For the first time in seven years the Government's budget has reversed the familiar formula of cutting spending and raising taxes to achieve fiscal consolidation. Yesterday's financial statements by Michael Noonan and Brendan Howlin marked the end of austerity, as they announced a slight increase in spending and a slight easing of the overall tax burden. A year ago – as Ireland prepared to exit the EU-IMF bailout – the outlook was for modest growth (2 per cent of GDP) and for a 12.4 per cent unemployment rate in 2014.
Mr Noonan now expects unemployment to fall to 10.2 per cent by December, and has raised this year’s growth forecast to 4.7 per cent. This rapid rate of economic recovery has been boosted by strong economic activity in two of Ireland’s main export markets, the UK and the US, and in recent months by increased domestic demand. This has enabled the Government to loosen fiscal policy somewhat, while still achieving a key EU target – a budget deficit below 3 per cent of GDP by 2015.
The Budget Day exercise has lost much of its traditional mystery and magic. Rarely have a government’s intentions been so clearly signalled so far in advance of Budget Day. The net gains for taxpayers and households remain relatively modest, partly offset by the imposition of water charges in 2015. The tax adjustments are nevertheless a sign of future Government intent. Both the reduction in the marginal (52 per cent) tax rate, by increasing the tax band and cutting the higher income tax rate to 40 per cent, and the moves to reduce the impact of the Universal Social Charge (USC) on those on lowest incomes, are welcome as part of a three-year tax reform plan.
Likewise, the major current and capital spending (€800 million) on social housing is necessary and overdue. But in some respects the Government has allowed political concerns – Fine Gael and Labour's low poll ratings and their poor performance in the recent by-elections – to influence some of its budget measures. One such was the €100 per year water subsidy provided to all (653,000) recipients of the House Benefits Package and Fuel Allowance Schemes – a response no doubt to last weekend's huge protest march in Dublin. Despite increasing evidence of a strong economic recovery, the benefits of it have yet to be felt by the people, and reflected in greater support for the Government parties. Will this budget mark a turning point in the Coalition's fortunes?
On another front, the Government had little choice but to respond to international pressure to curb some aggressive tax avoidance practices, notably use of the “Double Irish” by multinational companies to minimise their tax payments. By requiring all Irish-registered companies also to be tax resident, it proposes to eliminate that loophole. It has, albeit under duress, done the right thing.
