Power Talks – commentary and updates from Friends First Chief Economist Jim Power
On Tuesday next the two ministers with responsibility for fiscal policy will present Budget 2017. While the economic and fiscal background against which it is being presented is reasonably good, there are clouds appearing on the horizon.
It should be borne in mind that Ireland’s economic recovery has been driven largely by very benign external developments over the past couple of years. These include:
- the relative strength of the US and UK economies;
- the weakness of the euro against sterling in particular, up to the end of 2015;
- the interest rate policy pursued by the ECB;
- and the sharp fall in oil prices.
All of these factors are totally outside of the control of Irish policy makers, and unfortunately in recent months some of these factors have started to deteriorate.
- Sterling has fallen sharply since last November and particularly since the Brexit vote in June. This week it has traded over 88 pence to the euro, which is a 5-year low and against the dollar it fell to a 31-year low.
- The UK economy has proved quite resilient since the June vote, but business investment intentions do give cause for concern in relation to the UK’s economic prospects over the next year or two.
- The US economy is still growing at a reasonable pace, but it is certainly not a stellar performance, as demonstrated by the fact that US interest rates have been left on hold since last December, despite bearish interest rate guidance from the Federal Reserve at that stage.
Looking ahead over the coming months, Brexit and the possibility of further sterling weakness should give policymakers cause for concern. There is also the small matter of the recent Apple tax ruling and the implications for Irish FDI in the longer term.
While there is nothing that Irish policy makers can do about these external developments, they should take note and in framing Budget 2017, populist policy should be avoided. The focus should be on ensuring that the economy is as resilient and competitive as possible. Ensuring that the environment is as conducive as possible to job preservation and creation should be the focus.
There is always a lot of hype around the annual budget but the reality is that little can be achieved in a single budget, particularly Budget 2017 which will have around €1 billion to dispense. However, one would hope that any budget but particularly the upcoming offering would form part of a longer-term strategy to make Ireland as attractive as possible for labour and job creation.
The personal tax burden that workers face has to be a crucial consideration. Those on the left are predictably arguing that no tax cuts should be delivered in the upcoming budget and that the total focus should be on increasing expenditure. This view of the world fails to appreciate the onerous tax burden that many taxpaying workers face in this country. The recent report from the Irish Tax Institute showed the burden of taxation that many workers face and the extremely progressive nature of the Irish income tax system.
An alternative way to look at the nature of the income tax burden is to consider the fact that in 2006 Ireland had just over 2 million people working in the economy and they paid €12.4 billion in Income Tax and this accounted for just over 27 per cent of the total tax burden.
In 2016, Ireland will again have just over 2 million people at work in the economy, but this year those amongst them who pay Income Tax will hand over €19 billion, which will account for over 40 per cent of the total tax take. This demonstrates the extent to which those who work and pay Income Tax bore such a significant part of the savage fiscal adjustment that occurred after 2008.
It is essential that the personal Income Tax burden be used to make Ireland as attractive a place as possible in which to work. In Budget 2017, the process of easing the Income Tax burden on middle-income workers in particular has to begin.
However, it is also important that the Minister for Finance does not continue with the trend he established over the past couple of years of removing workers from the tax net altogether. This was the strategy adopted by successive ministers in the 1990s and early 2000s, which had the effect of decimating the tax base. In Budget 2015 the Minister for Finance announced that he would remove 80,000 workers from the tax system and in Budget 2016 he announced that he would remove over 42,000.
The proper tax strategy would to have as many people as possible in the tax net, but paying low marginal rates.
The incentive effects of taxation should not be forgotten and those who consistently argue that the solution to every problem is to increase the tax burden on those who pay tax, should be ignored and resisted. Apart from the tax situation, obviously the quality of public services such as health, law & order and education should also be focused on, but taxpayers should not be used as scape goats. The fact is that those who create employment and those who work generate the resources that fund social and other forms of government expenditure.
Analysis based on data available on 7th October 2016.
The views and opinions expressed in this article are those of the author.