Labour lying somewhere February 11, 2007
Posted by franklittle in Economics, Irish Election 2007, Irish Labour Party, Uncategorized.trackback
Economics is not particularly complicated. There is a mini industry in academia and newspaper commentary to argue to the contrary, but by and large anyone who has ever dealt with a household budget understands the basics of economics. If you spend more than you have coming in, you need to borrow or reduce spending. Big capital investments, require long-term financing. And if the whole thing goes wrong, the MABS can serve an IMF like role in terms of advising you out of debt. MABS people also tend to be smarter and nicer than your average IMF official.
That’s why the announcement by Rabbitte that Labour is going to cut 2% off the standard rate of tax, benefitting low AND high income earners, should set alarm bells ringing. Like most people, my immediate reaction was to calculate how much it would mean for me a week and it added up to a little over a week’s salary. The next question I asked myself, was who’s week’s salary was I getting. A nurse? A community garda? A civil servant?
Labour has committed itself to increased spending in a host of social welfare, capital infrastructure, public sector pay claims and the like. And they’ve committed themselves to not increasing taxes. And now, they’ve committed themselves to cutting tax on the standard rate leaving, as one politics.ie contributor rightly observed, ‘a hole the size of Texas’ in the economy.
Does this mean that Labour, in order to fill this hole, are going to fail to provide the investment in social services? Will they fill the hole through the introduction of deeply regressive service charges? Will they privatise public property in order to pay for tax cuts?
On a political level, it sounds good. People understand a tax cut better than they understand widening the tax bands and tax credits, which would have delivered more for those on low incomes for less money than a standard rate cut that benefits the very wealthy as well as low to average income earners. It also kills dead the notion that Fianna Fáil and the PDs can portray Labour as a ‘high tax’ party.
From an economic point of view, it doesn’t make sense. Labour cannot, repeat cannot, cut taxes at the standard rate AND increase spending. As I pointed out before, their claim that they could increase spending and not increase taxes for the wealthy was dishonest. This is even worse. So which is Labour going to choose? Tax cuts or social services? It is a choice it is going to have to face.
Look at their other commitments: Over 2,000 new hospital beds, costed by Labour at 600 million; pre-school education for one year for all children, costed by Labour at 180 million (Woeful underestimate I suspect); tripling the number of community Gardaí at a cost of 10 million; abolition of the means test for carers at 140 million; and another hundred million (Again, underestimated I think) for their ‘Begin to Buy’ campaign.
These five commitments alone amount to an extra billion a year in spending on an annual basis. It ignores the extra spending they’re promising in public transport, such as the proposal to cut Dublin Bus fares for example, or their proposals for higher social welfare spending. Where is the money to come from? This is not the 1980s. Pat can’t simply get De Rossa to speed-dial Pyongyang again.
They could have targetted regressive service charges that hit low income households, they could have widened the tax bands, but they went for the simplest option, the most political expident option, and the one that will cost the most.
And people say Fianna Fáil and Labour have little in common.
It does appear to shift them even further towards the centre. But it’s the mediocrity of the vision which is most disturbing. There is a case that left progressives have to tackle with tax, but this isn’t tackling with it. Instead it smacks of a headline grabbing opportunism.
Are we surprised?
“Labour cannot, repeat cannot, cut taxes at the standard rate AND increase spending.”
Of course they can. Incomes don’t remain static, after all. As economic growth occurs, people pay more in taxes and some people move from the standard rate to the higher one.
If I’m paying 50% of my income in tax and my earnings increase by 5%, and the tax rate drops to 48%, then I’m still paying more tax.
[...] ever, the folks at the Cedar Lounge Revolution have fantastic analysis of policy. In this case it is Pat Rabbitte’s commitment to cut the [...]
I accept the point you’re making Pidge but I think people are woefully underestimating both the size of a 2% cut in the standard rate, in terms of how much it will cost, and the amount of new spending commitments Labour has made, something Fianna Fáil have not ignored, I guarantee you.
Labour have put all their eggs in one basket, that there will be rapid, massive, unconstrained economic growth that will allow them to cut taxes and invest in social services. And I would still argue that the money spent on a tax cut should go into social services to deal with eight decades of capital under-investment. Finally, if you’re going to give low income earners a tax cut, there are better ways of doing it than simply cutting the rate.
This was an electoral stunt, and bad economics.
Taxes have been cut all over the shop (except VAT) by every government since 1987 including Labour coalitions and spending has massively increased so your sweeping “can’t cut tax RATES and increase spending” is full of crap. You can’t cut the tax TAKE but that’s a different thing. Sometimes reducing taxes increases the take (because fewer people go under the table and so on). Decreasing CGT rates massively increased the take as people liquidated assets they were hanging onto because it wasn’t worth selling them before. It doesn’t always work, as FF found when they cut VAT to 20% and had to reverse the cut because of how much money VAT raises – a regressive tax, mind.
However, while I think increasing the standard rate band might have been a better call by Rabbitte, bettering as it does Labour’s preferred constituency – the middle class, it doesn’t get anything like the publicity.
[...] would reduce the lower rate of tax from 20% to 18%. Shocking really. As Frank Little says over at Cedar Lounge Revolution, this benefits ‘low AND high income earners’ and is nothing more than electioneering. For a [...]
The commitment is couched by the phrase if economic conditions allow, meaning that the cuts would be made if we can afford them. It is worth noting that the state is going to be up €600million or so due to the end of the SSIAs for a start and Pat spoke of growth averaging 4.5% over the lifetime of the government. The budget is current €54billion or so so 1% is €540million, of course every 1% growth in the economy doesn’t translation directly into growth in tax revenue but it has come correlation.
And part of the point of a set fare for Dublin Bus would be to increase usage and in turn reducing congestion which has some economic benefits. And the Begin to Buy scheme is actually something that would be generating revenue after a period when people start to buy the state out of their part of the house, just like with the current rent to buy scheme.
[...] do something with the pie that is perhaps not already being done. Whether Labour’s proposal stands up on those grounds is probably a better way of dealing with the proposal than this “auction [...]