Sighs of relief could be heard emanating from living rooms, offices and pubs across the country last Wednesday evening as finally after six years of unrelenting misery on Budget days there was some form of relief for hard-pressed citizens. Having endured such negativity in recent years most people would have settled for ‘not being any worse off’ after this Budget but in the end most people probably ended up modestly better off.
This was a notable turnaround as for most of the year, and until very recently indeed, the expectation was that this would be yet another Budget of retrenchment and the most people dared to hope for was that it would be the last such Budget in this cycle of austerity. Even as the public finances improved over the course of the year people only dared hope for something that might be described as having a neutral impact on their finances. This does then represent something of a turnaround in the country’s economic fortunes but whether it marks a turnaround in the fortunes of the government is not so clear.
Relief for the ‘squeezed middle’
The tax package was clearly aimed at middle income earners or the fabled ‘squeezed middle’. There were probably two key reasons for this. First of all there is a sense that these people have taken a significant hit to their disposable income in recent years. Secondly there is the argument that with the top tax rate at 52% - and workers entering the top band at quite a modest level of income – there is something of a disincentive to work. Doing some overtime or seeking promotion doesn’t have the same appeal if more than 50% of your extra earnings are being taken in taxes. The government would love to get this rate below that psychologically important 50% mark and Ministers have indicated that they will endeavour to do so over the next two years.
While there was an expectation as Budget day approached that the government would increase the level at which people would enter the top tax rate there were some eyebrows raised at the decision to cut the top rate of tax. This decision taken in isolation would benefit high earners disproportionately. However the decision to simultaneously increase the USC rate on earnings over €70,000 largely cancelled out the benefit of the tax rate cut for higher earners. This was a clever move and the government has clearly signalled that this is a course they intend to follow in future Budgets. While we may only be talking about a percentage point or two at either end, Insider notes that the government is effectively introducing a third rate of tax on middle incomes, something that has long been something FG have toyed with but that we haven’t seen since 1992.
Social Welfare increases – but what of low earners?
In addition to tax changes Minister Joan Burton was also in a position to secure a surprise increase in child benefit and also a partial restoration of the Christmas bonus for social welfare recipients. This will go down well with some of Labour’s base. One criticism that can again be made however is that the child benefit increase will again benefit families who are already well off and that it is a poor use of resources. The government is again making the argument – and this is one that Insider has never subscribed to - that it would be too cumbersome to tax the benefit.
One group that may be feeling disappointed however is low wage earners. The government made some modest changes to the USC – increasing the exemption threshold, widening the bands and reducing the two lower rates – but made no changes to tax credits or PRSI. For anyone earning less than €32,800 per annum then– and for all the talk of the ‘squeezed middle’ there are a lot of people in this lower-earning category - the benefit will be minimal. This has the potential to damage Labour in particular.
Dual Objective – Spending and Polls
There were some voices last week that urged the government to resist the temptation to loosen the purse strings. Many people urged them to opt for a neutral Budget and there were even some voices – such as the government’s Economic Fiscal Council headed up by NUI Galway’s John McHale – that urged them to proceed with the €2bn adjustment originally envisaged this time last year. In reality – for reasons partly economic but mainly political – the government felt it simply had to take a chance and release the purse strings.
The government is essentially banking on this course of action having two impacts. The first is a hope that the extra money in people’s pockets – especially as it was somewhat unexpected - will act as an economic stimulus in the shape of increased consumer confidence and consumer spending and hopefully will aid job creation.
The second impact they are daring to hope for is an improvement in their rather dire poll ratings. In itself putting more money in people’s pockets is likely to have a short-term impact on the government’s popularity. In the medium term however in the run-up to the General Election the government’s hope is that the electorate will buy the government’s argument, which is essentially that – we took over a mess, yes we had to make some brutal decisions that hurt people badly but we have come out the other side and there is light at the end of the tunnel so give us a chance to see it through rather than risk giving the keys back to FF or to some untested alternatives.
There are however some problems for the government in getting this one across the line. The first is that they have exuded incompetence in recent times – and alarmingly one could almost chart the day the troika left town as the turning point in this regard – with some truly comical own goals at inopportune times. The second problem is one that has really come to the fore recently – water.
Gains all washed away?
When people assess their finances for the coming year most will see some sort of positive benefit from this Budget. They will however also see the impact of water charges, which will largely cancel out the Budget changes for most people and in many cases will in fact result in them being worse off next year in net terms.
In recent weeks we have seen large public demonstrations against the introduction of these water charges coupled with two by-election reversals for the government in which the charges played a large part. That the government has been spooked by the level of resistance can be seen by their decision to introduce a tax credit for the water charges in the Budget. This has the hallmarks of something of a panic measure however as emphasised by the confusion over whether in fact this will give any relief to low earners.
As Insider has said many times, while acknowledging that there are strong and diverging views on these charges, the government would stand a good chance of getting the public broadly onside on this issue if they could clearly illustrate that the money would go towards improving water services and quality and would encourage water conservation. Unfortunately the launch of Irish Water has been an unmitigated disaster with the public smelling yet another expensive quango and a field day for external ‘consultants’. The government may well have lost this battle before it has even begun and the concession of a tax credit – while welcome for squeezed taxpayers – could almost be seen as an acknowledgement of this.
What does this mean in Galway?
We have considered broadly what this means nationally but it is tempting to be parochial for a minute and wonder what this means locally in terms of the next General Election. In Galway West the government parties currently hold 3 of the 5 seats but the constituency would ordinarily only return 2 FG/Labour TDs. The addition of votes from South Mayo will likely help Deputy Sean Kyne but both city TDs are likely to be under pressure.
Labour’s Derek Nolan will come under intense pressure from former party colleague Catherine Connolly and may be vulnerable on the water charges issue and more generally among working class voters. FG’s Brian Walsh (or Hildegarde Naughten ) however look very vulnerable to a challenge from the heavily populated Oranmore electoral area, especially if the recent surge in support for Independents materialises. This area is full of voters who might be classed as the ‘squeezed middle’, ostensibly quite well off but struggling under the burden of heavy mortgages, pay cuts and tax hikes. FG will hope the tax cuts and child benefit increase will help keep them onside.
The Galway East constituency is one that has been transformed in recent years and now has a large ‘commuter belt’. Again the squeezed middle looms large but so too does the traditional farming vote, which of course will also be very important in the new Roscommon/Galway constituency. Following a detailed consultation process and review of farming tax incentives the Budget did introduce a number of changes in that area, with the objective being to focus more of the reliefs on active young farmers. For all of the spin about the importance of farming to the Irish economy, the reality is that there has been a shocking falloff in young farmers.
The ultimate question that will decide the government’s fate though is whether jobs will be created and the scourge of emigration shows signs of being tackled ahead of the next General Election.