincentive to work,” he said.

“While it is true that taxes increased over the crisis some delegates expressed a view that we need to be careful not to hollow out the tax base as we did during the boom years. Arguments along these lines led some delegates to caution against a decrease in the overall tax take while accepting that shifts across tax heads could be desirable.”

A review of the national economic dialogue has concluded that a key change to the Coalition’s plan for the October budget would better meet the demands of delegates at the talks.

The Government had been insisting it will not reverse its decision to allocate up to €1.5 billion in “fiscal space” next year on an equal basis between tax cuts and spending increases. However, Prof Barrett said in his report that many participants were “less inclined” to agree with the 50/50 split.

“One reason for this was a tendency for delegates to talk in terms of the need for increases in current spending, capital spending and reductions in taxation,” he said.

“This three-way framing of the discussion created a sense that a three-way split across the €1.2 [billion] to €1.5 billion would better capture the damands of delegates.”

Budget target

The report on talks last week with 140 figures from business, trade unions, farming and the voluntary sector was submitted on Monday to the Government.

Noting that no delegates argued for the €1.2 billion to €1.5 billion target to be exceeded in the budget, Prof Barrett said there seemed to be a “general acceptance” that the proposed range should be observed.

He added: “On the argument that high marginal tax rates are acting as a disincentive to work, it is not clear that this assertion is true in the case of many men whose labour supply is typically largely invariant to changes in take-home pay.”

However, it could be that women’s labour supply could be more responsive to childcare improvements as opposed to tax cuts. Many delegates agreed that preschool and early-school programmes should be expanded but there was “less agreement” on how this should be funded.

Of capital expenditure, he said many delegates observed that this had fallen to very low levels in Ireland compared with EU and OECD countries.

“Many argued that it was important to reverse this decline and this argument was made by delegates from differing sectoral viewpoints. Two areas which received particular attention were housing and broadband.”

Last night Fianna Fáil leader Micheál Martin attacked the exercise as a "choreographed set-piece" for the Government.