In election year, Government is deaf to the warnings

In election year, Government is deaf to the warnings

The Fiscal Advisory Council, or Ifac, was set up in 2011 to help Government avoid the mistakes that had led to economic crisis in 2008.

If we do repeat those mistakes, we can’t say we didn’t know.

The warnings from the Central Bank, the Economic and Social Research Institute, and the few notable academic economists that spoke up were not forceful enough to cut through the exuberance of the Celtic Tiger. Last week’s Ifac report, however, doesn’t hold back.

In the boom, we funded increases in current spending with the proceeds from stamp duty generated by a housing bubble.

Surely, we couldn’t fall into the same trap within a decade of the deepest economic crisis in our history? The trap is the same, but the names have changed. Today, we are funding current spending from windfall gains in corporation tax.

Corporation tax accounts for one in every €5 received by the exchequer. Ten businesses account for half of the €10bn corporation tax take.

Ifac estimates that between €2bn and €6bn of the corporation taxes cannot be explained by standard economic trends and we should not be relying on them into the future.

This is essentially a windfall and the Government must not make annual commitments that are difficult to unwind. But that is exactly what it is doing.

Since 2015, it has gained up to €10bn annually from favourable developments, including excess corporation tax, as well as a lower interest bill on the State’s debt, and savings from lower-than-expected unemployment level.

The Government has increased current primary spending beyond the levels it had planned.

This is a worry, because spending commitments are very difficult to reverse and doing so would also impose hardship on the people who have come to rely upon them.

The Ifac is clear on the need to maintain a sustainable fiscal position, particularly with the risks to the economic outlook from Brexit, global trade wars, and slow growth in our major trading partners.

The problem is that the windfall gains from excess corporation tax receipts and low-interest charges have now been spent.

The economy is growing strongly and does not need the stimulus of a budget surplus.

This is a time when we need to be put the economy in a position to better cope with the inevitable downturn, whenever it occurs.

This does not mean we need to cut spending on critical services, but the financing for these must come from regular and reliable sources.

This means a rise in income taxes, property taxes, including a site valuation tax, and a meaningful tax on wealth.

On the capital side, despite the strength of the economy, we continue to have bottlenecks in areas that are critical for our society in the coming decades.

This should be where windfall gains, like those from excess corporation tax receipts, are directed.

With interest rates as low as they are, there isn’t a strong case for paying down the national debt with these gains, since there are projects that will sustain our quality of life in the future with returns higher than the current borrowing rate.

The homelessness crisis and climate emergencies require substantial investment in social housing, public transport, and renewable energy.

If we do not invest in these areas now, the scope for resolving these problems will simply not be there when the economy slows.

Maintaining a rainy day fund is commendable, but it amounts only to deferred current expenditure, since it will be raided to keep the commitments on public pay and day-to-day services at the first sign of recession.

Instead, we need to set aside a substantial proportion of unexpected windfall revenue for capital projects to deal with climate and housing, and the gap in current spending needs to be filled with higher taxes elsewhere.

But there is even greater noise blocking out this message this time: It’s the noise of election year.

Declan Jordan is a senior lecturer in economics at Cork University Business School in UCC

More on this topic

Homelessness charity calls for extra beds for rough sleepers as weather gets colderHomelessness charity calls for extra beds for rough sleepers as weather gets colder

Housing minister defends policies as over 10,000 live in emergency accommodationHousing minister defends policies as over 10,000 live in emergency accommodation

Homeless families are in in 'desperate crisis' and ‘close to breakdown’ , says reportHomeless families are in in 'desperate crisis' and ‘close to breakdown’ , says report

Report highlights 'completely unacceptable' situation of children in one-night-only accommodationReport highlights 'completely unacceptable' situation of children in one-night-only accommodation

More in this Section

China welcomes preliminary deal in trade war it blames on USChina welcomes preliminary deal in trade war it blames on US

Irish shares climb as election drives sterlingIrish shares climb as election drives sterling

Profits fall at hotel groupProfits fall at hotel group

Profits rise 35% as gym group Flyefit expandsProfits rise 35% as gym group Flyefit expands


Lifestyle

Want to be cultured this Christmas? From TV to podcasts to books, Ed Power has the definite list of everything you missed this year - so you can curl up on the couch and catch upThe definite list of everything you missed this year

Artist Ciara Rodgers teaches older people how to rediscover their creativity and regain confidence, says Rowena WalshBrush with art: Discovering your creative side in later life

Furniture, paintings, jewellery and silver are on offer at James Adam in Dublin, writes Des O’SullivanAll set for home run: See what's on offer at the James Adam sale in Dublin

It’s not too late to hunt out a unique gift. Des O’Sullivan previews sales in the lead-up to the festive seasonA flurry of auctions in Munster sets the scene for Christmas

More From The Irish Examiner