In this blog, NERI Co-director, Dr. Tom McDonnell discusses the Commission on Taxation and Welfare's independent review of the tax and welfare system called 'Foundations for the Future'.
The Commission on Taxation and Welfare (the Commission), of which I was a member, launched its independent review of the tax and welfare systems called ‘Foundations for the Future’, just about one year ago. It made 116 recommendations for reform based on the five core principles of sustainability, reciprocity, adequacy, equity and efficiency. Perhaps the most important of these recommendations was that:
“...given the medium-to long-term threats to fiscal sustainability, the overall level of revenues from tax and Pay Related Social Insurance as a share of national income must increase materially to meet these challenges. These increased yields should be obtained in a manner that minimises economic, social and environmental costs.”
While the Commission argued that the base of taxation should be broadened across all categories of taxation, it particularly emphasised increasing the yield from wealth and capital taxes, from polluting activities, and from the elimination or restriction of a swathe of tax expenditures (e.g. Help to Buy, various CGT and CAT reliefs, and the tax relief on private health insurance). The Fiscal Advisory Council estimated that the Commission recommendations would, based on certain assumptions, cumulatively increase total revenue by around 5.3% of GNI*.
On the welfare side the Commission emphasised the foundational goal of income adequacy and proposed a series of major reforms including the benchmarking of all working-age payments, the elimination of all cliff edges in the system and greater coordination between schemes, the introduction of a second tier of child benefit, and a new working age assistance payment.
It is fair to say that the report and its recommendations were not universally welcomed at the time of its publication by everyone within the political system. Arguments for tax increases are rarely politically convenient.
The Report has made more of an impact in the research and wider community. For example, just last week the Commission Report was awarded the 2022 Miriam Hederman O’Brien Prize by the Foundation for Fiscal Studies. The Irish Congress of Trade Unions broadly welcomed the findings of the report at its Biennial Delegate Conference in Kilkenny in July.
Last Wednesday marked the first official response from the political system via the cross-party Committee on Budgetary Oversight’s (CBO) examination of the Commission’s report. The 15-member Committee (19 including former members) held 10 days of public meetings between November and April calling on the views of a wide range of groups from think-tanks to special interest groups.
The CBO made 40 recommendations of its own. The CBO’s first recommendation is to broadly agree with the Commission that we need to increase the overall level of revenues and broaden the tax base.
“The Committee broadly agrees with the Commission proposals to broaden the tax base in order to secure the sustainability of revenues needed to address future challenges and....agree with the Commission’s proposals aimed at improving the effectiveness of the welfare system.”
For example, the CBO agreed with the Commission that the current system of inheritance tax (CAT) was too generous and that the Group A Threshold should be lowered on grounds of greater fairness. Such a reform would indeed be welcome on a range of grounds, not least intergenerational equity. This particular proposal was the one that received the most political push-back at the time of the report’s launch.
Overall, the CBO seems to disagree with very little of the Commission’s report, with many of the CBO recommendations centred around issues such as the need for better data and distributional analysis before reforms are implemented. The CBO also reiterated its own support for the benchmarking of welfare payments.
Will this analysis make any difference to Budget 2024? Probably not. Over €1 billion of tax cuts are promised regardless of longer-term sustainability or equity concerns or of their appropriateness at this stage of the economic cycle, while welfare policy will presumably continue to be uncoordinated across payments, unconnected to any empirical analysis of adequacy, and riddled with cliff edges and other policy flaws.
One thing that would be welcome on Budget day is clarity regarding the Government’s own analysis of long-run fiscal sustainability alongside an elaboration of a medium-term strategy for addressing income adequacy issues. Something similar from each of the political party manifestos as we approach general election season would also be welcome.
We really need a proper conversation about these issues so that we can as a country start to prepare for the immense fiscal, economic and social challenges rushing towards us over the next 20 years.