Wednesday, 7 December 2011

Day 2 - Budget 2012

Sinéad Pentony: Day two of the budget focused primarily on revenue raising measures and the introduction of measures aimed at stimulating economic growth. Let’s see how some of the big announcements on day two perform against the principles of fairness, jobs and reform.

A big part of yesterday’s announcements related to measures aimed at resuscitating the property market. Although every successful advanced economy has a functioning property market that makes an important contribution to economic activity, this Budget seems to be relying on new property-based tax breaks rather than a programme of strategic investment to support economic activity.

Budgetary measures in this context included changes to Stamp Duty, Capital Gains Tax and Mortgage-Interest Relief (MIR) aimed at incentivising transactions in the commercial and private property markets. The changes in MIR include an increase to 30 per cent for first-time buyers who bought at the peak of the boom (2004-2008) along with increases to MIR for new first-time buyers and non-first time buyers in 2012. These measures fail the test of fairness for a number of reasons:

• If you bought a house during the boom you are likely to be in negative equity, but if you are still able to make repayments and have not lost your job, the changes to MIR are an added bonus and will reduce your mortgage repayments.
• If you bought a house during the boom and are in negative equity and you are in mortgage arrears, the reduction in MIR may improve your prospects of meeting your mortgage commitments, but many will never be in a position to repay the mortgage. Changes to MIR should have targeted this group along with the introduction of personal insolvency resolution mechanisms whereby personal and mortgage debts are restructured and/or written down. An announcement on the latter is due shortly.
• Many low income families were never in a position to buy their own home during the boom and will never be in a position to benefit from state subsidies for home ownership. For these groups social housing, housing associations and/or private renting are the only options.

Another measure relates to Section 23 property reliefs, the abolition of which was announced in last year’s budget but was later reversed pending an economic impact assessment. Yesterday’s measures included the introduction of a property relief surcharge of 5 per cent on annual gross incomes over €100,000.

Reforms to the budgetary process include a commitment to greater transparency, so the economic impact assessment should be published so that it can be subject to public scrutiny.

The main taxation measures include changes to the Universal Social Charge (USC), increases in VAT, carbon tax, motor tax, CGT, CAT along with the introduction of the household charge. The changes to the USC are welcome and certainly pass the fairness test on the grounds of equity on their own terms. The increases in CGT and CAT are also to be welcomed as these are taxes on the sale and transfer of assets. The application of the PRSI to other forms of income along with increases in DIRT is also good news, although the former will only come into effect in 2013.

Ireland is a poor performer when it comes to taxing assets and wealth compared to other European countries, so these increases are a step in the right direction but much more could have been done in this budget to spread the burden of the adjustment more equally.

An example of where more could have been done relates to the taxation of Irish people who are non-resident for tax purposes. The domicile levy can only be described as a failed attempt to ensure that this group of people are made to pay their fair share. Plans to abolish the “citizenship” condition for payment is unlikely to make any difference to the amount of revenue generated through this measure. The introduction of a “citizenship-based” tax or a tax on global assets are measures used to generate revenue from non-residents in other countries.

The bad news on taxation is that when you combine the changes to the USC with the decision to base the jobseekers’ benefit payment week on a 5-day week rather than a 6-day week, the likely outcome is that people earning less than €10,000 – who are probably working on a part-time basis and likely to be women - will actually lose more of their income, especially when the increases in VAT and carbon tax is included, not to mention the household charge.

Indirect flat taxation measures are blunt instruments for collecting revenue. They are regressive and take proportionately more from low income families. Such measures are also counter-productive because they reduce the spending power of such households which will further depress consumer demand and ultimately lead to more jobs losses and job insecurity. So this group of measures fails both the fairness and jobs tests.

The household charge is a good example of how not to introduce a property tax and fails the fairness test because it is going to apply to all houses (with a few exceptions) regardless of location, house size and income. While the introduction of a Site Valuation Tax has been flagged for 2014, the household charge will cause alot of pain in the meantime. TASC has developed an equality-proofed residential property tax model that could have been introduced relatively easily and used on an interim basis.

As organisations start quantifying the effects of the overall Budget,the picture that seems to be emerging is one where everyone will be affected by the budgetary measures, but once again, low income families will lose proportionately more through reductions in their income, spending power and access to essential public services.

This budget also contains cuts to areas that are not going to save the Exchequer a significant amount of money but will have a disproportionate impact on the provision of locally-delivered services and advocacy work that provides a voice for marginalised groups. These cuts include the disproportionate cut to the budget of the National Womens’ Council, cuts to the Local and Community Development Programme, Rural Transport Programme and Community Employment.

This budget is a very bad budget for women and children in particular, both of whom are at the coal face of this recession.

The latest poverty statistics illustrate the impact that responses to the economic crisis are having on women and children. Unfortunately, this budget is likely to result in a continuation in this trend, so it is more important than ever that the effects of budgetary measures are quantified and alternatives policy options put forward.

At the end of the day the budget represents a set of choices and the political priorities of the Government. Once again the wrong set of choices appear to have been made for the economy and a large part of the population.


David Joyce said...

Well done to Sinead once again on a very useful analysis of this week's budget. Just to add a small but significant item to the discussion. People may have noticed a cut from €150,000 to zero for Equality Proofing in the Department of Justice and Equality estimates. What's that you might say..Well, this was a mechanism by which the already financially challenged Equality Authority was able to use €150,000 drawn down from the European Social Fund to via the Department to run a programme of activities supporting equality competence and mainstreaming measures by employers, trade unions and others. And at absolutely no extra cost to the Exchequer because it was match funded by salary money the Equality Auhtority already had. Combined with the stated 2% cut to the Equality Authority, this amounts to a 23% cut in the non pay budget of the Authority and flys in the face of stated intentions to create a new "enhanced" equality and rights commission by merging the Authority with the Irish Human Rights Commission (also financially challenged and facing anothe 3% cut in 2012). Madness..

Sinead Pentony said...

Hi David,
Thanks for clarifying what happened that budget line item, I wasn't sure what the 100% cut meant and if the equality proofing function was being absorbed elsewhere. It is apparent that some of the decisions in this budget have nothing to do with making savings and are aimed at rolling back the years when it comes to embedding equality principles in policy making processes and silencing dissenting voices, as evidenced through the disproportionate cut in the NWCI's budget.

Anonymous said...

This budget is a very bad budget for women and children in particular, both of whom are at the coal face of this recession.


All the statistics indicate that men have suffered far more job loses than women in this recession.

But then again, who cares about the facts when there's a lazy ideological point to be scored?

Anonymous said...

Work for a HSE agency that caters for children with disabilities. HSE have just told the agency that its budget will be cut by 450,000, but that all services should be maintained.

Sinead Pentony said...

Thanks for your comments. Yes, more men have lost jobs than women and this budget is heavy on the rhetoric of job creation and light on the detail of how the budget will lead to more jobs. The overall efffect of the budget is unlikely to lead to more job creation which is bad for women and men.

But the budget is not just about jobs - it sets out the spending and taxation decisions that will have an impact on both the economy and the society. In this year's budget the Department of Social Protection cuts in particular will have a disproprotionate impact on women and children living in low income households and these are the groups that are most at risk of poverty and are more likely to be living in poverty, than any other group in society. Here's the link to the preliminary findings for 2010

While the budget will impact on everyone, when you look at the status of women and children in Irish society and you look at the measures included in this budget, there will be a disporportionate impact on women and children in relation to income, spending power and access to essential public services, which leads me onto the next comment about cuts to the budget for services for children with disabilities.

This is an example of the picture that is emerging of just how deep the cuts in this budget are to services for vulnerable groups. Of course it won't be possible to maintain services with a cut of €450,000 and clearly illustrates where the priorities of this Government lie.

TASC and others have presented alternative choices that could have been made to avoid these kind of cuts. But the Government made other choices based on a different set of priorities.