Improvements in welfare for the poor over the past five years have beendwarfed by the scale of tax reductions slanted towards the better off,writes Eithne Fitzgerald
The present Minister for Finance has made no secret of his ideological preference for a low tax, low public service society. By underestimating the cost of his tax-cutting programme, Charlie McCreevy has gone even farther than he originally intended. The sharp cutbacks in public spending announced in the Estimates will bring public spending as a share of GNP even further below the European norm.
It's not as if we can't afford good quality public services and decent public investment.
Over the last decade, income per head has risen by three-quarters. Earlier this year, the UN placed Ireland as the fourth-richest country in the world in terms of GDP per head, after adjusting for the relative spending power of different currencies. While this use of the GDP output measure rather than the GNP income measure flatters Ireland's relative position, today's Ireland is anything but a poor country.
Yet the quality of public transport services in accession countries like Poland or Hungary, with per capita incomes a third below ours, would put us to shame. We are light years away from Sweden's or Finland's standards of public services.
The €6 billion turnaround in the public finances in the last two years under the stewardship of the two parties in government owes its origins in part to the underpricing of generous tax cuts to the better off as well as to the overshoot of public expenditure. Yet all the signals from the Minister are that it is the expenditure side alone of the Budget, particularly services for the poor, which will bear the burden of adjustment.
Income tax revenue in 2001 was almost €800 million below target, while to date in 2002 it is almost €300 million extra below last year's outcome. This is after adjusting for spending on SSIAs, which bizarrely are classified as reductions in tax rather than the cash transfers they are. Thus over the last two years, income tax revenue has been €1.1 billion off target.
Independent research at September's Budget Perspectives conference has clearly shown that the fall in income tax revenues cannot be attributed simply to the economic slowdown. It is clear that the tax cuts have eroded the tax base by significantly more than originally planned.
Budgets are about choices. Over recent years, massive amounts of resources have been redistributed on Budget day in tax cuts and spending changes, as well as the social welfare increases, which, by convention, are held over from the Estimates to Budget day.
Over the last five years the positive measures for the poor have been dwarfed by the scale of tax reductions slanted towards the better off.
The net effect has been that in the fastest period of economic growth this country has ever known, resources were deliberately redistributed upwards. As Prof Brian Nolan told a recent FÁS conference, market incomes did not become more noticeably unequal. However, the figures show that when tax and welfare policy is factored in, the gap between the disposable incomes of rich and poor has widened in recent years. This widening gap in incomes reflects not blind economic forces but the outcome of deliberate policy.
While most attention has focused on changes in personal income tax, company taxes, capital gains tax and taxes on development land have tumbled. Windfall gains on property speculation are taxed at 20 per cent.
Business has received particularly generous treatment in the tax code. The Celtic Tiger increases in employment were delivered while PRSI rates stood at 12 per cent and last year's reduction to 10.5 per cent is costing €350 million a year.
This is on top of the windfall for business, particularly the banks and retail sector, as corporation tax has been progressively reduced - this year's instalment cost more than €300 million. The tacit understanding that some of this gain to the banks and others might be recouped through alternative taxes has never been implemented. Maybe this is the year to ask business to pay its share towards addressing the crisis in the public finances.
The SSIAs now present a major hole in the Budget, at double the original estimated cost. This is a scheme with little economic rationale which is costing €2,500 million, the price of three Bertie Bowls, with not even a white elephant to show for it. It goes, by definition, to those who already have a surplus to put away.
The international evidence is that savings incentives of this kind tend to displace savings rather than increase their volume. By updating 1987 data on household savings, I estimate that at a minimum a quarter of Irish households would be able to pay their first 18 months' SSIA contributions simply by switching their money from an existing bank account to an SSIA.
Targeted changes to the SSIA scheme could release significant funds for higher priority services. Maintaining the full bonus on SSIAs for big as well as small savers is at the expense of alternatives like money to prevent early school leaving (now running at around 25 per cent in Dublin), which was cut three months ago.
Mr McCreevy says the SSIAs promote the savings habit. I would pose the question: which is more important for our economic future - the savings habit, or the learning habit?
The published Estimates show a drastic cut in capital spending, yet the future growth path of the Irish economy is being held back because of poor infrastructure - clogged roads, inadequate rail, snail's-pace Internet access. None of us would try to buy a house outright from current income - we take out a mortgage.
It makes sense for Ireland to borrow for productive capital investment that adds to future income, rather than restrict investment to what we can fund from current income.