The pageant of impossible promises

Budget day. It’s like Christmas, but designed by drunken, bitter economists. The ministers will come into the Dáil with their bags of sweeties and, depending on whether the little interest groups have been naughty or nice, the bags will open. And out will pour the sweets. Not as many as the little interest groups would like, but hey, let’s not spoil them. The little interest groups will have to behave, of course, and promise to behave for a good while afterwards. In particular the little interest groups have to promise to show their love for the sweetie-doling ministers in the election, a kind of beauty pageant for impossible-to-fulfil promises.

This election will be coming up not so long after the budget, so the little interest groups will have to be on their extra-best, super-best behaviour. They have all asked for much, and they will all be given little. But that will have to be enough.

There are others who say they would like to become the next set of sweetie-dolers. Many of them have told us recently what sweeties they would give out if they were given the big sack. Sinn Féin would like to increase taxes by €1.1 billion on things like alcohol, betting taxes, income taxes on the rich, introducing a pensions’ earnings cap netting €135 million, introducing a second homes tax for €110 million, and more.

Fianna Fáil would increase taxes by €208 million, mostly by raising taxes on old reliables like alcohol and tobacco, netting €96 million, and introducing a sugar tax, netting €75 million. Sinn Féin would give a bit back too, abolishing the local property tax, reducing USC and scrapping water charges, handing back around €815 million or so. Fianna Fáil would totally abolish the USC, handing back around €399 million, reducing income tax by €152 million, and reducing capital taxes: all in, it would hand back around €765 million.

Both would spend small fortunes on capital projects, here, there and everywhere. Both tinker at the margins of a €44 billion spend on the public sector, combined with about a €44 billion intake from taxes. Either way, their promises sound pretty good, depending on who you are and where in the wealth and income distributions you happen to sit.

Newer parties like Renua are promising a refreshing alternative to the tinkering of other parties: they want a flat tax of 23 per cent on everyone, with a basic income for those on lower incomes to offset the increased taxes they would pay. Overall, the rich would pay a bit more, the poor a bit more, the middle classes a bit less. This would lower the amount of tax in absolute terms, but might well increase the amount of productivity in the system, and make it much easier to administer.

But that’s for another day. In only two more sleeps, we’ll learn who is getting what. We already know the broad contours of the spending ‘envelope’. There will be €1.5 billion to spend, with €750 million going to tax cuts, and €750 million to expenditure increases. Of the expenditure increases, about €350 million is going on pay increases for the public sector. The remaining €400 million or so will go on subsidised childcare, probably by extending the Community Childcare Subvention Programme, and most of the rest on increases in health and education spending which were going to happen anyway.

Looking at it this way, the budget is broadly neutral in expenditure terms, correcting for the fact that under the emergency legislation which took away their pay, public sector workers had to get something back.

The Spring Statement showed clearly that demographic pressure from the young and the old were going to drive up expenditure in health and education no matter who was in power. Extra cash coming from the fact that there are fewer unemployed people will help balance the books, but ultimately this government will need to borrow a bit to balance the books.

Why? Because despite having as close to a primary surplus as possible, we still need to pay around €8 billion interest on our whopping national debt, which is about 86 per cent of GDP, once you take out all the cash the state has on hand and other assets.

On the tax cut side, we know USC is for the chop, and this will eat most of the €750 million to help those on lower incomes. The minimum wage will probably be increased, so we’ll see a helping hand for employers in terms of PRSI to offset the hit their margins will take. Helping the self-employed has been a constant refrain from both sides of government, so we may well see tax credits being deployed for newly self-employed workers. Again, a lot of it is tinkering at the edges of the system, rather than introducing bold changes. Electorally this plays well, as people’s disposable incomes will go up. Sweeties! Voters with kids at pre-school age - and there are loads of them - will be happy as childcare will become more affordable. More sweeties!

It is probably the wrong point in the business cycle to be cutting taxes, just when the economy is not only recovering, but bouncing back, hard, from the years of the crisis. This bounceback won’t last forever and the economy will most likely settle down to a 2 or 3 per cent growth rate over time.

A broadly neutral budget in terms of spending the minimum on increasing services makes sense. With bottlenecks for funding all over the system, the government would have been better keeping as much tax in the system as possible. It has set taxpayers’ expectations up for an income tax decrease, however, and so has to follow through, otherwise it’s curtains for them come the day of the beauty pageant for impossible-to-fulfil promises.

In fact, the story of the last two years has been about expectation management. Less than three hours after delivering the last major austerity budget in 2013, Michael Noonan told Miriam O’Callaghan on Prime Time that if funds allowed, taxes would be cut in 2014. In 2015 he said the same. The government has now come full circle.

From 2002 to 2007, that government had to manage expectations while doling out sweeties in a growing economy. From 2007 to 2011, the government had to implement giveaway policies and then implement a crisis management plan. From 2011 to 2015, the government had to implement a crisis management plan and manage expectations as asset values rise again. We’ve come full circle, 2002 to 2015. Nothing much learned, a lot of potential squandered. Some nicer roads and a bit more child benefit, better cancer care and more obesity, more child poverty and social exclusion, longer waiting lists but better third-level qualifications, an older population with more very young people.

Individual budgets don’t fix these things, good or bad. Only multi-year strategies do, and then only with luck, persistence and excellent planning. This budget is about sweeties for the next beauty pageant for impossible-to-fulfil promises. But that’s okay: it’s what we seem to like in Ireland.