Who Benefits?

Jun 05, 2018

Sunday Business Post, 3 June 2018
According to some news headlines this week, Italy is in chaos because of its political impasse.  Elections held there over two months ago have yet to result in a government being formed.  There may well be political chaos, but I spent some time in Italy last month.  Day to day life didn't seem to me to be any more chaotic than usual.  

Politicians and those who comment on them are capable of over estimating their impact on the people and institutions which they govern.  Our own country didn't fall over back in 2016 for want of a government for several months after the inconclusive election results. In Europe it is becoming increasingly commonplace for countries to cheerfully survive months without an established government. 

Realpolitik

However, where there is political indecision or instability, institutions can come up with politically deaf notions.  A report by a Dublin City University professor some weeks ago suggested that UK MEPs would not have to leave the European Parliament post Brexit, because they were, in some sense, still representative of the European population as a whole.  That finding was met with some suspicion by the political system.  Our man in DCU may well have been right in his reading of the way European law works.  Pragmatically though, there will be no room for politicians from the UK in the European Parliament after 29 March 2019.  Their influence is already in decline. 

Similarly, the European debates on tax, notably the Common Consolidated Corporate Tax Base proposals, miss the realpolitik of the foisting of Europe wide rules on national governments.  Brian Hayes MEP has been especially strong on this point to any European officials or Commission members who will listen to him.  No finance minister can come back to their national governments to explain that their country is going to lose €1 billion or more in tax collected  because of change to a new EU system, 

When there are some political holes that simply cannot be filled, democratic controls curtail the poorer policy ideas that governmental institutions can bring to the fore.  Any policy reform must be both politically and technically feasible.  There is a much quoted observation, apocryphally ascribed to the late Dr Garret FitzGerald, that some proposals may be all very well in practice but also have to work in theory.  Usually the risks are all the greater should theoretical desirability trump the practical application of a new policy. 

Where is the Private Sector?

Take for example the setting up of the Interdepartmental Pensions Reform & Taxation Group as reported by Michael Brennan in this newspaper last week.  It is made up of officials from a range of government departments.  There are no private sector representatives among its membership.  Shouldn't there be someone with life experience of private sector pension funding contributing to any such think tank?  

Remember what happened the last time policy makers turned their attention to private sector pension funds.  A levy of 0.6% of the capital value of private sector pension funds – note private sector only – was applied to unsuspecting pensions savers.  That levy was unjust.  It was a wealth tax levied on one cohort of our society simply because it was possible, not because it was right.  In normal circumstances the political system might have headed this injustice off at the pass.  Tax policies from 2011 were not created in normal times and the levy has since been abolished. 

In recent years pensions “reform” has involved proposals to remove tax reliefs for pensions savers without any underlying systemic reform, which is an odd approach for a nation where 65% of private sector workers have made no provision of their own for retirement.  The government’s latest “pensions” roadmap says this is “despite the availability of generous pensions reliefs”, without apparently considering that maybe 35% of private sector workers can afford to make contributions to schemes only because of the availability of said “generous” pensions relief.  

A lack of generosity

Nor is there anything particularly “generous” about a relief that reduces future demand for state services while collecting tax on future pensions payments.  Pensions tax relief is only generous when it is compared to the other few tax reliefs available to workers.  Pensions tax relief only seems generous if you don’t have to rely on it for a secure retirement because you have a state funded pension. 

Promises to introduce mandatory private sector pension funding, with an option to opt out, have been made for decades.  According to the government pensions roadmap, mandatory pensions funding in the private sector might not be a reality until 2022 at the earliest.  This is a bizarre delay for a strategy which is favoured by trade unionists and employers alike. 

The current government could well be heading into its last few months.  The confidence and supply arrangement keeping the Taoiseach and Cabinet in place only extends to the next budget.  In such a climate ideas emerging from the likes of the Interdepartmental Pensions Reform & Taxation Group might not receive the kind of political scrutiny they should. 

We need our political system to knock poor ideas from our governmental institutions on the head.  Pensions policy has a poor track record. Tax relief for private sector pension funding is one of the last tax reliefs available to individuals which carries a social benefit.  If it is to be curtailed or eliminated, we need our politicians to be asking who benefits from increasing the tax burden on the private sector.  

Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland