Taking the axe to tax

Most of the parties want to cut tax and hike spending on ‘fiscal space’ that could quickly vanish

I’m going to reduce almost every party’s economic plan to one sentence for you, then explore the details.

Ready? For almost every party, the plan is: taxes down, current spending up, capital spending up.

Honourable mention to the Social Democrats, who want taxes kept the same, current spending up, capital spending up. But that’s really it.

It is interesting to see how the debate has changed. Compare the fiscal space fracas to last year’s pre-budget submissions, when everyone accepted the government’s €1.5 billion envelope and quibbled over the tax versus spend proportion.

All of our political parties are planning their policies out to 2021, the putative lifetime of the 32nd Dáil. Everyone is assuming more money in the national kitty thanks to buoyant revenues from growth. Even the Irish Fiscal Advisory Council argues there will be €3.2 billion to spend over the coming years. You can debate if that number should be 3, 12, or somewhere in between, but everyone agrees there will be cash. And lots of it. And this cash will do everything.

No, it won’t.

Forget that the assumption models these estimates are based on are weak; forget that growth forecasts are always, always wrong; forget that Ireland’s growth rates are highly volatile, forget that a host of international bodies are warning that we are in a bubble.

Worse again, we now have the spectacle of opposition parties negotiating what they think the real figure is, with Fianna Fáil and Sinn Féin agreeing on a figure over €8 billion. Oddly, in defending Fine Gael (and the Department of Finance’s) €12 billion figure, Minister for Finance Michael Noonan made the most intelligent comment in trying to explain the fiscal space argument last week.

He said that ministers for finance never index in advance or make changes to the nation’s finances except on a nominal basis and with one year forward as the focus.

This is exactly correct. Given the volatility of the state’s finances, there is no sense in considering indexing now or into the future. 

This week, I’m going to look at non-government parties. Next week, I’ll take a very close look at Fine Gael and Labour’s plans.

Every party wants to create more jobs. Sinn Féin focuses on policies to help low-paid workers and those who want to work but can’t, for instance by introducing supports for people with disabilities who want to work.

This is a good idea, as Ireland has the lowest work intensity for households in the OECD. This is caused by the interplay between the tax and welfare system; the state of the labour market at a given moment; the individual characteristics of jobless households like their age, level of education, number of children and the health status of adults and children. So one, two, or even three policies won’t help these households.

A much more comprehensive suite of policies needs to be built.

Renua Ireland have probably the strongest focus on SMEs and the self-employed of all of the non-governmental parties, and if in power would overhaul the various discriminatory practices the self-employed have to deal with, along with some nice ideas for share-based remuneration for employees and their flat-tax proposals.

Fianna Fáil will focus on the employer side of job creation, aping Renua somewhat by proposing to incentivise SMEs by dropping capital gains tax to 15 per cent, reforming rates and extending PRSI benefits to the self-employed along with a pretty cool non-bank crowd financing idea nicked from Britain.

These are all good things, but given that Ireland is going to grow faster than any other OECD country this year, I doubt employers need the leg up as much as the employees.

The Social Democrats focus on three broad areas in their proposals to create 100,000 new jobs. They want to reduce costs and admin by focusing on Norwegian-style e-government to kill as many paper forms as possible, increase the take up of research and development tax credits, and they quite correctly connect their childcare policies to all employment initiatives.

So whose policies win? It depends on where you stand. If you’re a low-paid worker, Sinn Féin are the party for you. If you want better government, go with the Social Democrats policies. If you’re one of the benighted employer class, pick Renua or their copycat cousins, Fianna Fáil.

Either way, despite warning signs in the international arena, labour market conditions will improve over 2016, unemployment will fall, perhaps to 8 per cent or even lower, and the state’s finances will improve as the newly-employed contribute taxes without increasing social protection spending.

There is a real danger that unrealistic expectations of wage and profit increases will take hold again, and short-term policies will be enacted to meet these expectations for electoral gain.

We have several long-term problems: housing, social inclusion, capital investment of all kinds. None – not one – of these problems are solved with tax cuts. And yet everywhere we turn, its tax cuts, spending increases, and capital investment.

Next week, a forensic look at how realistic Fine Gael and Labour are in their aspirations for the country.