A Grand Climacteric?

Aug 27, 2018

Sunday Business Post, 26 August 2018
Martin O'Donoghue, a key figure in the formulation of Irish economic policy in the late 1970s, passed away a few weeks ago.  His work formed part of an emerging pattern to the budget cycle in this country.  Every 10 years or so, we seem to have embarked upon major change and major reform.  The end of the 1980s was the era of Ray MacSharry and expenditure cuts.  The end of the 1990s was the era of Charlie McCreevy and the significant reforms he made to the capital and income tax regimes (remember individualisation?).  The late Brian Lenihan, at the end of the first decade of this century, was forced to introduce tax corrections to pay for the otherwise unsustainable expenditure commitments of his predecessors and rescue a dysfunctional banking sector.  If that ten year cycle were to continue, we could confidently forecast major tax policy changes in the next Budget. 

Will Paschal Donohoe be the author of another grand climacteric in Irish fiscal policy?   Judging by his comments to date, the Minister has a fairly clear idea already of the shape of the next budget process.  He works in a government which is constrained not just by the fiscal rules of the Eurozone, but also because being in a minority, it has to preserve the principles of the confidence and supply arrangements with Fianna Fáil.  Confidence and supply is scheduled to hold until after the Budget for 2019, which we expect will be announced sometime in mid-October.  

All things considered, the current government’s budgetary policy has stuck closely to the commitments made in the confidence and supply agreement.  For instance there is a commitment to a Rainy Day fund.  The plans to reduce USC have mutated into a debate about the merging of USC and PRSI to come up with some overarching system of funding social protection.  This approach is also consistent with the confidence and supply commitment to reform PRSI for the self employed. 

Paschal Donohoe, as the minister with the recombined portfolios of Finance and Public Expenditure and Reform seems to have a keener degree of interest in the latter rather than in the former.  That apparent preference for spending policy over tax policy is filtering down into civil society, with groups as diverse as Social Justice Ireland and even IBEC not prioritising a need for general income tax cuts.  

Across the world, governments are tapping into disgruntled middle-class Conservative rump for the support.  In their own way, Erdogan in Turkey, Modi in India and Trump in the US are prioritising the concerns of this group.  There is no reason to believe that a current Irish government or a putative future Irish government should overlook the same cohort of voters.  Their concerns were disregarded at the last general election, and both Labour and Fine Gael suffered for it.  That cohort does require some progress on reducing the burden of income tax, particularly those on the margin of income around the industrial average wage where the tax knife on their wages sharpens to 40% from 20%.  Indeed, at the National Economic Dialogue held in June of this year, the Minister himself signalled that changes to the income bracket where the 20% band applies are very much on the agenda.  

There are more people in work now – 200,000 more than at the time of the last general election. With stronger economic growth, modest increases are appearing in the pay packets of workers.  If however the tax bands and allowances don't keep pace with such modest increases, the net effect is a higher burden of taxation.  This isn't just an academic economic calculation.  It makes a real difference to take-home pay, and in fact is intended to raise revenue as set out in the Programme for Partnership Government.  It may be both thoughtful and noble for civil society commentators to eschew income tax cuts in favour of improved social spending.  But that won't win votes.  

Rather than the major reforms we come to expect at the end of successive decades, the next budget will inch us further along the path of fiscal righteousness.  I think workers will be a little bit better off, and businesses will be expected to continue to grow with the mediocre tax reliefs for investment and gains currently available.  I expect there will be some tinkering with the 9% VAT rate for hospitality and other activities, and some move towards carbon tax reform where  increases seems inevitable.  

International reputation seems to be a particularly sensitive point for the current Minister and perhaps the only major talking point after the next budget will be a further series of reforms to the way companies in this country are taxed.  The reforms proposed both in the Coffey report and more latterly by the Public Accounts Committee to ensure we are on a par with international best practice will undoubtedly be examined and progressed. 

Minority governments tend to be paranoid about not going about fixing what is not broken.  The current Minister doesn't have the same latitude for reform as O’Donohoe and McCreevy in their time because of EU rules and fiscal constraints, but nor does he face the same crises as McSharry and Lenihan did.  He will want to keep it that way.  Budget 2019 will not perpetuate the ten year pattern of major tax reform. 

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