Time to learn from previous budget mistakes

Hard investment is needed to equip Ireland for the future, writes Tom Healy.

Much progress has been made in regards to the state of Irish public finances, due in large part to the recovery in economic activity in recent times. Taxes are flowing under many headings as unemployment continues to inch downwards and there is a broad-based recovery.

Yet, many people are scarcely feeling a positive bounce in their discretionary spend. Though wages have been on the rise for most workers, by the time various costs are factored in, what is left at the end of each week or month is not what it was before the crash of 2008-2013. Even with modest cuts to income tax and USC in the last three budgets, disposable income is still hardly increasing for many as housing costs, insurance and transport costs outstrip increases in income.

The much talked-about ‘middle Ireland’ is being put under pressure. Many of those under pressure are young and relatively new entrants to the workforce who struggle to pay rents or save for a deposit on a house. The housing crisis has gone from bad to worse, with no immediate relief in sight.

This is no time for unwise budgetary decisions to further expose Ireland to future economic shocks.

Plans to further reduce the tax base and tax rates (whether on income or wealth) repeat the mistakes of the past when Irish tax rates fall well below sustainable levels and place us well below European norms of taxation and public service.

Above all, we cannot sustain the public spending we need to make in children, housing, health, rural broadband and renewable energy without maintaining and increasing the overall tax level.

Few are prepared to acknowledge or honestly debate this in public.

Rising population, an ageing population and the winds of competition from outside leave us with little option but to bring Ireland more into line with other parts of Northern Europe.

However, to maintain and improve fiscal health as well as accelerate investment in the key bottleneck areas, we also need to pay urgent attention to two areas.

The first is reforming and improving our public services, so that a greater social consensus around taxes and public expenditure is possible. The second is the devising of a medium-term strategy to up the game for SMEs.

To reach a public consensus on what is needed by way of public service is not difficult. Less easy to arrive at is a consensus on how health services can be reformed and how the additional funding can be raised through taxes or social insurance.

Yes, it is true that ‘middle Ireland’ needs a break. However, the break ‘middle Ireland’ needs is policy delivery that can lower the cost of living and provide a comprehensive public service which enables families and communities to live, work, travel and study in a way more befitting a prosperous northern European country.

The equivalent of two cups of coffee extra a week, in the form of a tax cut, would be welcome but would be lost in additional consumption.

Better still is investment to relieve the pressure on household budgets as a result of limitations in key areas of public service. We need to focus on both hard and soft investment to equip Ireland for an uncertain and challenging world as well as an environment which is under huge pressure.

• Tom Healy is director of the Nevin Economic Research Institute