Colm’s columns

Colm Rapple
Irish Mail on Sunday March 8, 2009

A harsh supplementary budget is inevitable given the sharp deterioration in tax revenue and the spiraling cost of funding social welfare benefits for the unemployed. But let’s not start believing that we are heading for the national equivalent of bankruptcy. Our national debt is very low by international standards and even if it doubles over the coming few years it will remain relatively low.

There is every reason to raise taxes in order to reduce the Government’s borrowing requirement but we don’t have to accept a complete reversal of the gains made during the Celtic tiger years. We are still a relatively rich country and can still afford a high level of social services.

Of course we need to get the best value we can for our money and will need to somehow replace the tax revenue that once flowed from the housing boom. But there is no need for a slash and burn approach. We’re still a rich country with ample resources to provide a good living for all.

What we need from the Government are measures to ensure that those resources are equitably spread. That will require, at the very least, that the plea from Mary Harney not to reverse her cherished low tax regime be discarded in the same waste bin as her former party.

We will need to tax the rich, not only for the revenue but also to prove that the cost of the downturn is being equitably borne by all. Unless the package is seen to be equitable, it won’t get the acceptance that is necessary to see us through the downturn and speed us into the recovery.

But before looking at some ways in which that could be done, let’s nail that idea that the country is almost broke.

Back in the 1980s the national debt at one stage rose to about 130% of national income (GDP). Interest rates were far higher than they are now and the cost of servicing that debt represented a heavy burden on the economy that took many years of high taxes to eliminate.

We don’t want to revisit that experience. But we are not anywhere near it. Interest rates are, for one thing, far lower but more importantly our debt is now down at 41% of GDP. That’s before taking account of the offsetting savings we have in the National Pensions Fund and cash balances held by the Exchequer. Take those into account and the debt to GDP ratio falls to 20%.

When you consider that most new homeowners owe about three or more times their annual income, a country is hardly in the basket case category when it owes only 20% of its national income.

The average for the EU as a whole is 59% and a higher 66% for the fifteen countries of the pre-enlargement EU. At the end of last year Italy had a debt to GDP ratio of 104%, followed by Greece at 95%, Belgium at 94%, Hungary at 66%, Germany at 65%, France and Portugal at 64%.

The projections prepared by the Government in January envisaged that national debt would rise to 66% of GDP by 2012 before starting to decline. That was on the basis of more optimistic forecasts for tax revenue and employment levels than are actually emerging. The measures to be unveiled next month will be designed to put us back on track.

With no certainty about what’s in store for the economy in the short, medium or long term, it may well be that the Government will decide to err on the side of caution and impose enough extra taxes and spending cuts to ensure that its original January targets are reached even in the worst possible scenario.

A total figure of €4.5 billion is being mooted. If the trend evident in the February exchequer figures continues, the tax shortfall for the year as a whole is likely to exceed €2 billion and the extra demands on the social welfare and health budgets from rising unemployment could add another €2 billion to that.

Back in 1985 we had three rates of income tax, 35%, 48% and 60%. Now we have only two, 20%and 41%. It only requires a relatively small increase in those rates to yield €2 billion revenue a year. Every 1% rise in the standard rate can yield €622 million in a full year while 1% on the top rate would yield almost €300 million

So Mr Lenihan could raise over €2 billion by pushing the standard rate up to 22% and the top rate to 44%. Those rates would be far short of what they were in the bad old days.

An additional €500 million or so could be raised by imposing a new third rate of say 50% on incomes in excess of €200,000. The Revenue Commissioners estimate that last year some 29,000 taxpayers, including two-income couples, had gross incomes in excess of €200,000. Between them they declared incomes of almost €13 billion (or perhaps €16 billion when pension contributions are included) and paid tax of €3.8 billion – an effective tax rate of under 25%.

These are people who, for the most part, did very well from the Celtic Tiger and while they are not as rich as they were at the top of the property and stock exchange booms, they are likely to be still very wealthy. Some extra income taxes wouldn’t hurt them too much.

A slowdown on capital spending and some further productive gains across a wide range of spending programmes could well produce whatever else is needed by way of savings without cutting social welfare payments or indeed the level of State services.