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Thursday, 25th April 2024 |
| Ireland’s second budget for 2009 has been described as severe. It had to be that. But it has focussed more on tax increases than spending savings. The next budget will have to rebalance this if those who are being asked to bear the burden for now are to be treated fairly and long term damage to the economy is to be avoided. In the meantime the Government needs to improve its communications and let the silent majority of taxpayers know it is prepared to make some tough calls. |
Defer judgement
It would be a mistake to rush to final judgement on this Budget. The problems it seeks to tackle are many and complex. Many of those problems lie in the areas of macro economics and international finance, as well as in the area of relationships in the EU and
Euro zone.  | | Brian Daly |
But it is difficult not to be worried by some aspects of the proposals, in particular the over reliance on increased taxation rather than sufficiently focusing on cut backs in public spending. The impression given in the Budget is that not only is this over reliance on taxation the solution for this year, but it might be the solution for next year as well. Hopefully this is not the case.
The present crisis in public finances has been caused principally by the decisions of the past several years on how the tax revenues from construction activity were spent, and not by the fact that such revenues were generated. If more had been spent on productive capital projects and less on salaries in an unreformed public service we would not now have a problem of any similar magnitude and would have a more competitive economy. The pension levy on State employees does not do enough to bring value for money into the public service compared to costs in the private sector; the attempts to reduce public sector numbers are unfocused and doomed to be short lived; and the task of curbing the costs of the health and social welfare system has been long fingered.
Many of those who are fortunate enough to be still in a job and those who are trying to run businesses in the current environment will be prepared to bear their share of the burden, but only if the Government gives leadership and a clear indication that it is prepared to take the tough calls that many business people are having to take at the moment to remain competitive.
It is critical that between now and the next Budget, the Government sufficiently educates public opinion so that they don’t again end up solely appeasing vocal sectional interests and daytime radio DJs. They must ensure that a fairer and economically healthy balance between increased taxation and savings on public spending is delivered in the next Budget.
Other concerns
The Budget proposals could be accused of displaying certain shortcomings:
• There seemed to be a lack of urgency. Much is proposed as desirable in tax terms and in spending terms but action is not to be taken just yet. Why not? The sooner action is taken, the less borrowing is piled up and the faster we will return to
economic health.
• Because tax reform has been linked to the work of the Commission on Taxation, and spending reform to the work of “an bord snip”, we are in the doubly unfortunate position that the work of those bodies, which requires time to be done thoughtfully, has to be rushed, but in the meantime the immediate action on tax is crude and there has not been enough action on spending cuts.
• An example of deferred decisions is the statement in the budget speech: “The Government does not think that it is fair to pay the same level of benefit irrespective of the level of income of the recipient. For that reason, the Government has decided that Child Benefit will be means tested or taxed in the Budget for next year.” If it is not fair to pay regardless of income, then why do it this year? Why not start the changes in the system right now?
• There seems to be failure to prioritise policies to assist competitiveness. The Minister rightly identified the need to address competitiveness in what is an export dominated economy. This was one of the encouraging aspects of the budget speech. But where are the actions to strengthen competition throughout the economy, including in the State dominated sectors? We see instead cuts in tax reliefs for private provision of health services which was critical to achieving a cost effective customer orientated health system. Where are the actions to ensure that the cost of the State does not represent an uncompetitive burden on the private sector? What we got is additional taxation impacting heavily on employment costs.
• The proposal to disallow 25% of the interest cost of rented residential housing on top of exposing it to the “second home levy” seems like a move which will do nothing to restore confidence in the housing market or improve the banks bad debts position. Many affected owners may now have negative equity, partly vacant property, and falling rents. It is possible in such a case that the partial loss of tax relief on the interest may make it impossible for some to meet interest payments and thus lead to foreclosures and further bank bad debts. This seems inconsistent with the otherwise welcome move to establish NAMA - to make NAMA a success will be a major challenge but it is highly likely to be a better solution than having to leave the full State Guarantee of Credit Institutions in place on an open ended basis which might well have been required in the absence of NAMA.
Looking forward to December 2009
At this stage what the minister has done is done. But there can be no excuse for another failure to tackle the real problems over the remaining part of 2009 and in the December 2009 budget.
The errors made in framing the October 2008 Budget, in the discussions on the New National Wage Agreement, and the implementation of the Pension Levy on the public sector were probably significant factors in why the Government backed away now from public service reform and expenditure cuts, and chose to instead place a further burden on the largely silent majority of taxpayers. They have between now and the next Budget to persuade public opinion that a different balance is required.
The Government must also tackle the management deficit in the public sector. There is some fantastic talent in the public sector, but it isn’t being fully supported by Government in its attempts to instill the right approach to the delivery of cost effective quality service to customers. Downsizing must be tackled in an intelligent way by releasing the least effective and least efficient public servants and by identifying entire sectors of activity from which the State should withdraw. The measures announced - a ban on promotions and on replacement of departing staff, and a generous incentive for those aged over 50 years to voluntarily retire – are crude and undiscriminating. They leave the choice of who will leave the public service to factors such as death and illness, and the cherry picking of top talent by the private sector. If the best and most experienced public servants leave, as is possible under these proposals, downsizing may be achieved at the cost of reducing the overall quality of those delivering the service. The proposal to benchmark the salaries of top public servants against other comparable EU States is a good one in principle but it is not clear that you can realign top salaries in this way without impacting on salaries at all levels in the public service.
Social welfare schemes and rates must be based on what we are prepared to pay for as opposed to borrow for. Given that that the real value of social welfare payments is expected to be 7% higher in 2009 than prior to the October 2008 budget, it is difficult to justify either additional taxation or further borrowing to finance this cost.
All of this can be done only if the entire cabinet communicates effectively as to the true nature of what has happened and fearlessly confronts the myth mongers who currently dominate the media. The ground work must be done now and not in a years time if the next budget is to correct the mistaken emphasis in this budget and the previous budget of raising penal taxes to finance inflated, and unsustainable spending.
Positive steps
The renewed confirmation that the corporation tax rate of 12.5% is to be retained untouched is to be welcomed. Any uncertainty in this area would be the worst disaster this crisis could visit on us. Our competitors would use any suggestion of weakening of resolve here to damage us.
The package of measures designed to produce a tax code friendly to intellectual property management is a positive move. It takes courage to move forward in a crisis and to focus on the future recovery and not the present difficulties. The minister is to be congratulated on this move.
The detailed provisions may need some tweaking and improvements in detail in the next budget but this is a good start to the process.
The enterprise stabilisation fund is a good idea in principle. But the amount is too small to be of much use and runs the risk of having high administrative costs relative to the amounts that will reach businesses. It’s chances of being useful might be increased if the task of administrating it were handed over to the banks that are the natural source of finance for business.
The stamp duty trade in scheme (lets hope it escapes being called a house scrappage scheme!) though welcome as a minor measure is no substitute for the freeing up of mortgage finance and the restoration of confidence in house values and job security. It sits oddly with the restriction of mortgage interest relief which will impact exactly those targeted by this proposal - those trading up. It also sits oddly with the suggestion that the government expects further falls in house prices - which it says will be the trigger for total abolition of mortgage interest relief.
Let’s hear from the Government
Hopefully the minister will, in the December 2009 budget correct the imbalance between additional taxation and spending cuts. Hopefully he will recognize that the reforms of the over staffed and under-delivering State machine will be politically possible only if the entire government convinces the country that it really believes in what must be done and that it will, in the national interest, face down opposition from vested interests no matter how good their access to the media. |
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