At the National Economic Dialogue last week, appropriately known as NED, the taoiseach introduced a new term to the lexicon: “The hidden fiscal space”. This should not be mistaken for “the fiscal space”.
There are many definitions of the fiscal space, but it is basically defined as the amount of money the Government will have at its disposal for tax cuts and expenditure increases, once all existing commitments have been met and EU fiscal rules are complied with, particularly the so-called Expenditure Benchmark.
On the other hand, “the hidden fiscal space” takes account of the €53bn of gross voted expenditure by Government and the manner it is deployed. The taoiseach is suggesting efficiencies will lead to new resources, such as tax cuts.
My fear is that the Taoiseach has now created a false sense of expectation amongst those who bear the brunt of our very progressive tax system. The reality is that the pressure for more spending in every conceivable area of public spending provision is intense.
Once all of these balls have been juggled, there won’t be a lot left to ease the tax burden on those who get up early in the morning.
The European Commission, which is ultimately the arbiter of Ireland’s fiscal policy, has warned the Government against abolishing the Universal Social Charge (USC) and warned against narrowing the tax base.
It criticised reductions in the USC, the Help -to-Buy scheme in the housing market, and the very successful and effective 9% Vat rate for accommodation and food services.
It also argues that fiscal policy this year is pro-cyclical, or in other words, it is adding growth to an economy that is already growing quite strongly.
These warnings from the Commission should be given serious consideration. Back in the early 2000s, the Commission warned Charlie McCreevy about his fiscal stance, and it was basically given the two fingers by official Ireland. I am not suggesting that all of the Commission’s suggestions are correct, but they do warrant careful attention.
The USC was introduced in an effort to broaden the tax base and very few earning income were exempt from it. However, over recent budgets a lot of people were taken out of the USC net, and despite the hint in the name, “universal” is no longer an appropriate title.
The USC should not be abolished and neither should any more workers be removed from the net. In my view, the most efficient tax system is one where as many people as possible and as many businesses as possible pay tax, but the marginal rates should be as low as possible.
The most appropriate and straightforward way to reform the tax system and help those who get up early in the morning would be to gradually lift the threshold at which people enter the top marginal rate of tax of 49.5%.
At the moment, once a single worker earns more than €33,800 and a couple €67,600, the top marginal rate, which includes PRSI and USC, applies.
Lifting the floor is expensive, but if lifted on a gradual basis over time, it would ultimately be the most efficient, simple and effective way of helping hard-pressed taxpayers. No more messing around with the USC please, enough damage has been done already.
The 9% Vat rate in the hospitality sector was very effective in helping firms that were on their knees at the time, but some would argue based on Dublin hotel and restaurant prices in particular, that this measure has passed its sell by date.
The problem is that what is happening with hotel and restaurant rates in Dublin and some other urban areas, is not remotely reflective of what is going on all over the country.
Many hospitality businesses around the country are still struggling outside of the brief tourism season. Increasing the Vat rate by 4.5 percentage points would likely have to be fully passed on to customers.
This would put pressure on many struggling businesses.