Tough budget decisions mean income tax is only feasible target

THE budget predictions merry go round, like Christmas, comes earlier each year. A few years ago budget day was moved to early December.

As a result, the traditional summer political and media silly season is now dominated by pre-budget speculation. This speculation has come even earlier this year, partly because Charlie McCreevy and his government colleagues were holed up all day yesterday for their last bout of budget planning before the summer cabinet recess.

One document informing their discussion was the Economic and Social Research Institute's Mid Term Economic Review for 2002-2009 which was published last Monday. The Mid Term Review concluded, among other things, that our current low rate of economic growth is a temporary phenomenon.

The ESRI predicted that, in about 18 months time, as the international economy lifts, this country will be back again to strong growth rates of about 5%.

This ESRI has done the government some service because their Mid Term Review restrains the doomsday-sayers who love to talk up a sense of economic crisis in this country. Our economy has slowed down, but it hasn't stopped. We will shortly be back to strong growth.

While the Cabinet can't be complacent about the economic turnaround, it behoves it to exercise significant political leadership in the interim. Three key economic and social priorities have dominated political debate in this country in the last few months. In no special order these have been: public services (in particular the health services), infrastructure development (in particular the transport infrastructure) and education (especially in tackling educational disadvantage).

As they begin setting budget priorities for the next 18 months ministers need to ensure that the central political priorities of health, infrastructure and education are not compromised. There are no quick fixes in any of these areas.

The government must avoid the temptation to pare back financial resources to these key priorities in the short-term interest of maintaining some macho reputation for balancing the books or because of some obsessive devotion to the God of Low Taxes.

The next 18 months will be crucial in the area of public sector reform, which is now inextricably linked to the benchmarking process. Those living in households where at least one of the incomes is public service related got a nice pre-holiday bonus last week when the first quarter of benchmarking backdated to December, 2001 arrived in their pay packets.

However, in other households there is some understandable discontent that, yet again, the public sector appears to have been insulated from the realities of sluggish economic times. Nonetheless, there is something in the Taoiseach's contention that any backing away from benchmarking commitments now could deal a fatal blow to the social partnership.

It seems benchmarking is a bill which we have incurred and it will have to be paid, but the electorate will ask to see value for this money. It must be accompanied by a change in public services.

The next 18 months will also be important for health service reform. The electorate will not tolerate a delay in implementation in this area. Any real reductions in health expenditure, even if only for 18 months, will do significant damage to the pace and nature of improvements in the health services.

Within the health and education budgets there is one particular spending commitment for which the next 18 months will also be crucial. That is the provision of financial resources to address the needs of people with intellectual and physical disabilities. It is true that this issue has not always been a political priority successive governments and all political parties have been guilty of this neglect. Recent years have seen dramatically increased funding of disability services and a dramatic increase in places.

The Special Olympics has had a significant impact, not just in raising the political profile of these needs, but also in raising public understanding of the demands placed on the families of people with disabilities. This immediate political impact can be seen in the publication of legislation relating to the education of people with disabilities. More importantly, it can be seen in the special package of increased funding announced last Tuesday by which an additional 50 million is being made available for residential and day care services.

HISTORICALLY, inadequate capital investment in services for persons with a disability is now being redressed. That progress cannot be halted by short-term fiscal corrective measures.

The next 18 months will also be crucial in terms of the development of our infrastructure. The ESRI again emphasised that this investment was essential to our overall competitiveness and cautioned against taking a short term view.

Education is also an investment in infrastructure and educational expenditure delivers longer-term economic results. However, the targeting of educational resources to tackle educational disadvantage at all levels also has significant social results. The interim package announced, at the height of the third level fees controversy earlier this year, was funded by a once-off windfall. Sustaining this funding next year and the year after will require provision from the central pool. Tackling educational disadvantage cannot be suspended for the next 18 months.

In interviews last weekend, Charlie McCreevy put it up to those who want to tell him where additional public monies should be spent to also tell him which of the current spending programmes should be cut or which of his tax cuts should be reversed.

Well, one of the suggestions advanced by many commentators is the reversal of benchmarking commitments. That is an option open to McCreevy but it appears unlikely the government will avail of it. Another option is to reduce the state funded top up to Special Savings Incentive Accounts, but it appears that has now also become a sacred cow. An option still is to reduce payments for the moment to the National Pension Reserve Fund. The fourth option is to re-introduce third level fees, but that too the government has concluded is not politically possible.

Let me then advance a fifth option a one or two percentage point increase in the top rate of income tax. The last reduction in this rate was implemented in the 2002 budget. In the changed economic environment it should be reversed.

In circumstances where the majority of medium to higher earners have been handed a bonus in the form of the Special Savings Incentive Accounts, where those who are public servants are getting significant wage increases from benchmarking and where even those who can afford it are still left without having to pay third level fees, it is time to consider an increase in direct taxation. At the end of the day direct taxation is the most equitable and most honest way to fund public services.

The argument that increasing direct taxation would affect the employment environment is bogus when applied to the suggestion of increasing the top rate of direct taxation. With the lowest tax regimes in Europe and the best corporation tax environment, the reality is that forces other than our top tax rate will determine our job creation figures in the next 18 months.