October 19, 2015
Last week’s Budget puts some money in most people’s pockets. But other that maximising votes, is there any serious thinking behind it? Does it set the country on a new and better path to a stable and prosperous future? An examination of five big ideas in the Budget suggests it does quite the opposite.
1. The Budget creates a more work-friendly marginal tax rate
“We must ensure that work pays.” Government TDs have been saying these six words all week. Michael Noonan intoned them in his Budget speech Tuesday afternoon and explained that “the many barriers to taking up employment include taxation”. This refers of course to the marginal rate of taxation, which is public enemy number one for this administration. The Government’s big idea is that reducing this rate will encourage more people to work.
In theory, a rate of 51pc kicks in once any of us earn €33,800. But not in reality. Tax credits mean that for a single PAYE worker, the higher rate kicks in at about €42,000. For a married, one-income household with a 10pc pension contribution, it’s at over €62,000. So for the single person earning €50,000, or the married person earning €70,000, reducing the rate from 51pc to, say, 44pc (full abolition of the USC), would be worth just €560 a year.
So for the Government’s big idea to work, there’d have to be loads of people refusing jobs on €50,000 to €70,000 and higher, because they object so strongly to paying that €560. This, clearly, is complete nonsense. And yet it’s a cornerstone of Fine Gael/Labour fiscal policy.
2. The Budget strengthens economic stability
We’re hearing the word from the Government more and more frequently, as the election looms closer – ‘stability’. On Tuesday, Minister Noonan explained this big idea as follows: “We must not gamble with the future. This Government will not take chances that destabilise the recovery.”
But numerous economists and economic organisations warned the Government not to erode the tax base in the Budget. Instead, Fine Gael/Labour dedicated a full half of the €1.5bn available to doing exactly that. It was politically clever, with RTE’s Budget-day analysis focused almost exclusively on these tax measures, and how much better off households would now be.
Eroding the tax base is exactly what Fianna Fail did during the bubble. It felt pretty good at the time, but it had disastrous consequences. Many of the circumstances are the same today: the ECB is making cheap money available; the economy is growing; house prices and rents are soaring. Eroding the tax base in this context does not stabilise the recovery, it destabilises it.
3. The Budget is about job creation
There’s been a lot of talk around the Budget of “getting Ireland working again”. The big idea here is that a broad reduction in the tax base puts money back in people’s pockets, who then spend it, which helps create jobs. Somewhat true, but not the right way to maximise job creation in either the short or long term.
Much of the Budget’s tax benefits accrue to higher income households. For example, a typical household on €150,000 will be better off by about €1,200, compared to about €500 for a household on €25,000. As a general rule, the lower income household will spend much of that money on local goods, like food, which flows directly into job creation. In contrast, much of the €1,200 benefit to the higher-income household will either be saved or spent on imports – neither of which are much use for job creation in Ireland.
One thing that would have supported both short and longer term job creation is capital investment. In his speech, Minister Noonan stated that: “We must invest in the critical infrastructure needed in a modern economy.” True, and the Government recently announced a €27bn capital investment programme. But it turns out that was already committed investment. Because, believe it or not, Budget 2016 actually reduced capital investment, from an already low base, by €50m. The single greatest investment in long term job creation would, of course, have been via education. Which brings us to the fourth big idea.
4. The Budget invests in public services
Here’s what the Minister said: “The top priority of this Budget is to keep that recovery going, while providing relief and better services for the Irish people.” Better public services is a critical big idea – so is this at least one which the Government can stand over?
Unfortunately not. The two most talked about public services are healthcare and education, both of which have been starved of investment for years. But of the €1.5bn available in the Budget, just €18m was allocated to healthcare. That’s one tenth of one per cent of existing healthcare funding. For education, the figure was €24m – that’s one third of one per cent of education funding. Or put another way – healthcare and education combined accounted for less than three per cent of the total Budget allocation. In a week full of numbers, this is arguably the most important one.
We can judge the Government’s Budget priorities very easily – follow the money. The change to USC is very welcome for many people. But it accounts for €561m of the €1.5bn available. That means it received more than 13 times the public funding that healthcare and education received, combined.
5. The Budget supports innovation
Another big idea of the Budget was that reducing taxes for people who sell companies will stimulate innovation. Minister Noonan stated: “We must create the conditions in which new ideas, innovation and entrepreneurship will be encouraged, leading to increased long-term growth and wellbeing.”
A noble sentiment, which rings hollow in the context of investing almost nothing in education. The two greatest hubs for innovation on earth are California and Boston. Why? Because they’ve got some of the best universities. I’ve yet to meet an investor or venture capital fund that won’t fund great people with exciting ideas because of a tax rate.
But that’s the big idea – reduce taxes for those selling their companies to incentivise others to set up new companies. But when it was announced the Web Summit was moving to Lisbon, the Government just shrugged. Investing in education stimulates innovation. Building innovation hubs stimulates innovation. Supporting events like the Web Summit stimulates innovation. Cutting capital gains tax for the sale of companies does not.
The big ideas behind this week’s budget simply don’t stand up. Eroding the tax base while investing almost nothing in education and healthcare is not just irresponsible, it’s dangerous. Enterprise, innovation, entrepreneurship, job creation – these things thrive in an environment of great education, reasonable living costs, high quality healthcare, strong communities and modern, reliable infrastructure.
A budget that championed these big ideas would be one that could take the Republic on an altogether better path.
This Article Originally Appeared in the Sunday Independent on Sunday 18th, 2015.