THANKS TO BETTER-than-anticipated growth in the economy the budget for 2015 will not need to be as difficult as expected in order to meet our deficit targets. For the first time in a long time this means that the upcoming budget will have room of perhaps as much as €1 billion to play around with in spending hikes or tax cuts.
The room is not created by a return to surpluses, and we still spend €800 million more every month than we raise in taxes in Ireland. The room is created by the fact that we will not have to work as hard as previously expected to meet a deficit target for next year of 3% of GDP.
Growth has taken off in the Irish economy, and we are starting to see forecasts for growth as high as 5% in 2015. The last time we saw growth like that was 2007, and while we’re recovering from a deep trough this will nevertheless put the size of the Irish economy about €15 billion ahead of earlier projections.
In this context, the government can afford to borrow more money in real terms whilst keeping the deficit target to 3%.
Plenty looking for a pre-election reversal of fortunes
As ever when there is money on the table, folks come clamouring to get a piece of it. There are plenty of vested interests who took a hit, particularly in the public sector, who will now be looking for a pre-election reversal of fortunes.
The Labour minister in charge of expenditure has been making cooing noises towards the party base of champagne socialists who feed at the trough of public money, promising to start the process of returning them to their pre-08 pay levels. These folks who enjoyed near perfect job security all through the greatest downturn in the history of the State now want to be first in line to start lapping up any cream, however thin, the taxpayers can provide.
We saw the power of certain groups during the downturn, when unions representing the most senior civil servants had pay cuts reversed for their members. Other unions didn’t fare so well and their members took hits, in particular by forcing them to contribute more to their generous defined benefit pension schemes. Any threat to job security usually came in the form of early retirement schemes, with golden handshakes and guaranteed payments for life at pre-cut levels.
Even those unions unfortunate enough to be subjected to these draconian offers did quite well in the years leading up to the crash. The benchmarking years will go down in history as a time when so much was given to so many for so little, with bumper pay increases in return for fictional performance increases. After years of ‘performance enhancing and modernising’ benchmarking, Brian Lenihan still had to fight tooth and nail to get certain public sector workers to give up perks like time off to go lodge their paycheques in the bank, despite now being paid by electronic transfer.
Brendan Howlin failed miserably to end a raft of daft allowances, like paying forklift drivers extra money atop their salaries for driving forklifts; or secretaries getting extra for putting stamps on the post. Now the Labour minister wants to make sure that his core constituency is first in line, as their privileged status surely entitles them to be, for recompense after the bad years.
It would be a bad start to the recovery if we begin by giving in to the demands of Labour’s financial backers at SIPTU.
There are a whole range of worthy causes that we could be funnelling cash to that have not yet got the airtime of the unions, who are focused on wage increases for their narrow slice of the population. But these too, to be honest, should not be first in line.
Our aim should be one thing: economic growth
The reason we are able to talk about budgetary easement in the first place is simple: economic growth. It makes everything easier. More growth leads to a higher GDP, which allows us more room to manoeuvre around the targets set by the Troika and our other financial backers. The growth also delivers more tax into the coffers of the state directly.
Growth is the solution to all of our problems in the long run. Every good cause needing funding, every hospital, school and Garda station that needs opening, every public sector worker who wants an allowance for the abuse received by them from columnists, can only get their money when the economy is growing.
We need to focus on spurring on growth in the economy now, at this critical juncture when we see momentum building. Our European partners, bar the UK, are floundering in economic stagnation and the European Central Bank is starting to look wild eyed in its attempts to prevent deflation kicking in across the Eurozone. These guys risk dragging us down with them just as we are starting to get back in the game.
To spur on growth against these headwinds, and amplify the positive factors driving us forward, we need to cut taxes for all workers. Remember that when we brought down the 13.5% VAT rate to 9%, it created 30,000 jobs. More than putting money into the hands of select groups of people, or even good causes like school building programmes; tax cuts drive growth.
There is no more efficient way to drive growth in the economy than to put more cash into pockets of ordinary folks every month. And there is no more destructive, unfair, pervasive and unpopular tax than the Universal Social Charge.
There’s only one sensible thing to do
The USC is big fry. It brings in about €4 billion every year in taxes for the state. It was brought in as a temporary measure to fight the downturn, but many doubt if we will ever truly see the back of it. It brings the marginal rate of income tax for most workers over 52% before they reach the earnings of the average industrial wage. It is a disincentive to work, and it holds down growth in the economy by keeping cash out of the hands of the most effective growth drivers known to economics: the consumer.
The middle rate of USC that most people pay of 7% on earnings over €16,016 could be targeted in this budget. Not by much, mind you; for even a 1% reduction in the tax would cost the exchequer €750 million a year. But it would put a dent in our annual tax bills and represent the first increase in net income for most workers in several years.
We can dole out the sliver of cash we have to special interest groups and a smattering of good causes in this budget, and not make much of a dent in anything more substantial than fleeting political poll numbers. Or the government could show a commitment to growth, and deliver money into the pockets of all workers across the economic spectrum.
Tax cuts will create growth. Growth will solve the other issues we have across our public services in time. There’s only one sensible thing to do in this budget.
Aaron McKenna is a businessman and a columnist for TheJournal.ie. He is also involved in activism in his local area. You can find out more about him at aaronmckenna.com or follow him on Twitter @aaronmckenna. To read more columns by Aaron click here.
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