Political agreement on a supplementary budget can help restore confidence, writes GARRET FITZGERALD.
A SUPPLEMENTARY budget could have five beneficial effects. First of all, and most obviously, it would pre-empt the negative effect of any further deterioration in our expected revenue flow, the likely emergence of which could further weaken public confidence in the absence of such a budget.
Second, a supplementary budget could help to bring home to domestic public opinion the scale and gravity of our crisis – for despite widespread generalised pessimism, it is clear that many people have yet to grasp just how tough are the corrective measures that will have to be taken over the next couple of years.
Third, however unpopular early increases in taxation may prove to be, the emergence of agreement amongst the Dáil parties on a supplementary budget could help to rebuild confidence in our political system, which has recently been at a low ebb.
Fourth, tax increases on higher incomes in an early budget could help to conciliate the trade unions and avoid further industrial action.
And finally early action in relation to taxation would help to restore external confidence in our economy.
(It may not be widely understood here that this confidence, already weakened by the apparent uncertainty of the Government’s approach in earlier stages of the crisis, has latterly been seriously eroded by British speculators. Unfamiliar with the positive working of the euro zone, these people have been seeking to make a “killing” by talking our economy into bankruptcy. On Thursday Jean-Claude Trichet explained convincingly why they are bound to fail in this attempt. We shall all enjoy their eventual discomfiture – but the sooner we can demonstrate this, the better we will be placed).
Last Saturday, in pressing here the need for an early supplementary budget, I had no idea what effect, if any, that proposal would have. Suggesting that the political opposition take the lead in proposing tax increases was asking a lot. But last Thursday the leaders of the two main Opposition parties reacted in a most constructive way, and yesterday in this paper Enda Kenny set out positive suggestions for what such a budget might contain.
Much now depends upon the tone of the Taoiseach’s response to this Opposition approach when tonight he addresses his ardfheis.
If he can avoid the kind of point-scoring to which – as I, above all, know well! – party leaders are prone on such occasions, and if instead he responds positively to what has been a statesmanlike Opposition approach, we could be well on the way to getting on top of our crisis.
Meanwhile, the table published with this article shows just why we need above all to restore our revenue flow.
It does this by setting out the key figures in the Government’s early January submission to the European Commission, and comparing these with the projections for the current year that were published by the Government in its 2008 budget statement, on December 5th 2007.
This comparison shows unequivocally that our problems do not derive from overspending. Indeed, current public expenditure in 2009 is now projected to come out slightly below the figure that the government had estimated in late 2007.
Our borrowing crisis is solely a consequence of a severe shortfall in revenue.
This 30 per cent revenue shortfall has in part been due to the fact that our 2009 national output is currently foreseen to fall at least one-sixth below the level that had earlier been expected – and even that may soon prove to have been optimistic.
But – and this is the really important point – by comparison with what had been projected in late 2007, there has also been a decline of as much as one-seventh in the proportion of this much-reduced national output accruing to the Government in the form of tax revenue.
We have to accept that the part of the decline in tax revenue attributable to the drop in the value of national output cannot be recovered in the short term.
It would not be desirable or practicable to raise the share of national output taken in taxation above the 30 per cent level at which it stood in 2007. Instead, that part of the revenue shortfall has to be met by cuts in spending – and particularly by cuts in public service pay at least to match reductions in pay currently taking place in the private sector.
But we do need urgently to tackle the additional revenue gap of over €6 billion that is the consequence of this year’s dramatic drop in the share of this much-reduced national output accruing to the Government in the form of tax revenue.
That is why we urgently need a supplementary budget, to start the process of restoring gradually to its 2007 level of around 30 per cent the share of national output accruing to the State as tax revenue.
A supplementary budget could be used to bring forward carbon taxation, which would be relatively easy to introduce. By contrast, property taxation might require a longer preparatory period, and its design could certainly benefit from the views of the Commission on Taxation.
The total exemption from income tax of a large proportion of our population – which has no parallel elsewhere in Europe – must eventually be tackled, but given the possible short-term impact of this upon employment, that may also be left till later.
However, as suggested earlier, a new tax rate designed to raise additional revenue from people in the community with higher incomes could facilitate an early settlement of the present dispute with the trade union leadership, thus heading off what could otherwise develop into a dangerous level of industrial strife.