The proposed budget for 2016 (Republic of Ireland) will go for approval by the relevant European authorities in the coming weeks. One can expect a favourable outcome from that quarter albeit with a caution that the Government ought to be spending less and paying down more of the national debt. In many respects the ‘budget’ is modelled on an annual Westminster Treasury outing involving an annual piece of theatre. Not to be outdone, the pattern set by the UK in having an ‘Autumn Statement’ is followed here by means of a ‘Spring Statement’.
The real impact of budgetary statements and specific legislative changes in relation to revenue, taxation and spending is seen in between budgets. The devil can be in the detail of the Finance Bill which appears weeks later as well as in Government or ministerial decisions following on directly from the allocations or adjustments announced in the budget. Indeed it is not unknown that decisions announced or implied on budget day do not translate into implementation.
There is much public focus on ‘money in the pocket’ – how much will John, Mary and Aoife receive in their pockets by way of changes to taxation, social welfare and grants. There is particular focus on income tax and—for some reason that continues to baffle— the Universal Social Charge. Yet, the real action will be played out in the real economy where decisions around investment, jobs and payment of wages are made. Fiscal policy has a huge role to play in setting conditions, in redistributing income and wealth and in regulating the business cycle. Clearly, the business, fiscal and political cycles are heavily inter-linked and it would be naïve to deny or ignore this.
The progress made in terms of economic recovery, growth in employment and reduction in interest rates since about 2012 is very welcome and has proceeded at a pace that not even the most upbeat of forecasters or pundits might have predicted. It took longer but when it kicked in the scale of recovery has taken everyone by surprise just as the scale of collapse in 2008-2009 took everyone by surprise (the most apocalyptic commentator of the time predicted a hole of €25 billion in the bust banks a view that was dismissed as ridiculous at the time …).
Over and beyond the short-term impact of budgets including this coming year’s budget there is the question about what direction is fiscal, social and economic policy heading. The baseline assumption and consensus is that:
- Taxes will be reduced further as the size of the State relative to GDP is gradually reduced to the early 30s or late 20s as a % of GDP – the only residual political issue to debate is how to make such reductions ‘fair’ or ‘fairer’;
- Growth will continue in and around 3 % per annum on average for the foreseeable future; and
- Somehow or other we will manage to fund long-term health care, pensions, early childhood care, education from that most wonderful of sources of fiscal grace known as ‘Tax Buoyancy’. Tax Buoyancy is the fruit of sound pro-enterprise and low-tax public policy – we are assured.
The notion that low taxes and vibrant entrepreneurial effort go together does not stand up against the economic research evidence as my colleague Tom McDonnell has pointed out recently here. There are at least four problems with the current debate and consensus (which incidentally embraces left, right, centre, north and south):
- That a position where more and more households are removed from the income tax net (including payments of PRSI and much maligned USC) is financially and socially sustainable in the coming years is highly questionable.
- That taxes can be cut (whether at the margin or on average) without implications for key public services.
- That there is an endless stream of potential savings and economies from driving public services more efficiently so that taxes do not need to be raised to pay for natural growth in population (never mind better services). See the chart below.
- That big recessions and fiscal-banking crises are a thing of the past since we have a battery of new fiscal rules and we have all learned the lessons of the past.
This is no time to be a party spoiler. Roll on the good times. It feels like the noughties again although many who are still under-employed, over-indebted and at risk of being homeless don’t see it.
Details on the NERI post-budget seminar on 21 October are available here .