Beware of political parties bearing gifts

All parties insist their election promises are costed. That’s not quite the full story

All elections are filled with promises. Promises to tax us less, to give us more, to reward whatever interest we think is special. Promises to do the right thing for our locality.

Post-election, these promises are, by and large, forgotten. The big ones, such as promising to cut taxes, not jack up student fees, not cut social welfare payments, and so forth, typically come back to haunt the government that breaks them. You would think, then, that this time around a bit more circumspection about promises would be in order.

You would be wrong. You could possibly quality for the Professorship of Wrong at the University of Wrong. The fundamental truth of Irish politics is that parties who responsibly promise to be responsible are fated to spend their time in the next Dáil warming the back benches, if they are there at all.

Every party’s manifesto will contain promises they will say are “costed”. Sometimes, the party’s finance spokesperson will thump their chest and say the policies are “fully costed”, which means almost exactly the same thing. Which is to say, not much.

Over the next few weeks I’ll be looking in detail at all of the parties’ policies, how much they cost, and how much they might end up costing us.

But this week, a few words on costings. There are two ways most parties do their costing of policies in Ireland. First, the departments of Finance and Public Expenditure and Reform have a series of models (spreadsheets, basically) which give their best guess as to what happens when you do things like cut income taxes or abolish USC, or something like that.

Say you cut taxes, and in doing so you increase a household’s disposable income by €100. They’ll spend, say, €90 and save the other €10, or use it to pay down their debts. That €90 spent helps the businesses the household has bought from. They go and spend the €90 on wages for their employees, and spending for other things, and so on.

You have just stimulated the economy a little bit. Happy days.

Now comes the hard bit: you have taken €100 from the government’s coffers, so services have to either drop back a bit, or you have to hope the economy grows enough so that there are more people paying more taxes to plug the hole you’ve made.

If growth doesn’t materialise, you’ve got to start austerity policies, which harm the weakest. There’s a risk to altering the tax base, as we have learned three times since independence.

I digress. Models are a good way to cost some policies, but the departments’ models only go so far. If you want to introduce a new policy such as a tax on net assets over €1 million, or a new tax on children’s shoes, then the model can’t run that because it has no previous data, and so you have to lick your finger, stick it in the air, and think up a number.

Typically, what you’ll do is have a TD submit a parliamentary question to the Department of Finance, or the Revenue Commissioners if it’s just a tax matter. The diligent civil servants will then do their best to come up with a number for you for how much it will cost to implement your policy, hopefully with as little finger licking as possible.

But you never know. A series of parliamentary questions later, and your policies are costed. Voilà!

The problem is that these costings are static, partial and sometimes based on weak assumptions.

The parties’ costings are static because they don’t take into account the effects of a few years’ worth of these changes.

Say I tell you I’m going to reduce USC to nothing by 2021. You probably won’t wait around until 2021 to feel the benefits – you might start spending like the money is gone now. Likewise, the Renua Ireland’s tax plan relies a lot on dynamic effects, where people go back to work over time because poverty traps get eliminated and the tax system is vastly simplified, thus driving tax revenues up and reducing the cost of running the tax system.

The costings are partial because in the real world, policies offset one another. So for example, if you increase a public servant’s gross pay by 10 per cent, but they pay half their salary in income tax anyway, it hasn’t cost the state 10 per cent but 5 per cent. The costings almost never compute this offset. Changing inheritance taxes affects how farming subsidies are calculated, changing income tax bands affects medical card take up. And so on. Government is a complex system.

Sometimes the assumptions the costings are based on are just weak. Take healthcare spending. There are systemic issues with the health service, but no one year’s spending could solve all of them. It is easier to work a little magic using “efficiency gains”. (You see the same thing for the Department of Social Protection, where millions are always magically saved combating welfare fraud).

Attempts to rein in healthcare spending always include a line on securing better drug costs by nailing the multinational pharmaceutical companies that make these drugs. Estimates vary widely here because there are no clear data to extrapolate from. For example, in their last pre-budget submissions, Sinn Féin pledged to reduce healthcare costs including medicines by €36 million, while Fianna Fáil was going to do the same and achieve €155 million in savings.

The numbers can be a bit dodgy, folks. There is no central costing agency to deliver authoritative spending estimates based on clear guidelines, so things stay murky. The outgoing government has committed to looking at setting up an independent costing office under the Houses of the Oireachtas as a service to all parties, but we’re unlikely to see this welcome addition to our policymaking process this side of 2017.

Taking three parties – Sinn Féin, Fianna Fáil and the Social Democrats, and looking at their pre-budget submissions for 2016, you can see how varied the policy prescriptions are in terms of simple tax and spend.

Sinn Féin plays a high tax, high spend game, while the Social Democrats focus on capital spending and retaining the tax base. Fianna Fáil adopts a very balanced approach. All three parties respected the ‘envelope’ of €1.5 billion the government set out, but which it didn’t respect itself when it came to budget day.

To date, only two parties have publicly declared their manifestos for the general election: the Social Democrats and Renua Ireland. The other parties have flagged their major tax and spend policies quite well, however.

Everyone wants to cut taxes bar the Social Democrats, who admirably want to keep the tax base as it is. Renua wants to introduce a 23 per cent flat tax rate to replace the 17 different rates of income tax.

Fine Gael wants to reduce marginal tax rates below 50 per cent, abolish the USC by 2021 and reduce the entry point of PRSI to €13,000.

Labour wants to abolish USC on the first €72,000 of an individual’s income and limit any tax relief our highest income earners receive.

Fianna Fáil wants to abolish USC up to €80,000, and apply a 5.5 per cent rate on the rest.

Sinn Féin wants people earning €19,572 or less to pay no USC, and wants a 7 per cent marginal tax rate increase for those earning above €100,000 with a 1 per cent wealth tax on net assets over €1 million, excluding 20 per cent of family home, pensions and business.

Some numbers that aren’t dodgy. Ireland isn’t a high-tax economy. Take a look at the chart, which compares the total tax burden to gross domestic product for Denmark, Germany, Ireland, Britain and the US. Ireland is a low tax economy, much closer to the US at around 28 per cent of GDP than Britain, where the tax burden is 36 per cent of GDP, and of course miles off Denmark, where it is 45 per cent of GDP.

Ireland is not doing that well in terms of taxation revenue. We barely balanced the books this year, despite nearly €7 billion of extra tax revenue we weren’t expecting. The Department of Finance’s latest exchequer returns report shows we took in around €49 billion and spent just over €49 billion including repaying the national debt. Not exactly a large fiscal space to play in. But who needs numbers when you’ve got promises?

Figure 1 Tax burden as per cent of GDP. Source: AMECO.