Jim Power


Jim Power: Be wary of promises that cannot be kept

From public spending and tax cuts, to pension reforms and house-building, some of the proposals from parties chasing your vote do not add up, writes Jim Power

Jim Power: Be wary of promises that cannot be kept

From public spending and tax cuts, to pension reforms and house-building, some of the proposals from parties chasing your vote do not add up, writes Jim Power

Over the past week, various party manifestos have been published which has set the context for much of the electioneering we have subsequently seen.

This is as it should be as the electorate needs to have a clear idea and understanding of what each party stands for and aspires to deliver. Whether these manifestos will be delivered or not by those who form the next government is a moot point, but I guess it is important to have a plan.

The economic and fiscal context for General Election 2020 is mixed. In the early days of January, the Department of Finance updated its growth forecast for 2020 reflecting the lessened risk of the potential for a disorderly Brexit in 2020.

The revised forecasts are predicated on a free-trade agreement between the EU and UK that mirrors existing arrangements or the agreement of an extension to the transition period.

GDP is forecast to expand by 3.9% in 2020 and growth is projected to average 2.9% between 2020 and 2025.

These forecasts look realistic based on the facts available at the moment and the various manifestos are based on these forecasts.

Other relevant issues include the fact the UK eventually left the EU on Friday night, and the trade negotiations over the coming year will be difficult and the risks of a significant trade disruption next January cannot be dismissed lightly.

In addition, Ireland is still a heavily indebted country, roughly €205bn at the end of 2019, equivalent to just over 100% of gross national income (GNI), which is a more accurate measure of the real size of the economy compared to GDP.

The various manifestos certainly differ significantly in nature and provided the electorate actually believes the various promises will be delivered, choice is being provided.

The balance between spending and taxation is the kernel of what differentiates the various party offerings. Labour, Sinn Féin and Fianna Fail have a very heavy emphasis on increasing expenditure, while Fine Gael is slightly more concerned about the hard-pressed taxpayers of the country. Not surprisingly, housing and health dominate the expenditure commitments.

Fine Gael has committed to €2.8bn in tax reform and reduction between 2021 and 2025. The key tax commitment is to lift the Standard Rate cut off point from €35,300 to €50,000. This policy has been criticised on the grounds that it does not help the lower paid.

However, for a country that is seeking to attract Brexit related investment, the level of income at which one ends up paying the top rate of tax is ridiculously low and is not a positive indicator of competitiveness. There is also a pledge to increase the USC exemption from €13,000 to €20,500.

On the expenditure side, Fine Gael is committing to extra spending of €8.57bn on top of what is already pencilled in. It plans to spend an extra €5bn on health.

Fianna Fáil is allocating increased resources of €9.75bn. It is allocating €7.9bn to additional expenditure measures, with health, housing and social welfare getting the bulk of the extra monies.

On the taxation side, the proposed measures will cost €1.85bn. The main tax measures include cutting the CGT rate from 33% to 25% (that proved very successful for Charlie McCreevy in the past); an increase of €3,000 in the Standard Rate band and a reduction from 4.5% to 3.5% in the USC rate.

Sinn Féin has committed to an additional €12bn in day-to-day spending on public services and social welfare, and a further €10bn in additional capital expenditure, with housing accounting for the bulk.

This is a very substantial expenditure package. What differentiates Sinn Féin from its two rival parties is the commitment to fund some of this with a tax-raising package of €3.8bn. The USC will be removed for those earning under €30,000; the local property tax will be abolished; but taxes on higher earners will be increased significantly.

It is clear what segment of the electorate the party is targeting its appeal, but the damage this policy could do to Ireland as a place for higher-earning talented individuals to locate would be damaged by these policies.

It is worth bearing in mind, that somebody earning €100,000 currently hands almost 51% of this to the Revenue Commissioners.

They are already making a very significant contribution to the State coffers. Demonising higher earners is not the way to create a functioning economy.

The Labour Party has a much shorter version than the others, but it is very firmly opting for spending increase over taxation reductions.

There are a number of aspects of all the party offerings that should give cause for concern. All parties are committing to significant increases in expenditure on public services.

This is all well and good, but history should show us that there is not a strong correlation in this country between extra spending on public services and better public services.

There is little mention of public sector reform from any party. It is important to remember that the extra spending commitments from the various parties are coming on top of already strong pre-committed increases in expenditure.

The USC is a tax that is deeply disliked, but it is a fundamentally good tax as originally conceived, as it ensured that a lot more people were taken into the tax net, which is positive from a social solidarity perspective, and also from the perspective of broadening the tax base. It is a retrograde step to start narrowing the tax base again.

The commitments that are being made on housing delivery, both in terms of cost and capability of delivery, are deeply flawed. The private construction sector is facing serious capacity constraints already and will unfortunately struggle to deliver what is being promised.

The reaction of all parties to the changes in the State pension age is worrying.

There are very good reasons why the changes announced back in 2011 make sense. To suggest that the demographic time bomb is not an important issue that needs to be addressed is reckless in the extreme. However, in the heat of election battle, logic is very often a casualty.

Another issue of concern is the manner in which the parties have costed the various proposals. Fianna Fáil’s in particular is full of smoke and mirrors and there would appear to be no account taken of second-round and carry-over costs of the various measures. It would appear that some parties have certainly set out to obfuscate.

As usual, we the gullible electorate are being treated to many significant promises.

All parties are pledging to significantly increase the spending base of the country, which is all well and good if fair winds continue to blow. We should all remember that once spending is committed to, it gets embedded in the system and is very difficult to row back on should economic times change, and then taxpayers become the easy victims.

At the end of the day, the resources to finance expenditure on public services derive from economic activity. We should be wary of policies that might damage growth. Some parties take this fact more seriously than others.

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