We are at the beginning of a painful four-year period – and we have to face the music now, writes GARRET FITZGERALD
THE GOVERNMENT’S fiscal options are narrowing. It is not going to find it easy to scrape together the €4 billion budget adjustment in 2010 to which it is committed – and which will do no more than stabilise our borrowing next year. An actual reduction in our horrifyingly large annual borrowing figure will not begin until 2011. Indeed, because of the fact that the current year’s tax revenue is likely to end up €2 billion below the level budgeted for last April, we cannot now even be sure that a reduction in borrowing will start before 2012.
It is important not to lose sight of the fact that we are committed to further adjustments of €3 billion to €4 billion in all three of the years after the next. The truth is that we are only at the start of a very painful four-year period of spending cuts and tax increases. It is this harsh reality that makes quite unrealistic the suggestion by David Begg, supported by Labour leader Eamon Gilmore, that we postpone some of this year’s adjustment.
First of all, this would be a fatal breach of our commitment to the European Commission – and also, of course to those financial houses which, on the strength of this commitment, are currently enabling our State to pay its bills by lending us €1 billion every two-and-a-half weeks. Postponing the pain of adjustment would dangerously increase the burden of interest payments on future taxpayers. We simply have no choice but to face the music now.
Two weeks ago in this column, I identified and criticised an attempt by some Fianna Fáil Ministers to transfer the whole cost of this fiscal adjustment to the spending-cuts side of the budget. In that article I accepted that “there may exist a case for some kind of shift in the balance . . . towards more spending cuts and less tax increases – but certainly not on the huge scale that is now being put forward”: cancelling all tax increases, and virtually trebling the spending cuts.
Tax increases of up to €1 billion were in fact suggested by the Economic and Social Research Institute (ESRI) at its budget conference last Tuesday, “through the introduction of a carbon tax and limited increases in other taxes”. And Fianna Fáil seems to have abandoned its opposition to any tax increases, for the Green/Fianna Fáil “Renewal Programme” proposes carbon taxation, which is expected to add €400 million to tax revenue. The Government also seems to be considering removing the cap on PRSI contributions, which would add several hundred million euro to exchequer revenue.
I believe the Government should now revert to its earlier proposal to introduce a new higher tax rate for people with very large incomes, in replacement of the temporary levy that was established because changes in the tax bands could not be introduced in the middle of a tax year. Such a move could help alleviate widespread concern about what is felt to be the concentration of so much hardship on the less well-off.
While the ESRI recommended postponing any significant further tax increases until the worst of the recession is over, they added that in the medium term “the structure of taxation will have to be restored, unless we want to reduce the level of public services”.
In this connection, it was pointed out at the recent ESRI budget conference that property taxes have many advantages: they are hard to evade, because property is immobile – unlike its owners who can all too easily escape to a low-tax, warm-climate environment! And such taxes have no disincentive effects, and can be substituted for income tax, which has. The conference was shown that, by using a property tax with a waiver scheme for the less well-off, the old, and the disabled, it can be made socially just. Such a tax can also be used to regulate housing bubbles, and is suitable as a local tax base. Finally, what is seen as one of the best property tax systems in the world exists on our doorstep – in Northern Ireland.
However, we don’t yet have an up-to-date and consistent valuation base. But the renewed programme for government includes a commitment to start with the valuation and registration process “with a view to moving to introduce a form of property tax known as a Site Valuation Tax for non-agricultural land”, which would provide an incentive rather than a disincentive to development. That is an important change of policy by Fianna Fáil, albeit one that will take a couple of years to implement.
I now believe the December budget is likely to involve increases in tax revenue to the tune of about €1 billion, as well as a doubling of last April’s proposed spending cuts from €1.5 billion to €3 billion. However, finding €3 billion of cuts that can be implemented within 12 months will not be easy.
First of all, while in view of this year’s unintended increase in purchasing power, a case can be made against increasing social welfare benefits in 2010, it would be difficult to defend a decision actually to cut them.
As for Child Benefit, because in most cases the father is the main or only earner, and the benefit is paid to the mother, the ESRI says “there are serious technical difficulties in implementing [taxation of these benefits] within a year”. Accordingly, the institute has proposed to save €500 million by cuts of between 18 per cent and 33 per cent in Child Benefit rates pending preparation of a scheme for taxation of the benefit. But that would intensify family poverty at precisely the moment when the poor, and especially the hugely increased body of unemployed, are under great financial pressure.
What does that leave? Just other McCarthy cuts. But securing from that source €3 billion of savings that would become effective within 12 months could prove very difficult indeed.
So, the Government is being pushed into an uncomfortable corner, from which the only way out might be through a further cut in public service pay. If that proves to be the case, honesty will require that those opposed to such a move, and those who reject other parts of the package, justify their stances by bringing forward their own set of fiscal adjustments, adding up to a total of €4 billion.
There is at present no sign of anyone being willing to do this; every sector remains obstinately in denial about our crisis.