IN THE last 10 days the Dáil has passed the legislation giving effect to the carbon tax, welfare and public sector pay provisions of the recent Budget. Indeed the Government has enjoyed surprisingly comfortable margins in most of these votes.
There has been no repetition of the explosion in public anger which greeted last year’s budget. The absence of protests akin to those which erupted on the streets and in Westland Row church is notable. Mind you, if people were to take to the streets or storm altars these weeks, it should be in protest at church rather than Government behaviour.
So as they begin their Christmas break, Government Ministers can breathe a sigh of relief. It will be short-lived, however.
This year’s Budget was only the first stabilisation phase. Next year’s will be an even more monumental task.
In his Budget speech the Minister for Finance suggested that the Government is about to embark on wholesale tax reform, welfare reform and public sector reform. All of which means that once the Taoiseach and his colleagues are back at their desks, they will almost immediately have to begin laying the groundwork for next year’s budget.
The Government has made it clear that in next year’s budget it aims to rework entirely the income tax system. It appears this will involve replacing the current mix of tax rates, PRSI and income levies with a single social contribution paid by all or almost all income earners and then staggered income tax rates will be imposed on the relatively wealthy.
Brian Lenihan suggested that while the decision has been made in principle to overhaul the income tax system in this way, much work remains on precisely what would be involved and who would pay. This overhaul presents the opportunity to achieve three key things in one go: the integration of the recently introduced income levies; the raising of the PRSI ceiling; and the widening of the income tax base in the fairest way possible.
The preparation for this year’s Budget has shown that there is much merit in publicly discussing the detail and design of tax and spending proposals. The Government should float its proposals on these income tax changes as early as possible in the new year, ask the Opposition parties, think tanks and commentators to publish their responses and then engage, perhaps through public hearings of the Dáil finance committee, in a detailed consideration of what would be involved.
It would be wrong to begin this debate, however, by ruling out any particular category of income earners from paying this social contribution. At the outset at least everything should be on the table.
The Government is also set on a further programme of welfare reform. The Budget opted for the cruder mechanism of cutting payment rates. This proved possible in part because of the deflation experienced in recent months. However, the further savings required from the welfare budget next year will have to be achieved in a more sophisticated way. It will require a more comprehensive reform of entitlements rather than another rate cut.
An initial contribution to the public debate about the need for this type of welfare reform was set out in the McCarthy report. A more detailed public debate is now required. Of necessity the Government will have to revisit the level of entitlement for all ancillary reliefs in the welfare system and indeed will have to question the need for some of them.
Demographic realities would have forced such reform on us in due course; budgetary necessity will force it on us sooner. At a time when our population is ageing rapidly, it is just not sustainable to continue to provide free healthcare, free travel, free telephone lines, some free electricity, free TV licences and even free passports to everyone of a certain age irrespective of capacity to pay.
Similarly, it is neither sustainable nor equitable to continue to pay ancillary supports such as rent relief at a level where the cumulative value of these together with relatively high welfare payments renders families on welfare in some instances substantially better off than working households.
Moving to a system of better-targeted welfare supports will not be easy, not least because we do not know at whom precisely they should be targeted. It is a great pity that during the boom years our public sector did not manage to put in place the necessary technology and other integrated mechanisms to enable the Department of Social Welfare and the Revenue Commissioners combined to give an accurate assessment of the income and need of each household. The difficulty this creates was brought into sharp relief by recent efforts to reform child benefit. Because we cannot say with accuracy which children live in households earning more than €100,000 the Government had to implement a larger cut across the board.
In addition to tax and welfare reform it appears the Government is also now finally set on achieving real public sector reform. This policy is shaped by the need for better and more flexible public service delivery but also by the need to further reduce the public sector pay and pensions bill. Again a disinclination to touch increments, shift allowances or the link between final pay and pensions meant the Government chose dramatic pay cuts. In order to achieve the next phase of savings the Government must address the structure as well as the level of public sector pay and pensions. There is a growing view around Government that having banked the recent pay cuts they should now insist on the transformation required. If there is to be industrial relations conflict it might as well be in the context of seeking real reform.
If they are to ensure they do not waste this crisis, have any hope of political redemption or any prospect of regaining a reputation for competence, this Government will have to maintain its recent courage.