Economy

As lobby groups have organised to try to reverse some of the cutbacks in Brian Lenihan’s first budget, little attention has been paid to the fact that the cutbacks and their impact are the direct consequence of policies that gave us 15 years of unprecedented economic boom. For Ireland’s successful model, which was eyed with envy by small countries around the world, was based essentially on keeping taxes low. It is the consequences of this that we are now facing, in the decision to cut back social services already woefully inadequate for a country with Ireland’s level of wealth, instead of reforming an unjust and inadequate taxation system. Even if protests succeed in reversing some of these cutbacks, this does nothing to change the fundamental realities now facing the population. If citizens want well resourced, efficient and equitable health, education and social protection systems, adequate to protecting the vulnerable in their time of need, there is no way to do this other than through higher levels of taxation. Yet, as Budget 2009 showed yet again, our government remains committed to trying to keep taxes low, thereby ensuring that the most vulnerable among us will continue to pay a high cost. The addition of so-called stealth taxes, including PAYE income tax levies, shows the gyrations this government is prepared to go through to be seen not to raise basic tax rates, in particular corporation tax and income tax. Yet, as former Taoiseach Garret FitzGerald has pointed out, the growing dependence in recent years on asset-based taxes such as stamp duty, capital gains tax and capital acquisitions tax has made the Exchequer extremely vulnerable to the sudden reduction in such taxes that inevitably accompanies an economic downturn. But this was the means through which a steady reduction in income tax was funded. As he has written: “The idea that when the boom ended, our public and social services could be maintained with such a miniscule level of income tax payments was patently absurd, although clearly many people fell for it – including our economically unsophisticated business community” 1. This gets us to the heart of the issue that public debate needs to centre around if we are to chart a way forward out of the mess in which we now find ourselves. For the benefits of the boom went disproportionately to a small, wealthy elite, while successive governments failed to invest sufficiently in public infrastructure and services. There is plenty of evidence for this. For example, the ESRI points out the “substantial increase” in the share of national income that went to the top one percent of income earners at the height of the Celtic Tiger boom. As they put it, “By the end of the 1990s, the share of the top one percent was more than twice the level prevailing through the 1970s and 1980s”2. Similarly, if we examine EU figures on the share of national income going to profits as against wages, we see just how dramatic has been the change in Ireland over the course of the economic boom. In the 1980s workers gained 71.3% of the national income, slightly more than the EU average of 69.6%. However, by the 2000s, this had fallen to 55.1%, while the EU average stood at 64.4%. Even allowing for the growing presence of multinationals in the Irish economy, these figures show a huge increase in the amount of Ireland’s national income going to profit rather than people3. As Ireland’s wealthy elites increased their income spectacularly, state spending on social protection fell as a proportion of our national wealth over the course of the boom. The Central Statistics Office tells us that social expenditure in Ireland as a proportion of GDP fell from 17.6% in 1996 to 14.1% in 2000, but that it subsequently rose to 18.2% in 2005. Over the same period the EU average hovered at around 27%4. To quote Garret FitzGerald again, “Our chaotic health service and our grossly understaffed education system, together with the many serious inadequacies of our social services, reflect very badly upon a political system that has massively maldistributed the huge resources we have created. The harsh truth is we have allowed far too much of our new wealth to be creamed off by a few influential people, at the expense of the public services our people are entitled to”5. It is not surprising, therefore, that Ireland turns out to be one of the most unequal countries in the developed world. But what may surprise many is that the government has no policy to try to reduce the wide gap between rich and poor. In other words, it does not seem to believe that it is worth worrying about. This is dangerous. International research shows that the more unequal a society, the higher its levels of poverty and crime, and the lower its standards of health and public services6. It is an issue we neglect at our peril. In 2005, the Economist magazine published a global quality of life index for 111 countries in which Ireland came out top. This ranking got a lot of publicity at the time, but what received less attention was the fact that Ireland’s highest scores were for family and community life, factors that owed more to the legacies of the past than to the Celtic Tiger; what the Economist called “the interplay of modernity and tradition in determining life satisfaction”. This is consistent with the fact that life satisfaction levels in Ireland in the late 1990s were no higher than they were in the 1970s. Meanwhile, other surveys have shown that Irish people report a deterioration in their quality of life during the Celtic Tiger7. This points to the importance of examining more critically where Ireland’s low-tax model has got us if we are to learn the lessons of the past and plan for a better future. A system of low taxation may attract a lot of investment for a period, but its weakness as a development strategy is