Tax increase could limit borrowing and restore State's credit rating at international level, writes GARRET FITZGERALD
IT IS clear that through a combination of short-time working and pay cuts and loss of employment, the earnings of many workers in the private sector and many self-employed people have fallen.
However, apart from the clues provided by rapidly-declining income tax receipts, we do not yet have any clear measure of the scale of this development.
In the absence of such data, it was never going to be easy to persuade workers in the public sector, especially low-paid workers, to accept a reduction in their net incomes. This was especially so when this reduction was being imposed by a Government that had – incorrectly and irresponsibly – told them twice in recent times that they were so underpaid by comparison with the private sector that they had merited two benchmarking top-ups, over and above normal pay increases.
As tax increases were in any event going to be necessary at some point to fill a huge void in tax revenue, the Government should clearly have dealt with this psychological aspect of the problem by introducing, simultaneously with the public service pensions levy, some additional taxation on higher incomes. That might have at least partially assuaged public sector workers.
Not to have understood the need for prompt action of this kind was a political error of the kind that governments make when they have been in office for too long a period.
At Government level, there was an ideological predisposition in favour of making ends meet through spending cuts rather than by tax increases. Over the last two decades, pervasive right-wing propaganda had created a strong and ultimately dangerous bias in favour of ever-lower taxation.
In the 1990s, as the Celtic Tiger emerged, there had been a genuine case for getting income tax down from the very high levels of the 1980s. And during the 1990s this process was skilfully deployed by successive governments to secure moderation in pay claims that contributed significantly to our remarkable economic success.
However, by the end of the 1990s, that process had run its course and many of our problems today derive from the Government’s failure in the early years of this century to grasp this fact.
Persistence with income tax cuts beyond a point of no return, combined with the policy of filling the revenue gap with what was self-evidently a temporary flow of asset-based taxation, was a huge blunder – the impact of which we will not recover from without considerable pain. After the crisis broke last December, it was unhelpful that the Government persisted for so long in denial about the need for substantial tax increases and spending cuts.
That was unfair to the public, who were entitled to be told the reality about our tax shortfall, and the need to fill this huge revenue gap. Failure to address this issue did no one any favours, and has not helped the Government’s credibility.
Furthermore, if the Government had come clean about this issue at the start, the Opposition might have felt able earlier to take up a constructive position. But one could not reasonably expect Opposition parties to have offered support for tax measures whilst the Government was persisting in saying that such measures were not needed.
There have been persistent demands for the preparation and publication of a plan that shows how we are to emerge from this black hole. It has to be said that it has been extremely difficult for the Government to plan a way out of a crisis that seems to keep getting worse.
The Department of Finance can of course be faulted for the scale of its optimism at budget time, and there was still an element of optimism in what the department submitted to the European Commission two months ago. But from what we have been told of the figures that the department put to the Opposition last Wednesday, it would seem the latest projections look more realistic – although they will still, inevitably, be liable to further revision.
With the Government now accepting, or indeed proclaiming, the need for tax increases and with what look like more realistic projections of future revenue and public expenditure available, there may exist a basis for a tentative plan, extending beyond the end of the year.
I think it is now recognised by both sides in the Dáil that, with our revenue and expenditure figures much worse than was foreseen even two months ago, it is now vital that we take whatever action necessary to keep our borrowing this year to the figure furnished to the European Commission at the start of the year.
If we do that, those whom we will be seeking to borrow billions of euro from will have more trust in our viability – and the huge interest rate premium we are now being charged on our borrowing, to the detriment of future taxpayers, may start to fall.
While our economy will not collapse if we do not stick to that commitment – for the sake of the euro we will be bailed out – control of our own fortunes could be lost. There are no free lunches in international relationships and a price will have to be paid for that rescue. As Jim O’Leary said in this paper yesterday, this will “limit our freedoms in the post-adjustment period”.
Let me spell out what this could mean.
When German chancellor Angela Merkel spoke of such a possible rescue process in defence of the euro zone, her words were accompanied by a reference to our corporate tax level by an unnamed German official. That could have huge implications for our future economic health and for our long-term growth rate.
Thus, what is now at stake is nothing less than a crucial element of our economic independence – hitherto so well preserved within the beneficent European Union framework.