herald

Wednesday 18 October 2017

Dan White: Budget on a Pearl Harbour in December

THIS year, Budget Day falls on December 7, the 69th anniversary of the Japanese sneak-attack on Pearl Harbor.

After the tragedy, then-American president Franklin D Roosevelt described December 7 as "a day that will live in infamy".

It is likely that taxpayers will nurse similar feelings towards the date after Brian Lenihan delivers his Budget speech.

So what can we expect?

The recent weakness of sterling against the euro -- the single currency was up to almost 87p this morning -- rules out any significant increase in excise duties or VAT. If Brian Lenihan does try to hit the "old reliables" or increase sales tax then the pre-Christmas queues for Newry will start at Drogheda.

Lenihan's room for manoeuvre is also limited on PAYE and other payroll taxes such as PRSI.

While Lenihan did not increase nominal income tax rates in his first three budgets, the income levies have achieved pretty much the same result with top-rate taxpayers now paying an effective nominal tax rate of up to 56pc.

Already there are clear signs of a return to the "black" or cash economy.

Any further significant increase in income taxes will merely further increase the proportion of income disappearing into the black economy.

While middle- and upper-income earners are likely to escape further raids on their pay packets, it's a different story for the lower paid.

As things stand, half of all those at work don't pay income tax. That's going to change on December 7.

No further increases in income or sales taxes will be the only good news for middle- and upper-income earners on December 7.

However, with the international bond markets now effectively closed to Irish borrowing, the Government has to find new sources of tax revenue. This makes it virtually inevitable that Brian Lenihan will have to reverse previous Government promises not to introduce flat-rate property and water taxes.

A flat-rate property tax of €1,000 per household would raise €1.5bn, while a flat-rate water charge of €300 would add a further €450m to the Government's coffers.

We can also expect the DIRT and capital gains tax rates to increase from their present 25pc to 30pc while the "carbon tax" will be doubled to the equivalent of €30 per tonne. Between them these measures could add a further €500m-€600m to the tax take.

And that's about it on the tax side.

With the gap between spending and taxation now running at a minimum of €19bn, Brian Lenihan is going to have to convince the international financial markets that he is serious about reining in excessive spending.



Overlap

To do this he is going to have to go where the money is: health, education, social welfare and public sector pay. Between them, these four categories -- and there is some overlap between them -- account for at least four-fifths of total day-to-day Government spending of €55bn.

First for the chop will be the Croke Park agreement. The Government's promise not to cut public sector pay any further and impose no compulsory redundancies looked daft earlier this year. It is now doubly daft.

With public sector pay and pensions still costing €19bn a year, both pay and numbers will have to be cut further, no matter what the trade unions might think.

There will also have to be further social welfare cuts. These will be necessary not just because we are spending €23bn a year on social welfare but also because the introduction of PAYE for the lower-paid will otherwise reduce the incentive for people on low incomes to work rather than claim social welfare benefits.

The other big spending categories are health and education, which between them consume a further €25bn a year.

Our pampered doctors, teachers and nurses are going to have to learn to do a lot more with a lot less.

When we wake up on December 8 it will be a very different world. Not only will taxes have increased yet again, but we will have been forced to dismantle the expensive public sector we acquired in a fit of absent-mindedness during the Celtic Tiger years.

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