Back in 2006 the Government cut taxes and increased spending. It balanced the books by relying on the tax receipts of property related activity. When the property market crashed, everything went south – in particular, the public finances.
Fast forward to 2024 and the Government is cutting taxes and increasing spending. This time they are balancing the books (at least on paper) by relying on ‘windfall’ or ‘transitory’ corporate tax receipts. If something goes wrong with these receipts, we’ll be heading south again.
It feels like 2006 all over again.
Governments led by Fianna or Fine Gael have subjected the Irish economy to a series of reckless fiscal policies. Prior to the crash, Fianna Fail-led governments stimulated an already over-heating economy. When the property market crashed, first Fianna Fail and then Fine Gael-led governments pursued reckless fiscal contraction policies, extending and deepening the recession.
These were boom-and-bust pro-cyclical policies, best captured by Finance Minister Charlie McCreevy’s famous statement - ‘when I have it, I spend it’. And now the current government, is preparing to deliver another round of pro-cyclicality based on unreliable tax receipts which they describe as ‘transitory’.
This matters because persistent pro-cyclical policies undermine long-term economic stability and the productive economy. If we are creating the conditions where the economy goes up and down like a roller-coaster then long-term planning becomes moot, leaving us exposed when we need resources in an inevitable downturn. As ICTU’s Owen Reidy pointed out:
‘. . . cutting taxes (today) will mean larger tax increases in the future.’
The government will claim they are taking this into account by setting up long-term saving funds in which the ‘windfall’ tax receipts will be placed. They further they state:
‘The Government cannot, and will not, use these transitory receipts to fund permanent increases in public expenditure.’
But this is exactly what the Government is doing According to the Fiscal Council:
‘. . . the Government is saving just half of its corporation tax windfalls and pumping the rest into the economy.’
The Government appears to be spending nearly half of the transitory corporate tax receipts, contradicting its statement that it couldn’t and wouldn’t do so. They are splashing the cash in order to win seats in marginal Dail constituencies.
No, we’re not staring into a repeat of the crash. If there is a negative impact on these receipts it is more likely to be a long-term whimper rather than a short-term bang. However, just three companies make up a third of all corporate tax receipts. Falling sales, new tax avoidance strategies, market decline, competition from other low-tax countries – all these could come into play. Nothing is certain; just ask Germany and Poland. Intel has paused the construction of two new chip factories (a significant investment) due to ‘liquidity’ problems.
So if the downside is a long-term whimper, what’s the harm of using corporate tax receipts in the budgetary short-term? Maybe little, all things being equal and sustainable. However, with the economy at full capacity and near full employment, such expenditure could further embed inflation in our productive base. Indeed, this is kindergarten economics. The Central Bank and the Fiscal Council have estimated that expansionary budgets have fuelled domestically-sourced prices even as overall price increases are slowing due to lower energy costs.
The Government is targeting particular constituencies who will experience short-term gain, but at the cost of higher prices in the future. 50 percent of people want Budget 2025 to help with the cost-of-living. The Government response will be to fuel unnecessary price increases. And this in an economy which already has the highest living costs in the EU.
But this is not new. Fuelling demand through the Help to Buy and First Home schemes may help the particular recipients but at the cost of higher house prices for everyone else. Splashing the cash means we all get wet with no dry clothes to change into.
This should be an open goal for progressives. Fine Gael and Fianna Fail cannot be trusted with the public finances; history and current practice shows that. But we can only press this case if we propose an alternative fiscal framework that excises pro-cyclicality and excess corporate tax receipts out of budgetary policy; that uses transitory or once-off funds (including the Apple money) in a sustainable and innovative manner (e.g. equity financing for a publicly-owned construction company which can build scale in the market); which drives increased investment in public services and social protection through tax increases on capital, assets and wealth as per the Commission on Taxation proposals; which prioritises productivity gains in the poorly performing indigenous sector.
If we can do that, we can open a new front in the economic debate.
We can show that public finances are only safe with progressives.
After all, prudence is a socialist virtue.