Surfing the Wave

Sep 16, 2019

The Sunday Business Post, 15 September 2019, What a wonderful time for any government to be framing a Budget!

All the Finance Minister has to do next month is surf the zeitgeist created by the bow wave of Brexit.  After Minister Donohoe’s announcement earlier this week that the Irish Budget statement on October 8 will be framed in the context of a no deal Brexit, no one will expect very much, so few will be disappointed.  The national narrative has played down any sense that Brexit is a good thing for any of us, a perspective which is largely correct. 

This is not just the result of political reportage.  Even advertising is reinforcing the tone – for some reason I find the warnings about the future shortcomings of a UK driving licence in this country particularly depressing.  We are stepping back to an age where having the wrong paperwork routinely undoes the endeavour of the unwitting, and when duty-free was a thing. 

The way we talk about things now matters even more.  There is a significant difference between talking about an Irish backstop and a British backstop.  The phrase “Irish Backstop” is fundamentally inaccurate, as the backstop is a British requirement.  Yet the phrase “British backstop” hardly ever features and the emerging term “Northern Ireland backstop” is a lot more accurate in what it describes.  This type of verbal gymnastics is hardly surprising in a week that saw the Taoiseach deliver a reminder about appropriate behaviour to his British counterpart using a motif – the story of Hercules and Athena - from Greek mythology.

Another kink in the language which featured again this week is the notion of a “tax expenditure”.  Just as “Irish backstop” mistakenly connotes some notion of a grudging concession to Ireland which we don’t deserve, “tax expenditure” is redolent of some kind of grudging and undeserved concession to taxpayers. 

Last Sunday, Michael Brennan of this paper highlighted the cost to the Exchequer of not taxing the child allowance.  In 2017, the last year for which figures are available, the Revenue estimated this tax expenditure amounted to some €550 million.  Yet how is it a “tax expenditure” if the State forbears to tax a benefit to its children?  Isn’t this something the country should be doing anyway?

There are of course worthy and precise economic descriptions of what constitutes a tax expenditure, but that doesn’t entitle it to an entry in the lexicon of legitimate public comment.  For most people the phrase itself is at best misleading, at worst oxymoronic.  Further, its meaning can be entirely subjective.  Most people paying LPT, for instance, would agree that the exemption for new houses constructed since 2013 is indeed a “tax expenditure”.  I suspect however that this would be disputed by anyone living in that category of new house. 

Similarly, is it a “tax expenditure” not to apply higher rates of income tax to the better off, or not to apply universal social charge to people on lower incomes?  That very much depends on your political point of view.  If all the myriad ways of extracting tax from an unwitting populace that could be applied were captured on the Revenue list of tax exemptions, it would extend considerably further than the 140 or so items it does currently include.

Given that we face a no deal Brexit Budget, Revenue are unlikely to be troubled too much having to recalculate upwards the cost of these 140 tax expenditures in 2020, or for that matter having to add more items to the tax expenditure list.  Anything that is done for people in the Budget on October 8 is more likely to feature on the spending side, supporting (we are told) sectors and regions most exposed to Brexit-related disruption.  Don’t be surprised however if there is also something to favour the elderly in our population who are understandably less tolerant of delays and deferrals. 

The Finance Minister can make a Budget statement replete with quiet disappointments on October 8 secure in the knowledge that the political response and adverse commentary will be muted.  It seems that the Fianna Fáil confidence and supply arrangement will not be shaken on October 8.  He could well be forgiven if he doesn’t top up the war chest known as the Rainy Day fund.  It must be galling anyway for any Finance Minister to have to create reserves for future political rivals to spend.  Post Budget, Minister Donohoe may even be praised for his prudence; that elusive virtue most often practised by those who have no option to do otherwise. 

The Minister could signal that further support will be forthcoming from the EU.  The new Commission might be willing for once to turn a blind eye to those troublesome state aid rules which have so plagued the Irish political and tax narrative in recent years.  There is no technical reason why any form of state aid to a particular sector in an EU Member Country can be blocked in a time of crisis.  The State Aid rules say that aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State can be disregarded as State Aid.  Brexit probably qualifies as both. 

Pulling the Budget figures together is never easy, yet I can't remember a time when it would be easier for any Finance Minister to push a disappointing Budget through the Dáil.  All the Minister has to do is surf the Brexit wave.  What indeed could go wrong?

Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland