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| From: Irish Political Review: Editorials |
| Date: November, 0001 |
| By: Editorial |
Ireland: Budget 24 |
| The Budget was framed within an economy at full employment and a Balance of Payments surplus on the current account of about 8% of GDP. The Balance of Payments figure shows our trading balance with the rest of the world. Our surplus indicates the economy as a whole is saving. In a previous issue of the Irish Political Review it was suggested that this is appropriate for the Irish economy. We have a high income economy with relatively poor infrastructure. We need to invest more to sustain our relatively high incomes. In an economy with full employment, any increase in consumption will only lead to inflation. T he rational economic approach would be to suppress consumption in order to divert labour and material resources towards clearing infrastructural bottlenecks. The State must drive the necessary investment. However, our political leaders are obliged, not just to run an economy, they also must manage a society. Apparently, we have a “cost of living†crisis, notwithstanding the statistics showing a high level of personal savings. It is true that inflation was at about 8% in 2022 and wages have tended to rise at less than that level. However, the Minister for Finance thinks the inflation rate will be 5.25% for this year and 2.9% for next year or so, it is likely that the 'crisis' will abate. Nevertheless, it does make sense to help the most vulnerable. In general social welfare payments will be above the inflation rate. The position of welfare recipients will be helped by an array of “lump sum†credits. This will help tide them over the high inflation environment, but can be easily withdrawn at a future date. There weren’t many changes to the tax system. Most credits went up by about 5%, as did the standard rate band. There was a substantial increase in the ceiling for the 2% Universal Social Charge [USC] rate (up €2,840 (more than 12%). This will help the low paid. The 4.5% rate of USC was reduced to 4%, which will help the so-called 'squeezed' middle (income between €25,760 to €70,044). However, the other Bands did not change. S o, the top 8% rate will still apply to income over €70,044. There were two controversial measures. In economic terms it is difficult to understand why it was necessary to give any mortgage interest relief. It looks like the Government Parties were panicked into this measure by a similar proposal from Sinn Fein. Why support people who are already on the property ladder? In defence of the Government, the relief is restricted. It is capped at €1,250 per annum. Taxpayers will be able to claim a 20% Tax Credit for increased interest payments paid in 2023 over 2022. It will only apply for mortgage holders with an outstanding balance of between €80,000 and €500,000 on their principal private residence. The thinking seems to be that anyone with a balance of less than €80,000 is doing fine. And anyone who has a balance of over €500,000 must be wealthy and in no need of help. In truth the cohort that has been targeted for the relief consists of a mixed bunch. There may be some people who are struggling, but anyone who bought property after the crash in 2008 will have bought cheaply, and for most of the period will have made repayments at very low interest rates if they were on a tracker mortgage. The only good thing about the relief is that it looks like it will only be operational for one year. The second controversial measure was a Tax Credit for landlords. This will be worth €600 in 2024; €800 in 2025; and €1,200 in 2026. This compares to the €750 credit for tenants. The obvious question is why do landlords need help from the Government? There have been claims that they have been leaving the market for various reasons (e.g. rent restrictions). But is this a problem? Is there any reason to believe that the residence will be unoccupied under a new owner? In many cases the new owner could be the Local Authority. There may be disruption for the tenant in situ but maybe the solution is for greater legal rights for tenants regarding the notice period. The vacancy Property Tax has increased from three times the Local Property Tax to five times. This is welcome although it’s still too small. On the issue of housing: the supply seems to be improving. There are now about 170,000 employed in construction. This is 23,000 more than pre-Covid levels. Wages are going down in this sector, suggesting there is a greater supply of labour. This may be because there has been a contraction in construction in Northern Ireland. Also, the vacancy rates in the commercial property sector are now quite high. There is no appetite to build more shopping centres, so the resources of the construction sector can be concentrated on house building. The Government is predicting 31,000 new build units this year. While this is encouraging, we need twice that amount. This is achievable with the political will. There needs to be about 250,000 working in construction: about the same level as during the Celtic Tiger years. There were some generous Reliefs for small businesses, in particular the 50% rebate on commercial rates. But again, there was the sense that this was a once off. It was good that the Government finally increased the VAT rate for hospitality to the level which applied before Covid. As indicated in a previous issue of the Irish Political Review, there is no reason to stimulate this service industry. There is no doubt that this was a generous budget. The effect of it will be to increase inflation by about 0.5%. Nevertheless, there will be a Government surplus of €8.8 billion, or 3% of national income, this year, and €8.4 billion or 2.7% of National income next year. These are quite remarkable figures. However, a large part of the reason for the buoyancy has been Corporation Tax receipts. The Government estimates that the windfall benefit is between €10 and €12 billion. If there were any change in the regulations governing where multi-nationals pay their tax, the government surplus could very quickly be transformed into a small deficit. This is why the Government is setting up reserve funds so that capital projects will not be affected if there is a sudden downturn in Corporation Tax receipts. Overall there was an increase in capital expenditure of about 8% and current expenditure of 6%. It has to be said that the increase in capital expenditure is too modest, given the infrastructural deficit in the country. Finally, there was an interesting exchange on RTE television between Fianna Fail Minister for Finance Michael McGrath and the Finance Spokesman for Sinn Fein, Pearse Doherty. McGrath made the point that SF neglected the economic consequences of increasing taxes on high earners. Doherty didn’t really answer the question, but instead suggested that the business class was more worried about the shortage of housing for its workers. Most statistics show that we have the most progressive tax system in the OECD. An Economic and Social Research Institute report shows that the 2024 Budget was also a progressive budget in that low-income earners benefitted by a greater proportion than other income earners. In the present writer’s opinion, the progressive nature of our tax system is entirely appropriate. We have a quite unequal distribution of income in this country. This is possibly a result of our two-tier economy, in which a highly productive world class multinational sector exists alongside a less productive indigenous sector. So, whereas there is an unequal distribution of gross incomes, our progressive tax system ensures that the net income distribution is around the EU average. But can we make our tax system even more progressive? At present our highest marginal tax rate is at 52% (40% tax, 8% USC, 4% PRSI). Can this be increased? In the 1970s and 1980s the top tax rate was 65% plus PRSI (7%?). But in that era there was massive tax evasion. Throughout the 1990s the top rates as well as the standard rate were gradually reduced—along with closing loopholes. Sinn Fein’s overall policy is “redistributionistâ€, rather than socialist. It has identified a cohort of people with incomes below €100,000. It has ascertained what this—far from homogenous cohort—wants: no Property Taxes, better Social Services; and, more recently, the possibility of their children owning their own homes. And this ambitious programme is to be financed by those on salaries over €100,000! In the past the Left advocated similar policies (except for SF’s policies on property), in tandem with a view of the economy which envisaged a greater role for the State in driving the economy. But Sinn Fein has no such policies. It relies on the private sector to continue to generate jobs. Sinn Fein’s policies may or may not be the right ones. But it must be admitted that McGrath has asked a good question. It is up to the leading Opposition Party to come up with a more convincing response. |