Am taking a break from the blog until the first week of January.
Wishing all readers the very best in this holdiay season. Rest up.
There is plenty of work to do in the New Year.
In defending Budget 2013 Labour has argued that it contained €500 million in a ‘wealth tax package’ or revenue from taxation on high income groups. This, goes the argument, is evidence of Labour’s influence on the budget – revenue that would be missing were Labour not in Government. So what are the measures that add up to €500 million? And is this sum robust?
First, we have a problem with labelling. While some Labour TDs have called this a ‘wealth’ package, the only tax on wealth (defined as an asset) is the property tax. However, they do not refer to this and with good reason – the property tax will attract revenue from high income groups. So Labour is not referring to tax on wealth but rather on personal or capital income.
The list that Labour has been putting forth includes: a mansion tax on properties worth over €1 million (this is a small tax on wealth), an increase in the USC on high-income pensions, extending PRSI to trade and unearned income, reducing tax reliefs for large pension pots, an increase in Capital Gains tax, Capital Acquisitions tax and Deposit Interest Retention Tax (DIRT), etc. So does all this add up to €500 million?
Let’s look at the measures that will be introduced in Budget 2013.
In the above measures we find that €114 million will be raised in 2013 with a full year yield of €174 million – though this latter figure is slightly inflated by an extension of the PRSI base on to unearned income that won’t be introduced until 2014.
This seems a long ways away from the €500 million package Labour has referred to. What else could there be, that is not captured by the table above?
Deposit Interest Retention Tax: This has been referred to as a tax on high incomes and clearly high income groups are more likely to hold more cash than the rest of us. However, low and modest income groups also have deposits. And the tax rate is somewhat quirky. If interest on deposits were included in the income tax regime, low-modest income groups would pay only 20 percent while those on the top rate would pay 41 percent. As it is, low-average income groups pay more under DIRT and high-income groups pay less. Nonetheless, let’s allow this a tax on high-income groups, knowing that others will be caught.
Pre-retirement access to funded Additional Voluntary Contributions: this is the provision that allows people to draw down 30 percent of their AVC prior to retirement. This is intended to give a boost to consumer spending (more on this in a later post). Holders of AVCs would usually be higher income earners and if they pull down this money they will be taxed at the marginal rate – for most this would be 41 percent. However, this is not a tax. If I don’t pull down my AVC, I face no tax. In essence, the 41 percent tax I would pay is the price for being allowed to draw down the money. And if no one, or very few, draw this down, there is no gain to the Exchequer. This is not a tax and shouldn’t be included.
Changes to the maximum allowable pension fund: this refers to withdrawing relief from large-pension pots. This is a good step. The problem is that this is not part of Budget 2013. This is intended to be introduced in 2014. We have no details of how this will be achieved or what the estimate of €250 million revenue is based on. If we allowed this as part of the calculation then we would have to spread the impact over two years which would dilute the impact of the €500 million package. It’s not consistent to include this in the package since it plays no part in Budget 2013.
‘Mansion Tax’: as compensation for not achieving an increase in the USC on incomes over €100,000, Labour was able to get an increase in the property tax of 0.25 percent on houses valued over €1 million (but only on the portion that exceeds €1,000, 000). The Minister has provided no estimate as to how much this will bring in. The Commission on Taxation, using 2004 valuation data, assumed that there were 3,000 houses valued at €1 million or more. However, this was a guestimate and was not grounded in any data. But assuming 3,000 houses in this category, and an average value of €2 million, the mansion tax would raise approximately €7.5 million. Let’s include that.
Now we have a sum of €168 million in 2013 and €245 million. One could make an estimate of property tax revenue from high-income groups that don’t have houses valued at €1 million or more, but even if we could agree the assumptions, the sum would only push up this total by a relatively small amount.
How does this compare to the previous two budgets?
In last year’s budget, €229 million was raised from taxes targeted primarily at high-income groups. The big items were changes to capital income and DIRT.
In Budget 2011, Fianna Fail’s farewell budget, nearly €470 million was taken from primarily high-income groups. The big items were the abolition of the PRSI ceiling for incomes above €75,000, restrictions on legacy property reliefs, PRSI on pension contributions (this raised €60 million but, like DIRT, would have hit some average incomes), other pension contribution changes, DIRT and capital income. Of course, this was also a budget which hit low-income earners through cuts in personal tax credits (much like the current abolition of weekly PRSI allowance) and the Universal Social Charge.
So Budget 2013 is not much different than last year and is yielding less than Budget 2011 when it comes to targeting high-income groups.
Of course, some may insist on adding the €250 million in changes to the pension pots which was announced Wednesday but won’t be implemented until 2014 – and in a way we don’t know yet. But that would only be taking the progressivity from the 2014 budget and inserting in this one artificially. To my mind, let Budget 2014 speak for itself and hope that Labour can build on it.
It is hard to see where Labour’s ‘€500 million wealth tax package’ is coming from, But in one sense I doubt that it will have much political impact. It will be little solace to low-paid PAYE workers affected by the PRSI changes, or medical card holders facing a trebling of prescription charges, or parents seeing their Child Benefit cut – little solace to be told that x amount of money is being levied on high income groups. For one is concrete – the impact on one’s own household where the increase is almost, if not fully, unaffordable; the other is abstract or, at least, distant – the impact on a household that can afford it anyway.
For therein lies the problem that Labour faces. I have no doubt that this is not the budget that Labour backbenchers would have introduced. Using inflated or highly contestable figures to counter what is a regressive budget will not diminish the cuts and regressive taxes. The cold political reality, being in government with a larger party that does not share its values, is that they may have to vote for budget not of their making.
‘May’ being the operative word.
This post was originally written for TheJournal.ie
Child Benefit cuts, PRSI rises, respite care cuts, property tax, pension caps (eventually) – how does the budget look when we stand back from the individual elements? What is the narrative? How does it fit with what the Government is projecting over the medium-term?
There are two elements that stand out. First, is the impact on employment. The Government has accepted that its current employment policy is failing – projecting that unemployment will only fall by one percentage point during its lifetime. And no wonder. The Nevin Economic Research Institute has estimated that up to 29,000 jobs could be destroyed as a result of this budget. The cuts in public investment and the continued job losses in the public sector will have a particularly negative impact. But the overall reduction of disposable incomes – through the flat-rate PRSI rise and property tax, to the cuts in social protection, increases in prescription charges and reductions in community supports – will mean less spending power in the economy which, in turn, will postpone private sector investment. So we shouldn’t be surprised that the Government is projecting that the domestic-demand recession will continue into next year – a recession caused by the Government’s own policies.
But what of the 10-point employment plan that the Minister for Finance led off with? It’s part of a trend. The Government has launched the Jobs Initiative, the Action Plan for Jobs (which had 77 points), the ‘Investment Stimulus’ – and yet since taking office the Government has regularly revised unemployment upwards and employment creation downwards. Micro-initiatives are insufficient when there are 30 unemployed people for every job vacancy. The issue remains one of demand – and the Government’s budget will reduce that demand further.
Second is the hollowing out of social protection. Social protection goes beyond cash transfers; it encompasses the provision of services and supports – cash or in-kind – for people, whether in work or not. The budget will drive Ireland’s social protection system into further means-testing – and we already have the most means-tested social protection system in Europe. It will undermine the quality of public services – with further expenditure cuts. It will reduce the ability of social insurance to provide a living income floor – with cuts to Jobseekers’ Benefit duration.
A number of factors will work to see yet another rise in income inequality and further increases in the deprivation rate: the abolition of the weekly PRSI allowance, the projection of only marginal employment growth next year, and the real cuts (i.e. after inflation) in basic social protection payments.
Within these basic elements – the loss of employment and the hollowing out of social protection – lie further stories of contradictory policies. The claim that this budget will protect/grow employment is at odds with the cuts investment and demand. The goal of caring in the community is at odds with cuts in home-help and respite care (the latter suffering a 19 percent cut). The goal of education, up-skilling and re-skilling is at odds with cuts to the Back-to Education Allowance grants. All this suggests Ministers working in their individual silos trying to meeting departmental targets without reference to wider policy goals.
All this will lead to what the Government has already projected – an extended period of stagnation. The domestic economy is only expected to grow by 1.6 percent annual average over the next three years. On current trends, we shouldn’t expect the domestic economy to return to pre-recession peak levels until 2017 or 2018 – representing a lost decade. Unemployment is still expected to be above 13 percent by 2015, while wages (after inflation) will continue falling for years.
In all this Labour carries a particular burden. It is only the junior party. The very math of the coalition means that they cannot direct economic policy. But the problem for Labour is that they carry high expectations – for low-income earners, for the unemployed, for those reliant on social protection, for those who see their household income falling in the face of arrears, childcare and living costs. To meet those expectations would seem impossible – especially when they are implementing austerity policies. This contradiction makes it difficult for Labour to explain, never mind justify, a budget largely not of their making. This was always going to be the logic of entering Government with a party opposed to social democratic values.
However, Labour should still take care in how it explains their input into this budget. They have pointed to ‘a €500 million wealth tax package’ in the budget. This is hard to credit – especially as they are not referring to the property tax (which is arguably the only ‘wealth’ tax – as it is a tax on a capital asset). The best revenue estimate of taxes that can be described as ‘targeting’ high income earners (capital taxes, PRSI and USC extensions, smaller measures) is €114 million in 2013 and €174 million in a full year. The cap on pension pots – which is a positive measure – won’t be introduced until 2014 and, so, does not figure in the budgetary arithmetic for next year. This is a long way from half a billion euros.
In one sense, this budget didn’t do anything different than what was signalled last year when the broad targets were established. In that sense, it doesn’t disappoint. What is disappointing is that the Government didn’t work the budget to ensure a progressive impact (Department of Finance comparisons of the impact on different income groups and household types show that earners between €25,000 and €45,000 will take the biggest hit, whether single or couples). Or that it didn’t work to reduce the extent of cuts in public investment. But in all other respects, it is what we expected.
And that is probably the most depressing thing to come out of Budget 2013.
Whatever about the leaks, the underlying thinking in much commentary and policy analysis shows why some people will get hit very hard. Yes, those on social protection should look out –especially around secondary benefits and eligibility. And pensioners – many of their programmes will be sliced if not totally jettisoned. If you’re unemployed, don’t expect much help from the budget (it will end up destroying jobs – especially through investment cuts).
What struck me most is the proposition that Child Benefit should be taxed. This featured on RTE’s This Week (the weblink to the programme is unfortunately not available). The Minister for Social Protection claimed her preferred position was to tax Child Benefit since this would protect the most vulnerable. The ESRI’s Professor John Fitzgerald made a similar statement – that those on high incomes would be taxed while the vulnerable would be spared. This view shows a lack of appreciation of what can happen to hundreds of thousands of households struggling on modest incomes.
Of course, Child Benefit will not be taxed in this budget; apparently, the computers in Revenue and the Department of Social Protection still can’t ‘talk’ to each other. And here’s another thing: taxing universal benefits does not undermine the principle of universality. Taxation can introduce a progressive feature in payments that are granted to all, regardless of income or employment.
But the emphasis on ‘protecting the vulnerable’ ignores the fact that people at work are also vulnerable. Yet it is this crucial group that would be hit in the ‘preferred option’. It underlines a view that social protection is for the poor, rather than for protecting the social.
What would happen if Child Benefit were taxed? How would some income groups be hit? Those on social protection would be protected – but low and average paid should watch out.
People – whether single or couples - on low or modest incomes would be hit significantly if Child Benefit were taxed. The most vulnerable would be protected, yes. But there are two issues here:
These income groups may also be vulnerable – with the cost of raising children, possible childcare costs, mortgages, etc.
Hitting these groups will put pressure on even lower income groups – because the loss of demand will result in more cuts in weekly incomes for those employed in domestic service sectors (e.g. retail, hospitality) while ensuring that next year there will still be pressure on public finances – thus maintaining social protection in the austerity spotlight.
Okay, this is an academic exercise – though the leaks suggest that the households above will suffer cuts of €120 for each child, with additional cuts for three or more children. But what about the property tax? Leave aside the vexed question of whether housing property should be targeted while exempting financial property. Leave aside whether it is economically prudent to impose a tax when domestic demand is still falling. Let’s just look at the ‘protecting the vulnerable’ angle.
Leaks suggest that single people on €25,000 or less will either be exempt or the payments deferred; this rises to €30,000 for couples. So how many average income earners will still be hit by this tax – those on moderate means but above the thresholds? From the Revenue Commissioners data for 2010 (the latest year we have data for) we find the following:
There are 438,000 taxpayers in these very modest income ranges. We don’t know how many are home-owners so we can’t assume all will be levied a property tax. But for those who are home-owners, they are not likely to gain any relief from a property tax.
One could argue that these are not ‘vulnerable’, but these are income groups that have suffered income falls over the last few years – whether through pay/working hour cuts, tax increases, and social protection cuts (e.g. Child Benefit). A property tax will see an additional cut in disposable income – and if they have children, it will be even more.
There is a social equity issue here and there is an economic argument – the impact on domestic demand. However, what I’m suggesting is that the ‘protect the most vulnerable’ position means that many people who are struggling will not get protected because they do not fall in that category. These income groups need social protection, too – in the broadest sense (income support, health services, educational resources, childcare, eldercare, etc.)
That is why some people will get hit very hard - they don't fit in the politically instrumental category of 'the vulnerable'.
That the most vulnerable will also get hit merely reinforces the view that whatever the government does, it has little to do with social equity or economic rationality; never mind ‘protecting the vulnerable’.
Many people will get hurt in this budget. This should lead us to a broader interpretation of social protection. The former will happen, the latter will not.