Despite their ideas of budgetary discipline, the PDs turned out to be high spenders, writes Garret FitzGerald
THERE WAS a period when I had a guilty feeling that I was personally responsible for the establishment of the Progressive Democrats party. It was, I think, late in 1985, after Des O'Malley had lost the Fianna Fáil whip, that I arranged to meet him as I passed through Limerick en route to a function in Kerry.
I knew that Des shared my concern about dangers our State might face if Charles Haughey were to secure an overall majority at the next election. I therefore raised with him the possibility of his joining Fine Gael so as to help ward off this possibility.
He responded by saying that he could not possibly cross the floor in this way, to which I commented that the only other way he could play a part in preventing the outcome we feared would be to form a new party.
Shortly afterwards the establishment of the Progressive Democrats was announced, and some years were to elapse before I discovered that, at the time Des and I had met, the process of forming that party was already well under way. I was relieved to find that I bore no responsibility for its establishment.
Somewhat to my surprise, the PDs turned out to be a right-wing party, claiming to be dedicated to small government and low taxes.
Now that is, of course, always a political option in any society - although one that I would not myself support. But most right-wing low-tax parties are also concerned about budgetary discipline and are prepared to match tax cuts with spending cuts.
However, like the Republicans in the United States in recent times, the PDs, although always eloquent about the need to keep the cost of government down, proved in practice to be high spenders.
Let me trace briefly the economic background to the PDs' emergence in Irish political life.
In the proposed budget that our government put to the electorate at the end of our second term of office, following Labour's departure from the government (a budget that Fianna Fáil effectively adopted when the 1987 election brought them back into power), the borrowing rate that had faced us in 1981 had been halved from 19 per cent of what we now know to have been the GNP for 1982 down to 9.7 per cent of GNP in 1987.
By 1989, with the support of Fine Gael in opposition, and aided by an 11 per cent spurt in national output, Ray MacSharry had done the second half of the job that we had undertaken, effectively eliminating borrowing, mainly by cutting current spending more than we had been able to do.
Then, after the 1989 election, the PDs joined Fianna Fáil in government. Immediately the share of national output absorbed by current public spending started to rise again, climbing from 41 per cent of GNP to 43.5 per cent within three years.
There was, of course, nothing intrinsically wrong with this, but it did not reflect the stated ethos of the PD party.
By contrast, helped by the Celtic Tiger, the two governments which followed that first FF/PD alliance, in both of which Labour participated, reduced the share of GNP absorbed by current public spending substantially, cutting this spending ratio by one-fifth.
That was followed by two more FF/PD governments which, between 2000 and 2006 (we don't yet have figures for 2007), again increased by two-and-a-half percentage points, or one-twelfth, the share of national output absorbed by public spending.
Those two governments also cut income tax rates. Up to a point this was justified, for the 1997 standard tax rate of 28 per cent was higher than was reasonable for an economy that was becoming increasingly prosperous. Reducing the standard rate to 24 per cent by l999 could therefore be justified.
But further cuts in income tax rates made after 1999 - especially combined with measures that largely exempted workers on the average wage from paying income tax - clearly went too far. And over the next couple of years this will pose a huge problem for the Government.
The tax policies adopted by these FF/PD governments between 1997 and 2006 reduced the proportion of tax revenue derived from income tax from 37 per cent to 27 per cent of GNP. I believe that no modern western European state can be run properly with such a very low level of income taxation.
The only reason our Government could briefly get away with this was the largely temporary boom in receipts from asset-related taxes.
Back in 1997 those asset-related taxes were yielding barely 10 per cent of what income tax was producing - but by 2006 this ratio had swollen to almost 60 per cent of income tax receipts! The recent Budget suggests - optimistically, I fear - that this ratio will be more than halved to 25 per cent next year.
The last thing we needed during the past decade was a party which, on the one hand, increased the burden of current spending and, on the other, advocated that taxation be reduced to the kind of level that has now pushed us into a crisis.
That is why, although I have a high regard for some of the PDs' leading personalities, I cannot mourn the demise of the party.