Michael Taft: Getting On The Fiscal Pitch

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From top: Irish Fiscal Advisory Council Chairperson Seamus Coffey (left), Chief Economist and Head of Secretariat Mr Eddie Casey (centre) and Mr Michael G Tutty speaking to the media at the launch of the The Fiscal Assessment Report last week; Michael Taft

The Irish Fiscal Advisory Council has provided the Left an open goal. If we shoot, we score. But first we have to get on the pitch. And right now the Left has not even put on their jerseys.

In their latest Fiscal Assessment Report, the Fiscal Council got more than a bit tetchy with the Government’s handling of the public finances.

They used some undiplomatic language:

‘ . . . the medium-term budgetary plans are not credible . . . ‘

Ouch. The Fiscal Council’s critique of the Government’s fiscal policy boils down to (a) failing to drive a budgetary surplus in the good times; (b) leaving the debt at an elevated level; (c) stimulating an economy to the point of over-heating; and (d) failing to factor in the downsides in future projections.

All of this is leaving us badly exposed of the inevitable slowing down of the economy, never mind the damage Brexit, changes international taxation and trade wars could do.

In short, Fine Gael is squandering the recovery. Put this together with Fianna Fáil’s reckless pre-crash policies (never mind the equally reckless austerity measures both parties pursued) and the Left has a good starting narrative: you can’t trust the Right to manage our public finances.

This doesn’t mean people will automatically trust the Left, which to date has had little to say about the issues of debt, over-heating, deficits, etc.

This allows the Taoiseach to get away with deflecting the debate away from the Fiscal Council’s criticism:

‘[The Taoiseach] insisted the Government’s spending was modest compared to the constant demands of the left-wing Opposition for increased spending . . . if people listened to that kind of left-wing rhetoric the economy would plummet very quickly.’

The Left’s silence allows our opponents to monopolise the issue and distort its position. So let’s start engaging the debate.

Here are some ideas. These are not comprehensive or necessarily authoritative. But hopefully it will get things started.

1. Stick with the Fiscal Rules.

Never thought I’d write that but for now the Fiscal Rules are a practical defence against more orthodox policies. Sticking with the Rules’ deficit target will allow us more space than Government spending projections. We can still critique the Rules’ faults, though: the treatment of investment, the inapplicability of the Rules’ methodology to a small, open economy; their deflationary bias, etc.

2. Strengthen Automatic Stabilisers

There are two key stabilisers: Unemployment Benefit: In the event of a slowdown higher unemployment benefits will help maintain domestic demand. In our EU peer group, unemployment benefit is far stronger – over €300 and €400 a week; in Ireland, it is only €193. Increase unemployment benefit with a small increase in Employers’ social insurance.

Employment Subsidy: It is important to maintain employment in downturns. Therefore, rather than job losses, employers would reduce workers’ hours with the state subsidising workers’ income to prevent loss in take-home pay. This programme was pursued by Germany during the last downturn with considerable success. This would be less costly than growing the dole queues.

3. Underpin the Productive Economy

There are three main areas: Introduce cost-rental housing to substantially reduce rent levels. This would increase spending on goods and services and reduce unnecessary upward pressure on wages.

A new financial model for childcare: current policies are not working (last year, the Government handed over €1,000 in cash subsidies to childcare providers– and fees still increased). Reducing fees would, again, allow for higher expenditure on goods and services, and reduce entry costs into the labour market.

Human capital, education, and innovation capacity: to see us through the medium and long-term, increase resources into education, innovation, and basic and applied research (Ireland compares poorly to other EU countries), switch away from tax credits to grants for SMEs, increase links between state, universities and progressive enterprises, etc.

4. Collective Bargaining Rights for Workers

Optimising our response to any downturn requires employees to be part of the solution, part of the decision-making process at firm-level. Further, sectoral committees should be set up in those sectors most at risk of Brexit or other-related slowdowns with full employee participation.

Collective bargaining has two significant benefits:It tends to favour those on low and average incomes – the groups that have a higher propensity to spend during a downturn

It tends to reduce precarious contracts which currently exclude people from fully participating in the consumer economy (that is, they are forced to save during those weeks they have less work or no work at all).

5. Keep Public Banks Public

Notably, AIB. Banks are notoriously counter-cyclical; when the economy goes into downturn banks withhold lending. A public bank can act differently since it is not beholden to short-term shareholder interests. It can continue to support viable companies, which might not otherwise be able to access credit.

6. Engage in Real Public Services Reform

We need to ensure efficiency and productivity in our public services. So why not bring in the actual producers of public services; namely, the employees. Employee-driven innovation is a feature in many other EU countries. It is employees who are best placed to know why something isn’t working and how it can be put right.

7. Unleash Public Enterprise

Public enterprises are essentially investment-driven businesses. This will be all the more needed in the rough periods ahead. During the last recession, public enterprises maintained investment. Currently, the top six public enterprises invest the equivalent of 40 percent of the state’s capital budget.

* * *

It might seem curious this hasn’t focused on tax issues. Budgets, however, merely reflect the state of the economy so we must first look to economic policies.

You will increase revenue if you raise the wage floor, end precarious contracts, drive investment, strengthen stabilisers, reduce rents and childcare fees, and support innovation.

Measures that put the economy on a more sustainable footing can then be complemented by tax measures – in particular, taxation on property, assets and passive income.

Two short-term measures would be to introduce a net assets (wealth) tax and substantially increase inheritance tax. And, of course, stop Fine Gael from introducing its €3 billion tax cut bonanza.

However, the debate involves, whatever other and better measures are proposed, the key thing is to resolve in the New Year to enter the fiscal debate. Let’s put on our jerseys and get on the pitch.

An open goal awaits us.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front.

20 thoughts on “Michael Taft: Getting On The Fiscal Pitch

  1. qwerty123

    Another good article Michael, however the left (SF, PBP) are against a wealth tax. The main wealth people have is their homes after all. Inheritance tax also struck me as unfair, a for of double tax on wealth.

    1. Rob_G

      The exemptions for inheritance tax are extraordinary – something like €300k per child. So a parent of two kids could bequeath over €600k before paying a penny in tax.

      Between taxing someone on €50k at 42% marginal rate for money that they have earned, versus taxing people a little more on the several hundred grand that have done nothing to earn themselves, I would personally go with the latter.

      1. qwerty123

        That 600k+ has already been taxed during the life of the parent. And again, at a flat 33% over the allowance. So a house worth 800k to a single child, this child owes 165kish in taxes straight up!!

        A wealth tax on the net value of the house would be much fairer, which Michael proposes but the left are against.

        1. Rob_G

          “That 600k+ has already been taxed during the life of the parent.”

          If most of this wealth has come from appreciation of value of a residential property, then it has not been taxed in any meaningful way.

          “So a house worth 800k to a single child, this child owes 165kish in taxes straight up!!”

          Sound like a great deal – sign me up. This is much, much less tax than you would have to pay in acquiring €800K in almost any other way.

          1. qwerty123

            nothing like the death of your parents to pay a huge tax bill resulting in you having to sell your family home within a year. Score!!

          2. Rob_G

            The example you are using seems very specific, so if in fact this situation it one that recently applied to you, apologies, I didn’t want to come across as insensitive.

            In the case you describe, the person could get a very small mortgage to pay the tax bill, and keep the house. Or sell the house, and use the €630k left over to buy another house.

            Another way of looking at it is that person is getting a very valuable house for only €165k; it is a very enviable position to be from a financial standpoint (obviously not for the family/personal life of the person concerned).

          3. qwerty123

            No worries Rob, did not apply to me personally, and indeed there is a dwelling house exemption anyway for people who still live in their house. Just using hypothetical eg’s.

      2. Increasing Displacement

        Why would they pay huge tax on handing over a house to family? That would mean, in the majority of cases, the person would have to sell the home. How is that a good thing?
        A person’s home is all they usually have at the end of their life to give their family, if even that.
        Something they’ve put their soul into. A lifetime into.

        “people a little more on the several hundred grand that have done nothing to earn themselves”
        The person has already been taxed heavily on their income, used to buy, update and maintain the property over decades.The home will cost they many tens of thousands over its life in maintenance alone. Never mind property tax.

        You’re idea is nonsense.

  2. Michael Taft

    qwerty123 – thanks for that. I wasn’t aware that SF and PBP were opposed to a wealth tax (or a net assets tax), as this is usually attached to higher income groups. I take the point, however, that many on the Left are opposed to the residential property tax. May I say that is a position I find difficult to understand; however, there is an inconsistency in the tax code. Why is house property taxed but not financial or land property? To be a bit mischievous – we could tax all net assets (that is, after liabilities so it wouldn’t attach to assets with a liability, like a mortgage) at 3 percent and raise as much revenue as income tax.

    Re: inheritance tax – that is a tax on passive income; income I have not earned. It is taxed in the hands on the recipient. There is no reason in equity why passive income is taxed less than income from labour (PAYE, self-employed).

    Regarding ‘double’ taxation – I would point out that all income is double, triple and more taxed, in large parts because of its circulation. I pay income tax on my earnings; I also pay USC and PRSI on that same income. Then I pay VAT on items I consume; and Excise. I will pay duties on bank cards, credit cards. I will pay DIRT. I will also pay extra for items due to corporation tax – if the company seeks to recoup some of their liability in their turnover. Everything is taxed over and over again – the trick is to ensure that taxation in its totality works progressively and to support the productive economy.

    1. Hansel

      “We could tax all net assets (that is, after liabilities so it wouldn’t attach to assets with a liability, like a mortgage) at 3 percent and raise as much revenue as income tax.”

      Wealthy people would just run everything as close as possible to break-even (offset any potential taxes). Not sure if that’s good or bad. Could ideally encourage more productive use of accrued money (re-investing into property to upgrade it and improve its value etc).

    2. qwerty123

      Oh I’m ll for a wealth tax on net assets, the left are not, due to the residential property bit.

      I suppose the problem with inheritance tax is that for example i made above – house worth 800k to a single child, this child owes 165kish in taxes straight up.

      Does not seem fair and will only mean the house will have to be sold to pay the liability in most cases. Whereas a wealth tax on the property constantly over time, say 1.5%, would yield 12k pa. More sustainable and predictable for the government if you ask me.

      1. Cian

        A problem with an annual wealth tax is pensioners who own a house but have limited income.
        So a couple lucky enough to have bought a house in Dublin in the 60s that is now worth 800K. They only have the state pension – but need to find your 1.5% (12K) per annum from their €12,636 pension.

        In this scenario I would imagine they would prefer inheritance tax!

  3. Cú Chulainn

    What’s with the obsession with taxing people. If someone makes money, good luck to them. That should go to their children or next of kin tax free. Why not. Except to feed the vastly overstuffed public service. Who do not give value for money. Who feather their own nest. There is plenty of tax being paid if only it was used wisely. The only reason to bring in a wealth/inheritance tax was to correct an historical imbalance. I would argue that job is now done.

  4. Mike

    @qwerty123, inheritance taxes could be configured to be paid over a period of time so that children don’t have to immediately sell the house they inherit.

    Also I don’t think the double tax argument holds much merit – for one, double taxes aren’t unusual (e.g. paying VAT on stuff when you’ve already paid income tax) and two, the person inheriting the wealth hasn’t paid tax on it already.

    I’m a fan. Inheritance taxes are quite progressive. They don’t dissuade working or investment. I understand why people don’t like them; they tend to conjure thoughts of children/young adults being cruelly turfed out of their homes. However with life spans as they are, it’s more likely to be adults in their 40s, 50s and 60s inheriting.

    1. Cú Chulainn

      I’m glad you like progressive tax. What about spending some time and energy sorting out the public service. It’s a fallacy to say this could reduce paye/prsi tax. That won’t happen. The government just takes more and feeds it for votes to an overstaffed, inefficient public service.

  5. Stan

    “In our EU peer group, unemployment benefit is far stronger – over €300 and €400 a week; in Ireland, it is only €193”
    Small point but the rate for Jobseekers Benefit (no longer UB) is €198 not €193. Lower than most in the western EU, but much higher than in the UK at £73.

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