Tuesday, October 05, 2010

For Discussion - Uncertainty and Recovery

Karl Whelan has made the case for a General Election to be held now. Minister Lenihan has also argued for the need for a four-year fiscal strategy though not in the context of an election. Colm Harmon's morning radio interview last week talked a lot about uncertainty. A discussion topic that I would like to open here is the potential behavioural effects created by continuously softening people up for impending taxes in different domains but not providing any real certainty as to which taxes will come on stream and when, and what particular welfare cuts are going to be imposed. For me, we should always have a culture of debating expenditure and tax but this is different to a culture where politicians are continuously floating kites about an impending change that might have large effects on people's incomes. We have many different examples, including parents who have no idea whether or not they will have to pay for their children's college fees in the next five years, public sector workers who have no idea whether their lump sum pension will be taxed, parents who do not know whether they will continue to receive child benefit and so on. The very mention that corporation tax might  come up for discussion often leads to a frantic warning that imposing any uncertainty on large corporations might lead them to change their behaviour. Yet we very rarely ask about the potential effects of imposing such uncertainty on the decisions of small firms and consumers. 

A growing number of voices are calling for the imposition of a credible four year fiscal adjustment strategy that would state precisely how much will be cut and which taxes will be raised throughout the next four budgets perhaps even decided in the context of a general election. The argument goes that such a move would enable consumers to "see the bottom" and encourage those with money to start spending again. An outcome that is becoming increasingly likely is that the opposition parties will not be willing to commit to specific adjustment items prior to the election and will struggle to bring their core supporters on board after the election. This could lead to a scenario whereby almost no-one will have any real idea what tax bill they are going to face in any tax year. So I have to echo the voices asking would there be a value in having a four year credible commitment to specific expenditure reductions and specific tax increases? Failing that, is it time to scrap this entertaining yet potentially self-defeating process of revealing the budget every twelve months as if it were the conclusion of a Dan Brown novel. George Osborne announced large-scale adjustments to the welfare system yesterday quickly and decisively - whether you agree with them or not it is surely better that he did it like this so people now know where they stand rather than playing a ridiculous guessing game with the public that would only serve to add dread to the eventual injury.

In short, if the Minister knows what he is going to do in December then just tell us and we can start factoring it in.


Kevin Denny said...

Presumably he knows what he would like to do but doesn't know what he can do. The minister is probably hoping, even praying, that things turn for the better so is prepared to delay any annoucements.
That said, multi-year budgeting is good practise in large complex organisations. I can't see any good reason why governments should be an exception.

Stephen Kinsella said...

The last sentence contains the problem Liam--'If'.

'if' they knew what they were going to do, then it would be a different story, but Kevin's right, the complexities involved must be tremendous.