How future economic growth translates into revenue growth will determine if Fianna Fáil can live up to both tax and spending pledges, writes Marc Coleman
Mid-February in Milan is the catwalk season and the most daring fashions are paraded in front of the cognoscenti of the fashion world. The point of the exercise is to express ideas in their purest and most unadulterated form, but the purest designers know that for those ideas to be implemented they will have to watch as less artistic and more opportunistic and commercially-minded people alter them, match them with those of others, and generally water them down.
This also appears to be how the general election campaign is working in Ireland as far as tax policies are concerned. Having strutted their more particular designs, Labour, the Green Party, the PDs, and to a lesser extent Fine Gael, last Saturday saw Bertie Ahern take elements very similar to their own and mesh them together.
Having changed his own party's priorities last month to come out in favour of a two percentage point cut in tax rates, Pat Rabbitte has now seen Ahern endorse that policy, but then adjust it to include another aspect supported by the Green Party: support for indexing tax bands and credits. The fact that last week the UK's socialist chancellor, Gordon Brown, cut the standard income tax rate by two percentage points may also have encouraged Ahern here.
Ahern also announced that if elected, Fianna Fáil will cut the top rate from 41 to 40 per cent. The proposal to double the home carer's allowance is also similar to that of another party, namely Fine Gael. On top of this Fianna Fáil is proposing a few of its own ideas, most notably halving the full rate of PRSI from 4 per cent to 2 per cent and abolishing the €49,000 ceiling for paying it (the rate of PRSI paid by the self-employed will fall from 3 per cent to 2 per cent). Ahern said nothing last Saturday about stamp duty, suggesting that some fashions are just too daring to even be considered.
If implemented, the package will considerably help a constituency that Labour and Fine Gael have been targeting - families on middle incomes - while the doubling of the home carer's allowance will ease anger among some traditional Fianna Fáil voters about the individualisation of tax bands by the preceding Fianna Fáil/ Progressive Democrats coalition.
For PAYE workers on the full rate of PRSI, the biggest winners from these policies are married couples living on one income of between €35,000 and €55,000. They stand to get a 5.3 per cent rise in take-home pay. Double income couples gain most in a proportionately similar way, ie, when on combined incomes of between €65,000 and €100,000; single earners in this category will gain between 4.2 and 4.4 per cent.
There are losers as well, but Fianna Fáil has probably concluded that when it comes to the election the extent of their losses will be too small to cause annoyance. Single earners above €250,000 will see a 0.3 per cent fall in their incomes, while those earning above €500,000 will see a 1 per cent fall. To get a fall higher than that under these policies, you would have to belong to a species that remains rare despite the Celtic Tiger, ie, be a person who earns more than €1 million annually either singly or jointly.
Assuming this is the be-all and end-all of Fianna Fáil tax policies, those other than first-time buyers who purchase houses over the next five years might also be considered losers. Speaking to Gerald Barry about his tax policies on Sunday, the Taoiseach said that when spread over the next five years of government, Fianna Fáil tax and welfare policies would prove less ambitious than those implemented in the last five years.
On the taxation side, this may not be the case: recent cuts in incomes have - through a failure to index tax bands - been significantly counterbalanced by a €1 billion a year rise in stamp duty receipts. Some would say this is robbing Peter to pay Paul (some would even say it is robbing Peter to pay Peter). Whether true or not, that figure needs to be subtracted from the cost of tax cuts implemented between 2003 and 2007. Expressing those cuts in 2012 values (which needs to be done to compare it with the cost of what is being promised) gives a figure of just under €4 billion, which, subtracting the increase in stamp duty revenues, gives a figure of just under €3 billion. Fianna Fáil's own costings, which are based on Department of Finance figures, are that its tax package will cost €4.2 billion by the year it is fully implemented, 2012.
Is it affordable? The answer to that question always depends on two other factors. Firstly, by how much the economy will grow (and how this translates into tax revenues) and, secondly, how much the Government plans to spend. To put the €4.2 billion in some context, the exchequer received €10 billion in tax revenues in November 2006 alone. Underlying Fianna Fáil's assumption of continued tax buoyancy is an assumption that the economy will grow by 4.5 per cent over the period of government. This is in line with ESRI forecasts.
What may alter dramatically, however, is the extent to which economic growth translates into revenue growth. That this relationship has been strong in recent years is down to a very strong reliance on unsustainable trends in the property market.
There is also the fact that last weekend Ahern made significant extra commitments on spending. Between them the commitment to hire 1,500 extra gardaí, 4,000 primary school teachers and 2,000 hospital consultants should cost an extra €1 billion by 2012. The promise to increase the basic pension from €200 to €300 per week will add €2 billion to that. With Fianna Fáil yet to publish its full economic document, those commitments are likely to grow.
If the economy fares badly and Fianna Fáil is in government, either its policies on taxation or those on spending will have to stay on the rack.