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Tuesday, 23rd April 2024
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Government can give away up to €2 billion on Budget day Back  
Robbie Kelleher this year’s ‘Best Research Economist’ according to the Finance Stockbroking survey 2005, reckons that the Minister for Finance Brian Cowen could give away as much as €2 billion in tax incentives in Budget 2006, and still target a deficit that is not much more than 0.5 per cent of GDP. Kelleher would also welcome the expected removal of property tax breaks, as well as introducing some innovation with regards to the micro-economy, particularly by introducing some real transport incentives, as the recent ‘Transport 21’ plan announced by the Government was ‘less than encouraging’, he writes.
We are only a couple of weeks away now from yet another Budget and not surprisingly there has been a fair amount of comment on its likely shape. At the very least it looks like the Minister will have a good deal of room for manoeuvre. In many ways the public fianc?s have never been in better shape. Those of us who lived with and commented on the harsh regime of the 1980s could never have imagined that the arithmetic could now be so favourable – an opening balance that is not only showing a surplus on the current account but an overall surplus taking into account capital spending as well and at a time when the debt/GDP ratio is below 30 per cent and falling.
Robbie Kelleher

Twenty years ago in 1985 the interest bill on the national debt amounted to 12 per cent of GNP and, in itself, absorbed more than a third of all tax revenue. This year the interest bill will be lower in nominal terms than it was in 1985, will account for less than 2 per cent of GNP and absorb less than 7 per cent of tax revenue. Cleary one of the big public policy successes of the last twenty years has been the transformation of the public finances and it was an important foundation for the economic success of the last ten years.

It is important that we continue this policy of sound finance, although there is no great pain in doing so while the economy delivers the buoyancy of tax revenue that we have seen in recent years. We reckon the Minister could ‘give away’ as much as €2 billion on Budget day and still target a deficit that is not much more than 0.5 per cent of GDP.

Some of the giveaway will be used to lower the income tax burden again. In recent years the focus of such resources has been to increase bands and allowances rather than reduce tax rates and that is a policy that I believe they should, and will, continue with. The marginal tax rates in Ireland are not unduly high but the higher rates do kick in at very low income levels, particularly for single earners.

We are also promised that many of the property tax breaks that have been introduced over many years and in which in some cases have been used to significantly reduce the tax liabilities of those on very high incomes. I very much welcome this proposal also. Many of these tax schemes have negative distribution implications and can have unforeseen spatial and development consequences.

On the expenditure side there will almost inevitably be significant additions to social categories such as health, education and welfare, as the Government attempts to build on its ‘caring’ image at a relatively mature stage of the electoral cycle. The major public policy issue here is value for money. We have seen very substantial additions to these budgets in recent years but the returns in term of service delivery have not been particularly impressive.

The same can be said to be true for capital spending. In that regard the recent €34 billion transport plan was less than encouraging. Its focus was very much on ‘trophy’ type projects and very often involved fixed line solutions, not only for urban development but for interurban transport as well. It would appear than the plan has failed to recognise that Ireland as a country has one of the lowest population densities in Europe and that its major cities have also very low densities. That significantly reduces the efficacy of fixed line transport modes and suggests that buses, roads and cars should be the prime focus in these solutions.

It would also be nice to see micro innovation in the tax code. Nearly all of the initiatives of recent years have been focussed on reducing the macro burden. In that regard transport should be a prime candidate with tax code building in incentives to encourage more efficient patterns of travel. For example a significant portion of the taxation of cars comes in VRT tax and the annual road tax. These taxes are once off or annual levies that build in no incentives to change travel patterns whatsoever.

Finally, outside of the Budget perhaps the most pressing public policy issue is how best to approach and influence the process of national wage negotiations. The multi annual national partnership deals have been in place now since 1987 but this writer believes they have now outlived their usefulness and that it is time to allow local bargaining to take its place.

A particularly harmful spin off from these national deals has been the benchmarking process that has been used for the purposes of determining public pay scales. The round completed some years was a particularly poor piece of public policy that lacked any credible form of transparency.

At the aggregate level it would appear the public sector has little difficulty, even in a tight labour market, recruiting and retaining all the staff it needs, not surprising given that it offers pay levels, security and benefits that are well ahead of what is available in the private sector. Next time let the market do the talking.

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