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Wednesday, 5th August 2020
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Houdini, Minister for Finance Back  
And with a single leap, our hero is free! Well actually Mr McCreevy required three leaps - one over the PRSI fund, one over the Central Bank, and one over the business community. The critical election year budget has been delivered nonetheless.
As the years roll by your memories of particular budgets fade. They become a single memory, not of the taxation details announced, but of badly-constructed speeches incoherently delivered against a background of noise that sounds like a school-yard while teacher is having a cigarette in the toilets.

The outstanding relief provided by Mr McCreevy in the current year’s budget was a brief well-constructed speech, coherently delivered. Even the noises were muted compared to previous years. In 20 years’ time, if we are lucky enough to be alive, that may be our sole remaining memory of the budget of 2001.

But in the shorter term, was it a sound budget?

Sharing the cake
Mr McCreevy expects GDP growth in 2002 to be 3.9 percent. He states that that forecast is ‘subject to the risk of variation in view of the uncertain international outlook’. His budget then proposes an increase in net current spending of 10 percent and in net capital spending of 10 percent. In other words, the government’s share of the cake is to grow at more than twice the rate at which the cake is growing. That suggests that the government’s slice is going to get bigger, and the slice left to everybody else will be smaller in 2002. On the face of it, a substantial amount of GDP is moving out of private wallets into public piggy banks.

The Minister might rightly point out that the current account money (and part of the capital account money) is directed to the provision of important services, such as public transport, law enforcement, education, and health. That would be a satisfactory answer if any of these services were associated in the public mind with quality and efficiency. In practice a large part of the population express their opinion of these services provided by the State by travelling by car or bicycle, taking out private health insurance, paying for car and house content insurance and expensive burglar alarms, and creating waiting lists at private schools.

The Minister is aware of problems in the delivery of health services and recognises that they are not entirely problems caused by lack of resources. The same may be true of other areas benefiting from the large increases in spending.

Out of the tax net
In his budget speech the Minister stated that ‘there will be over 690,000 income earners outside the tax net or 37 percent of all those on Revenue’s records’. There is no reason to suppose that the Revenue’s records of income-earners are comprehensive, so the number of income-earners outside the tax net may well be greater than the Minister calculates. Of course these income-earners are not in truth outside the tax net. They are outside only the income tax net. They are likely to experience many taxes, including VAT, television licence, car tax, stamp duty on cheque books, stamp duty on house purchases, to name but a few.

Nonetheless the Minister is making an important point. On the one hand the least well-off sections of the community are benefiting from being excluded from the income tax net. On the other hand, it would now seem that a substantial proportion of the voting population may no longer have direct experience of the relationship between political spending decisions and take-home pay. It is paradoxical that ‘social inclusion’ measures equate with ‘taxation exclusion’ measures.

PRSI error corrected?
Last year the Minister levied a substantial tax on the creation and maintenance of higher-paid jobs. He did this by extending employers PRSI contributions to the entire cash income paid by the employer, whereas previously it applied to part only of that income.

We are no longer a ‘screwdriver economy’ driven by low-wage jobs. Our economic future lies in securing employment for highly-skilled highly-educated citizens. That implies that we are going to be a high-wage economy. Therefore increasing the tax cost of the creation of high-wage jobs was unwise. It would be so even if we had not been facing into a recession.

The Minister’s response this year has been to reduce the rate of employers’ contribution from 12 percent to 10 percent. In terms of economic impact, the change has more than reversed the overall effect of what the Minister did last year. The Minister estimated that in a full tax year the 2001 removal of the PRSI ceiling would yield £169m. His estimate of the cost of reducing the employers’ rate in the current year is £273m.

What these figures conceal are winners and losers. Those employers with a high proportion of higher-paid employees could well have seen their PRSI bill doubled (or more) by the removal of the ceiling in 2001. The reduction in rate in 2002 would reduce their bill by 10 percent. They are still significantly worse off. On the other hand, those employers who largely employ people earning less than the ceiling that existed up to 2001 will have had little additional cost imposed upon them by the removal of the ceiling, and now benefit from the reduction in rate. The breakeven point for an employer is a salary of £40,855 (€51,875).

The broad picture is that the cost of providing lower-paid jobs has been reduced, and the cost of providing higher-paid jobs, taking the budgets of 2001 and 2001 together, has significantly increased.

Raiding the Social Welfare fund
In theory PRSI is a compulsory insurance scheme, and the social welfare fund is an insurance fund. Due to our long history of low employment and high unemployment that fund traditionally was bankrupt and in need of subventions from the taxpayer. The change in our economic fortunes means that there is now a positive balance in the fund. The Minister has helped himself to part of this balance.

If the surplus on the fund is indeed not required there can be no objection to the Minister taking it from the fund. The sensitive point rather is whether the amount which the Minister has taken from the fund was determined by an actuary as other professional as being what was surplus to requirements in terms of meeting obligations in the future, or whether it was merely driven by what the Minister needed in an election year.

Anyone familiar with the insurance business knows that in good years it builds up surpluses which help it meet the high claims of bad years. The insurance business is notoriously cyclical in that respect. Nobody would insure with an insurance company which has no reserves to meet the bad years. Since the social welfare fund is an insurance fund, and not part of the general funds of the government, the Minister should have access to it only when professional advice suggests it is truly in surplus having regard to the prudent funding of an insurance fund. It may be that the Minister got such advice but if so he did not reveal this in his budget speech.

If the Minister is not running a deficit this year and concealing it when he raids the social welfare fund, does that mean that he actually had a greater surplus than he declared last year when he allowed the social welfare fund to grow?

The most dangerous aspect of this raid is that it is a precedent. There are still moneys left in the social welfare fund. Will a Minister next year be able to resist a second bite at the cherry?

Minting money
Right up to the 18th Century monarchs facing a budgetary crisis sometimes resorted to the simple solution of calling back in the coinage, melting down the precious metal, and reissuing in exchange coinage of lesser value. The profit on this little ‘debasing the coinage’ exercise would give a breathing space for the high-spending monarchs.

Mr McCreevy’s decision to grab the profit from issuing euro coins has uncanny echoes of this ancient practice. Our pound coinage is being withdrawn and replaced by euro coins of lower value, and the Minister takes a profit! I suppose when it comes to plugging budget deficits, minting coins is a nice change from printing money.

Unless a future Minister is willing to take us out of the euro, this at least should be a once-off raid only.

Corporate soaking
The business community has been so skilfully sandbagged by the corporation tax change that it may not even realise what has happened yet. On the face of it the payment date for corporation tax has been brought forward by seven months and even that is being phased in.

It sounds relatively innocuous. The economic reality that will be experienced by most companies is equivalent to a 20 percent surcharge of tax for a five-year period. In other words they are being called upon to pay six years’ tax in a five-year period. The possibility of ultimately getting a credit for that sixth year’s tax largely depends on their going out of business!

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