Taoiseach Leo Varadkar has staked out a clear political position with his commitment at the Fine Gael Ardfheis over the weekend to focus future budgetary policy on tax cuts for middle-income earners. This is a decisive shift in approach given the emphasis of the Fine Gael-led Government for the past three budgets on increasing public spending rather than cutting tax.
Varadkar's new direction, which has positioned Fine Gael in opposition to all of the other parties in the Dáil, carries serious political and economic risks but he has decided to throw caution to the wind in a bid to win the support of middle Ireland. On the political front, securing agreement on a new confidence-and-supply arrangement with Fianna Fáil will be more difficult given the very different priorities of the two parties on budgetary strategy.
Fine Gael fought the last election on a tax-cutting pledge to abolish the Universal Social Charge (USC) but the party lost significant support as the electorate was swayed by the fairness argument put forward by Fianna Fáil. This has guided the budgetary approach of the Government to date with the emphasis on spending increases rather than tax cuts to ensure continued Fianna Fáil support.
There is no arguing with the fact that workers on average income enter the higher rate tax band too quickly
Varadkar has now set out on a new course in line with the commitment he made during the Fine Gael leadership election last year to represent the interests of “people who get up early in the morning”. His decision to revert to that message is a calculated one that he believes will resonate with a large swathe of voters. By contrast with the last election, the appeal this time is to middle income earners on salaries of between €35,000 and €50,000 rather than those on high incomes.
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There is no arguing with the fact that workers on average income enter the higher rate tax band too quickly. But raising the threshold to €50,000 will not come cheap – Government sources estimated the cost at just under €600 million a year. It must be asked whether the State can afford such a promise at a time of deep economic uncertainty due to Brexit and international trade wars.
It is also a big risk on the political front. Not only does it make a renewal of the confidence-and-supply arrangement more challenging, it puts Fine Gael at odds with the other parties in the Dáil and that could put serious obstacles in its way of building a new coalition after the next election.
On the other hand Varadkar has shown himself to be a shrewd judge of public opinion since he took over as Taoiseach. He took a big political risk with the abortion referendum and it paid off handsomely. By rejecting the political consensus that emphasises public spending rather than tax cuts, he has ensured that voters will have a clear choice at the next election.