It came at the end of the speech. Covering all the bases, including his Commitments for Change, with passionate words on the health service (‘health is a community service, not a market commodity’: absolutely), the Labour Party leader was drawing to a close, with a final appeal to the electorate and a motivation to the membership. Then, from nowhere, Pat Rabbitte announced that Labour was committed to a cut of 2% in the standard tax rate – from 20% to 18%. Shock is an understatement.
The first question is why? Is there a constituency demanding a standard rate tax cut? ICTU? Anti-poverty groups? Consumer groups? Farmers’ organisations? Environmental groups? Even IBEC and employers groups are focusing their ire on local authority charges. Instead, two-thirds of the electorate stated, in the Irish Times Tns/MRBI poll, that they wanted the budget surplus to be invested in public services and anti-poverty measures.
The next question is where – as in ‘where did this come from?’ One will search the Labour Party website in vain for clues as to where this idea germinated. No ground was prepared, no analysis of an ‘over-burdened’ taxpayer. Joan Burton, TD and Finance Spokesperson, has been clear that reform is about removing the injustices that work to the advantage of a wealthy few, not a Trojan horse to cut taxes. When proposals for a €1 bus fare or housing purchase supports were announced, they were based on a solid body of policy work from which they organically grew. But a cut in the standard tax rate? There is no soil to be found.
Even in the conference speech itself, the proposal appears as a coda, an aside, inserted at a late stage, stuck between a lengthy prescription for a better heath service and a recap of the five Commitments to Change. Prior to this bombshell there was no evidence adduced that a significant tax cut is either economically necessary or beneficial.
So clumsy was this interpolation that it contradicted the Party Leader’s own reference to the €11 billion which Labour is now claiming justifies a tax cut:
Growth at 4.5% over 5 years will generate at least 11 billion Euro in additional revenues for the Exchequer. I want those resources to deliver public services that will add to our quality of life.
Whatever about the explanations now, this reference did not tee-up an argument for tax cuts. It’s difficult to avoid the conclusion that the proposal was developed, not by a concensus of relevant spokespersons or economic advisors. but by a tightly knit group with the short-term goal of making the next day’s headlines.
So if we can’t answer the why and the where, what about the ‘what’? The proposal would be expensive – costing over €1 billion in a full year, and rising in subsequent years. Leave aside the inflationary impact – certainly a concern in a high-priced economy with a deteriorating trade balance.
The Department of Finance predicts tax revenue will grow over the next three years by a little under €11 billion (I’m surmising this is the figure Labour is using – though they say it’s five years). However, expenditure will grow more – nearly €1 billion more – on the basis of current government policy. In less than five years, on current trends and without adding any additional expenditure than this Government is planning, the general government surplus will turn red.
This is not, in and of itself, so alarming. There will still be a current surplus, and borrowing for capital purposes is no bad thing. The issue here is that Labour’s tax cuts, without compensatory tax rises in other areas, will send the numbers in the wrong direction.
In addition, factoring in Labour’s proposal, nearly 50% of tax revenue growth would be reliant upon VAT. Not only is this risky given the National Competitiveness Council’s statement that growth based on consumption is unsustainable. It is also inequitable given the highly regressive impact of VAT, whereby the poorest 10% pay twice as much of their income as those on the highest 10%.
Most damning is that the rising costs of Labour’s tax cut proposals will be, over five years, approximately €6.1 billion (each year the cost will increase – by 9% on the basis of the last five years – since there will be rising incomes and more people entering the tax band). That, right away, gobbles up a majority of the ‘extra €11 billion’. But that’s the situation on current trends.
Labour has rightly put forward ambitious plans that will of necessity increase expenditure over current trends. For instance, the NESC called for local authority housing lists to be eliminated by 2012. Labour endorsed this. But there’s a price tag. The extra 75,000 social housing starts will an increase of €600 million extra every year in 2004 terms. Put that together with a €1 billion per year price tag for tax cuts, and after five years most of ’€11 billion extra’ is gone. Now add in health investment, public transport, social exclusion, affordable housing, education, and childcare (don’t even mention the costs of meeting the challenge of climate change which Eamon Gilmore TD honestly addressed). Not only are tax cuts are unaffordable in the context of these demands for social investment: new sources of tax revenue will be needed to accomplish Labour’s programme.
To put it in a broader context, Ireland lags far down the EU tables in social protection expenditure (this includes not only social welfare but health, housing and other social supports). The average EU-15 expenditure for social protection measures is 28% of GDP. For Ireland it is a lowly 20% (GNP – we’re in a tie for last place with Spain). Were Ireland just to reach the EU average, never mind the levels that pertain in other countries as wealthy as Ireland, this would mean spending an extra €13 billion in today’s terms. That’s how far behind we are – in just one critical area of social and economic inequity.
So now we will cut taxes and at the same time substantially increase social expenditure. All in a period when manufacturing jobs are being lost, and even slight contractions in the current unsustainable rates of consumption and private house building could start to seriously sour the figures. One doesn’t have to agree with the proposition that ‘low-tax + low-spend = a low-service economy’ to realise that Labour’s equation doesn’t add up
Ireland’s leading left-wing party is now advocating a tax-cut strategy in an economy that has one of the lowest tax burdens in Europe. One may disagree with Labour’s earlier position – ‘Under Labour taxes will stay down’ – but it was, at least, understandable. The Government parties were attempting to paint Labour as a ‘high-tax’ party to divert attention away from the chronic poverty of public services. Labour’s stance was a defensive measure, to take that issue off the table in order focus on the Government’s manifest weaknesses. There was validity in the tactic, if not the economics.
But this was a far cry from arguing for actual cuts. Whatever about party canvassers assuring the electorate on the doorstep that Labour won’t raise taxes, are they now to argue, ‘Vote Labour and we’ll cut taxes better than the PDs?’
Exactly what signals is the Left trying to communicate?
And to whom?
Notes on the Front 
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