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Budget 2006 Back  
Popular reaction to the budget has been predictable. Spending measures are welcomed and the taxation measures needed to finance them resented. Such an attitude cannot lead to useful critical review of government plans. Some spending is both necessary and good, but some government spending is wasteful. Some tax is necessary to pay for desirable spending but some of the current level of taxation is undesirable and damaging. But any significant change in tax has to commence with a review of spending. Will we ever learn?
The big picture
According to budget figures, the level of national debt at the end of 2004 stood more or less where it was in mid-1995. Notwithstanding that we have had the ten most prosperous years in our country’s history. Furthermore, in every year in the new millennium the national debt has increased year on year.
Brian Daly, Editor, Tax Monitor

It is true that the debt is now more affordable than it was. At the end of 2004 it represented 30.5p.c. of GNP, whereas at its height at the end of 1987 it represented 117.6p.c. of GNP. The percentage of tax revenue devoted to servicing the national debt has fallen from a peak of 35.3p.c. of taxes in 1985 to 5.8p.c. in 2005.
These figures illustrate that the State has experienced much the same economic conditions as individual taxpayers. There has been a rapid rise in incomes and a collapse in interest rates. The reaction of many taxpayers to this has been to load on additional debt. The reaction of the State has been to make no serious effort to use the good years to eliminate the burden of national debt. We may be sure that interest rates will not remain at their current level, and we can be far from sure that economic growth will continue at the rate we have experienced in recent years. If economic growth and tax revenues do not continue to increase significantly in future years, but interest rates rise, the percentage of tax revenue which will have to be devoted to serving the national debt will begin rocketing again. As recently as five years ago, that percentage was twice what it is now.

There is an irony in that the State simultaneously worries that individuals are not saving enough for their old age when their income will fall, when the State itself seems to spend even more than 100p.c. of its current bumper income, while leaving debt burdens to future uncertain years.

There is another statistic revealed by budget papers that is worth keeping in mind. The Minister expects the economy to grow by between 4.5p.c. and 5p.c. in 2006 but he proposes to increase the current day to day government spending by 9.9p.c., and overall government spending by over 11p.c. in 2006. In doing this, the Minister is continuing a trend of previous years in which the government sector grows faster than the national economy. On our doorstep we have the example of Northern Ireland as a warning. There the government sector is unduly pervasive. Efficiency, value for money, quality of service, are not labels normally associated with the State. A decision to continue to grow the State sector, and dependence on the State sector, deserves greater debate.

Review of incentives – the lesson
The Minister is to be applauded for pushing through the review of tax incentives, from a viewpoint of their relevance and efficiency. The response to the review, in allowing for a phasing out of incentives no longer justified, and in not closing the door on the use of incentives in the future, is a measured one and praiseworthy.

There are lessons to be learned from this review process which could be applied more widely to the whole budgetary process. The summary overview of the Indecon comments on property based tax schemes had (inter alia) the following general conclusions and recommendations:

Full disclosure of information by claimants: To enable the full costs and impact to be monitored. Are all expenditure schemes across every department subject to a similar annual process?

Assessment of cost and benefits: New incentives should have a cost benefit analysis performed. Are similar cost benefit analyses prepared for all new expenditure? Are such analyses published?
Consider option of public expenditure: Weigh up the merits of public expenditure as opposed to tax incentives, to achieve the objective. Is this done as regards all proposed public expenditure, and not only as regards tax incentives? Are user pay options rather than State financing options, public private partnerships, and tax incentives fully considered in an objective and measured way as alternatives to public expenditure?

Maximum three year review period: Review all tax incentives within three years with a repeated cost benefit analysis. Would it not be useful to apply the same to all expenditure programmes of every type, including all areas of employment in the public service?

Independent certification that conditions of schemes have been met: Should there be independent verification that the objectives of public expenditure, as set out in justifications and initial cost benefit analyses, have been achieved?

Cap on tax reliefs: Total tax reliefs by any one individual should be capped. Should we consider a cap not only on tax reliefs per individual, but also a cap on the total tax that may be levied on any one individual, under all tax heads?

It is rare to hear of proposals to bring spending programmes to an end. Such a climate, compounded by a “job for life” ethos in the public service renders an important part of our economy inflexible and can reduce its efficiency. It would be interesting if the Minister initiated rigorous reviews of all elements of public spending, along the lines applies so successfully to the tax incentives. What would the reaction be if the bottom ten percent of State expenditure, in terms of cost benefit justification, were discontinued each year, freeing up resources for new initiatives, or for reducing State expenditure taxation and the national debt?

Tax net
The Minister in the budget speech stated that over one third of the work-force is now outside the tax net completely, at least in terms of income tax. Through his restriction of the amount of specified tax incentives that any one individual may avail of, the Minister has gone a long way towards introducing an alternative minimum tax of approximately 20p.c.. The concept of a minimum tax however is restricted to higher earners. There is a dilemma here. On the one hand it seems right and desirable that those on low incomes should not be subject to income tax. On the other hand, it can in the long run become politically unhealthy if a significant part of the voting electorate are exempted from feeling the cost of the political measures for which they vote. The concept of a minimum tax is one that can be ignored where the great majority of voters are subject to income tax. But if one third of the labour force are excluded from income tax, it may be time to keep the situation under review.

We have seen the hysteria which has been created regarding tax free millionaires. Part of the political agenda has been driven by a media storm whipped up by the left wing. But according to the Minister, the number of individuals involved is in or about forty, out of a population of more than four million.

What is important is not the principle which was being debated, as to whether there should be a minimum tax, but rather the tone in which the debate has been carried on. If a country is one in which high earners and high achievers feel threatened and despised, and potential targets for witch hunts, it is unlikely to sustain a buoyant economy for long.

Any fair observer would have to say that the crafting and delivery of the budget speech was excellent. The Minister is to be congratulated. The content also contained many admirable features. But in some areas of detail which may not have attracted as much of the Minister’s personal attention as did the big policy issues and politically sensitive issues, improvement is possible before the Finance Bill.

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