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Budget 2017 - the good, the bad and the ugly

Posted on October 16, 2016 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

The draft budget for 2017 for the Republic of Ireland will now be submitted to the European Commission for approval. In the meantime, the real work in relation to the implementation of Budget 2017 proposals will involve various deliberations and discussions leading to the Finance Bill in a number of weeks as well as various initiatives and announcements on foot of the proposals in ‘Budget 2017’. The one definite outcome so far is that the price of Tabaco has gone up. So far so good!

The annual budget fanfare is a legacy of the Westminster system of administration now augmented and refined by the processes springing from EU oversight of budgetary matters and ‘semetrisation’. The annual speech and announcements provides a focus point for debate, submissions, commentary and analysis. Sometimes, the real implementation work gets lost in the details of the Finance Bill or the quiet dropping of major announcements (one remembers the complete amnesia surrounding the ‘decision’ to levy €200 per annum on city centre workplace parking (see here) or the considerably attenuated ‘super pension pot’ tax relief tightening proposals in ‘Budget 2013’ (see here in front of a pay wall).

Did Budget 2017 point towards a particular vision for this society?  Taken in association with recent budgets and the general consensus across society it is not apparent that public policy is heading towards a rupture with the existing economic and social model characterised by primacy of markets over people and the primacy of tax reliefs for the few over public services for the many. Yet, the budget did contain some positive new developments as well as being in a succession of budgets giving relief years of fiscal austerity.

The decision to raise public spending – albeit by a modest amount relative to demographic need and social crisis – is welcome. Whatever the exact magnitude of the ‘fiscal space’ (we will never know until after the event) the decision to proceed on the assumption of a space of around €1.2 billion is good.

On the positive side, the initiation of a new Affordable Childcare Scheme is welcome [Childcare measures in budget a good start but we still have long way to go]. Yet, the scale of investment and the breadth of the challenge not least in the area of housing demands a much larger outlay of expenditure backed by appropriate additional personal or corporate taxation or social insurance. Moreover, such investments require a clearly articulated vision and strategy stretching out over 20 years. The micro-debate on the size of the ‘fiscal space’ and the apportionment of this space between ‘public spending increases’ and ‘tax cuts’ is not helpful. For one thing it can deflect from a debate on the composition of total amount of public spending (which comes to €72 billion next years based on Eurostat statistical conventions). Secondly, such a micro-level and short-termist debate avoids the bigger picture of where we want to go as a society.

The decision to grant modest increases across the board for social welfare recipients is welcome. This only goes a small way to redress the real cuts since 2009 especially in the case of lone parents and young unemployed persons under the age of 26

The availability of more information in the months leading up to the Budget is also welcome. Certainly, matters have improved on the past. Yet, we need much better and more timely information including documentation on the likely equality impacts of specific budgetary proposal or package of proposals. It is simply not good enough that Government commissions the ESRI (or others) to assess the impact of a Budget on different households arranged by income after decisions have been made. This information – based on incomplete budgetary proposals – should be a normal part of the pre-budgetary debate and deliberation.

According to very preliminary analysis by researchers at the Economic and Social Research Institute Budget 2017 was probably mildly ‘progressive’ in the sense that taking all the measures together including the suspension of water charges in March of this year households at the bottom of the income distribution gained (in percentage terms) a little bit more than households at the top or in the middle [Lower income groups gain most from budget].

It is noteworthy that of the 8 tax payer examples cited in the main Budget 2017 book (page B.17 and onwards) only one example refers to persons with a household income of under €27,000 per annum. This says a lot about the one third of the population below this income level and the priority given to them in commentary about the ‘squeezed middle’. Once again, one sees a reference to the lowest income household example benefitting from the ten cent per hour increase in the national minimum wage. This is misleading to the extent that not every household on low income necessarily benefits from this extremely modest increase (at most only €200 a year) depending on hours worked and other factors.

On the negative side Budget 2017 continued the policy of cutting tax rates on most forms of income including the granting of tax reliefs to very high income and high wealth individuals. The raising of the threshold on Capital Acquisition Tax is most regrettable. No arguments on grounds of economic efficiency or social equity have been advanced to defend this regressive and anti-equality measure (a similar drive to redistribute wealth to the better off is well underway in the UK. See here). At an estimated annual cost of €22 million the money forgone could have been used, instead, to build 120 social houses a year – a drop in the ocean compared to the scale of house-building needed but still something of value to 120 families currently sleeping in hotels or bed and breakfasts.  An associated budgetary matter is the policy adopted by the vast majority of local authorities to not index residential property values in line with inflation and thereby forfeit significant revenue flows at local level which could have been used to alleviate some of the housing and accommodation emergency that is evident.

The record of the current Government (and the previous two) in relation to housing and social housing in particular is appalling. Many new strategies and initiatives have been brought forward in recent years but the level of housebuilding remains relatively static and hugely inadequate.

The house price stimulus measure (otherwise known as the ‘Help to Buy Scheme’) has received a resounding negative response from economists.  Given a relatively inelastic supply curve on housing the stimulus to demand via an income tax rebate for buyers of newly built homes is a perfect gift to builders (and indirectly to landlords because the measure is unlikely to have an appreciable impact on supply which is the core problem underlying the housing crisis).

The policy of cutting income taxes (via USC rates and measures to raise various tax credits) will put a very modest amount of money in the pockets of those paying income tax. However, it will further erode the base as well as the flow of tax revenue across the income range in a way that will hurt families and communities by depriving them of key services. Consider that forgone income taxes (USC) of €300 million could have paid for:

  • 9,500 additional Special Needs Assistants in primary schools; or
  • 2,000 social housing units; or
  • 6,500 new speech and language therapists.

A key area of weakness in Budget 2017 and in recent budgets is the relative neglect of capital investment. The most recent editions of the NERI Quarterly Economic Observer have highlighted the need for a large increase in public capital investment. Government plans are to increase the level of spending from 1.7% of GDP to 2.2% by 2021. This level of investment needs to be at least double that.

Other regrettable decisions include the continuation of a ‘temporary’ reduction in VAT rates especially in the highly profitable hotel sector in many areas of the country a point emphasised strongly by trade unions in the run-up to the recent budget [see Budget lacked the ambition needed to begin the process of repair].

In keeping with tradition the Nevin Economic Research Institute is hosting a post-budget seminar in Dublin. Details of the event are here.

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