Budget 2015…..Careful Now
Enda Kenny and Michael Noonan will be feeling pretty good right now. Tax figures are €1bn ahead of expectation. That will show the doubters. Despite promising to keep a calm head they are bound to be thinking that things are about to turn for them and this is their chance.
The reality however is a little more grey. Between 2004 and 2007 Ireland doubled its spending while cutting its taxes. An unsustainable model was in place all gambling that even a property crash would not derail things. The assumption being that the property crash would affect Ireland only as we sleepwalked into the International crises. From 2008 on some semblance of sense returned. Much of this has been forced upon us but there was no avoiding the fact that it was necessary. As a result Ireland is improving in terms of its economic bottom line. It’s still fragile but it is better. The government can now start to look forward with some certainty and they deserve credit for this.
In the 1970’s a national crises was compounded by an international oil crises, it took us much longer to emerge. Our most recent crisis was much worse but at least this time governments did not postpone action on spending.
The problem is that the bottom line suggests that with the extra tax boost we won’t need to cut as much, but we still need to cut. In 1987 Ireland started the process of pain to stabilise the economy. We had a couple of advantages back then. Spending was not being cut from an all time high so it was easier to control. Basic tax rates were at astonishingly high levels so we had plenty of room for cuts to rates once things stabilised. We do not have these things now. Once we entered the crisis Income Tax was not touched apart from the USC. The government will no doubt plan some changes to the USC. However there is also much talk of reducing basic tax rates. Just how much reduction in basic rates do we want?
It is popular for politicians to change the basic rates because its impact is easier to see and understand. Changing something like the VAT rate would be far more effective in redistributing wealth and reducing bills but it doesn’t carry the same impact when you announce it. The USC needs reforming but changes to this are not easily understood and communicated either.
Amid all of this is the central problem we cannot escape from. The international recovery is weak and outside threats are still very real. Our borrowing is still at unacceptably high levels and we have to reduce this or we are throwing money into a black hole in interest payments. Finally, our services are nowhere near fully funded. They have not yet even adapted to the cuts that were made. Further savings are required but we already can see that the Health service, Security services, welfare services and services to groups like the elderly are all struggling. We will still instigate further cuts in the next budget to these services.
Normally one would not start to discuss tax cuts and possible pay increases or other such items until spending is under control and you have a firm idea of what is required for an acceptable level of services. None of this exists in Ireland right now. Yet, we are already taking of sweeteners. Now I know the argument will always be about a stimulus. The problem with that is timing. A decrease in VAT might encourage spending but a decrease in basic tax may just ensure people save money against future bills or threats.
Worst of all I’m not even convinced the government can rely on these sweeteners to boost them. In the early ’90s Ireland had some great figures going for the economy. Growth hit record levels, taxes were slashed, and indicators looked very strong. This had no impact with the public on the ground. It took years before any benefit was felt and people began to agree the economy was moving. Moreover cast your mind back to the pinnacle of the Celtic Tiger. Anyone would think that the government was storming to popularity with its tax cuts. In reality even Fianna Fail was still not as popular as it had been in the ’80s. The problem was it cost hundreds of millions to deliver a saving of three or four hundred euro a year to an individual. Back then we took the money but in reality we hardly noticed it given that pay increases were expected to outshine this and that cost of living wiped it out.
Now we have a situation where the government may find it will cost a huge amount of the money that was so hard got to put a sweetener in the budget. In turn this sweetener will be wiped out by water charges or rising energy costs. We will be happy for a month but once the next few bills come in we will be thinking that the few hundred euro the government threw us was worth sweet Fanny Adams in the current climate.
Finally we need to stop the debate about who contributed to the recovery. We all did. Yes middle Ireland and those in employment gave a huge sacrifice. In time this should not be forgotten. However, do not forget the sacrifice of the unemployed, many of whom lost not only their jobs but much more. They suffered rate cuts and young unemployed were targeted specifically. Do not forget the elderly. We talk a lot about protecting basic rates. Yet we forget that we slashed services and this hurt every bit as much. The cuts to services disproportionately affect poorer people and elderly people more than any other section in society. We all have a claim to make. it’s not a competition. The sooner we all realise that getting out of this is up to us working together the better. There is no room for complacency or greed. Beware of politicians bearing gifts and let’s hope that the lessons of the past have been learned by this government. There is an opportunity now and history will judge the next move.