Spending rather than tax cuts: General Election fiscal proposals

Ireland goes to the polls on February 8th and the main political parties have outlined their fiscal proposals, although some in greater detail than others, at least to date. A universal feature is the pledge to devote substantially more resources to  additional government spending rather than tax cuts, with the promised ratio far higher than was the norm in recent years. The plans are also  predicated on what are in effect pretty conservative projections for economic growth, although of course with no presumption that Ireland will experience a recession, either Brexit related or following a global setback.

For context it is worth noting that 2019 ended with Irish current revenue exceeding current exchequer spending by  €7.9bn, or around €13bn if debt interest is excluded, with a capital deficit of €7.3bn. That implies that if current   revenue rises broadly in line with projected GDP, the current budget surplus will continue to increase, allowing the sitting government the option to raise spending, be it current or capital, and/or to cut taxes, whilst still running an overall budget surplus.

That is exactly the position outlined in early January by the outgoing Government, envisaging €16.6bn in available resources in the five years to 2025, a figure which all the parties have taken as their benchmark. That sum is also consistent with an annual fiscal surplus of just over 1% of  GDP, although it should be noted that what is relevant for EU fiscal rules is the Budget adjusted for the economic cycle (the structural balance) and on that criterion the structural deficit might well be  in deficit and indeed worse than the 0.5% of GDP curently set as Ireland’s  fiscal objective, given that the EU believes that the Irish economy is operating much higher above capacity than seen by the Department of Finance.

That said, it also notable that the forecasts envisage a sharp deceleration in growth, from 3.9% this year to under 3% and then 2.5% by 2025.This is supply rather than demand related; the Department of Finance believes the economy is at full employment and so employment growth is forecast to slow , constrained by the growth of the labour force, with no pool of unemployed workers from which to draw.

On the various fiscal plans, Fine Gael augment the €16.6bn figure modestly to €17.1bn via higher taxes on tobacco and vaping,with additional compliance also assumed to add revenue. From the new figure  €2.8bn is allocated to tax cuts, largely to fund increases in the standard tax band, with  €14.3bn in additional spending, a ratio of over 5 to 1. On spending, €5.6bn is pre-committed (€3bn current and €2.6bn capital)  and the biggest slice of the €8.7bn unallocated is set to go on Health (€3.1bn) . The plan also includes €2bn specifically earmarked for higher  public sector pay.

The Labour Party have also set out a detailed fiscal plan, which envisages bolstering the available resources by €2bn, to €18.6bn, by raising tax receipts via higher stamp duty on shares and commercial property alongside a higher bank levy. Some €3bn of this €18.6bn will be set aside for indexing the personal tax system, implying raising allowances and the standard tax band by around 2% a year, leaving €15.6bn, of which €5.6bn is deemed pre-committed with the remaining €10bn for additional expenditure (€8bn current and €2bn capital).

Fianna Fail have not (as yet) set out a detailed fiscal plan as above but from their manifesto is is clear they are taking the €16,6bn figure as given, although arguing that the €5.6bn deemed as pre-committed by the outgoing adminstration is too low, including an underestimation of demographic pressures. Consequently FF would set aside an additional €1.2bn to also  include unforeseen expenditure, leaving €9.8bn to be allocated overall. FF pledge a 4:1 ratio of spending to tax reductions, with €1.3bn of the unallocated figure  earmarked to fund personal tax cuts, including a lower USC rate and an increase in the standard tax band.

Of course these are all manifesto promises and not all will see the light of day, particularly as the opinion polls suggest that a coalition government is the most likely outcome. Events may also intrude, throwing any fiscal plans off course. Interesting to note, though, the big move by all parties towards higher spending and away from any notion of cutting income tax rates.

Published by

Dan McLaughlin

Economics Lecturer and Commentator