It's been a while since my last post but with a massively important budget on the horizon I felt it was time to dust off the type writer and say a few words, using as few commas as humanely possible! I am picking out some of the more important points in the debate and understand that there will be gaps in the blog. Not everyone will feel the same way so please feel free to comment and make your own suggestions.
Tomorrow's budget is being hailed by Fine Gael and most loudly by Michael Noonan as the final austerity budget..... or nearly the final one anyway. They plan to take 2.5 billion out of the economy using a mixture of tax rises and spending cuts, but also have signalled that this will be a budget aiming to get people back to work. Now anyone with the slightest knowledge of economics knows that these two don't go hand in hand, an austerity budget should mean less jobs right?
Not necessarily, if Noonan takes the stage tomorrow and makes the right announcements, we could in fact see the rate of jobs growth pick up. We have been drip fed bits and pieces of his plan, a cut in VAT for the construction sector - which has worked wonders for the restaurant and pub sector - a cut in capital gains tax for start ups, which should encourage risk taking and an increase in DIRT tax on savings which should encourage spending. However, some people may be sitting here scratching their heads.... Aren't we trying to decrease the deficit? How does cutting taxes help us?
The reduced taxes should increase activity (and again this has been shown to work in restaurant trade), spending and employment and thereby increase income taxes, VAT, etc. These increases conversely pay for the loss in revenue from the lower tax rates. One would hope that this increased activity actually leads to more tax coming in, than is lost by the tax reductions. At the very least it should be tax neutral, but we still get the benefit of having less people on the dole, less rent relief, fewer medical cards etc. All of which saves the state money. Britain has been doing this in it's budgets (lower income taxes, lower CGT and lower corporation tax) and the early signs are positive.
Why have we not been doing this all along? I hear you say. Well the theory would tell you that in recession you should lower taxes to stimulate employment and spending. This is rarely is the case however, as during booms (especially the one we had pre 2008) governments tend to become a bit lax on their spending (remember Santa Cowen) and can be fooled* into thinking that having one huge source of income is sufficient. In Ireland's case this was income from construction and in Britain's case it was construction and banking. When the bubble burst and this source of income dried up the Irish government had to move fast to shore up the finances. Do I chastise Noonan for the cuts he's made and the tax increases? The overall answer is no, we were on the verge of catastrophe and something drastic had to be done. The bond markets had already shut nay slammed the door in our faces** and we were staring down the barrel of a gun. Noonan had to get the deficit down any way he could. While I'm not a firm supporter of every decision he made, the job has largely been done and the deficit is now coming under control, so much so that we can start to introduce the growth policies outlined above. Britain has been able to do this much sooner because they have their own currency and can essentially print money for as long as they wish, in an effort to avoid a default. Their overall debt is also much more sustainable and this has allowed them more flexibility.
Anyway enough rambling, the budget. In my humble opinion Noonan can not afford to raise income tax (any tax really) by any amount whatsoever. If I had it my way I would actually decrease the top rate which weighs in at 53%. If people are to be motivated to work and if employers are to be competitive (remember employees are highly mobile) they need to be able to pay a salary that is attractive while staying in line with their competitors from the rest of the world. An Irish person who earns 100k in Ireland comes home with circa 47k after tax, in the UK they'd come home with circa 55k. This means the Irish employer would need to pay 115k*** to send their worker home with the same amount. That is 15k in extra cost and 15k less profit per worker. While a company may be willing to take the hit now they will not be willing to fork out any more.
VAT is another one that needs to be left alone. The top rate is already a whopping 23% and if we don't want to see a return to cross border shopping this absolutely can not increase and should in fact decrease. Increasing sin taxes on cigarettes and alcohol is also futile as the black market will simply step in and undercut the retailers (it has already done this to a frightening degree with cigarettes). Pubs can not take any more cost increases but a rise in off licence duty might help restore the balance.
I am vehemently against increasing the 9% rate for the tourism trade and raising that will help no one.
So back to the original question.. how can we take money out of the economy? Well it is my belief that the above tax cuts would start the process as employment and spending should increase with all of the positive spin offs associated with that. But unfortunately it ain't gonna bring us to the holy grail of 2.5 billion. For this we need spending cuts.
No one wants their income reduced but given the state of play it's unavoidable. And when I say unavoidable I mean we need to get out the machetes and start slashing. There has been a lot of talk recently about welfare traps. So called because it's not worth someone's while to give up the dole (and the associated benefits) to take a job that pays the same amount, in fact the job needs to pay considerably more to make it worth while. This is abhorrent and must be stamped out immediately. The dole should be a necessity not a choice. Anyone who has the ability to find work must be encouraged to do so at all costs. I am painfully aware that many people can not find jobs, but if employers have to pay above the odds just to entice a person to come off benefits there is something seriously wrong. The UK is going about this in a big way, far more drastic than I think Noonan would ever go for. Again there are people out there who are struggling and my sympathies go out to them but given that the economy seems to be starting its turn around these issues (welfare traps) need to be addressed.
On that note the dole for people under the age of 25 is set to be cut by 44 euros a week. This will make employers at the marginal level (i.e. paying a wage close to the old dole rate) more attractive and will force more young people to look for work. Again the work may not be there but at least some of them may decide to move back in with their parents and save the state money on that end.
International aid should be cut for a period of 5 years. Again this is a painful one but if we can't look after ourselves then how can we justify sending money to other countries. The EU would be up in arms about this but I think we could get away with it (possibly if we promised to make up for it down the line). Its easy for me to say these things rather than to do them, but tough choices have to be made and we need to look after our own people first.
Medical cards should be given to those who truly need them no questions asked, there have been many reports of late of people who have disabilities, cancer and other debilitating diseases having their welfare cut and this is not right.
Pensioners should also take a hit, most certainly those that can afford it, they have been the least affected by recession. They did not have large mortgages, they had been saving during the boom and thus have large pensions. The problem is that pensioners vote in large numbers**** and thus are protected from the worst of the cuts. Again I don't expect old ladies to be starved or forced to ration their gas and electricity but those who can afford to get less should get less.
Child benefit should be means tested (again see Britain) as the richest people in the country do not need this. Those on low incomes certainly do however and thus it should be left as is for them.
Finally in my budget I would not worry too much about the 2.5 billion target, if we can start getting growth going again and increase jobs the bond markets will give us more time. The yields on 10 year bonds are sitting at about 3.5% at the moment so we have time on our side. A good dose of growth would be welcomed far more than the deficit reduction.
The problem with my budget is in the name, its my budget and not Noonan's. He is going to increase some form of tax and cut less than he should, he like everyone else has to play the political game. I can't fault him but sometimes I wish politicians would take a stand for what is right.
There is one theme that overrides all of this debate. The corporation tax rate, if one thing is for sure that will not budge. Ireland has managed to shield itself from even more pain by managing to keep foreign Direct Investment flowing into the economy during the recession. This sector accounts for 100,000 direct jobs and probably the same again in indirect jobs. If the likes of Germany, the US and the UK get their way and they force this rate to go up or if they force multinationals to pay their fair share - rather than routing profits through Ireland - then our little island could suddenly become a lot less attractive. If you think the budget is tough now just imagine what it would be like with another 200,000 people on the dole.
In some ways this is a scary time to be Irish, we are on the verge of getting back on our feet and securing our future. However a bump in the FDI road could set us on a downward spiral once more. All Noonan can do for now is keep pushing on with the work he has done. You have to wonder about their job creation strategy however, given that it seems to be mostly reliant on foreign MNC's.
For more on the corporation tax
An optimistic outlook by Seamus Coffey http://economic-incentives.blogspot.ie/2013/10/12-billion-in-ct-revenue.html
A more pessimistic outlook http://www.davidmcwilliams.ie/2013/10/14/lets-talk-about-tax
*Some may wish to use the word bribed here
**Santa got hit pretty hard which explains the mushed up facial features
***I am ignoring tax free allowances and lower rates for ease of calculation
**** If Irish people took more of an interest in voting (39% turnout for latest referenda) this would not be a factor.
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