It is that time in the electoral cycle when political party back rooms are quietly starting to put together manifestos for the next general election. While the Coalition could run until March 2025, there must be a decent chance of an election being called some time next year.
The big budget surpluses forecast for the next few years change this game. And here, of course, we need to put in the statutory caveat about the vulnerability of this – with figures this week showing the top 10 companies pay 57 per cent of all corporation tax and that employees of multinationals pay more than one third of all income tax. But, for now, the official figures are what counts, and they foresee €65 billion of surpluses in the years up to 2026.
With the exchequer awash with money, the political parties face a question: how do you spend the spoils? It will be particularly interesting to watch what Sinn Féin do. A key element of the party’s economic programme is higher taxes on the better off – for example, a “solidarity” levy of 3 per cent on incomes over €140,000. It has also called for a tax on wealth and increased inheritance taxes. For the party, taxing the rich has been a key counterpoint to helping those on lower and middle incomes; it is a central part of the “change” that is central to the party’s political message.
But what now? The extra money the party wants to spend in areas such as housing and health could be funded from the proposed surpluses. That’s not to say a spending spree with the spare cash would be a wise course for any government. It wouldn’t. But political reality surely makes it difficult to propose big hikes in taxes on any section of the population, at least in the short term.
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Ditching – or delaying – plans for tax hikes on the better off would have a couple of advantages for Sinn Féin. It would, no doubt, make their efforts to woo big business much easier. And it would defuse accusations from the Government parties, particularly Fine Gael, that Sinn Féin would “wreck the economy” and drive away investment.
But how would this play with its base? A large part of the party’s messaging is that Ireland has been run for the benefit of the better off, to the detriment of less well-off families and “working people”. And Sinn Féin may well reckon that the wealthiest are not going to vote for it anyway. The political calculation it has to make is how its tax plans will play with the middle ground, some of which it has to win over if it is to have a realistic chance of leading the next Government. How does it calibrate its move towards the centre with the need to still appear radical?
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And the economic calculation is: what would this mean for foreign direct investment? For years the multinational sector and the Industrial Development Agency (IDA) have pushed for generous tax treatment of companies and their employees – including special income tax allowances for their senior executives. And such has been its success that the IDA has generally got what it wants.
“Well go ahead if you want, Minister, but we can’t guarantee that this won’t affect future investment,” has generally been enough to win the argument. Jobs, and more recently tax, are a powerful currency.
Because Sinn Féin, if it does get into government, needs the tax bonanza to continue. It has devoted considerable time to talking to multinationals. It needs them to continue to invest and contribute tax revenue to spend on housing, health and so on. And indeed, to smooth the way financially to its ultimate goal of a united Ireland.
The real impact of higher personal taxes on the wealthy, or an end to the special tax relief regime in place for senior executives, on investment is hard to predict. These would be factors which companies would consider in terms of future investment plans, but a lot would come down to the extent of what was actually implemented. Sinn Féin’s charm offensive has probably calmed multinational headquarters for now, but what they actually do would be closely watched. Some of its plans could be changed in Coalition negotiations anyway. And the electorate’s judgment will be based on whether it can deliver on housing in particular.
The budget surpluses will change the calculations for the other parties, too. A key indicator on all sides will be what is in the October budget and what the Opposition say about it. More prudent Government figures – including the two budget Ministers Michael McGrath and Paschal Donohoe – will argue for some money to go towards paying off the national debt and for some to go into an expanded national fund to help pay for future bills. But politics will demand a generous budget package and more investment in areas such as housing. Prudence does not seem to have won many additional votes in the last general election. But the Coalition will not want to abandon its reputation for fiscal responsibility, not completely anyway.
[ Ireland’s giant surplus, the forthcoming election and the prudence pushbackOpens in new window ]
The management of the budget by Donohoe and McGrath through Covid and the extraordinary bounceback in the economy has left the State finances strong. Over the years to 2030 the tax take – and the tax base – will need to expand a bit to pay the bills of ageing and climate change, notwithstanding the forecast surpluses.
The question for Sinn Féin, in this context, is whether to stick with its plans for tax hikes for the better off. It is also promising to do away with the local property tax and to freeze carbon taxes. Both these cuts would be mistakes: narrowing the tax base and requiring that the money be found elsewhere. But tax hikes – even on the rich – are a hard sell in this era of big surpluses. Sinn Féin will have to decide whether to stick or twist.