The Government’s budget policy has been judged as broadly appropriate by the European Commission and the International Monetary Fund (IMF), even if it is clear that neither was entirely happy with the shape of the package delivered last October. The Government is obliged to stay within EU rules in terms of the overall shape of annual budgets, though of course what it does in terms of the detail of spending and tax plans is a matter for itself. Nonetheless , many of the points made by the Commission and the IMF should be heeded, particularly in the light of general election promises which are now being rolled out.
The IMF made a particular point of warning about further reductions in the Universal Social Charge (USC), a key aspect of last October’s package and already a focus of election pledges. Most of the big parties realise that the USC is an unpopular imposition and are promising to either phase it out or abolish it in the years ahead. The IMF staff members warned, however, that the introduction of the USC was a key element in restoring a long-term, sustainable tax base. Big USC reductions risk narrowing the base and leaving Ireland open to problems if there is a sharp fall in future revenue elsewhere.
This advice looks likely to be roundly ignored in the election debate to come. But it should not be. No tax is perfect but the USC is progressive, in that better off people pay more, and is also an efficient collector of revenue. Although social welfare pensions are not liable to USC, pretty much all other income is. It applies to earnings which are not covered by income tax meaning, in particular, that it is useful in getting more from some higher earners.
We await the full manifestos from the political parties. But will any be willing to lay out a comprehensive tax strategy which also allows for the possibility that economic growth could slow significantly from current levels? There may be a case for a long-term reform of taxes and charges on income, but merely focusing on abolishing or cutting the USC will not achieve this. There remains a case for a proper charging system to cover investment in waste and water infrastructure and to get it off the State’s balance sheet. And the residential property tax is also being gradually decommissioned as a decent source of revenue, with no property revaluation until 2019, at least under the current plan.
We need a solid tax and revenue base to fund public services and investment for the future. There may indeed be scope to roll back some of the emergency taxes introduced during the crisis, but this must be within a sustainable strategy. Just because, having left the bailout, we don’t have to do the bidding of the EU Commission and IMF on our economic programme does not mean we shouldn’t be listening to their advice.