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.
Dr Aoife Ní Lochlainn
Aoife Ni Lochlainn was a policy analyst with TASC. She holds a doctorate in economic history from the European University Institute in Florence.
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