Throwing away all the hard work

Good news is hitting the government like a man in a safari suit getting slapped in the face with a massive halibut. It’s not that big of a deal unless the hapless safari-suited chap is standing at the edge of large body of water into which he can fall.

Well, this government can fall.

So much more tax is coming into the state’s coffers that, for 2015, the gap between government spending and income from different taxes is €2.1 billion compared to around €6.1 billion in 2014. That’s quite the halibut. Our exchequer is run like a GAA club’s accounts, so we tend to just look at money in minus money out as a good measure. It is roughly in balance. We took in €41 billion, and spent €41.1 billion.

The Central Bank, the ESRI, and the Irish Fiscal Advisory Council have all released detailed forecasts and some commentary urging caution around this good news, raising their forecasts for growth from 4 per cent to around 5 per cent for 2015 on the back of strong increases in domestic demand. They have all strongly warned the government not to stimulate a buoyant economy with tax cuts and spending increases when large funding deficits exist across the system, particularly when debt levels are still so high. Expect them all to be roundly ignored during the post-recession bounce, as they were ignored during the construction boom, and for the same reasons. They don’t fit the narrative of ‘giving something back’.

The problem with a really strong economic performance a month before an election-defining budget is the very strong incentive it gives politicians to spend the increased money on those sections of Irish society who might vote for them. Both Michael Noonan and Brendan Howlin are highly intelligent and honourable men, and have both sworn a hole through a pot they won’t blow the recovery. But they aren’t the only people making the decisions. History shows us that we have a system which breeds both short-termism, populism, and no long-term thinking. In fact, feck history. Look at the present.

Witness the awful spectacle of South Dublin County Council voting en masse to forgo €4.6 million in property taxes in the middle of a homelessness crisis. Who voted this in? Ireland’s Tory party? Not at all. Almost the entire council voted it in, 36 to one as a matter of fact. A broad church of Fine Gael, Fianna Fáil, and independents, Labour (who wanted only a 7.5 per cent cut), Fine Gael, People before Profit (really), Sinn Féin (no, really), the Anti Austerity Alliance (no, no, really), the United Left (no, no, no, really), voted this cut in, the maximum allowed under law. Only the Green Party voted against it.

Wicklow County Council, South Dublin County Council and Dun Laoghaire-Rathdown County Council followed South Dublin in dropping their property charges by the maximum amount allowable. These are the richest areas in the country. The tax income forgone is in the tens of millions. While families can’t find homes.

This rate cut is only possible because property values are increasing, meaning the absolute amount to play with has gone up – this time. When property values fall again, as they will eventually, the tax will have to be increased, worsening the hardship many will feel. This is the very definition of pro-cyclical taxation policy. It is precisely what got Ireland into the mess it found itself in, in 2007 and 2008. And the behavior of the councils illustrates that most fundamental truth of economics, and of politics: nothing is ever learned for long.

Prepare to be shocked – shocked! – when the same councillors decry the lack of funding for basic resources in due time. Every councilor voting will have lived through the economic crisis here. It is astonishing to see them remove income from the state at precisely the time when increased funding can do the most good.

Ireland’s fiscal rules prevent the kind of cross-party stupidity happening at the council level. The fiscal rules ensure the expenditure envelope is tightly controlled in terms of current spending, meaning the pressure to reduce taxes more than advertised will come very strongly from industries lobbying for lower VAT for the products they use, for services they offer and so forth. Each lobbyist will claim their project is the most important for society, while trying to help their supporters or constituency.

Income taxes – in particular the USC – are flagged to fall, while spending increases on public sector pay, child benefit, childcare expenditure and more have been mooted. The capital plan envisages another €110 million for capital projects in 2016, and larger increases thereafter thanks to the new capital plan. That sounds like a lot until we remember that capital investment by the government is projected to rise by around €600 million over the next three years, while tax cuts will cost €750 million next year alone.

All in all the case for stronger capital spending, as opposed to tax cuts, is fairly good. As a percentage of GDP, Ireland has never, ever spent more than 6 per cent since 1970. The long-run average for capital expenditure relative to GDP is only 3.5 per cent, and since 2010 has been about 2 per cent. Moving the expenditure needle up to even its long-run average would mean doubling the already announced capital plan. Increased capital spending is probably the best way to really ensure we all ‘feel the recovery’, if not in our pockets, then under the wheels of our cars and under the soles of our shoes as we walk through our hospitals.

The other side of the spend-more argument is this: income taxes made up about 31 per cent of all taxes in 2002. That percentage fell, thanks to stupid fiscal policies, to 27 per cent in 2007. Thanks to the crisis blowing a hole in the finances of the state, income taxes in 2014 were 42 per cent of all taxes, right at the levels where they act as a disincentive to increased innovation and productivity. Returning to a state where income taxes represent, say, 38 to 40 per cent of the total tax take by 2017 requires those monies to be found elsewhere, either from increased numbers of people at work or via property, water, carbon, or other taxes. Maybe they’ll tax the water on Mars. Who knows?

The ministers will be fighting for balance in the run up to the next budget, possibly as the spur for an early election if the October polls are good. The problem we have is the confusion of a nominal surplus in terms of money in and money out with a structural deficit. When you make this mistake, the sound you’ll hear is the schlap of a cold halibut as the economy heads downwards. People will be very surprised, of course, but aren’t they always?