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Interest groups must not dictate policy
29 November 2009
Should the government make budgetary and economic policy to achieve the best results and bring about a recovery? Or should ministers make policy so as not to upset people and keep as many interest groups as possible happy?
If our recent history has taught us anything, it is that keeping people happy in the short term is most certainly not the same thing as smart, sustainable and successful policymaking .Voters were kept happy with the budgets of 2005,2006 and 2007 - so happy, in fact, that they re-elected Bertie Ahern’s Fianna Fail party for the third time. These budgets inflated the twin bubbles of the housing market and public spending, and contributed in very significant measure to the problems we face today.
So let us be clear on one thing: placating the various interest groups, who have been so vocally making their case for special treatment in recent weeks, does not come without a cost.
This is the background to the debate about taxation and reducing public spending in the budget. In the short term, raising tax is much easier politically than cutting spending - particularly if it is dressed up as taking money from ‘‘the better off’’. But there are problems. First, the only way to raise a significant sum in tax is to hit a large group of earners, including many on middle incomes. Second, raising taxes on income indiscriminately will damage incentive, effort and enterprise. Already the levy increases in the last budget have pushed the marginal income tax rate for many to more than 50 per cent. Why work an extra few hours if taxes are hiked further and the Revenue is going to be taking 60 cent-plus out of every extra euro you earn?
A crucial part of the rebalancing of our public finances will be cutting spending. Day-to-day spending has risen by 70 per cent since 2003.We cannot get our public finances back onto a sustainable path without cutting this back. If we try to do so, we will only be back in a year’s time facing the same problem - a fundamental imbalance between spending and revenue. We may all wish that it was otherwise, but it isn’t.
If the government meets its target of getting the bulk of the adjustment in this budget from cutting spending, then it will start to close the gap and make life considerably easier in the years to come. The pity is that, given the time constraints, it must do so in an indiscriminate manner. Had half of the promises about driving reform and productivity in the public sector which we have heard in recent years been met, then we would not be in so difficult a position. For this, the blame rests squarely, not with ordinary public servants - understandably hurt and angry like us all about what has happened - but with successive governments and the senior management of the public sector.
Taxes will need to rise, too, in the years ahead, to replace the revenue lost by the collapse in the property market. We have already had big hikes in taxes on income, via the levies. We are also to have a carbon tax. Further budgets should plan a tax on residential property. There is a strong case for cutting back on the special reliefs and allowances which still allow many of the super-rich to minimise their tax bill. All these measures will help to rebuild the tax base. But further indiscriminate hikes in the income tax take will not. They will merely add a further burden to the group of middle and higher earners - particularly in the PAYE sector - who are already shouldering the vast bulk of the tax burden. They will discourage investment and cost jobs.
A sustainable plan to correct the public finances means we can only plan to spend what we can reasonably hope to earn. Even allowing for a recovery in tax revenues in the next few years - and for some new taxes - government spending is now way above what we can afford. Whatever else it does, the budget must address this.
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