| A Budget that was more ‘new’ labour than old |
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| From a financial services perspective the Budget can be welcomed as continuing to reveal a progressive policy on the part of the Government towards the development of finance in Ireland and Ireland as a competitive financial services location. The reduction in capital duty is a measure that has been long called for, and will represent an important step towards establishing Ireland as a headquarters location, which is a policy objective of the Taoiseach. |
It is clear from this Budget that this Government’s definition of socialism remains more ‘new labour’ than old, and that it remains uninfluenced by the negativity of those on the left who would call for the reduction of incentives for financial services and other international industries that have put the money on the table for the big health and social welfare spending increases that have been possible in recent years.
As Financial Services Ireland and the Irish Bankers Federation say, it is to be hoped that the duty will be fully abolished next year, when it becomes clear that the overall impact on tax revenue and economic buoyancy will be positive as a result of the reduction in duty.
Important too to the stability of finance is the overall stance of economic policy. The Budget’s major macroeconomic targets are just about consistent with stability, although if something went wrong internationally, the generosity evident this year could not prudently be repeated in 2006.
The Budget provided for an increase of 10 per cent in current expenditure, which is at the limit of tolerance compared with tax revenue receipts projected for next year of 5 per cent and overall receipts of 4.5 per cent, and an inflation target by the ECB of less than 2 per cent.
The effect of extra capital spending projections of 20 per cent means that the Government will be forced to turn a surplus on account of €1,348 million in 2004 into a deficit of €1,200 million, indicating a turnaround, or extra resort to borrowing of €2,548 million in 2005.
The Budget also contains a post Celtic tiger ‘first’ and that is that is 2005, for the first time since 1985, the cost of debt service is to rise from 6.4 per cent to 6.5 per cent as a percentage of tax revenue. It was the preemption of tax revenues by debt service that threatened the fundamental financial stability of the state in the 1980s. At that time debt service was pre-empting over 35 per cent of tax revenue, and there was a crisis in the state finances as the level of debt service was at a critical mass point, where it was threatening to assume a life of its own, and pre-empt ever increasing proportions of tax revenue.
Of course the levels today are different, and the interest rate environment is much more benign. And, when account is taken of the balances in the national pension reserve fund it could be argued that net ‘debt’ service is at zero per cent of tax revenue. This is a happy position to be in, but nevertheless, expenditure increases of 10 per cent cannot be assumed to be infinitely possible in the future, and expectations of further expenditures will have to be controlled, especially in the electoral phase of the economic cycle that we have now entered.
Control of expenditure will be necessary if tax is also be be controlled and the stated Government’s policy of fostering growth is to be sustained |
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| Article appeared in the December 2004 issue.
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