Prudence is a Progressive Virtue

Michael TaftResearch Officer, Unite

A World of Risks ‘We are a small and very open economy in a world

that has more risks than usual. It makes sense to complete the task we set ourselves and get to a balanced budget. It makes sense to continue reducing our debt to much lower levels and to build our capacity to withstand shocks. It makes sense to avoid the mistakes of the past that could lead to overheating our economy. It is an uncertain world full of risk and now is not the time to move away from the prudent and sensible fiscal policy we have been following.’

- Minister for Finance, Financial Statement, Budget 2017

Faux Prudence When we think of prudence we immediately think of

the conservative orthodoxy. For instance: The day after the budget the Irish Fiscal Advisory

Council was out with an instant judgement – claiming that the tax and spend numbers went ‘beyond what was prudent and was set to breach key EU rules’.

The Irish Times was even more dramatic: ‘The notion of a prudent Budget appeared threadbare after Michael Noonan announced a package of measures in the Dáil stretching the so-called “fiscal space” to near-destruction.’

Fiscal Rules and Space IntactStructural Deficit Projections

2015 2016 2017-2.2 -1.9 -1.1

There is a requirement under the Fiscal Rules that the structural deficit fall by slightly more than 0.5% per year. This didn’t happen last year, but the projection for next year shows the Government exceeding this target and over the two years has fully complied with the rules.

In comparative terms, Ireland’s fiscal situation looks relative healthy.

SpainSloveniaFrancePortugalBelgiumItalyLatviaSlovakiaFinlandEurozoneNetherlandsAustiaMaltaIrelandLithuainaGreeceCyrprusEstoniaLuxembourgGermany

-3.2-2.9

-2.7-2.3

-2.0-1.7-1.6-1.5-1.5-1.4

-1.2-1.2-1.1-1.0

-0.8-0.6-0.5

-0.20.3

0.5

EU Commission: Projected Structural Deficit 2017 (% of

Potential GDP)

Still, Critics May Have a Point The issue of fiscal space and fiscal rules has

been over-stated. But critics may have a point about ‘prudence’ even if they are missing the real target.

There is a sense of déjà vu about some of this. Erosion of tax base Pumping property prices Reliance of revenue bubbles Ill-prepared by Brexit Never mind mentioning the ‘A’ word

1. Eroding the Tax Base If there are ‘more risks than

usual’ and a determination to ‘avoid the mistakes of the past’, why are we eroding the tax base?

Painful and in many cases irrational (raising taxes on low-average income earners during a recession) but by 2014 we had finally reached the average of our peer group.

Yet in the last three budgets, personal taxation has been cut by €2.1 billion (over 10 percent of total income tax take) while the Government is committed to cutting overall taxes by a further €3 billion in net terms.

BelgiumDenmark

GreeceOther SOE

AustriaGermany

ItalyFinland

NetherlandsNCEE

IrelandSwedenFrance

UK

36.535.134.9

31.230.6

30.129.7

28.227.4

26.826.7

25.723.8

21.7

Employees Effective Tax Rate: 2014

(% of Gross Wages)

2. Pumping The Property Market Not satisfied that Dublin prices

have risen enough, fearful that Central Bank rules might cause a more sustainable rise, the Government is handing out €20,000 to first-time buyers for houses up to €600,000 (which will be transferred to developers).

Then there’s the postponement of the property re-valuation to 2019.

And to be sure to be sure, landlords who have increased rents to unsustainable levels will get a tax break. 2012 2013 2014 2015 2016 July

90

100

110

120

130

140

150

160

170

Dublin Residential Property Prices: 2012 - 2016 (February

2012 = 100)

3. The New Revenue Bubble Are we experiencing a new

bubble? A corporate tax bubble?

Since 2012 corporate tax revenue has increased by 92 percent; 33 percent for all other taxes.

Corporate tax revenue has made up over a quarter of total tax increase.

Just 10 companies paid 40% to 50% of all corporate tax revenue last year.

Ireland

Belgium

Sweden

Denmark

Netherlands

Finland

UK

Average

France

Austria

Germany

4,609

3,857

2,838

2,565

2,523

2,522

2,392

2,350

2,333

2,165

1,987

Corporate Tax Revenue per Employee: 2017 estimate (€)

4. Brexit Unready The budget document ‘Getting Ireland Brexit Ready’ lists a

number of Brexit-readying measures but most are policies conceived prior to the referendum:

Increased tax credits for self-employed, capital gains relief for small disposals, rainy day fund (which won’t start until 2019) – these are mere extensions of policies introduced in last year’s budget or announced in the election.

More worrying, Government is basing economic and fiscal projections on a Sterling exchange rate of 85 pence out to 2021 when the trajectory is towards parity.

If the Government was concerned about Brexit (described as a ‘material negative impact on the Irish economy’) why erode the tax base? Have we not learned from the crash and what happens with a narrowed tax base?

5. Who Dares Mention the ‘A’ Word? One of the biggest potential economic and fiscal impacts – the

Apple ruling - was not mentioned once. The award and the appeal are a diversion from the real issue: the acceleration of European coordination on corporate tax avoidance.

Only weeks before the Apple ruling the EU Parliament overwhelmingly (nearly 80%) passed a resolution on corporate tax avoidance, calling for:

EU register of beneficial owners of companies, Action against abuse of “patent box” regimes and transfer pricing A common consolidated corporate tax base (CCCTB) An EU-wide withholding tax and other measures Nessa Childers was the only Irish MEP to support it while the only

party grouping to oppose it was the far-right Europe of Freedom and Direct Democracy co-chaired by Nigel Farage.

Can Run, Can’t Hide European cooperation on corporate tax is coming down the

line. What are we going to do? Are we going to hide our heads in the sand – like we did

during the property boom – and hope the world doesn’t notice us?

Are we going to line up with the far-right in Europe and tax-dodging multinationals?

Or are we going to face this issue head-on and start preparing new policies to attract FDI based on infrastructure, education, affordable housing and investment?

No one wins in the global tax avoidance game, it’s just that some countries lose slower than others. We’re a very slow loser but a loser nonetheless.

Opportunity Progressives have an opportunity to claim the ground of

prudent, rational and common sense fiscal policy. During the recession, progressives ceded the macro-

economic ground and did not challenge fiscal contraction on its terms. We mustn’t repeat this in the battle over the recovery.

Since the 1960s Ireland has spent more years in a domestic demand recession than any other EU-15 country bar Spain.

Right-wing led governments gave us fiscal irrationality prior to the crash; inflicted irrationality during the recession; and is now preparing a third wave of irrationality – tax erosion, pumping the property market, revenue bubble, whistling Brexit and avoiding the tax avoidance train coming down the line.

This is our opportunity.

BUT We need to refine our analysis, ground it in a long-term

framework and, on the way, shed confusions and misapprehensions. Here are some examples:

1. The Fiscal Rules that shape fiscal policy are not EU rules – they are constitutional rules. They cannot be broken.

2..Let’s soak the rich or at least give them a darn good splash. But this won’t buy us a free health service or free education at all levels.

Only 3% of income earners are above €100,000. And of all the financial wealth 50% is in pensions/insurance and another 37% is in highly mobile cash. Soak the rich but don’t think it will fill a swimming pool.

More Buts 3. Is there an inconsistency in claiming we have a

housing emergency (which we do) and at the same time call for abolition of the property tax and vote to cut property tax at local level? LPT should be transformed into a comprehensive property tax, including financial.

4. We need to build lots of houses; we need to increase and maintain water investment for a decade; we need to bring rubbish collection back into public control – but we can’t assume we can throw all the costs into the ‘general taxation’ pile.

We need to examine the full range of financing – tax, charges, levies, SPVs – and select on the basis of economic efficiency, social equity and opportunity costs.

The But of Taxation 5. We need an honest conversation on personal taxes.

We had the nonsense of the ‘squeezed middle’ even though the median income is between €27,000 and €33,000 depending on how it is measured.

Many claim we are high-taxed, citing the marginal tax rate on average income earners (3rd highest in the EU-15) but conveniently forget to mention that the average tax rate on these same average earners is the lowest in the EU-15.

This points to a flaw in our tax system which some commentators cynically exploit in the debate and which progressives avoid.

What the Low-Waged Need

Irish low-paid are severely under-taxed - lower than low-paid in ultra-poor countries like Portugal and Greece. It is a mistake to exempt more low-paid from income tax or USC – just like as it was exempting minimum wage workers from tax prior to the crash.

We must confront this imbalance. But the tax base should only be widened when the recovery base is widened as well.

The hospitality sector enjoys profits 40% above pre-crash levels. But employers are boycotting the JLC. This should not be allowed by law.

To raise the living standards of the low-paid, more need to be brought into the tax net and all need the protection of a modern functioning pay bargaining structure.

GermanyDenmark

NetherlandsBelgiumAustriaFrance

AverageSweden

ItalyGreece

UKFinland

SpainPortugal

Ireland

30.829.9

24.624.3

23.520.8

20.019.8

18.415.515.2

14.612.0

11.03.7

Headline Average Tax Rate on Incomes at 50% of Average

Wage: 2014 (%)

The Biggest But of All We must abandon ‘welfarism’. We must not be

content to allow capital to create income and argue over how that income is redistributed – through tax, wages and spending.

We must enter the debate over the productive economy, develop the enterprise policies, intervene in the markets with new public, non-profit and investment-led enterprise models, privileging labour in the decision-making process over how and what goods and services should be produced.

Business in Ireland is too important to be left to Irish business.

If we develop a constructive, non-sectarian and innovative debate about these and other issues, we stand a chance of creating a new prudent Common Sense majority.