A “back to the future” movement is emerging. As some limited wriggle-room appears in our public finances it is time, we are told, to get rid of the “temporary” USC and “restore” the cuts to public sector pay.
The crisis is over so everyone deserves to get “something back”.
The problem is that there was nothing temporary about the financial emergency we faced, and many of the fixes will inevitably remain in place.
Boom-time tax revenues – most of them based on the property market – were being used to support an inflated level of government spending. By 2009 the gap between tax and spending was over €18 billion or 11.4 per cent of GDP.
This wasn’t a temporary little problem; it was a public finance crisis.
The hole was so deep that we needed to borrow some €95 billion between 2008 and last year, not counting capital put into the banking system, to keep the country going. Given that our national debt is now around €200 billion, you can see how significant this was.
The chasm between tax and spending was not the only problem. Before the crisis broke we had an unbalanced tax system and a government spending programme which splurged cash without getting a sufficient bang for its buck in terms of improved services to the public.
We have done most of the required emergency surgery, but rebuilding should involve doing many things differently.
We need to be realistic about where we have got to – and how much wriggle-room we have. If you exclude the interest payments on the national debt, government spending and tax revenue will, finally, be roughly in balance this year. Our debt burden is starting to fall.
We are, in other words, slowly regaining stability, but it is fragile and depends on growth continuing.
Taoiseach Enda Kenny and Tánaiste Joan Burton both made promises to improve living standards in their New Year newspaper articles. But for both of them a continuation of encouraging job-creation trends will be the clearest sign of economic improvement as scope to really boost people’s living standards through budget measures just won’t be there – at least not before the next general election. We can’t start to turn back the clock to 2008 – or even 2011 or 2012.
The USC, for example, was introduced by then finance minister Brian Lenihan in 2011 and now raises more than €4 billion a year, around 10 per cent of total tax revenue. It is a crude, sledgehammer of a charge which has few deductions and exemptions, and thus catches parts of earnings not hit by income tax.
Phased out
But if we don’t pay via the USC we will have to pay some other way. Everyone from Lucinda Creighton to the trade unions want it phased out, but no one is saying where the money to pay for this should come from.
And after the fuss about the water charges you can’t see any party looking for imaginative new sources of tax revenue beyond calls from the left to soak “the rich” via a new high income tax rate or some kind of wealth tax.
It makes sense to reverse some of the crisis tax hikes but within an overall plan for what our future tax structure should look like.
You could merge the USC in with PRSI if you wanted to. You could call it something different if that makes you feel better. But the reality is that this charge on our income is here to stay.
The same constraints apply to spending and the crunch issue of public sector pay. Some €2.2 billion was saved by the pay and pension cuts during the crisis. Now there are to be talks with the public sector unions , starting this year, about a gradual process of “restoration”.
Already we face the cost of meeting annual increments – automatic pay rises based on seniority – which were delayed under the Haddington Road deal.
The deal also commits to restore the 2013 pay cuts to public servants earning under €100,000 per annum, starting in April 2017.
The talks will involve demands for other “concessions”, including a reversal of the 2009 pension levy. But would this really be the best use of our limited additional resources? If it does not set out a strategy for where it sees the public finances going, the Government faces the risk of being “picked off” by one demand after another.
Hospital beds crisis
We face straight choices. Say the Government has around €1 billion to “spend” in the next budget, similar to the amount it had in Budget 2015, which was published in October, or even a bit more. This could be quickly used up by “restoring” some of the crisis cuts and tax hikes. But would this solve the hospital beds crisis? Or create a more efficient tax system? Or leave enough cash to hire some new frontline public sector staff in key areas of pressure?
A lot of these questions are being dodged and fudged by all sides, partly due to the predictable political frenzy as the general election comes into view and partly due to the continued telling that all would be fine if we had not had to bail out the banks. The truth is that it wouldn’t be.
With or without Anglo, Irish Nationwide and the rest, our public finances were bust, though the banking crisis made it much worse.
Things have now improved, but the job of deciding where to tax and where to spend still requires choices and a strategy.
Gradually unpicking parts of what was done is not the way to proceed. We need to move forward, not back.