When it stops moving

Jun 22, 2020

Originally published on Business Post, 24 May 2020

The late US President, Ronald Reagan, had a simple maxim about government's view of the economy.  If it moves, tax it.  If it keeps moving, regulate it.  If it stops moving, subsidise it.  Coronavirus has thrown this maxim into action.   Everything has stopped moving in the economy and must now be subsidised. No less a body than the European Commission formally recommended this week that Ireland “take all necessary measures to effectively address the pandemic, sustain the economy and support the ensuing recovery”. 

 

Borrowing is of course one way of funding these subsidies.  In its capacity as the watchdog of fiscal rectitude among EU countries, the Commission has invoked its General Escape Clause.  That means that there won't be any sanctions for countries borrowing what they have to borrow, and doing what they have to do, to secure their nations’ health and livelihoods.  The European institutions have even made long-term finance available at virtually invisible lending rates for these very purposes.

 

While all this is helpful, it doesn't take away from the need to ensure sustainable tax revenues to deal with increased bills for our healthcare system, social welfare and other essential services which are likely now to extend well beyond 2020.  These bills cannot be met indefinitely by borrowing.  Gloomy unemployment forecasts of up to 22% in the second quarter of this year, as suggested by the Department of Finance this week, don’t augur well for sustainable tax revenues.

 

We find ourselves in something of a phoney war, a period of stabilized abnormality.  Everyone is looking forward to the resumption of something approaching normality as the country embarks on its phased reopening of businesses and amenities.  The real measure of the Covid-19 pandemic will be not so much on what does reopen, but what does not.  While it is the high-profile household names – Debenhams, FlyBE - which receive all the attention when they hit the wall, most industry will find it just as difficult to return to pre-covid trading levels.  Smaller service industries in particular are now finding that once they have worked through any business that was on hand, there is nothing new in the pipeline.

 

To compound matters, the British government's proposals on implementing the Northern Ireland Brexit protocol published this week, while receiving cautious welcome as being something rather than nothing, will not be workable.  The proposals emphasise not imposing additional customs declarations on GB and NI business as trade in goods flows between Britain and Northern Ireland.  This is politically understandable, but customs is a tax.  Taxes are very hard to enforce without declarations.  Further, the proposals are silent on how to manage the exports from Northern Ireland to Britain which are channelled for instance through Dublin Port.

 

We have a battered economy that is dealing with massive unemployment, compromised business models and the challenges of Brexit rearing up again.  Irish industry is not even paying the taxes which are currently due let alone being able to deliver additional ones. 

 

Downturns tend to promote clamour for tax reform because the fairest tax is always the one which you don't pay yourself.  Tax reforms like changing the corporate tax regime or introducing a wealth tax seem all the more attractive when cash is tight.  The current signals are that tax-raising measures are not high on anyone's priority list, but that will change.  Given the high number of business closures and job layoffs, there will be fewer income earners and hence fewer taxpayers for the next several years.

 

For years Ireland has used tax as a primary lever of economic policy.  Long before we surrendered our interest rate and exchange rate mechanisms when we joined the euro group of countries, tax was used to drive investment and the employment which follows it.  Our system is characterised by a high rate income tax regime, a high rate VAT regime, a moderate rate capital tax regime, and a low rate corporate tax regime.  We aspire to social equity by having income tax rate thresholds and allowances skewed towards lower earners, generous tax relief for pension provision and a wide range of essential goods and services charged with VAT at lower rates. 

 

It is impossible with any certainty to determine what tax changes might be sustainable when we really don't know what our economy is going to look like in three months’ time, let alone three years.  Overall though, when compared with most other developed economies the Irish tax burden is not particularly high.  We can rely on debt to meet the upfront emergency costs in 2020 and hope that these do not recur, but we cannot rely on it indefinitely while waiting for the numbers of successful businesses recover, and unemployment to fall.

 

Changes will have to be made, but now is not the time to make them.  It is still the time for subsidies, not for taxes, just as Reagan’s maxim demands.

 

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