A new emergency Budget

Michael Taft26/01/2011

Michael Taft: Whatever about the disputes over facilitating the passage of the Finance Bill, what people want to know is what parties are going to do about it when they get into office. And this is where progressives can stop feuding with each other and get the debate back to where it belongs – showing how Budget 2011 will do such harm to economic recovery and fiscal stability. And, more importantly, what can be done to remove that harm and show how a progressive platform will bring immediate benefit to the economy and living standards.

Here’s one way of doing that: a precondition for entering government should be the enactment of an emergency budget within 60 days based on three concrete pledges:

• Repeal the Universal Social Charge
• Immediately release funds for public investment
• Reverse the cuts in social welfare income and the minimum wage

Let’s go through these three pledges.

Pledge 1: Repeal the Universal Social Charge

The Universal Social Charge (USC) should be repealed and the previous tax regime – the Income Levy and Health Contribution Levy – should be reinstated. This has no budgetary implications as it would be, per Government estimates, fiscally neutral. But the benefit to households and the economy would be considerable:

As seen, low-income earners could benefit by up to €10 per week while higher income groups would lose out. This would help economic growth – low-income earners spend their additional income; high-income earners tend to save.

This platform could be developed. For instance, the Health Contribution Levy, while marinating its former thresholds, could be integrated into the Income Levy which has a more progressive base (e.g. rents and dividends are exempt from the Health Levy). Therefore, abolishing USC could actually be a revenue raising measure.

In addition, further progressive tax measures could be introduced alongside repealing the USC. The Community Platform, TASC, ICTU and other civil society organisations – all have put forward practical and easily implemented proposals in the areas of tax expenditures and extension of levies to capital income.

The total impact of this would be to increase tax revenue further while providing a small stimulus to low-average income households in the form of removing deflationary tax increases.

Pledge 2: Immediately Release Funds for Public Investment

The second pledge would be to immediately release €2 billion for investment – to come from a combination of the Pension Fund and Exchequer cash balances (we still have nearly €30 billion in liquid assets). This would be done in tandem with re-opening negotiations with the IMF/EU to ring-fence our cash and assets for investment/fiscal consolidation purposes.

To ensure it gets on-stream as quickly as possible, this investment would be largely pumped into ‘shovel-ready’ projects at central and local government (a good start would be refurbish every school to best standard in time for autumn classes).

However, we can go beyond ‘bricks and mortars’ – as UNITE has shown: modern information systems, preventative health initiatives, one-on-one tutoring to raise literacy and numeracy skills (both in schools and in the community), loan guarantee schemes for SMEs, etc.

The economy would not get a full year benefit from this increased investment. But let’s assume 50 percent of the total multiplier gets into the economy by year’s end (it will continue to benefit the economy for an additional 5 and a half years):

• 10,000 jobs created directly with an additional 3,000 to 4,000 spin-off jobs
• Reduction in unemployment and related costs
• An additional €350 million in tax revenue
• A GDP boost of 0.75 percent

A big impetus – which would take some time to get off the ground – would be an announcement that a public enterprise company will be established to build a Next Generation Broadband network to reach every household and business by 2015. While publicly-directed and owned, private investment can be leveraged in. This would be a clear signal of intent: that we are going to invest our way to economic recovery and fiscal stability.

Pledge 3: Reverse the cuts in social welfare income and the minimum wage

A pledge to reverse the cuts in social welfare income and the minimum wage should also be non-negotiable. This measure would boost demand and GDP, increase business turnover, protect retail employment and raise tax revenue (e.g. VAT, etc.). Therefore, it would end up costing the Exchequer far less than the headline cost of repealing the social welfare cuts (€397 million) while the reversing the minimum wage will actually boost Exchequer revenue.

There are other measures – minimal in cost but capable of lifting inequitable burdens on those on low incomes while increasing demand:

• Repealing the GMS co-payments – not likely to cost much after administrative savings are taken into account
• Protect all minimum wages – namely, no cut in pay rates and working conditions under Joint Labour Committees
• Increase Family Income Supplement by the amount as in Budget 2010 - €6 per child per week: this will enhance living standards of thousands of low and average income families with children.

Any increase on the public expenditure side would be more than compensated by tax measure introduced on high income groups (under Pledge 1), tax revenue from investment activity (under Pledge 2), and the benefit of higher demand that increasing people’s living standards would produce (under Pledge 3).

Its win-win-win.

* * *

This simple three-point programme does not address all the economic and social issues which progressive parties will have to address in their election manifestos, never mind when they are in government.

However, it would give a short, sharp signal to the electorate about progressive values and priorities. It will show people how people will be better off after 60 days of a progressive government. It will give everyone a clear picture of the medium-term direction of the new government.

And it will give something for progressive to agree over, instead of attacking each other. Such feuding only brings the prospect that more of the same failed economic thinking will dominate in the next government.

And who wants that?

Posted in: EconomicsFiscal policyWelfareTaxation

Tagged with: budgetsocial welfaregrowthuniversal social charge

Michael Taft     @notesonthefront


Michael Taft is an economic analyst and trade unionist. He is author of the Notes of the Front blog and a member of the TASC Economists’ Network.



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