There are some positive elements to the Budget but overall it represents a major missed opportunity.
The economics behind Budget 2015 are shaky to say the least. An expansionary budget based on tax cuts for the better off fails the economic best practice test and also fails the equity test. The Budget 2015 tax changes are regressive with single earners on €70,000 benefiting by four times as much as minimum wage earners from the direct tax changes. Taking into account the water charges the ESRI have confirmed that poorer households will lose out from Budget 2015 while richer households will gain.
The public finances are still fragile and given Ireland's low revenue base it was unwise to start reducing taxes. Ireland’s low tax and low spend model is not only being maintained but reinforced. Tax cuts have to be paid for and budget documentation suggests that per capita non-interest public spending will fall by 9% in real terms between 2013 and 2018.
It is important to widen the tax base. However, the current water charges regime is regressive, impacts disproportionately on low income households and raises significant affordability concerns. Once water charges are considered most under €30,000 are net losers from Budget 2015.
Overall the big winners are higher earners and corporates. There was over €80 million in new tax breaks for large corporations.
Instead of cutting taxes the budgetary emphasis should have been two-fold - a large-scale increase in public capital spending to increase jobs in the short-term and boost the productive capacity of the economy in the medium-term - along with a reversal of cuts to the most vulnerable people and communities in Irish society.
The NERI, along with the IMF and others, have argued that that the best way to inculcate growth is to increase public investment. Ireland's investment to GDP ratio is the second lowest in Europe and a major impediment to growth. Public investment will have fallen to a dangerously low 1.2% of GDP by 2018. This will have long-term consequences for Ireland’s growth potential.
Slides from a recent presentation on Budget 2015 are available here
The NERI will host a post Budget Seminar on October 22nd. Details availabe here