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Some further thoughts about the current Budget woes… October 28, 2008

Posted by WorldbyStorm in Irish Politics.
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Some points made over the weekend in the Sunday Business Post are worth considering. But perhaps not for the reasons the author of those points might think.

Cliff Taylor, writing about the current Budget debacle, has an interesting analysis of the situation. He argues that:

The government’s decision to back down on the over-70s medical cards and the 1 per cent income levy may have been politically essential, but the brouhaha has distracted from what should have been the key message from Budget 2009. Put simply, if economic conditions continue to deteriorate, we will be facing a full-scale public finances crisis.

First he makes a point that is central to his later argument…

Even if the relatively optimistic assumptions underlying the budget are broadly met, the government still faces a huge job in trying to keep borrowing from spiralling higher. Either way, many more groups will be following the over70s, the students and the farmers onto the streets over the months ahead. Taxpayers may be among them.

To which one can only ask, which ones… for therein lies a tale.

He comprehensively outlines the various problems:

Next year, according to Brian Lenihan’s budget sums, we will have to borrow €4.7 billion to fund current spending – in other words the day-to-day costs of running the country.

When you add in further borrowing to fund state capital investment spending, total borrowing (using the EU general government measure) will be over €12 billion, or around 6.5 per cent of gross domestic product (GDP). Borrowing to fund investment projects is justifiable. Borrowing to pay for day-to-day costs is another matter.

The reason for the rapid turnaround is the extraordinary collapse in property-related tax revenues. Here the real problem for the exchequer is not so much the drop in prices as the lack of activity. Without second-hand houses being sold, stamp duty is not paid; without new homes being build and sold, Vat receipts are hit.

Which leads to the following deplorable situation…

The difficulty for the government is that its authority in addressing this situation is now questionable. But if we have marches on the street every time there is a cutback – and row backs here, there and everywhere -we will never get to grips with it and we risk entering a very damaging downward spiral of higher taxes and slow growth.

There is no magic bullet. Opposition noise suggesting that somehow the money can be found by taxing the ‘‘rich’’ is nonsense. There is no easy way out. But the first job for the government is to communicate the gravity of what we are now facing into.

Interesting, isn’t it? The idea that ‘taking the “rich”‘ is ‘nonsense’. And note that the word ‘rich’ is in inverted comma’s. Of course, that raises another question. Just why is it ‘nonsense’? To dismiss the idea out of hand is inadequate as a response, particularly since he earlier notes that:

And then there are taxes. Further hikes are inevitable. Any hope that the carbon tax would be a revenue-neutral levy – with money raised through taxing polluting fuels redistributed through other tax or welfare measures – will be quietly forgotten. Next year’s carbon tax will have to raise a whack of money.

Other significant tax increases will also be necessary, unless the knife is really taken to spending. The risk is that higher taxes further depress growth and spending, prolonging the recession and hitting employment.

So, let’s get this straight. Tax increases are ‘inevitable’, but taxing the ‘rich’ is not a solution, or not even part of the solution. And note that he suggests initially that ‘taxpayers’, as if some sort of breed apart, may well be next out on the streets – presumably, though, he regards ‘taxpayers’ as defining those on certain incomes… but which, if not inclusive of ‘the rich’? We can only surmise that for him the taxes must be soaked from the broad mass of taxpayers and those with the wherewithal or the cunning to evade such measures will continue to do so.

Odd that. Michael Taft has been parsing the outcomes from the tentative notion of raising revenues from taxes on the… er…rich and super-rich and arriving at some very compelling conclusions. Moreover his approach would be at least partially detached from productivity in the economy and therefore essentially neutral in its impacts on economic activity.

I like that solution. A lot. But this is a Fianna Fáil/Green Party/rump PD Coalition, so calculating the odds of that being implemented – or at least a serious tax taking that format, since there were some noises about such a measure over the weekend perhaps from an FF desperate to grab back its ‘populist’ garb – I come up with a figure close to zero (and curiously I seem to get the same figure for any Fine Gael/Combination of others Coalition). So for something a little less heady, consider Finfacts which notes that in 2006 some 31.9% of PAYE taxpayers were on the higher rate, or some 620,900 in total. Now if we were to add even a minimal increase of a percentage point to that rate that would make an addition to the public finances. Not huge, admittedly, but something. But seeing as I’m all for progressive taxation being… progressive, and not restricted to PAYE earners either, I would hope that we might see a sliding scale for those on greater and greater gross incomes. Indeed Finfacts has an interesting quote from Revenue on the costs the reduction of tax rates incurred during the past decade. Hard too to see those on the higher rate who were brought into such a regimen – if it were pitched at that rather low introductory rate – finding too much to complain about, and although granted in a time of reducing economic activity the tax base might dry up, well, we still have the suggestions of Michael Taft. So both those on, what shall I call them, ‘higher’ incomes (and check out the CSO figures on employment, most interesting) and those who are actually rich and very very rich indeed would be given the opportunity to do their ‘patriotic’ duty. Still, I note that Taylor doesn’t recommend the government going out and impressing upon those the need to face tough times.

Returning to Taylor again there is a certain unreality to his thoughts, as when he argues:

Somehow, amid all the post-budget noise, the gravity of the situation facing the public finances has got lost. Unless we get a grip we will be heading back to borrowing figures of 8 to 10 per cent of GDP and a rapidly rising debt burden. This would have a disastrous impact on confidence and business investment of all kinds.

Except that there already is a disastrous impact on the confidence of business investment of all kinds through the melt-down in financial institutions (something, by the by, that Vincent Browne also convincingly points up some major issues with the current government bail-out, which as he notes has not stemmed the precipitous dip one bit since its announcement).

And then let us note that far from there being ‘no magic bullet’ Taylor actually does propose something that will help… except it’s the usual solution that the centre-right is now entranced by.

One way to progress might be a much accelerated early retirement scheme [in the public sector]. Time will tell how the government addresses this one. Cutting non-pay elements of day-to-day spending is equally difficult, as it tends to hit services to the public directly. Yet there is surely room here for a cull of a whole range of programmes and initiatives. Again, the key issue is how this will be achieved.

But a better question might be how this is meant to assist the economy, an economy which has grown with, broadly speaking a low growth rate in the public sector during the last decade.

I find this concentration on the public sector, and aversion to the very idea of progressive taxation (which is implicit to Taylor’s argument) fascinating. Yet again we see the state portrayed as an entity whose function is (with reluctance) to prop up a financial sector which has comprehensively failed – and is continuing to do so (those stats of Browne’s are pretty scary), and which is otherwise there almost as an inconvenience whose assets (the public sector) are to be looted by the ‘productive’ sectors of the economy. That such an approach is entirely self-serving (in a sectoral sense) appears to utterly escape its cheerleaders in the media. But it would be worthy of further scrutiny and publicising in the broader political arena by a left which has been given a stunning opportunity to makes its case.

Meanwhile, from yesterday’s Irish Times

A spokesman for the Green Party said they recognised it was a difficult poll finding for the Government, coming at a time of unprecedented international calamity in financial markets.

“But for the Green Party, it is a solid result in keeping with opinion poll trends since entering government 16 months ago. People recognise we are there to do a specific job on environmental and other issues,” he said.

Yes, but which ‘other issues’?

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Comments»

1. ejh - October 28, 2008

…unless the knife is really taken to spending. The risk is that higher taxes further depress growth and spending…

“We must cut spending, for fear that if we do not, spending will fall”

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2. ejh - October 28, 2008

(And yes, I know that he is referring to government spending in the first instance and consumer spending in the second. But as ever with this argument, it is neglected that government spending goes to people, who then in turn spend it themselves.)

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3. CL - October 28, 2008

Land and finance are intimately interlinked. More so in Ireland, with F.F. as the political wing of the construction/property development sector. This political economy has determined the Govt’s response to the current crisis.

“Three weeks ago, bubble turned irrevocably into bust. Brian Lenihan was faced with a choice between rescuing two banks and the handful of developers through whom they placed real estate bets, or recapitalising the financial infrastructure on which the other four million of us depend.”-Morgan Kelly.
Kelly calls the bank ‘rescue’ plan the worst economic decision of the last 30 years.
F.F is propping up insolvent developers and their associated banks.
Kelly’s piece is entitled ‘Things are going to get much worse’.
F.F reflex response to the crisis is to put the burden on those sections of society with least power. The task of the left is to prevent this happening. A real victory is possible.

http://www.irishtimes.com/newspaper/opinion/2008/1024/1224715115931.html

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4. WorldbyStorm - October 28, 2008

That’s very true ejh. And curiously it’s not shouted from the rooftops in the financial press… I wonder why… :)

In a way it’s funny how the land has just mutated across the generations from one meaning to another, but it’s still the land…

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5. Loan Systems - November 26, 2008

Hi ppl! I have made a blog about loans. Please welcome http://toploansystem.com

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6. WorldbyStorm - November 26, 2008

Some astoundingly esoteric spam…

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