Reasons to be cheerful despite calls for higher taxes

It’s hard to avoid concern fatigue setting in. What with the war in Ukraine, the cost-of-living crisis, the continued Northern political stalemate, multiple dire warnings amplified at COP27 over climate change and another possible COVID-19 surge—the list of concerns seems particularly endless at the moment.  

Some time ago, the commentator Marc Coleman projected that population growth—and, by implication, skills growth—would drive prosperity in Ireland. Coleman’s ideas have been given additional credence by the current situation in the UK. Chancellor Jeremy Hunt’s November budget looks towards an extended period of economic stagnation. British productivity has not grown in line with government spending in recent years. In the moribund British economy, there is a record low level of people out of work while the number of job vacancies is at a record high.  

There is a straightforward, one-to-one relationship between economic growth and the growth in tax yield, which permits more government spending without further borrowing. When the growth in gross domestic product (GDP) stalls, so too do the tax figures.  

In his book The Best is Yet to Come, Coleman pointed out some of the links between more workers, growth and greater resources for public services and benefits. Though the timing was unfortunate (the book was published just months before the 2008 financial crisis), Ireland is now indeed in a better place, at least economically, than it has been for many years. Government finances are in surplus and the debt-to-GDP ratio, at around 50 percent, is back under control.  

Unlike the British situation where a Budget bordering on the austere was required to meet existing public spending commitments, without an intolerably high borrowing requirement, the recent Irish Budget took a cost-of-living crisis in its stride, with grant aid against soaring energy bills for households and businesses alike being met through current tax receipts. Nevertheless, a narrative has emerged that the burden of taxation in Ireland will have to increase.  

Why this should be the case is not always specified. There are unquestionably problems with housing, health, and education, but it does not automatically follow that these problems arise from underinvestment. At the time of writing, close to half a billion euros set aside in 2022 for local authority housing remains unspent. This points to management or capacity problems, not funding challenges.  

The much-heralded report of the Commission on Taxation and Welfare has not had a huge impact on the political debate. This may be because it presents solutions in search of a problem. As research from the Irish Fiscal Advisory Council has pointed out, “its work was not framed around any specific shortfall in funding that needed to be filled. Instead, it was guided by a broad intention to generate additional revenue”.  

Even government politicians, who are rarely scathing about the output of an expert group, which the government itself commissioned, were dismissive of the recommendations. Clearly, there are some areas of the economy where additional tax funding will be required, if not immediately, in the medium-term.  

Unless there is an unforeseen level of immigration of people of working age, the ratio of workers to pensioners is going in the wrong direction. Climate change management, ironically being driven more by energy security concerns than global altruism, will come with a price tag. The sustained high corporation tax take may have peaked.

In Britain, the urgent need for higher taxation has been unanswerable. In Ireland, there needs to be a clear business case for any form of new or additional taxation. We have enough to be concerned about without the prospect of unnecessary taxes.

Dr Brian Keegan is Director of Advocacy and Voice at Chartered Accountants Ireland