Raising revenue by cuts to the PRSI exemption would have been fairer and less controversial, writes Garret Fitzgerald
BECAUSE I know from experience how easy it is for politicians locked up in government together to lose their sensitivity to popular opinion, I am less surprised than most people that the Government misjudged the public mood with regard to the ending of universal free access for patients to general practitioners.
I can understand that Ministers' righteous indignation at the prodigality of an earlier Fianna Fáil/PD government's decision to quadruple the medical card payment to GPs in respect of non-means-tested over-70s may have dulled their political instincts to the danger of proposing effectively to abandon this universal payment scheme.
In a crisis as acute as that now facing the Government it may have seemed eminently sensible to tackle such a flagrant case of overpayment - but to have done so at the expense of the elderly users of the scheme rather than by approaching the overpaid GPs was clearly politically unwise - and is now being belatedly corrected in a damaging post-Budget climbdown.
What was equally disturbing, however, was the absence of any strategic approach to the Budget. It was a recipe for incoherence to have imposed fixed percentage spending cuts on departments, leaving it to Ministers to decide individually just how the arbitrary saving imposed upon it was to be achieved.
The lack of co-ordination became clear to me when a helpful civil servant in the Department of Finance was genuinely unable to tell me what capital projects had been cancelled or postponed in order to produce a €1.5 billion cut in the capital programme. This was because these cuts had been left to individual departments, and even after the Budget the Department of Finance did not know what particular shape these changes had taken!
The truth is that imposing arbitrary percentage cuts on public spending across departments is neither a sensible nor politically wise way of preparing a budget, because by the time Ministers notify their proposed cuts to their finance colleague,
there may not be time to reshape these into a coherent pattern.
It would have been much more sensible for the Minister for Finance and the Taoiseach, using the detailed knowledge accumulated in the Department of Finance, to have selected a possible combination of cuts and revenue-raising measures that seemed to them to be economically and socially coherent and politically sellable.
Then they could have discussed this with Ministers, listening to and, where appropriate, adopting any sensible alternatives they might suggest that would fit within their overall frame of reference.
The important thing, surely, would have been to restore confidence by presenting a constructive and internally coherent Budget as part of a programme designed to extract us from our present financial difficulties over a period of years.
Above all, what a government needs in this kind of situation is to avoid death by a thousand cuts, which is precisely what a Minister for Finance tends to be landed with when he lets all his colleagues do their own thing. The simple truth is that one large cut or tax increase is generally to be preferred to a multiplicity of changes that may aggravate an endless number of aggrieved parties.
As I remarked in this column two weeks ago, the principal problem facing the Government today is not excess spending but a shortage of revenue. Of course every effort must be made to cut waste - as distinct from dropping socially necessary schemes.
The revenue shortage arises from the Government using for years an obviously temporary flow of asset-related taxes - three-quarters of which are now disappearing - to reduce by over one-quarter the burden of taxes on income.
The Government's main policy thrust should now be towards filling this revenue gap. And, while not going overboard to an extent that might over-depress the economy, it was clearly in the political interest of the Government to get as much as it could of this painful tax-raising process behind it now.
The levy on incomes was an effort in this direction, although it was flawed by an extraordinary failure to exempt people at the bottom of the pile, from whom little revenue would be derived. This error has since been tackled in a second climbdown.
But the Government missed opportunities both to increase revenue and to avoid the social and political damage that it has inflicted on itself by too many aggravating spending cuts. More revenue could have been raised by some combination of eliminating tax shelters that are used only by the very rich, charging an increased tax rate on higher incomes, or modifying the exemption from PRSI at 4 per cent on income above €52,000 a year.
The excuse for this latter regressive tax exemption is that the Irish social insurance scheme provides only flat-rate benefits, not pay-related payments, and that because of this it would be unfair to apply PRSI rates to income above a certain level.
But that argument involves accepting the fiction that these payments are made to a genuine insurance fund, which is not the case. Social insurance payments are not funded like normal insurance payments: they are paid out of revenue from the current year's PRSI.
The reality is that these payments are a form of supplementary taxation of PAYE income, but one in respect of which all earnings over €52,000 are exempt. And in 2009 this exemption will cost an estimated €320 million. I am not necessarily suggesting that all of this should have been levied in this Budget. But surely curbing the exemption would have caused a lot less hassle for the Government, and done much less damage to the educational system, than saving millions through increased class sizes, cuts in the number of language support teachers, funding cuts for education and youth services, and withdrawal of substitution cover.
Frankly I doubt whether reactions to such a move would have even come within shouting distance of the scale of hostility that these education cuts are evoking amongst tens of thousands of teachers and hundreds of thousands of parents.