Brian Lenihan's rejection of tax increases to deal with the crisis is astonishing, writes Garret Fitzgerald
TWO MONTHS ago in this column, I challenged repeated assertions by the Minister for Finance that he would tackle the borrowing crisis by cutting spending, and that he would not raise taxes. I cannot imagine why Brian Lenihan ever took up this extraordinary position.
For the reality was, and remains, that a major part of the solution to our crisis has to involve increasing the grossly inadequate level to which State revenue, other than that derived from disappearing asset-based taxes, had been reduced by irresponsible Government tax-cutting measures of the past decade.
Moreover, we have been faced with the fact that, without an early announcement of some form of public service pay cuts, we would not be able to cut this year’s borrowing sufficiently to preserve our capacity to borrow in bond markets. And, quite reasonably, the unions made it clear that their ability to secure tolerance of such a move by their members would require parallel action in relation to incomes of non-public servants, and in particular, of those with higher incomes – something that could be achieved only through changes in taxation.
Thus the rejection by the Minister for Finance of tax measures as part of the solution to this crisis had the effect of making it impossible for the Government to secure trade union acceptance, or at least tolerance, of what had to be a key element of any resolution of this crisis, namely moves to reduce the burden of public service pay. So, as a result of the Government’s rejection of taxation measures, we now face large-scale industrial action.
As January wore on, the Minister for Finance gradually modified that untenable position on taxation, eventually coming around to a full acceptance of the need for increased tax revenue – but, unfortunately, still without any concrete proposals of a kind that could have influenced the response of the trade unions, and thus have avoided industrial disruption.
The failure to bring forward any tax proposals has been defended on the grounds that, regardless of the urgency of the taxation issue, any action, or even announcement of intended future action, must await the deliberations of a Commission on Taxation which has been asked to report next September – a full year after this crisis broke.
No one seems to have challenged this decision to delegate all taxation decisions – even simple and urgent ones such as a higher tax rate on very high incomes – to an advisory body.
Taxation policy is a key prerogative of government, with the benefit of technical advice from the Department of Finance and the Revenue Commissioners. It is through government action on taxation that past financial crises were speedily managed - for example by ministers for finance such as Paddy McGilligan and Seán McEntee in the early 1950s and by Gerard Sweetman, advised by Ken Whitaker, in 1956.
Again, in 1973, the incoming government gave early effect to a proposal that I had prepared in opposition to substitute a small annual wealth tax for inequitable death duties. Again, in the early 1980s a residential property tax that I had also prepared in opposition was introduced by the government.
That is how governments used to handle tax policy. What has happened to this traditional role of politicians? Have they effectively abandoned one of their most important functions?
This is a serious issue that has attracted no media attention whatever, despite the obvious negative impact of this absence of Government action, or even announcements on taxation measures, in the present crisis.
On Thursday last the Taoiseach himself finally addressed this taxation issue in an important unscripted speech to an Engineers Ireland conference – the account of which in this paper some may have missed, because it was published on the Business Pages, rather than in the crisis news section on pages 6-10 of that day’s paper.
Far from dismissing the role of taxation in the resolution of the present crisis, Brian Cowen said on Thursday that the depletion of tax revenues last year in the order of 14 per cent, followed by an expected further drop this year of 9 per cent, makes redesign of the tax structure “imperative”. “There will be a need for changes to stabilise the public finances”, he added. (In this context “changes” was a polite word for “increases”). He went on, however, to criticise “commentators” who blamed the current crisis entirely on an over-reliance on revenues from the construction industry.
He is of course right that the crisis has other causes in addition to the collapse of the artificial building boom – although he was careful not to specify the principal other domestic factor in our crisis, namely the doubling of current public spending by his predecessor as minister for finance during the six-year period between 1997 and 2003.
However, it cannot be denied that a major factor in our present revenue crisis has also been the financing of unsustainable cuts in income tax, to levels unparalleled in western Europe, out of the essentially temporary proceeds of a short-lived boom in revenue from stamp duties on housing.
Our present crisis does not derive from over-spending – for current spending this year is now projected to be €2 billion below that projected for 2009 in the December 2007 budget.
As the Taoiseach himself has now made explicit, our problem is rather a €6 billion revenue shortfall, which his Government must now tackle.