| PRSI u-turn needed in upcoming Budget |
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| Colin Hunt calls on Charlie McCreevey to proceed with individualism, focus on tax bands and make a u-turn on the abolishment of the ceiling on employers PRSI. |
Minister, The drafting of Budget 2002 takes place against the most unpleasant international backdrop of your years at Finance. Personally, you have every right to feel vindicated about your economic strategy to date with last-year’s overheating concerns now evaporating. However, while you rightly point out that Ireland’s growth rate continues to be the envy of the developed world, the upcoming Budget should recognise the fact that the peak years of the boom now lie behind us. As GDP growth moderates towards sustainable levels over the next few years, so too will revenue buoyancy in the Exchequer’s coffers. Budget 2002 will be different from your previous packages in that its radicalism should be directed at the spending rather than the tax side.
You have delivered on the tax rate promises made in the last general election campaign and there seems to be little pressure for further near-term reductions. I am a strong believer in the positive economic impact of lower taxes and I am not going to suggest that further rate reductions should be ruled out over the coming years. However, having reduced the headline tax rates to tolerable levels, I suggest that you focus your fifth budget on bands. Certainly, substantial progress has already been made here but the entry point to the top marginal rate is too low. Broadening the band by ?5,000 to ?25,000 should cost less than ?400 million, will be positive for social equity and would, through the standard incentive effects, increase productivity and reward hard work.
Staying on the income-tax side, I recommend that you proceed with individualisation. Competition for high-quality human capital remains intense and if anything will increase as global growth moderates. If we are going to attract and retain the best of the world’s mobile talent, all barriers to labour market entry will have to be removed. The full implementation of individualisation would make a major contribution in this regard. I know that it is sticky politically. Last year’s Budget showed however that you can proceed with this major reform and at the same time dodge dissent and unrest by avoiding use of the ‘individualisation’ word.
A u-turn should form the centrepiece of Budget 2001. Last year’s decision to abolish the ceiling on Employer’s PRSI was a bad policy move whose detrimental effect on Ireland’s profitability has now been aggravated by slowing world growth. Ireland’s economic success has been characterised and reinforced by an ongoing drive towards higher value-added activities. Thanks to our low corporation taxes, we have attracted the world’s most profitable mobile businesses and, in so doing, raised the income and skill levels of the workforce, not to mention export growth and tax receipts. Last year’s decision significantly increased the tax burden on those industries that Ireland is seeking to retain and attract. There is no logic in penalising companies for paying decent wages particularly at a time of heightened employment and investment uncertainty. The global economic situation has changed. So should the policy.
When dealing with your spending colleagues around the Cabinet table, remember that every cloud does indeed have a silver lining. The realisation that the Irish economy is not invincible and that the government does not have an unlimited pot of cash at its disposal should help you in your efforts to rein in the big spenders in the closing months of this administration. Given recent economic uncertainty in employment, I imagine that those benefiting from the shelter and security of the public sector will become less vocal about bench-marking their employment conditions to the private sector over the coming months. Keep tight control over the current spending side, watch the public-sector wage bill and front-load the important parts of the NDP. Give some thought to sanctioning an independent, line-by-line audit of Government spending to eliminate unnecessary wasteful projects. That should focus your colleagues’ attention on the need for prudence on the expenditure front.
People are beginning to get a little wobbly about the property market. As you are aware, falling confidence tends to feed on itself and current signs of softness in the market could persist for some time. While the countervailing impact of lower interest rates will help to lift the sector over the coming months, the time has come to re-examine the need for anti-investor measures which have achieved the government’s objective of stable house prices. The re-introduction of interest relief on investment property would give a fillip to the sector in general and boost availability in the rental sector. You should also have a look at the stamp duty regime which is impairing mobility in the housing market and consequently in the labour market. If you want to rebalance economic activity towards the regions and away from the capital area, you can’t impose a massive cost burden on those who choose to move.
You know that I am going to raise this, but, while we are on the general subject, I would like to emphasise that stamp duty on shares is an anachronism in a globalised financial marketplace. Ireland’s relatively high rate of tax on share purchases is out of kilter with the low-tax strategy of the administration, raises the effective cost of capital for Irish plcs and deters investors from holding local stocks. It does not make any economic sense. Abolition is probably too great a step to make in one Budget and I would suggest that you half the rate at which it is levied on this occasion. You have spoken in the past about the amazing impact of lower rates on CGT revenues. Halve the rate of stamp duty and watch the same phenomenon at work in 2002. |
Colin Hunt is chief economist and head of research at Goodbody Stockbrokers.
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| Article appeared in the September 2001 issue.
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