An insidious budget

By Vincent Browne (for the Sunday Business Post)

“We have taken bold, decisive and innovative steps to manage our way through this crisis. In all our actions, our concern has been to protect jobs, to provide a functioning banking system and to return this economy to the path of sustainable growth.

We have sought to do all of this in a manner that is fair and that protects the most vulnerable.”

At least that’s what Minister for Finance Brian Lenihan said. But has the budget been fair? Protecting the vulnerable - by cutting disability payments, suspending dental treatments, imposing charges for prescriptions for the most vulnerable and the sickest? Protecting the vulnerable by cutting the pay of public servants who get 30,000 euro or less - mainly women, many of them working part-time as cleaners.

Protecting jobs while massively deflating the economy?

Getting the banking system functioning again is costing billions - and will cost many more billions, which will be taken in future years from social welfare, health and education.

‘‘The economy went into reverse for three reasons: a steady loss of competitiveness during a prolonged boom; the bursting of the property bubble; and an international banking crisis which triggered a worldwide recession.”

Nothing to do with a budgetary policy which overheated the economy for party political advantage? Nothing to do with the slashing of the tax base at a time when there was no economic justification for doing so? Nothing to do with reliance on transactional taxes (stamp duty and Vat), which were always precarious, especially given the inevitability of a cooling of the property market?

Nothing to do with rank incompetence in failing to perceive the imminent collapse of the banking system? The signals of a collapse were flashing, at least in the minds of Michael Somers of the National Treasury Management Agency and of the new governor of the Central Bank, Patrick Honohan.

“Our overriding objective has been to strive for fairness.”

Then answer a simple question.

First, the background.

The Finance Acts of 2006 and 2007 introduced measures to limit the use of certain tax reliefs and exemptions by high-income individuals.

Last July, the Department of Finance reported that, even after these measures had been implemented, the average effective tax rate for the group of people earning more than O500,000 who had actively mused the reliefs to cut their tax bill was just 20 per cent. Tax levies would have increased their effective tax rate to 26 per cent.

They are able to escape the rigours of the tax system because of the multitude of “tax expenditures” (ie tax breaks, whereby the rich can minimise their tax liability).

One of the most spectacular devices whereby the rich can escape tax is through private pensions. A few weeks ago, the ESRI published a report on pensions policy which pointed out more than O8 out of every O10 in tax relief on pensions goes to taxpayers in the top one-fifth of income distribution.

The ESRI explained: “This is because high income earners are more likely to participate in pension schemes, more likely to make higher contributions, and the value of tax relief at the top rate of income tax is about double that for the standard rate taxpayer.”

The ESRI recommended the standardisation of relief on all pension contributions (employee, employer and implicit government contributions), which would raise revenue of more than O1 billion per annum.

This would imply a reduction in income tax relief for top rate taxpayers, but no change for those paying the standard rate.

My question: if it is true that the overriding objective was to strive for fairness in the budget, why wasn’t the ESRI recommendation on pensions adopted? Why, instead, was it decided to cut social welfare, disability benefit and dental payments, to impose a prescription charge and to cut the pay of public servants earning less than 30,000 euro?

“The tax increases contained in my last two budgets have placed the heaviest burden on those best able to pay.

“It is also clear that our income tax system has become very imbalanced. Next year, almost half of income earners will pay no income tax and 4 per cent will pay almost half of the total yield. If we want to sustain high levels of government services, this imbalance must change.”

The very richest people pay only a small proportion of their income on tax (as shown above). On the basis of Revenue Commissioners’ data, I reckon that people (including couples) earning over 100,000 euro pay only 33 per cent of their income in tax and levies.

The Institute of Social Justice (formerly Cori), run by Fr Sean Healy, estimated that a couple earning between them 120,000 euro pay just 32 per cent of their income on tax. So what is this “burden”? Where is the imbalance - except that the rich pay too little?

“Ministers and Secretaries General of government departments will take a pay cut of 15 per cent: an overall cut of close to 25 per cent when the pension levy is taken into account.”

Untrue. Ministers were taking a pay cut of 5 per cent. Why the deception? It is irrelevant whether the earlier 10 per cent pay cut was voluntary.

The reality is that ministers will be taking a 5 per cent pay cut. In fact, the reality is that ministers are taking a minuscule benefit cut. Their ministerial cars and drivers cost 200,000 euro a year each. Their expenses come to at least 100,000 euro a year each.

So their total benefit is of the order of 500,000 euro a year. The cut in benefit is around 1 per cent a year, far less than the cut in social welfare.

Conclusion. This is a wretched, insidious budget and it reflects on more than the wretched parties in government, Fianna Fail and the Greens. It says a lot also about the economics and media commentators who have praised it for grappling with the fiscal crisis, while remaining indifferent to the social consequences.

It reflects on the plethora of “official” agencies - from the IMF to the EU, the OECD and the rest - who could not care less about the impact of this budget on the lives of those already in misery, so long as the “fundamentals” are addressed. “Fundamentals”?

Urgent Appeal