By Sinead Pentony.
Preparations for Budget 2015 are under way. As with previous budgets, the Government has choices it can make in meeting the requirement to reduce the deficit in the public finances to less than 3% of GDP in 2015.
Unfortunately, there are no such self-imposed or externally imposed requirements to reduce inequality and poverty, or to provide a reasonable standard of living for all families through the creation of good jobs with decent pay and the provision of high quality public services. Such a requirement would result in a very different budget.
The Government indicated in the April 2014 Stability Programme Update that it is planning a €2 billion fiscal consolidation in the October budget to achieve the 3% goal based on a range of tax increases and cuts in public spending. The mood music from Government now suggests that the adjustment may be somewhat less than €2 billion.
The tax take is running ahead of target and spending is down. Both indicators have been helped by an expansion in economic output, a modest reduction in unemployment and growth in employment. This means more people are working and paying tax and fewer people are claiming social welfare.
Growth in the economy is the key driver of economic recovery and deficit-reduction. The Department of Finance has forecast the growth rate for 2014 and 2015 to be 2.1% and 2.7%. The Nevin Economic Research Institute (NERI) growth estimates are 2.1% and 2.9% for 2014 and 2015, respectively. The ESRI is more optimistic and puts growth for the same periods at 2.6% and 3.5%. Growth in the economy appears to be taking hold.
On the basis of positive trends in key economic indicators, we are approaching the territory for a (near) neutral budget to take us over the line of achieving the deficit-reduction target of less than 3%. However, the European Commission, the IMF and the Irish Fiscal Advisory Council have all called on the Government to stick to an adjustment of €2 billion to meet the deficit-reduction target and to accelerate a reduction in overall debt to a more sustainable level.
However, these calls fail to take account of the impact of imposing further austerity on equality, poverty and living standards.
Whatever the size of the adjustment, it will be made up of a combination of tax/charge increases and cuts to public spending, with the emphasis being placed on cutting spending. To date, over €32 billion has been taken out of the Irish economy, two thirds of which has been achieved through cuts in public spending and one third through taxation measures.
Successive austerity budgets have had a negative impact on the vast majority of household incomes and living standards. Charts 1 and 2 show the ESRI research measuring the impact of tax and welfare changes across the income deciles (or groups) for Budget 2014 and cumulatively over the last four years. In Budget 2014 the lowest income group lost proportionately more income than any other group.
Over the last four years the two income groups worst affected were the very highest earners whose income fell by over 15% and the very lowest earners whose income fell by over 12%.
It is important to remember that the lowest income group has the least capacity to absorb a reduction in income compared to the highest income group. The ESRI analysis looks only at income, and does not quantify the impact of decreases in public services, on which lower income groups are more likely to depend, which have a further regressive impact on the lowest income group.
Income inequality is measured by the Gini coefficient and the income quintile share ratio. Ireland is close to the European average for both measures. However, at EU level, the overall trend is towards growing income inequality. In Ireland income inequality has remained relatively unchanged between 2007 and 2012 but this has to be understood in terms of the critical role of social welfare in addressing poverty and protecting incomes.
Income data alone do not tell the whole story concerning living standards. Poverty and deprivation levels have been rising consistently since 2009 and the latest figures show that 16.5% of the population (756,591 people) is considered to be ‘at risk of poverty’ (income below €203.70 per week per adult).
The level of deprivation now stands at 26.9% (1,233,472 people) and has almost doubled since 2008. Households experience deprivation when they are excluded from consuming goods and services which are considered the norm for other people in society e.g. keeping a home adequately heated or having a roast-meat dinner once a week.
What budget options exist that will allow us to meet the 3% deficit reduction target next year, promote growth in the economy, reduce inequality and poverty and improve living standards?
Various lobby groups, and a large proportion of mainstream commentators, are saying ‘it’s time for a cut in income tax’. This does not bode well for equality and poverty reduction.
While a cut in income tax would bring some relief to average income earners, it is unlikely to benefit those in the lowest income groups, as the vast majority do not earn sufficient income to benefit. A cut in income tax would put further pressure on our public services, which are funded through taxation.
Lower income groups are more dependent on public services and further cuts would have a disproportionate effect on these groups. Finally, a cut in income tax is likely to be offset by increases in taxes or charges in other areas such as VAT which have a disproportionate effect on lower income groups.
It is important to remember that Ireland’s total tax take, including social security contributions was 28.7% of GDP in 2012, which was well below the EU average of 39.4%. Public expenditure was 42.7% in 2012, which is also well below the EU average of almost 50%. It is the high tax and spending countries of Europe that are the most competitive economies.
In terms of putting more money in people’s pockets, the focus should be on increasing wages (especially the minimum wage). This would have the effect of increasing the tax take, stimulating some much needed demand in the domestic economy, improving the living standards of very low earners and starting the process of reversing the trend of growing poverty and deprivation.
The mainstream narrative on increasing wages is accompanied by concerns relating to ‘a loss of competitiveness’, ‘the need for wage restraint’, and ‘it’s too soon to be talking about wage increases’. But the facts speak for themselves. Ireland’s labour costs are well below our Euro Area partners and there is plenty of scope to increase wages without damaging competitiveness. Wage increases should be used to accelerate economic recovery, reduce poverty levels and increase living standards.
The adjustment in the forthcoming budget should focus exclusively on taxation measures that promote growth, advance equality and reduce poverty. Further cuts to public spending are likely to result in long-term damage to education, health and social protection services and should be avoided. Such cuts will impede growth through a lack of investment in physical and human capital and exacerbate poverty and inequality.
The taxation measures that should be considered as part of the next budget include:
l Reform tax reliefs, e.g. pension tax reliefs are regressive and disproportionately benefit high earners;
l Increase the effective rate of corporation tax paid by multinationals. While the very low level of tax paid by multinationals is now on the global agenda, Ireland could tighten up on the reliefs that facilitate significant reductions in the amount of corporation tax that is actually paid;
l Broaden the tax base by introducing a Net Wealth Tax, which could have a threshold of €1 million and be set at a low rate of, for example, 0.5%. NERI has undertaken detailed work on the design features of a Net Wealth Tax and how it could be introduced;
l Start the process of increasing PRSI from being one of the lowest in the EU to the European average over the next 5 years. This should be used to strengthen the social safety net;
l Further reform Capital Acquisitions Tax (Inheritance tax) by reducing the various reliefs and thresholds (i.e. tax free allowances) that apply.
Taxation measures need to be accompanied by an increase in wages, especially for those on low wages, and an investment strategy. While the Irish Strategic Investment Fund (ISIF) will play a central role in directing investment, there is still little information on how it will operate.
Ireland has under-invested for a number of years in areas such as housing, energy, transport and telecommunications. This will have a long-term impact on the capacity of the economy to grow and be competitive globally. In the immediate term, the current crisis in social housing has brought this dearth of investment into sharp focus and there is an urgent need for this issue to be addressed.
Budget 2015 presents Government with an opportunity to not only meet the deficit reduction target but also start the process of undoing the damage done by years of austerity. This should involve setting quantifiable and measurable targets in relation to income equality; poverty and deprivation reduction; and improved living standards. •