Some tax concessions but plug budget deficit first

It is mad that Ireland should still be running budget deficits at this stage of the economic cycle, writes Jim Power

A few weeks back, I argued in these pages that the minister for finance should adopt a very cautious approach in next month’s budget.

I suggested that injecting fiscal stimulus into an economy that is growing quite strongly would not be sensible and that Ireland’s level of government debt, properly measured, is still dangerously high.

Specifically, I argued that the Universal Social Charge (USC) should not be altered in the budget and that no more people should be taken out of the tax net through changes to that tax.

While the USC was introduced as a temporary measure in a time of deep crisis, its one positive attribute is that it helped broaden the tax base.

Narrowing the tax base as we did in the run-up to 2007 was a disastrous policy mistake that we must not make again.

Earlier this week, I received a letter from a gentleman in South County Dublin who is clearly not terribly happy with my views and for the first time in my life, I was accused of having left-wing tendencies.

That came as a bit of a shock to my system, putting it mildly.

He suggested that I might be “better employed in thinking about the business owners who have to work so hard and take so many risks to provide for themselves and their families”.

He also expressed the view that economists “in their ivory towers sit back and while away their days playing with spreadsheets, graphs and statistics, seeking to find yet more gimmick (sic) to screw the punter”.

He seems to have ignored the fact that in my analysis, I also argued that in Budget 2019, Government should do nothing to increase the costs of doing business and that on the contrary, every effort should be made to support indigenous Irish businesses in particular, including retention of the 9% Vat rate for the hospitality sector.

I also suggested that all forms of government expenditure should be tightly controlled.

In fairness to the letter writer, he gave his name, address and mobile phone number, which is a welcome change from the usual anonymous abuse that I get.

However, I remain unrepentant about the main premise of what I was advising.

Injecting excessive fiscal stimulus into an economy that is growing quite strongly would not be appropriate and it is mad that Ireland should still be running budget deficits at this stage of the economic cycle.

Ireland’s level of government debt is dangerously high and creates a massive vulnerability for the economy when it is inevitably hit with some economic shock.

Tax concessions in the budget should in my view, be focussed on lifting the threshold at which one ends up paying the high marginal rate of tax. Furthermore, all forms of government expenditure should be tightly controlled and all populist pressures to increase universal payments should be resisted.

The exchequer returns to the end of August showed that the Government ran a deficit of €1.8bn in the first eight months of the year.

Tax revenues are running 5.1% ahead of last year, while total net voted expenditure was running 8.3% ahead.

Not surprisingly, the Department of Health is the main contributor.

These details and others with the overall returns show that the public finance situation is nothing like as positive as it should be.

The obvious risk is the economy is hit with some internal or more likely external shock, and very quickly the precarious nature of the public finances would be cruelly exposed.

However, there is a longer-term structural issue that is of much more concern, namely the outlook for Ireland’s demographics.

A recent Department of Finance report analysed the impact of population ageing on the public finances.

The key conclusion is that shifting demographics in the coming decades will result in a slower pace of economic expansion and put significant pressure on the public finances.

An ageing population will put obvious pressures on health and pension expenditure, but tax revenues would also be affected.

Now is the time to lay the foundations to cope with this inevitability. Much can and should be done with domestic policies, but inward migration will also have to be a key part of the solution.

Wouldn’t it be nice to see our political system take a long-term strategic view for a change?