The view on here is that there is only a 50:50 chance that the Coalition will actually survive the next four months, as Budget 2013 hoves into view at the start of December. An Taoiseach Enda Kenny has already announced it will be the toughest budget for this government term – you might have assumed he was referring to a term which would naturally end in 2016, but both the deteriorating economic outlook, forecast by the European Commission last week and internecine wobbles in the Coalition itself, suggest that this administration’s term might not end naturally on the 100th anniversary of the Easter 1916 Rising.
This blogpost examines this year’s pre-budget kite-flying – politicians suggesting areas for cuts or new taxes, and then gauging public and other reactions.
The kites (so far):
Property tax: the €100 flat household charge/tax for 2012 remains defiantly unpaid by between 39-50% of eligible households depending on whose figures you believe. The Don Thornhill “expert report” on next year’s property tax was delivered to Cabinet over a month ago, but has not been published. Somehow, a public perception of the tax generating €500m per annum or an average of €300 per household, has been allowed develop. As things stand, we are likely to have a property tax based upon bands of the market value of a home, but the calls for a site valuation tax or indeed Professor Brian Lucey’s call for capital gains tax on profits on the sale of home in his column in yesterday’s Irish Examiner all show that it’s all to play for before a scheme is decided.
Water charges: In recent days, the impression has been allowed develop that we won’t have metered water charges before 2014 – Denis O’Brien’s Siteserv will be disappointed as it would have expected to have been a major beneficiary of the contract to instal meters. But meters mightn’t be installed in apartment blocks, will there really be a free water allowance, who will pay for the installation of meters. What will the average annual charge be?
PRSI (pay related social insurance): The incoming Government promised no changes to basic social welfare rates or income tax. But a line of least resistance might be tinkering with PRSI rates which are applied to income, much in the same way as income tax. The Government claims that the fund which pays out unemployment and pensions is in deficit.
Corporation tax rate: during the week, you might have been surprised to hear conservative FG politician and banking expert, Peter Mathews calling for a 2.5% increase to bring our corporation tax rate up to 15%. Deputy Mathews explained he was speaking in a personal capacity, but when a politician as pin-striped as the South Dublin TD puts the corporate tax rate on the table, you can conclude that he is not on a solo run.
Croke Park: with health workers making up 40-50% of Ireland’s public sector workforce, it was inevitable that Minister for Health, James Reilly would come under most pressure to deliver cuts and he claims that the payroll cost in his various departments represents 70-90% of his budget. Something has to give if he is to deliver savings, and it looks as if it will be the CrokePark agreement.
The flyers (so far):
Phil Hogan, “Big Phil” is probably surprised himself that he has been landed with the most contentious new measures in this administration, the property tax and water charges. There is no easy way to get average households to hand over the best part of €1,000 per annum, so Phil needs to launch lots of kites to see where the weak points might lie so that he can pursue the line of least resistance
James Reilly is coming under constant fire as his department comes under most pressure to deliver savings. Cuts to agency staff and overtime are not masking the reality of frontline services being cut, particularly to the most vulnerable in our society.
Ruairi Quinn, after health, the biggest spending department and Ruairi has recently launched his kite to introduce means-testing of third level grants, means-testing which will include assets such as farms and businesses.
Joan Burton, so far Joan has just launched her PRSI kite claiming that there is a deficit in the social insurance fund, which may mean that PRSI contributions from employers and employees may have to rise (see window-dressing justifications below)
Observers:
Enda Kenny has so far shown himself to be a masterful chairman of the Coalition. Phil Hogan’s fiasco with the household charge, James Reilly’s fiascos with the HSE board and overspending, Alan Shatter’s blighting of the Irish commercial property market with the Upward Only Rent Review issue have all somehow been papered over and not allowed topple the centre right/centre left coalition. No mean feat, but the forthcoming tribulations will test the chairman’s abilities to breaking point.
Brendan Howlin, the man most responsible for reform of the colossal public sector where salaries, pensions and allowances are still eye-wateringly high to many in the private sector and to commentators across Europe, has remained quiet, defending the Croke Park deal which according to the IMF will mean “nonetheless, as a share of GNP, the net exchequer [public sector] pay and pensions outlay in 2015 is projected to be 0.4 percentage points below the 2008 level, representing a relatively modest decline”
Michael Noonan, the most experienced minister in the Dail might have been expected to be the most active kite flyer but because income tax has been taken off the table, the Limerick veteran can sit back and watch the entertainment between public sector and welfare departments unfold.
So as the kite-flying season progresses, there are some home truths on here which, it is hoped, will help improve the quality of debate as the countdown to Budget 2013 continues:
1. The deficit between what we generate in taxes and what we spend on the public sector and welfare needs to be closed. As part of the EuroZone with a fixed currency, this country has no practical option but to close the gap. The alternative is default. The only questions are when, what and how much.
2. This Coalition inherited a crisis in which it had limited culpability from its previous role in opposition. You can blame this Government for decisions and actions from March 2011, but before that, our political system means that FG and Labour are largely blameless. And if FG and Labour are not to balance the books now, then what are the alternatives?
3. The Memorandum of Understanding with the Troika is not fixed. It can be changed by agreement between Ireland and the Troika, particularly if Ireland suggests a substitute measure “of equally good value” and convinces the Troika to accept the change. And the Troika is composed of reasonable people. The Troika are always contactable but the next review in October 2012 is likely to coincide with many of the Budget 2013 measures being agreed. This is what the current version of the Memorandum says about Budget 2013, but take note of the caveat at the bottom: changes can be made.
4. The Government will try to use every old trick in the book to justify new taxes and cuts. The general truth is that new measures are needed to close the gap, and the justifications that you will be presented with, are little more than window-dressing – “the household charge and property tax are needed to fund local service” Rubbish, if the Exchequer wasn’t reducing funding to local authorities then the new taxes wouldn’t be needed.
5. The Government will try to shift as much of the blame for the new taxes and cuts onto others, and may portray them as cardboard villains – Fianna Fail, the Troika, the Revenue Commissioners, the deficit in the social welfare fund, HSE chief Tony O’Brien. However, it is the administration in power which makes the choices, and it is the Government which fairly assumes responsibility for its own actions.
6. Although there is a spectrum of views, it is my view that most economists support cuts to the public sector and the welfare budget ahead of increases to taxes and cuts to the capital programme. Here was ECB president Mario Draghi speaking in May this year “The second area is what we can do at the euro area level to create jobs, basically by increasing investment and enhancing infrastructures. There are many proposals, such as increasing the European Investment Bank (EIB) action and redirecting the EU funds towards the low income areas. When we talk about infrastructure and fiscal consolidation, it is certainly much better to consolidate through the reduction of expenditure, especially current expenditure and not capital or investment expenditure, rather than through increases in taxes.”
7. If there are to be further cuts to public sector, then salaries need to be cut, which in turn means that the Croke Park agreement needs to be abandoned before it naturally expires at the end of 2014. And if it is abandoned, you can expect strikes and protests in response.
8. If there are new taxes, they need to be implemented in a way which minimises the impact on the economy. Both France and Italy have recently made changes to increase taxes on the wealthy. In the UK, coalition partner, the Liberal Democrats, has called for a time-restricted wealth tax. On the other hand, the UK, in the depths of a recession, has cut the top rate of income tax from 50% to 45% and cut its corporation tax rate from 28% to 24% – this is not Tories recklessly looking out for their own, tax increases tend to deter investment and spending and economic growth, so new taxes need to be carefully considered. And if any quarter in coming months suggests a wealth tax on the super-wealthy then they need be able to pass the “Sunday Times richlist” test whereby they can point at individuals on the list, and say how a wealth tax will affect them. Corporate holdings, ownership in trust, offshore assets and ability to relocate to other jurisdictions can all hinder a wealth tax, but that doesn’t mean we shouldn’t be trying to get wealthier individuals to contribute more.
9. Unemployment of 310,000 representing 14.9% of the workforce as part of a Live Register of 460,000 in receipt of employment-related benefits is not socially or economically sustainable. Ireland is building a nightmare for itself in future by not exhausting every avenue to deal with unemployment. The unemployment rate of 4.4% in 2007 tells us that as a society, the general problem is not the level of benefits, but the absence of opportunities.Remember the “Five Point Plan” on which FG was elected in 2011 “Point One – Protecting and creating jobs. Because jobs and opportunity are the best chance of keeping our best asset – our young people – at home. We plan to create 20,000 new jobs a year over the next four years. How? By cutting employers’ PRSI, by creating a welfare system that encourages work and by investing an extra €7 billion from State pension funds and from the strategic sale of state assets into developing the key infrastructures that will make our economy competitive for the future. In doing so, we can, by 2016, make Ireland the best small country in the world in which to do business.”
10. The €3.5bn budget adjustment required in December 2012 is part of a series which will see an additional annual €3.1bn adjustment in December 2013, an additional annual €2bn in December 2014. All told, we are going to be worse off by €8.6bn by 2015 compared with today, that’s an average of €5,000 per household. And if economic growth falls below forecasts, then even bigger adjustments will be required. As big as these adjustments are, they are small compared to the €70bn pumped into our banks, and the current negotiations with our European partners about reducing the cost of the bailout are critical to our future, the negotiations won’t obviate the need to get our budget to balance, but they can provide a cushion which ultimately can make or break our society.
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NAMA Wine Lake 
“You can blame this Government for decisions and actions from March 2011, but before that, our political system means that FG and Labour are largely blameless.” How many unions are affiliated to the Labour Party most of them.
The Labour party were in power through all of the Bertie era. They were the architects of benchmarking and the social partnership agreements. While Michael D Higgins was bellowing in the Dail “you all sat on each other’s remuneration committees” he conveniently forgot to tell us that as chairman of the Labour party he knew everyone of them by first name. Funny, when you get in the retaliation first, like this nobody would dare to suspect that you and your party were fully 100% behind it. The only claim the opposition might be able to make with credibility, is that, if they had been in power earlier, they would have made even a bigger bags of it that FF. Were they not complaining that the government was not spending enough, not raising salaries enough, not cutting taxes aggressively enough, not raising social welfare enough? They are all culpable and they have all shamelessly supported the Croke Park agreement which is essentially an agreement which openly creates an apartheid type society.
In general these types of society collapse and I expect Ireland will be no different.
@Robert, I think you are confusing the Labour Party with either the Progressive Democrats or the Greens, which might be a forgivable confusion given the polling trends for the Labour Party since it entered this Coalition.
Also didn’t K.Whelan have a post over on irisheconomy that suggests even an across the board 25% cut in Civil Service wages would only save a billion and a half a year. Which is what? A fifth of what’s needed. I’m not saying we shouldn’t do it, I think we should (progressively) but let’s not loose sight of the fact that a cut to PS pay is no panacea.
We need it along with
Debt Relief
Growth
New taxes
And existing tax hikes.
@John
Bear in mind that the civil service only accounts for a small proportion of the public sector when assessing the impact of any across-the-board cut.
NWL, are you sure Croke Park is due to expire at the END of 2014?
@TTA, there’s no immediately obvious expiry date in the actual Croke Park Agreement the agreement and its associated action plans provides for headcount numbers by year 2011-2014 for example the civil service is required to reduce its headcount to 34,600 in 2014, which I must say I assumed was the end of 2014. On the other hand, there are to be four annual reviews and that would imply expiry in mid 2014. Now that you mention it, Minister Varadkar has recently said the agreement expires at the end of 2013, so will double check.
Click to access Public-Service-Agreement-2010-2014-Final-for-print-June-2010.pdf
Couldn’t we keep it at 12.5% and close off loopholes eg ‘Double Irish’. Cut down on what kind of expenditures can be written off against it ie increase the tax bill for the NMCs without increasing the headline rate.
Another solution would be to add a temporary levy of, say, 3% to the 12.5% rate. I don’t think such a levy would have much impact on FDI as it would only really apply to existing firms and, I would have thought that, whilst complaining, these firms would acknowledge the need for the levy to help stabilise the State’s finances sooner rather than later (or never).
@NWL, The property tax is too easy a target. (2m homes * €200k average = €400 billion). A tax rate of one percent would bring in €4 billion. That’s where we will end up. But for a year 1 start, a rate of 0.25% to 0.5% will bring in €1 billion to €2 billion per annum.
The thinking in Fine Gael is that an increase in the corporate tax rate to 15% would not faze those bringing inward investment and jobs into Ireland. It would bring in another €1 billion per annum.
Nothing is sacred – including solemn promises made to overseas corporations on tax rates.
@WSTT, you may be right, but it has seemed that the 12.5% corporation tax rate is sacrosanct in the Old School tier of Fine Gael
“The Taoiseach, I and other members of the Government have repeatedly expressed the Government’s commitment to the retention of the 12.5% rate. In that context, I see no point in undertaking the hypothetical exercise suggested by the Deputy. It is possible to provide an estimate on a straight line basis assuming that the proposed levy would apply to the same taxable income of all companies to which the current standard rate of corporation tax rate applies. However in reality it is impossible to estimate the level of additional tax revenue that would be realised due to behavioural change on the part of taxpayers as a consequence of such a measure which would be a significant factor given the scale of the increase suggested in the question.”
http://debates.oireachtas.ie/dail/2012/07/18/00069.asp
@NWL, Yes, there is a distinction between the upstarts that haven’t made the cabinet and the old school. Upstarts are quite often told to keep their mouths shut and their opinions to themselves – especially if they express those opinions on the media.
What was it Rumsfeld said about “unknown unknowns”? Here we are preparing budgets on the basis of growth and a secure eurozone. No-one is taking account of the “known unknowns” never mind the “unknown unknowns”.
The euro zone is in outright recession. Early last week, Spain released downward revisions to its national account data that revealed its recession had deepened as of the second quarter.
The euro is a political currency, and the pillars of political support are beginning to crack both from the top, in Germany, and from the bottom, in Spain, Greece, Portugal, and Italy.
There is a rough month ahead for the euro that will bring downward pressure on its value and once more questions will be raised about its continued existence.
The head of Germany’s Bundesbank recently warned against the advisability of continued ECB purchases of euro-zone sovereign debt; and on Sept. 12 the German Constitutional Court will issue a preliminary verdict on the European Stability Mechanism that is unlikely to be favorable. Greece is scheduled to come up with new budgetary measures by the end of September that will probably fall short.
But, Nero fiddled while Rome burned….. and our budget is really irrelevant to the deepening recession in the wider european context. It just piles further misery on the Irish people in a futile and impotent attempt by ignorant politicians to revive the domestic economy. No-one can tax and cut their way to prosperity. If you keep raising taxes, you slow economic growth – it’s as simple as that.
We don’t need new taxes. We need new taxpayers, people that are gainfully employed, making money and paying into the tax system.
The answer will not be found in raising taxes on already stretched citizens. There is a fine line between the power to tax and the power to destroy. We have reached it.
One of my favourite authors Douglas Adams wrote that he was going to spend a year dead for tax reasons. Good advice.
@ NWL In relation to Ms. Burton, I feel you are slightly unfair.
The Actuarial Report on the Social Insurance Fund cannot be published until it is laid before the Houses of the Oireachtas. However the findings of the Report appear to be broadly in line with the two previous reports done on the fund to 31/12/2000 & 31/12/2005, particularly the more recent report which you can access http://www.welfare.ie/EN/Policy/CorporatePublications/Finance/Documents/actrev311205.pdf
When Ms. Burton was in opposition she requested that Actuarial Reports be prepared more frequently than the statutory maximum of five years. This of course was rejected by the then Minister, Calamity Coughlan.
She set out in a speech at the Tom Johnson Summer School and the core of the argument she (and others) have been making can be summed up on the following few sentences from that speech,
“Here is an interesting fact from the recent EU Tax Trends Report: our taxation structure is characterised by a strong reliance on taxes rather than social security contributions.
In fact, social security contributions represent a meagre 5.8 % of GDP compared to an EU-27 average of 10.9 %. Indeed, we have the second lowest social insurance contributions in the European Union.
The very low social security contributions result in one of the lowest level of taxes on labour in the EU (11.7 % of GDP compared with 17.1 % in EU-27
The consequences of these figures have been starkly brought home to me by initial drafts of the actuarial review of the SIF. This shows that the fund has a significant short fall of about €1.5 billion.
Simply stated, the benefits that are paid far exceed the contributions that are made by employers and employees. The review clearly shows that this situation will only get worse over time with increased numbers of pensioners and other calls on the system, particularly in the context of high unemployment and an ageing population.”
It is to be hoped that the publication of the Report on the return of the two Houses of the Oireachtas will lead to a rational discussion on the issues raised, which are not purely fiscal, but rather about the social and political direction our society takes.
@Niall, thanks for that – interesting detail that I hadn’t appreciated, but I would still regard the claims about deficits in the social insurance fund to be little more than window-dressing to justify an increase in PRSI. If we weren’t in the mess we are, there would simply be a transfer from the Central Fund to deal with the deficit.
Hi NWL,
The RTE website is reporting that ‘female underwear allowances’ in the Defence Forces will be cut (http://www.rte.ie/news/2012/0903/public-sector-allowances.html). I didn’t realise all Defence Forces staff are entitled to this. I would have thought that, at most, there might be underwear allowances for females and that these could be justifiably cut.
@Bunbury, there’s a joke in there some place about saving money with commandos! In fairness to RTE, it probably didn’t consider the possibility of male members of the Defence Forces wearing frillies. On the serious theme, I tend to agree with the unions, that as bizarre as some of these allowances might seem, they are established and regarded as part of the salary package by the ordinary soldier, Garda, teacher or nurse.