‘You follow drugs, you get drug addicts and drug dealers. But you start to follow the money, and you don't know where the f*** it's gonna take you.’
- Detective Lester Freamon, The Wire
The Programme for Government (PfG) has been touted as transformative, progressive, even left-of-centre. A former Minister claimed it was so left-wing that ‘James Connolly and Che Guevera could vote for it’. But in the fog of spin and a promised plethora of reviews and commissions, it is hard to see the woods for the trees, to assess whether the PfG will usher in ‘transformative’ policies, or just a new vocabulary of rhetoric and aspiration.
So let’s ‘follow the money’. A strong social state – based on enhanced public services, social security and climate justice with a Just Transition – will cost money. The increased current expenditure (day-to-day spending on public services, social protection, interest and subsidies) will need to be matched by increased revenue in the medium term. We will need a substantial increase in investment – to get the economy back on track and to deliver the carbon-reduction targets. The lack of detail is understandable given the highly uncertain environment. But let’s see where following the money takes us.
Deficit
The PfG seeks a ‘broadly’ balanced budget. That the deficit will fall is merely a function of a recovering economy, as revenue rises and unemployment costs fall. The Irish Fiscal Advisory Council gives a sense of this trajectory on a no-policy-change basis in their recent Fiscal Assessment’s Central Scenario.
The deficit falls dramatically next year and in 2022, before settling down to a slower reduction. However, this scenario was based on pre-pandemic crisis spending projections. These will increase, if only because of elevated unemployment costs. And introducing a single-tier health service or affordable childcare would require further spending. Therefore, without any revenue measures the deficit will in all likelihood increase.
The PfG gives no time-frame for achieving a balanced budget; however, the Government will make clear its plans within a few months:
‘At Budget 2021 . . . we will set out a medium-term roadmap detailing how Ireland will reduce the deficit and return to a broadly balanced budget.’
So we will have to wait to assess the Government’s intentions. The real issue is whether the achievement of better public services, stronger in-work benefits and social protection, and higher investment can be achievable within this falling deficit. The answer is quite clearly no. It will require fiscal adjustments – notably tax increases.
Investment and Debt
We get only some insight into the Government’s ‘investment’ plans. They have proposed a National Recovery Fund which appears to represent the stimulus part of the PfG for the next two-three years, diminishing as the economy grows (which is to be expected from stimulus expenditure). However, not all of the Fund’s expenditure will be investment; much of it could be continuing the Temporary Wage Subsidy Scheme and other current spending initiatives.
One concerning aspect of the PfG is its treatment of windfalls to the state:
‘We will use any windfall gains, such as the National Asset Management Agency (NAMA) surplus, the final resolution of the liquidation of the Irish Bank Resolution Corporation (IBRC), or the sale of the state shareholdings in the banks, to reduce our borrowing requirements.’
Why? Does it really make sense to pay down debt (i.e. save) when there is a crisis? One would have thought these windfalls would be ideal resources for the temporary National Recovery Fund. The picture becomes even cloudier given this article from the Irish Independent (thanks to Conor McCabe for pointing this out):
‘Finance Minister Paschal Donohoe said yesterday that spending cash windfalls makes sense when the alternative would be to increase borrowing.’
Absolutely. But where does that leave the PfG commitment above?
Again, we will get a better sense of the Government’s intentions in Budget 2021. But for comparison purposes we should note that in last year’s budget the Government intended to invest €50.5 billion in the five years 2021 to 2025 (or €39.4 billion up to 2024 – I’ve estimated up to 2025 based on trend).
This €50 billion investment envelope was projected at a time when the economy was in danger of over-heating. Given that the economy will have a lot of slack, we should expect the investment envelope to increase; or at the very least, be maintained. Any new green stimulus investment should be additional (otherwise we’re robbing Investment Peter to pay Investment Paul). We won’t be able to assess this until the Government’s projections in October..
Taxation
There are three distinct taxation categories in the PfG
(a) General Taxation
The PfG states:
‘We will utilise taxation measures, as well as expenditure measures, to close the deficit and fund public services, if required. In doing so, we will focus any tax rises on those taxes that tax behaviours with negative externalities, such as carbon tax, sugar tax, and plastics.’
The focus is on taxing environmentally-damaging activities which, while desirable, is inherently regressive. Without some compensating mechanism, low-income groups will disproportionately carry the burden. There is also reference to increasing taxes on vaping and a review of motor taxes to capture nitrogen oxide and sulphur oxide emissions.
On the other hand, the Government has stated that income tax, USC, property tax (with minor exceptions) and corporation tax will not be touched. Yet, these are progressive taxes.
In addition to freezing progressive taxes there are particular taxes mentioned with a view to cutting them (or increasing the tax break):
- The 3 percent USC surcharge for high-income self-employed
- Increase in the Earned Income Tax Credit (Self-employed)
- A cut in the Capital Gains tax
- Increase in the Home Carer Tax Credit
- Tax changes to facilitate remote working
- Tax changes to facilitate dairy enterprises in a volatile market
- Review the taxation environment for SMEs and entrepreneurs, with a view to introducing improvements
- From 2022 tax credits and tax bands credits to be indexed in line with earnings
This doesn’t mean all these will be implemented. After all, this is a review, examine, consider and assess PfG which in many cases doesn’t give firm commitments. However, the programme indicates intent. The cost of some of these cuts would be significant, even factoring in the pandemic’s impact on fiscal performance:
- Abolishing the USC surcharge would cost €125 million.
- Capital Gains tax is currently set at 33 percent. Each percentage point cut would cost €32 million. Fianna Fail’s manifesto pledge to cut capital gains tax to 25 percent would cost €256 million.
- Indexation of tax credits and allowances of 1 percent (that is, earnings rise by 1 percent) would cost €364 million.
These are serious tax cuts. The story here is that regressive tax increases could well end up financing tax breaks, some of which would benefit the highest earners.
(b) Carbon Tax
The PfG estimates the revenue over the next decade from increasing the carbon tax (by €7.5 per tonne each year up 2030) to be €9.5 billion. This sounds like a lot money and it is, though it will only amount to approximately 1 percent of total spending during that period.
The PfG will ring-fence carbon tax revenue for three areas: €3 billion for ‘targeted’ social protection measures to prevent fuel poverty; €5 billion for retrofitting; and €1.5 billion to encourage sustainable farming.
The revenue will be spread out over 10 years. But it will take a number of years to accumulate a significant sum in any one year. From my own - admittedly back-of-the-envelope calculation - 45 percent of that €9.5 billion will only be realised between 2028 and 2030 inclusive. So it will take time to accumulate.
(c) Social Insurance
‘Consideration will be given to increasing all classes of PRSI over time to replenish the Social Insurance Fund to help pay for measures and changes to be agreed including, inter alia, to the state pension system, improvements to short-term sick pay benefits, parental leave benefits, pay-related jobseekers benefit and treatment benefits (medical, dental, optical, hearing).’
This is a positive proposal, a potentially decisive step towards a European-style social protection system. Increasing employers’ PRSI opens up the possibility of enhancing in-work benefits such as Illness Benefit, Maternity Benefit and other family supports, and short-term unemployment payments.
However, except for carbon tax, the issues of taxation and social insurance will be kicked into a Commission on Welfare and Taxation. This is not necessarily a bad thing (though we had a tax commission reporting back in 2009). A Commission that looks in detail at all aspects of taxation and social protection could be a useful exercise. However, there is a caveat:
‘It will review all existing tax measures and expenditures and have regard to the taxation practices in other similar-sized open economies in the OECD. It will have regard to the principles of taxation policy outlined within this document (i.e. PfG).’
If it has regard to similar-sized open economies, then the Commission will be looking at how to substantially increase taxes. However, if it has regard to the principles in the PfG, it will be hamstrung given that the PfG has shut off so many areas for tax increases.
* * *
Here are some very tentative conclusions;
- The PfG is committed to a ‘broadly’ balanced budget but we won’t know how quickly it intends to achieve that until October. If the trajectory follows the Fiscal Council’s Central Scenario, we will need a substantial increase in revenue to significantly improve public services and social protection.
- Windfalls from NAMA, IBRC and the sale of bank shares will be used to pay down debt, not for investment (maybe)
- We won’t know the extent of the medium-term investment programme for a few months. But if it falls below €50 billion out to 2025, it will constitute a cut compared to previous projections.
- There is little evidence that the PfG envisages a stronger social state. This would require a substantial increase in revenue to significantly improve public services and social protection, unless it is intended that social insurance do all the heavy lifting. Issues such as Sláintecare, housing investment, Just Transition measures and education investment are either postponed, kicked into touch or reliant upon a Commission report.
- General taxation measures are unlikely to raise significant net revenue, especially given the references to potential tax cuts. The Carbon tax is a positive but could end up being highly regressive without compensation measures. In any event, most of the revenue won’t accrue until the latter half of the decade.
The above has tried to follow the money but it hasn’t gotten us very far. There are few details. However, the few indications in the PfG would suggest is that while we might increase spending, we will still labour under our historical low-tax status.
Hopefully, the incoming government will start to answer these questions soon. Otherwise, James Connolly and Che Guevera will have to reconsider their support.
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