ANALYSIS:THE LEAKING of budgetary and bailout documents in Berlin has caused some disquiet.
That German politicians have seen our budget proposals before their Irish counterparts has produced indignation, mostly among those with a tendency to blame foreigners for our ills.
Their ire is misdirected.
In most democracies, lawmakers make budgetary laws. The process of agreeing tax and spending measures happens openly in parliament and among the relevant parliamentary committees, usually over many months. There is none of the nonsense of a finance minister pulling a rabbit out of a hat on budget day. If our political institutions were more like those of other democracies, the Oireachtas would have not only seen Thursday’s proposals, its members would have been involved in drawing them up.
So if anyone is disgruntled about German parliamentarians seeing the proposals before TDs, they should direct their anger at our own political institutions and ways of doing things, not Johnny Foreigner.
On the content of the documents revealed in The Irish Times yesterday, the most surprising aspect was how few surprises there were.
Each quarter, since the State was bailed out almost exactly a year ago, the detailed conditions of the rescue are changed to take account of changing realities. One might have expected more ambitious structural changes – such as public sector reform and more rapid labour market reform – to be introduced as the EU, IMF and ECB deepened their understanding of our economy. But that, by and large, has not happened. The broad outline of bailout terms has not changed substantially over the year.
Among the notable changes contained in the leaked document was the taxes to be introduced in the budget.
In the last update of the memorandum, published in July, a lowering of personal income tax bands and credits was slated for 2012, along with a reduction in private pension tax relief and “a reduction in general tax expenditures”. None of the three now appears to be on the cards for 2012.
In their place are three new tax proposals. One is reform of tax on capital gains and acquisitions. Another is a vague “increases in other indirect taxes”.
Most significant was a mooted rise in the VAT rate by two points, something since confirmed. The VAT hike will generate the bulk of the additional revenues, according to the Government’s newly revealed plans.
At a time when the Coalition is putting a lot of hope for recovery in encouraging people to save less and spend more, taxing consumption appears strange. But given the Government’s (dubious) commitment to achieving a big chunk of next year’s budgetary adjustment by raising more revenue, additional taxes had to be levied somewhere. And there is a good argument to say that taxing consumption is the least damaging form of taxation. The alternatives are to tax work – via levies on income – and/or tax investment. Doing anything that hinders employment is not on. With investment key to generating the capacity to grow, substantial additional taxes on investment don’t make much sense either.