JOHN WALSH: Government needs public buy-in to hit deficit target

The Government is 85% of the way though one of the steepest fiscal adjustments ever undertaken by any OECD country.

Reaching the ultimate goal of bringing the fiscal deficit within the 3% of GDP limit by 2015 agreed with the troika largely depends on whether the Government can get the electorate to buy into its policies.

To this end, it faces an extremely difficult balancing act. It has to be fair and, more importantly, it has to be seen to be fair.

There was a lot in this budget that will yield little in terms of actual savings but are much more about the optics.

The cut to TDs’ expenses and the leaders’ allowances will go some way towards deflating public anger at the Leinster House “gravy train”.

Further measures to trim public sector pay and pensions will also appease growing anger in the private sector at what is seen as a two-tier economy.

The Government has to ensure that it doesn’t introduce any measures that will derail what is an extremely fragile economic recovery.

After all, orthodox economic theory suggests that the optimal means of achieving consolidation is through spending cuts rather than tax increases.

Finance Minister Michael Noonan said on a number of occasions in the lead up to this budget that it would be the toughest one yet because “all the low hanging fruit has been plucked.”

But in most metrics, there is an element of fairness in the measures introduced.

The Labour party certainly seems to have succeeded in getting a number of its policies introduced.

There was no change to headline social welfare rates and most income taxes were left unchanged.

The abolition of the PRSI allowance will cost every worker in the State €5 each week regardless of how much they earn.

However, the extension of PRSI to income from rental property and investments will most likely hit the well-off. But given the level of distress across the buy-to-let sector, it is uncertain what the implications of an extra tax on a second property will be.

The property tax came in slightly less than what had been flagged at 0.18% on properties with a value up to €1m. However, this increases to 0.25% on properties over €1m. To this end, the wealthy pay more. Moreover, a property tax is one of the most equitable means of raising taxes.

Until now, Ireland has been one of the few countries in the western world that didn’t have a property tax.

Fianna Fáil’s argument that a property tax is a sensible move — just not yet — doesn’t make sense. The Government has to achieve roughly €9bn in fiscal consolidation between now and 2015.

It is not possible to do this without some painful measures being introduced.

There were increases in the Dirt tax on bank deposits, capital acquisitions tax and capital gains tax.

Again, all of these measures are most likely to hit the well-off.

Of these three measures, the Dirt tax increase would seem the most risky.

The pillar banks are trying to attract deposits, so raising the tax rate on the return on savings might not seem like the most appropriate strategy.

The Government is obviously taking a punt that there is enough investor confidence in the banking sector to withstand such a move.

Sinn Féin and the United Left Alliance had been looking for a higher income tax band on the wealthy.

But money is fungible. If there are disproportionate punitive taxes put on human or physical capital, then it will most likely leave the economy.

Ireland is a small, open trading economy. It needs to attract highly skilled workers.

This country has one of the highest marginal rates of taxation among OECD countries. If that were to increase then it would do damage to the wider economy.

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