Wednesday, 2 November 2011

TASC Pre-Budget Submission

Aoife Ní Lochlainn: With the conclusion of the latest round of elections and referendums, public attention will now turn to the upcoming four year plan and Budget 2012. As usual, the budget rumour mill has been churning since early summer and various kites are in full flight: €1bn cut in welfare spending, €1bn cut in capital spend, a hike in VAT, and so on. This will be the Government’s first budget, and thus it presents an opportunity to make a decisive break with the past and to show that, although it is required by the EU/IMF deal to make savings in the order of €3.6bn, it can take a different, more progressive path to recovery.

TASC, in its Pre-Budget Submission launched yesterday, suggests a number of policy proposals aimed at reducing the deficit, supporting jobs and protecting low-income groups. Since the advent of the economic crisis, successive budgets have focused narrowly on closing the deficit, to the detriment of both low-income groups and the economy as a whole. The ranks of those on low incomes have swelled over the past number of years with increased unemployment and decreases in earnings, and it is here that the pain of recession is felt most keenly.

As demonstrated by a recent analysis conducted by TASC, the introduction of the Universal Social Charge (USC) and the decrease in social welfare payments meant that those on lower incomes were left disproportionally worse off by Budget 2011. Not only do reductions in the incomes of the lower paid increase inequality, but they also lead to reductions in aggregate demand, which of course has knock-on effects for our economy.

Planning to cut the deficit should not preclude investing in people and infrastructure. If Ireland is to emerge from this crisis in the next few years we will need to ensure that we have a well-educated, highly skilled labour force ready for work. If we are to attract investment and return to growth we need to continue to improve our infrastructure. TASC is proposing that the Government take €1.2bn from the National Pension Reserve Fund and invest in education, skills and training. Capital spending should be maintained at its current level.
Current spending should also be kept at its current level. There are certainly savings to be made in the public sector, but any efficiencies gained should be re-invested so that frontline services are maintained and low income groups are protected.

The Celtic Tiger years left our taxation system unbalanced and disproportionally reliant on consumption and transaction taxes. With the recession and the collapse of the housing market, this has lead to a serious erosion of our tax revenues. While the previous Government had begun to address some of these imbalances by increasing income tax, introducing a carbon tax and beginning the process of reducing harmful tax expenditures, there remains a lot more the current Government can do to create a more stable and equitable taxation system. As mentioned above, the introduction of the USC in Budget 2011 disproportionally affected lower earners; the Government should ensure that any changes in taxation do not further disadvantage these groups. In particular, the Government can remove the remaining property-based ‘Legacy Reliefs’ on non-residential property and cut the level at which individuals and companies can claim interest rates against tax for residential properties. A reduction from 75% to 40% will yield in the order of €350m for the exchequer.

TASC's proposals target mainly passive income, which means that they are less harmful to economic growth. The introduction of a property tax, for example, based on valuations rather than a flat tax, can raise a billion Euro per annum. If such a tax is equality proofed, i.e., incorporating a system of deferrals for those who cannot pay is introduced, it is a more equitable way of raising revenue than an increase in income taxes which hit low to middle income earners. Ireland is in the minority of developed nations in not having any form of recurrent property tax. Our reliance on property transaction taxes (stamp duty) rather than a recurrent property tax can be said to have contributed to the housing bubble, along with the bogeymen of lax regulation, bad planning and harmful property reliefs. The Government should also look at ways in which our taxation system can help address environmental concerns. A modest increase in the carbon levy for example, coupled with other emissions reductions policies will help Ireland lower its carbon emissions.

Finally, TASC has made proposals to save €2bn a year from 2012 to 2023 by restructuring the Anglo Irish promissory notes. These promissory notes are not covered by the EU-IMF deal and therefore the Government could argue with its European counterparts that any restructuring would not constitute a breaking of the deal. Saving €2bn per annum over the next decade would bring a massive boost to the economy and help narrow the deficit, ensuring that the need for damaging cuts and tax increases can be reduced.


Anonymous said...

wow, very impressive, really agree with all of this

Martin O'Dea said...

Don't often disagree with anything proposed by TASC's budget submission but would have to do so regarding excise taxes - particularly on petrol. This is a commodity that already takes a completely disproportionate amount of spend out of the active economy in one transaction and aside from round one of taxes then exits the country to oil producers.

Investing in alternative forms of power generation is certainly a good thing - but the reality is a massive number of people use their cars for a vast range of daily activities, not just the sometimes work route that might be feasible on public transport. Visiting family, staycations, medical emergencies, living in rural isolation and many others show positive uses of the car and as of yet it is fuelled by petrol.

The last thing a population that is not spending needs is another hike at the pumps!

Anonymous said...

Very very vague stuff... most seems very up in the clouds tbh!

Marlows said...

Excellent analysis of the regressive effect of FG/LP "charges" on low income ppl. But why no mention of FTT:

"Financial Transaction Tax (FTT) would raise €465bn - to tackle climate change and poverty across the world"

Aoife said...

Thank you all for your comments.
Martin, you are right when you say that we are over reliant on car transport in this country. This reflects decades of underinvestment in public transport and poor planning. When looking at all of the options in relation to possible tax increases, we decided to try to limit our proposals to those taxes which have the least damaging effect on the economy. If you decide not increase taxes on labour, then I’m afraid you must look elsewhere for revenue. The Government has decided that it will make up the majority of its €3.8bn target through cuts, this will have a greater effect on those who can least afford it, through a likely reduction in frontline public services. An increase in VAT will also lead to a hike in prices, except that it will hit a broader range of products than excise duties.

Marlows, you are also right to bring up the FTT. We have mentioned the possibility of Financial Transactions Tax (or a Financial Acquisitions Tax) in the pre-budget submission, but we haven’t included any figures in our tax revenue target for 2012. This is because although TASC is supportive of an FTT, it would need to be done at a European level rather than at the national level and therefore is unlikely to feature in Budget 2012.

Anyone looking for more information or detail on the proposals outlined in the blog should download a copy of the pre-budget submission - the link is in the blog.