Despite what some alarmists claim, we can increase taxes without damaging the economy, writes VINCENT BROWNE.
MAYBE NOT a defining moment but a crucial one on Tuesday next with the announcement of the rescue budget. Because that package either will shape our society for a decade or it will propel us into deeper calamity.
Calamity will occur if the budget dodges the substantial fiscal adjustment the crisis demands or if, because of manifest unfairness, it triggers social conflict that makes the management of the crisis impossible. We could be headed towards a generational crisis or towards the creation of a better and fairer society or variations in between.
The budget needs to meet four objectives:
- It has got to present a plan dealing with the scale of the crisis over five years and do so with credibility. That, in itself, would be a stimulus;
- It has got to be socially just – the rich have got to pay and the poor have got to be given a sense of hope and the means to realise that hope;
- It has got to deal with the banking crisis in a way that recreates confidence in the banking system and makes credit available, while protecting society against a repetition of the social vandalism that the bankers perpetrated of late. This should be achieved through nationalisation of the banks;
- The political class has got to be seen to take the most visible share of the burden and the political system has got to be transformed, through radical pay reductions, the abolition of all but a few Ministers of State and Oireachtas Committees, in general the halting of the gravy train. Also reforms are needed to make the Dáil effective and the Government accountable.
The Economic and Social Research Institute has clarified that the priority is to rectify the damage that Fianna Fáil and the PDs did in government over the last eight years by placing such reliance on what are now called “transactional taxation” – mainly stamp duty and VAT on property transactions.
The scale of the adjustment they have advised would be around €13 billion this year and next.
The Government is shaping up to present what it will call a “balanced” budget, where everyone shares the pain. By this they mean cuts in social welfare, extending income tax to the lower paid, further cuts in education and health – which will target the poorer strata – and reductions in public sector pay involving everyone in the public sector. If that is what happens they deserve the social outrage that I hope this induces.
We already have one of the most unequal societies in the EU and in the richer countries of the world (members of Organisation for Economic Co-operation and Development). According to the OECD itself, in its report Growing Unequal: Income Distribution and Poverty in OECD Countries, Ireland is the 22nd most unequal country of the OECD 29 members. In the EU only the UK, Italy, Poland and Portugal are more unequal and the other more unequal countries in the OECD are Turkey, the US and Mexico.
The countries that are most equal are Denmark and Sweden, both countries that have enjoyed strong economic growth; that are less affected by the world financial crisis than most countries; that have relatively low levels of crime, longer life expectancy, excellent education and health care.
We could have opted for the Danish/Swedish model, instead we went the Boston route, promoted by that social visionary Mary Harney. The consequence has been a deeply divided society, with poor healthcare, lower life expectancy, deeper social divisions, violence, criminality and lots of poverty, just like the countries we want to emulate: the UK and America. We have a chance now of turning that around, starting with the measures we choose to deal with the crisis.
Patrick Honohan, the TCD economist, has proffered some interesting insights at irisheconomy.ie. He makes the point: “In 1996, before Charlie McCreevy’s first budget, standard and higher rate income taxes were 27 and 48 per cent. Yet we were happy, growing rapidly and in effect ‘Europe’s Shining Light’. Such an income tax schedule did not destroy the economy. Now the tax rates are 20 and 41 per cent, plus the new income levies of between 1 and 2 per cent.” The point being that we can increase taxes significantly without damaging the economy, in the way some alarmist economist predict.
If, as I have argued for here previously, we take €1.5 billion more in taxation off the top 6 per cent of earners who earn more than €100,000 and then take a further €500 million off those earning between €50,000 and €100,000, we would be getting there. That would be €1.5 billion this year and €2 billion in 2010 and onwards. And then increased duties on drink and cigarettes, bringing in another €1 billion in a full year. Plus a property tax raising another billion. Plus carbon taxes, taxes on text messages. All probably bringing in around €10 billion over the two years. Then public expenditure cuts, primarily at the higher paid public servants.
Some of this is terribly painful, much of it is socially necessary anyway. It could be the start of a fairer Ireland.