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Fiscal Policy

The Government’s Plan

The statement by the Taoiseach can be read here.

The plan is quite remarkable in specifying substantial expenditure cuts, including the de facto reduction in the take-home pay of public sector workers via the pension levy. It was also welcome to see the extension of a reduction in remuneration levels to those providing professional services to the government.

Accordingly, this plan represents a welcome initial step in fiscal adjustment. As indicated in the Taoiseach’s speech, the fact that the unions could not agree to the plan does not mean that the social partnership approach has failed (the negotiation process delivered a ‘near endorsement’ of the plan and achieved a common consensus regarding the scale of the problem). Indeed, now that the pay element has been dealt with, it is plausible that social partnership talks could resume quite quickly regarding other elements in the overall strategy.

Internationally, this plan should help to dampen concerns about the state of the public finances.

23 replies on “The Government’s Plan”

I think you’re being far too polite about it. There is only one hard measure in the speech, the pension levy. The next-largest cut, the reduced capital allocation, required no action. The cuts in professional fees and the savings in administrative and other expenses are handwavium. All in all there is no evidence of the government’s having the ability to take hard decisions (even the use of a “pension levy” rather than a cut strengthens my view) and I cannot see how the government is going to find the backbone to make even larger cuts next year. Biffo has bottled it.

Do the January exchequer returns (3.74bn) suggest that sadly the ‘fiscal adjustments’ may need revisiting over the next few months or am I being overly pessimistic? I’d have thought they were looking for a number around 3.9-4.1 bn range

“€75 million through a reduction in the Early Childcare supplement from €1100 to €1000 per year and a restriction to child under 5.” It wasn’t already??

While the deferral of scheduled pay increases will help, what private sector workers wanted was benchmarking – if it’s okay in good times, it’s okay in bad times.

Today’s real announcement was the tax figures. I would suggest that the trends make mince meat of all of the projections of this silly Government.

Below I set out a table of the % tax paid under each sub heading and the totals for each of the last four years

Tax Source 2008 2007 2006 2005
Customs 10.08% 5.28% 6.61% 6.17%
Excise Duties 8.67% 7.98% 8.19% 7.72%
Capital Gains Tax 9.02% 6.02% 4.39% 4.29%
Capital Acquisitions Tax 8.13% 6.12% 6.52% 5.62%
Stamp Duties 10.90% 10.89% 7.83% 7.38%
Income Taxes 9.17% 8.12% 9.01% 8.48%
Corporation Tax 3.89% 3.26% 1.96% 1.55%
VAT 17.39% 16.08% 15.14% 13.84%

Total revenue 11.31% 10.04% 9.29% 8.84%

% Tax paid in January for each of the last four years

Using the 2008 percentage as a reasonable basis for calculating 2009, I come up with the following figures,

Customs 198.4
Excise Duties 3575.5
Capital Gains Tax 399.1
Capital Acqs Tax 233.7
Stamp Duties 458.7
Income Taxes 12704.5
Corporation Tax 3110.5
VAT 11328.3

Total revenue 33023.9

Add a further €1,000M for the Income Levy and the once off change in CT preliminary tax and you get a total tax figure of €34,000M, or around €8,000M short of the target. As the state of the economy is only getting worse, it seems probable to me that the tax take will fall to around €30,000 -€32,000M.

Put those figures into your models and what are the borrowing figures like?

Government by the IMF/ECB looks inevitable.

@Niall excellent point, much of our deficit is not surprise spending rather it is a collapse in expected tax receipts to meet the expenditure that is more the issue. I suspect more ‘surprises’ in how little comes in after Q1 will mean a revision of the plan given so far.

This is likely only an initial shot over the bow of what will have to be done, thankfully though with this plan they might not instantly bow to any public pressure.

There are plenty of other areas savings could be made and they will have to be considered, with the public sector dual-direction benchmarking is common sense as is a reduction in the numbers, we need to encourage working companies and not try to bail out dysfunctional ones, there is just so little time to do it all in!

@Niall

I wonder if your projections are too pessimistic. By using last January’s percentage, don’t you effectively assume that tax revenues will fall at the same rate as last year? But given transation-related revenues have already collapsed, that strikes me as unlikely. Are you assuming that non-transaction related taxes will fall at an even steeper rate?

Thanks, Karl.

On the tax issues, I think VAT paid in January, which of course is VAT charged in November & December is higher than might be expected. For example, cars for sale in January would be bought in December and the dealer would have a repayment for Nov/Dec, which the Revenue would repay in January. As there was no cars bought by garages, then there was no refunds claimed. Shops also are carrying almost no stock. I was shocked how little stock even Dunnes are now carrying. This is reflected by the collapse in customs duties, which of course are now mainly made outside the EU. The poor level of stock reminded me of the 1980s.

I had initially assumed that as this is pension levy it was not tax deductible, however if it is, then there is a tax hit of around €600M and as about 70% of Public Servants there is a further hit to the Social Insurance Fund in the region of €150M, including the employer contribution.

I would also suggest that it will make it very difficult to persuade key public service workers not to cut their hours. Many of these key workers are married women and marginal rates of deduction close to 60% make working additional hours or days very unattractive.

The two main groups who received awards under Benchmarking Two are a perfect example, School Principals and Management Nurses. I find it strange that the awards to Senior Staff and of course University Professors! have been paid, but these two key groups have not been rewarded. Certainly my experience of school principals is that they have some of the most challenging jobs in the Public Service. And the same would apply to nurses in senior management positions who are very poorly paid for their responsibilities and qualifications.

However as many Civil/Public Servants are married to others, the household hits are going to be quite concentrated. The degree to which they cut back even beyond their actual net loss will also be an issue.

I feel that many feel that this is only the first cut and that they are likely to cut back very considerably further.

One of the curious aspects of the pensions levy is that it seems to apply equally to fixed term contract public servants as it does to those with permanent posts.

An endlessly mentioned moitivation for the levy is that it represents some form of quid pro quo for the security enjoyed in public sector employment and the defined beneit pension that follows. This view ignores the fact that a growing number of public servants have fixed term contracts.

A public servant on a fixed term contract (be it in teaching, nursing research or whatever) enjoys no better job security than anyone in the private sector.

So one has to ask if a distiction should be made between the treatment of contract and permanent salaries subject to the levy.

Figures dont add up.
Two or three mininsters have stated the levy is on gross and will be tax deductible. If thats the case then we have
7.5% (Average)
15b (approx non pension part of pay)
.66 (assuming a 34% average marginal tax level)

Thats not 1.4b. Its closer to 800m if we are lucky.
Even if I am wrong the number earnign above 7.5% is less than half the total pay (54% are on clerical officer pay or below in the PS).

As for the rest of it…shifting deckchairs forward and back. A freeze of what you would pay is not a cut, its simply not an increase, for example.

Meanwhile, the tax base erodes before our eyes.

Im with Mr Goggin on this one – he has bottled it and to think that the markets will, in the medium term, see this as anything other than same is very optimistic.

Michael Taft has come to the same conclusion as Brian Lucey:

But even after that levy, would the Government have really improved the fiscal situation by €1.3 billion? No. It’s a gross figure. The levy would be tax deductible at the marginal rate. (So to be fair to the example above, the single average income earner would be down a net €1,327). The net saving would be substantially less – my back of the envelope calculation puts it at €800 million. It sounds like a lot but it amounts to 4 percent of the Government’s projected annual deficit. And this doesn’t count the loss of spending tax revenue or the multiplier effect of reduced spending power.

Doesn’t Brian’s point also mean that the actual hit to take-home pay of the high-earning public servants is much smaller than the figures quotes in the Dail by the Taoiseach, since they get to deduct at the marginal rate?

As the evening goes on, I get more and more worried about today’s performance. The government has spent quite some time preparing for and engaging in talks with the representatives of some employers, some unions and some other people. But I thought it might have been doing some thinking in the background, while the negotiating was going on. The really frightening thing is that, after all that time, it has come up with only one real idea, the pension levy, for closing the gap. The rest is, as Brian Lucey says, shifting the deckchairs: marginal tinkering and some makey-uppey numbers. Is that all they can come up with? Where are next year’s gap-fillers to be found?

“Where do correct ideas come from?” as the late Comrade Mao Zedong has so wisely remarked. “Not from the current government,” comes the plaintive reply.

And not, alas, from the opposition either. The speeches by the opposition leaders in the Dáil chamber were more powerful than the Taoiseach’s, but they too were remarkably lacking in useful concrete proposals that could be put into effect straight away.

“What,” as the late Comrade V I Lenin asked, “is to be done?”

Everything this government has done can be classified as simply tinkering with a failed system. It is the classic too little, too late. There can be no denying that the government could have done everything it did yesterday at least six months ago. If it had, our debt risk profile as a sovereign country would not be next to Greece, a country currently racked with social unrest. The government did not act, international lenders and rating agencies did. The excuse for doing nothing was that they needed to bring the social partners along.

To do this, they let the economy fall into near terminal decline, so that, even the so called social partners could not fail to see some semblance of reality. They could have hired a bus and taken them to view the half finished housing estates, empty hotels, and car sales showrooms, the overflowing labour exchanges, the auctions of plant and machinery soon to exit the country. The for sale signs all round the country that have been in place for over a year now!

Thankfully, eventually, they did see some “apparition” appearing at 4 a.m. this morning and left government buildings, where they should never have been in the first place! They decided that they did not like what they saw, they were queasy, had enough and were bailing out. This was just hours before the self inflicted deadline which showed the folly of the governments failure to act months ago!

They could have acted when top US analyst Meredith Whitney started drawing pictures for the experts who suffer from financial dyslexia! By the way, Ms. Whitney’s advice is available to the government for free, unlike our quangos and does not cost a cent!

The social partners forced an excessively weak Cowen to disguise his pay cut as a pension contribution. They forced him to reduce child benefits, watched as he reduced financial help to overseas aid agencies, watched as he scurried around to find other nondescript measures. All of this demonstrated the weakness of the government.

I am not impressed one iota by this governments “PLAN”. Tomorrow, our credit rating may be left alone. However, it is with sadness that as the Irish economy continues to deteriorate under Cowen it will not be long before we are revisiting the downgrading issue.

@John

No, I think if anything I may be understating the position.

Any improvement in the economy, which I think is highly unlikely will see a drop in VAT as there would have to be a build up of stock or capital goods.

The other crucial issue is that the public, many of whom have been living at 110 or 115% of disposable income, are back to living within their means. No substantial pay off of debt has started yet. This too will hit all taxes once it gets going.

I think core Income Taxes, monthly PAYE, will remain reasonably steady, but other witheld Income tax sources, for example PSWT & C45s will continue to collapse. The main self employed payday later in the year is unlikely to be good also.

I may have understated CT, as it is not dependent on the Irish economy, rather most of it is part of international tax planning. However the IFSC which I understand is a major contributor, is unlikely to be in this or future years. Many banks are said to have huge losses in London and as such transactions, which might have been routed through Dublin will happen there to take advantage of loss relief.

@Frank – yes. Zero leadership . sippo. The cut to me is (I think) 8.8% (boo) but , with one bound I write off 40% so its 5.3% (phew).

The only reason Cowen gave for doing it as a pension levy rather than a pay cut was that the latter would affect retired public servants as well. But I don’t know if he gave any reason as to why exactly retired public servants should be immune compared to serving public servants. Odd.

Also, making it deductible seems to have made it considerably more regressive in distributive terms than warranted – do people agree that this could have been more progressive as well as more aggressive?

@ Niall re. deficit

By my calculations the January returns imply total tax receipts of under 37 billion purely estimating carryover. Extrapolating the deterioration in the tax numbers in January – where the collapse in property-related taxes is worsening ando excise and VAT (partly exclusively property-related) are down significantly – I also get a figure of 33 billion and a GGB deficit in the range of 24 to 25 billion (before savings from the current round of expenditure cuts are factored in). The January returns are the lowest since 2005 with a particularly noticeable collapse in stamps, CGT and excise:

2005 2006 2007 2008 2009
Customs 14 17 14 25 20
Excise 404 458 466 472 310
CGT 84 136 187 129 36
CAT 14 23 24 27 19
Stamps 201 291 347 180 50
Income 945 1116 1107 1208 1165
CT 85 131 208 197 121
VAT 1673 2036 2332 2335 1970
Total 3468 4229 4745 4610 3735

@Ide
37b approx what the Adendum document suggested. So that would be pretty miraculous as it would imply that the pace fof deteroration has remainded the same since the end of nvember / dec when that was drawn up.

@brian

Yes. My carryover calculations are based on admittedly crude seasonal and payment-scheduling related adjustments to the monthly figures but implicitly assume no further deterioration which given the rise in Live Register numbers puts a question mark over the path of income tax receipts this year, not to mention expenditure taxes. In that sense it could well be regarded as a ceiling. However this is an extrapolation of just one month’s returns, in response to Niall’s post, and not a forecast.

@Íde

Over the past 4 years January has consistently become more important. However I have a number of reasons why I think even my 33 + 1 for budget changes may be excessive.

Excise – I can’t see how the car sales figures will do anything other than decline further. Sales numbers are in decline for a variety of reasons including the useful life of a car is now much greater and the lack of cheap money to fund car purchases. Also there is no market for most trade-ins. As those few buyers opt for lower tax options, there is a lower tax receipt per vehicle.

CGT – There are so many people nursing huge losses, any gains are likely to be covered by those losses. CGT is dead as a source of tax for at least 10 years.

CAT – This is also in terminal decline because the thresholds are so high and the value of assets is in decline. A solicitor friend commented that there is a huge build up of houses available as executor sales. Two more years of this will leave probably a further 25,000 executor sales to keep the market in house in decline.

Stamps – Much of the current yield from stamps is likely to be sourced from financial transactions, rather than property related transactions.

Income Tax – The increased pension contributions from the Public Service will cost at least €600M in tax. The decline in employment and business activity must also lead to a reduced yield, which means that the decline is likely to increase as the year progresses.

CT – February’s returns will include preliminary tax for companies with a year end 31/03, which is one of the more common acc. year end. However Bank of Ireland ????

VAT – January is consistently the best VAT month of the year. VAT in even months comes from tax payers who pay by monthly direct debit and VAT at point of entry. It is only downhill from here.

There are two further points,

1) Arrears – No information is available on the build up in tax arrears.

2) Statistics – The Revenue Commissioners have failed to publish their annual statistical report for 31/12/07. Where is it?

People – do I see a need for another conference here or a workshop “forecasting when the ground is eroding…”?

There is a further massive bill coming down the line for the exchequer at some point in 2010 that everyone seems to ignoring: namely the Social Insurance Fund. The SIF surplus is depleting at an amazing rate. At the time of the budget figures I thought it would exhaust at some point in 2011. But since then the Minister raided it (virtually noticed by the media) for €350million towards Unemployment Assistance costs plus the massive demands on Unemployment Benefit where most new unemployment claims are drawing from mean that it will now exhaust in 2010.

Presumably this means the cost of benefits and contributory pensions etc will then fall on the exchequer as was the case through much of the 80’s. This could be yet another €1-2billion bill pa that is about to land on the heads of taxpayers that no one seems to have noticed!!

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