Opposition parties must provide credible plans for fiscal adjustment ahead of next election, writes GARRET FITZGERALD
THERE IS one respect in which I find the otherwise excellent ESRI Quarterly Commentary unsatisfactory – namely its handling of emigration, which I wrote about in this column last week. It is not clear that when the commentary refers to emigration in 2010 and 2011, the periods in question are the years ended April 2010 and April 2011 – almost 12 months earlier than a reader might be led to believe.
Moreover, although in the section of the commentary dealing with employment emphasis is rightly placed on the fact that the drop in the number of immigrants at work has been much more severe than in the case of Irish workers, that section does not address the implications of these decreases for emigration.
The fact is the 50,000 net emigration figure for the 12 months ended April last – which received a lot of media attention – was caused by immigrant workers returning home, in particular I believe, to Poland, which uniquely in Europe had an expanding economy throughout the crisis period.
There is no sign of significant emigration by Irish people during that 12-month period, although at some point large-scale emigration is bound to re-emerge as workers tire of waiting for employment opportunities.
Another point that needs to be made in relation to the commentary is that the ESRI had reasonably assumed that €1 billion of the next budget’s €3 billion fiscal adjustment would take the form of the introduction of the tax on dwellings proposed by the Taxation Commission a year ago.
When the Minister for Finance disclosed earlier in the week that the Government had failed during the past 12 months to undertake any work to prepare for the introduction of this tax, there was no time for the ESRI to revise its projections.
Consequently, at the launch of the commentary, it was made clear that this missing €1 billion will have to be replaced, by increases in income tax receipts or by doubling the other €1 billion of cuts in current spending to which the Government is already committed in the December budget.
The Minister has indicated that he is likely to fill some of this gap by reimposing income tax upon some of the lower 40 per cent of incomes. He might also look at those people with incomes around or above the average who last year paid less than one-half – in some cases only one-third – of the tax paid on such incomes elsewhere in western Europe.
As for the argument that from an economic point of view, tax increases should be left until the economy has started to recover, this has much less force in a society like ours which, by comparison with other developed countries such as the US, UK and the rest of western Europe, is under-taxed to the tune of some €4 billion a year.
Moreover, that theoretical economists’ argument takes no account of the political reality that postponing increased taxation until a period closer to a general election may effectively rule out any such tax increases.
The Government also made a mistake last December by taking the administratively easier, but socially more disruptive, approach of spreading spending cuts more or less evenly across all government departments.
Flat-rate cuts across all departments, which seem to be favoured by the Department of Finance, may ease the short-term problem of getting Ministers to agree to spending cuts. But in our case, the effect of this approach has been to damage further the already grossly underfunded education sector, as well as disrupting a range of social services, many of them provided by subsidised voluntary bodies at low cost to the taxpayer.
This contrasts with what the British government did in its recent budget by exempting two areas – education and development aid – from cuts.
These are the same exceptions I made when cutting spending in the 1980s, which ensured that during that long, drawn-out crisis that both the secondary and higher education sectors continued to expand rapidly, whilst maintaining standards.
That strategy helped to provide us with the well-educated workforce that facilitated our extraordinarily rapid growth during the Celtic Tiger years. By slashing education spending and running down the teaching side of our universities, the Government is prejudicing our recovery in the latter part of the decade ahead.
Increasingly, I have the feeling that the Government has boxed itself in politically, because it failed to address the tax issue in good time, as long as possible before the election.
I do not understand the political rationale of this postponement which, even assuming the Government survives for another 15 months, may force it to go to the country in October 2011 rather than face having to introduce a tax-heavy budget in December 2011,
What of the Opposition? While acting responsibly by supporting the scale of the fiscal adjustments to which the Government had committed itself, including this year’s €4 billion figure, the two main Opposition parties subsequently avoided being drawn into the question of the precise form that this year’s €4 billion adjustment should take. And for the time being, they will no doubt continue to keep their own counsel about any further fiscal adjustments made between now and the election.
But whenever the election comes, the two parties, as potential participants in government, will need to come clean about their plans.
Failure to do so would hand a powerful weapon to Brian Lenihan, who has personally won respect and credibility at home and abroad for the tough measures that he has taken.
If the Opposition parties still failed at that point to disclose their intentions in government, Lenihan would be well-placed to use that failure to win back significant support for Fianna Fáil during the course of an election campaign.