The Irish budget for 2017 which was presented to the Dail on Tuesday was a small step in the wrong direction, a verdict we will explain in a moment. But first let us consider a few of the details.
Overall, the budget was as unexciting as predicted in this column a week ago. It was a case of much ado about very little.
That's not a surprise because there simply was not enough money available to do very much. The economy may be recovering, but revenue is still way below the level required for the kind of annual state spending increases many people here came to regard as the norm during the boom years.
To disguise this, the government has made a big deal out of very little.
The so-called "fiscal space" -- the extra amount available for tax cuts and/or state spending -- ended up being €1.3 billion, a small fraction of the overall budget of over €50 billion.
So the budget for 2017 is a complicated mass of minor tweaks, giving a little relief on tax and some minor improvements on welfare benefits, but not really enough to make much of a difference. For most people, the change in what they have to spend every week will be barely noticeable.
Here are some of the biggest takeaways from #Budget2017 so far pic.twitter.com/YZYsXHpzOT
— TheJournal.ie (@thejournal_ie) October 11, 2016
There are some who will do slightly better, like pensioners who are to get the predicted €5 a week increase, although after a delay of a few months. Working parents with kids in a creche will benefit from partly subsidized childcare, although this is still far behind what is given in some other countries. First time homebuyers will get a big tax refund to help them get on the property ladder, but property prices are already shooting up in Dublin.
Although these moves are well meant, they represent choices in state spending that may be neither wise nor justifiable.
For example, the increase in the old age state pension will bring the payment up to €238 a week which is around 40 percent higher than the state pension in the U.K. Is that justifiable when so many young families are being crushed by tax to pay for it?
The tax refund for first time homebuyers, which can be up to €20,000, will help young couples hit by the new Central Bank rules that limit how much they can borrow. The danger is, however, that it will simply lead to higher house prices since the real problem is the lack of supply of new homes. The same can be said about direct subsidies to childcare providers which may simply lead to creche costs going even higher than they are now (around €900 per month for a child in Dublin).
Of course this is always a problem with budgets, especially when resources are tight. There are always unintended consequences and problems of fairness.
That is why there was a last minute move before the budget to get more for other groups who get benefit payments, like people who care for a senile parent, for the disabled, the blind, people with chronic illnesses, and so on.
Giving the same €5 a week the pensioners are getting to everyone on welfare and benefits was the only real surprise in the budget. It seems to have happened as a Fine Gael response to Fianna Fail, who were the first to demand the "fiver for the pensioners" and were loudly claiming credit for that even though they are not in the government.
But this is a broad brush approach and makes no attempt to give more to those most in need -- for example to parents who save the state money by providing 24-hour care to a severely handicapped adult child at home. As we said, all budgets are always a matter of choices and the right balance is not always achieved.
Overall, this budget package does seem reasonable, with everyone gaining something from the recovery so far in the economy. As usual, most attention will be paid to the income tax reduction, a very small amount shaved off the Universal Social Charge (the emergency extra income tax imposed during the financial crisis) for low and middle income earners.
The reduction is paltry -- a few euro a week for most people -- in relation to the amount of tax a lot of people here are paying. And it will do little to address the motivational problems caused by 75 percent of income tax being paid by the top quarter of earners and little or no tax being paid by the lowest quarter of earners.
Disappointingly, there was no change in the tax bands, which means that for a single person here, anything they earn over €34,000 will still be taxed at close to 50 percent. You can earn nearly half a million dollars in the U.S. before your tax rate reaches 40 percent!
For the "squeezed middle" of taxpayers, all the younger families desperately trying to keep up with mortgage payments and extra charges, there's not enough in this budget to give them much of a break. They will have to struggle on because the state needs the money.
On the spending side, more money has been provided to hire a few thousand extra teachers, nurses and gardai, and there will be extra spending on education. This is welcome, but the government will have to be careful since many state workers, including some of the three groups mentioned, are now demanding big hikes in pay and threatening strikes if they don't get it.
There are some other budget changes which although welcome, are so slight they will have little effect. The first is a minor reduction in the tax that landlords have to pay ---- this tax burden is so great it makes no sense to buy property to rent, and it's why so many people who bought a second property as a pension investment a decade ago are now selling, resulting in the falling number of available rental properties and rising rents. The tiny increase in deductible interest which was announced in this budget will make little difference.
No delay in increasing TDs salaries but €5 pension increases not seen as a priority by Government #Budget2017 pic.twitter.com/vmaSAqM9UL
— Sinn Féin (@sinnfeinireland) October 11, 2016
It's the same with the slight increase in the threshold for inheritance tax. Even after the change, it still means that someone in Dublin who inherits the family home from their parents (say a house worth €650,000 which would not be unusual in the better suburbs of the city) will have a tax bill of over €110,000, which has to be paid immediately.
This is still unfair since the parents will have paid for the house out of after tax income over the years and paid stamp duty and property tax, plus there is all the tax originally collected when the house was built.
In general, although there are some anomalies, this budget tries hard to be fair to everyone as it attempts to divide the small increase in resources that supposedly is available. As we said above, despite all the hype about economic recovery, the reality is that the cupboard is still pretty bare.
The truth is that this budget is a small step in the wrong direction. The bottom line is we are still running a budget deficit.
It is too early for tax cuts and giveaways, no matter how modest, because that sends out the wrong message, not least to all the state workers clamoring to have their pay restored to boom time levels. If we are not careful we'll start another bubble, our costs will get even further out of line and we will kill off the recovery that is underway.
Despite the hype about how well we're doing, the fact is that the dark clouds of Brexit are gathering and the chill is already being felt here.
Part of that is the falling value of the pound against the euro, down 15 to 20 percent over the past year, which is devastating for all the Irish businesses who export to Britain, still our biggest single trading partner. Because of this our growth projections for 2017 are being rapidly downgraded by economists and commentators.
The future for the Irish economy is uncertain because of Brexit. This budget has ignored this reality and instead pretends that the recovery is gathering pace which means that it's okay to start giving away money again, even if the state has to borrow to do so. (This is the ninth budget in a row to run a deficit.)
This lack of leadership is the result of our weak minority government which has to keep a few independents and Fianna Fail happy to stay in power.
The independents all wanted giveaways they can boast about to the voters. But Fianna Fail (the party which ruined the country in the first place) was worse, demanding a lot of extra spending so it can present itself as the defender of those who have been hit by all the cutbacks.
The Fianna Fail strategy is clear. They are positioning themselves for a big comeback in a year or two -- or even sooner if they start voting against the minority government they now prop up from the outside. If there were budget day prizes for brass neck the Fianna Fail crew would win them all.
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