Budget 2025 is coming early this year. The Minister for Finance is already outlining what we should expect:
‘Taxpayers will benefit from “substantial” income tax cuts in the next budget, the finance minister has pledged . . . “I’m committed to introducing a further substantial income tax package in the autumn budget.”
The Government parties believe that ‘substantial’ tax cuts is the pathway to re-election. How should progressives respond without falling into the trap of promising ‘better’ tax cuts?
Substantial tax cuts would be fiscally irresponsible, highly irresponsible.
First, it would return us to the type of budgetary policies that existed before the crash when the tax base was hollowed out resulting in an over-reliance of fragile tax revenue from property and building activities. Future substantial tax cuts would just be a repeat of this – weakening our tax base and relying on all that – potentially temporary - corporate tax revenue flooding in. This is a return to irresponsible Celtic Tiger-type fiscal policies.
Second, the government is well aware that economic growth will slow in the future. Heck, they are projecting it themselves. A slowing economy generates less tax revenue. This can best be seen in projected employment growth.
Between 2015 and 2023 the annual increase in employment averaged 3.2 percent. Tens of thousands of jobs were created each year bringing in higher tax revenue and reducing unemployment-related costs. In 2024, the Government projects employment will increase by only 1.4 percent. In the lifetime of the next Government the projected increase will fall to ½ percent. So while the Exchequer could rely on increased employment to generate tax revenue in the past, it will be sluggish from here on to the end of the decade.
As Eoin Burke-Kennedy rightly points out:
‘The Irish labour market has also begun to soften and the Government’s extremely favourable budgetary position, fuelled by buoyant tax receipts, has probably peaked.’
Whatever about cutting taxes at the beginning of an upward business cycle (and with so many economic and social deficits, even then it wouldn’t be a good idea), cutting taxes at the beginning of a downward cycle is well, irresponsible.
If we are to build a strong social state – public services, social protection – we will need to strengthen our tax base, not weaken it. If we are to address the challenges of climate change and ageing demographics – we will need to increase taxation, not cut it. If we are to repair our infrastructural deficits (housing, health, public transport as identified by the Irish Fiscal Advisory Council) we will need to increase investment. And we will need to do all this without pushing capacity limits which could risk over-heating the economy.
Progressives need to challenge the tax-cutting agenda: first, that cutting taxes is highly irresponsible, a return to the bad ol’ days of Celtic Tiger profligacy – all in the name of buying an election. Second, we need to base our tax-raising measures on (a) the Commission on Taxation and Social Welfare recommendations; namely that capital, property and wealth should be targeted, and (b) incrementally increasing employers’ and self-employed PRSI contributions over the long-term.
We can also show that wage increases have the benefits of increasing tax revenue while, among low-income groups, reducing public expenditure through lower reliance on low-wage subsidies such as the Working Family Payment. Progressive pay rises are can have considerable fiscal benefits while collective bargaining can ensure that such increases are consistent with firm-level productivity.
It is never easy to argue against tax cuts. They give the illusion of increasing living standards (more money in the pocket) while doing very little to increase living standards. Extending and deepening free and affordable public services, bolstering in-work benefits and eliminating poverty through social insurance and social protection, investment in our economic and social infrastructure, and stronger labour rights – that’s the ticket to meeting the slowdown, raising living standards, and building a resilient economy.
Progressives can’t win the tax cut argument. Nor should we want to. If some people want tax cuts, they’ll vote for the government parties. We need a better conversation. And it starts with calling this for what it is.
Proposals to cut taxes and increase spending while promising fiscal stability is nothing but a three-card trick.