Have Fine Gael Ministers playing up the prospect of tax cuts in the budget lost the plot? The party think-in featured Tánaiste Leo Varadkar, in particular, highlighting the prospect of tax cuts for middle-income earners, as well as welfare and pension hikes. It is part of a general political narrative that our national finances have escaped the pandemic unscathed – and that we can somehow go straight back to normal budgets with a few euro for everyone in the audience. Just look at the string of promises from the party think-ins (also known as photo opportunities).
You would doubt that tax cuts are anywhere near the top of people’s priority list, much of course as we would all like to pay less. Many in the most damaged sectors are worried about their jobs and there are real questions about what happens to employment when wage subsidies are wound down. Varadkar did identify these areas as needing more help and he was right on that one.
Given the amount of money we have had to spend – and will have to spend – to support jobs and battle the ongoing pandemic and the many other spending pressures , a cut in the tax burden in the years ahead just won't happen. People are smart enough to work out that if they get a few euro extra in their pay packets, the likelihood is that it will be scooped back via local property tax, carbon charges or whatever. And we have all heard the repeated warnings from the Fiscal Council, the Central Bank, the Economic and Social Research Institute and others that government spending is now on an upward track, and before long we will have to work out how to pay for this.
Looking out over the next few years, there are also significant bills accruing from the ageing of the population and addressing climate change. Against this backdrop, the traditional budget debate about whether there should be an extra few euro for pensioners, an increase in the price of a pint or a tweak in income tax bands seems almost quaint.
Tough decisions
The good news is that the economy has come through the worst of the pandemic in better shape than expected. We might see modest welfare increases and some move towards indexing tax credits against inflation in the budget. But the sums involved will be small.
Tougher decisions are coming. Economic growth will pay many of the bills, we hope, by pushing up employment and tax revenues. But the Fiscal Advisory Council was right when it said the Government can't hope to increase day-to-day spending, invest more and cut taxes all at the same time. It has to choose.
In the current political environment, with massive pressure to spend on health and housing and big looming bills to tackle climate change, the tax burden is simply not going to fall. Being able to borrow at near-zero interest rates, thanks to the European Central Bank, has given us – and other euro zone countries – a priceless break during the pandemic. If we can hold the confidence of lenders over the coming years, as ECB support scales back, cheap borrowing may continue to be possible.
But it is not a free pass and the public finances have shipped some damage. The high national debt level will be watched by lenders and does limit room for manoeuvre. And the social insurance system is facing big pressures – senior civil servants recommended this week that PRSI rates for employers, employees and the self-employed be hiked significantly from 2023 to close a big gap in the social insurance fund, which pays out benefits and has been decimated by the pandemic.
Hardest-hit
Higher PRSI would more than wipe out the benefits of any likely income tax tweaks in future budgets in terms of take-home pay. Fine Gael can talk up the prospect of tax reductions for hard-pressed middle earners all it likes, but bar a bit of tinkering at the edges, it simply isn’t going to happen.
The battles to come will lie elsewhere . How can we protect those hit hardest by the pandemic as the rest of the economy moves ahead? Where is State provision to begin and end in areas like housing, health, pensions and childcare and how is this to be funded? How will we get value for money in the billions of investment planned in the years ahead? And how do we fit this all around the vital climate agenda?
There are huge political question here about who benefits and who pays in the years ahead, which will create controversy and division, at times pitting the public against the private sector, the self-employed against those in work and so on. Normal politics but in a time of big changes.
One of the vital divides will be old against young. Increasing pension payments across the board ends up giving a lot of money to people who have not been financially hit during the pandemic. There are better ways to help those who are struggling.
Delaying an increase in the retirement age, meanwhile, also benefits this group, while leaving fewer resources elsewhere. The commission on pensions looks set to recommend that the can be kicked down the road here for a few years – but a report from the Department of Finance this week points out the rapidly rising cost of not increasing the retirement age and the resources this would start to eat up in the years to come.
With young people’s education upended by the pandemic, youth unemployment soaring, thousands of jobs still at risk and life opportunities damaged by the fallout from Covid-19 and the housing crisis, the budget needs to – above all – set these areas as priorities. Giving the comfortable classes a few extra euro – literally – in their pensions or pay packets is just tokenism.