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.

Frontline: How to make the fiscal adjustment in Ireland

Frontline last night had a number of talks on how to achieve this year's fiscal adjustment. Dan O'Brien makes some good points such as some of those listed below. Some of these are discussed on John McHale's irisheconomy post today. O'Brien doesn't mention some other potential sources of revenue generation and spending reduction such as rises in corporation tax (see Peter's post below), property taxation, water charges and so on. From the comments,  you get again the sense that the potential for social consensus is being severely dented by public anger over banking bailouts.

- The need to question the emphasis on "broadening the tax net" to lower earners. The potential for making severe poverty traps in the context of a major recession needs more scrutiny here.

- The need to examine FAS expenditure. O'Brien focuses on the community employment schemes but, in reality, the wide range of FAS training programmes need more attention. It is not clear at all that they have any value in an economy which is experiencing such a massive demand slump.

- The need to examine further income levies on high-earners. This seems to me like a no-brainer for December.

- The need to prioritise expenditure taxes over income taxes, particularly income taxes on lower incomes. 

- O'Brien also argues for adjustments to specific social welfare schemes.

- Adjustment of public sector pensions.