‘Late Late Show’ Budget for 2015

‘One for everyone in the audience’ was the catch-phrase made famous by Gay Byrne as the ‘Late Late Show’ became a Friday night fixture on RTE, and a national institution.

Having bid farewell to austerity, this one-liner neatly sums up the FG-Labour coalition’s first post-crisis budget. As a book-keeping exercise, budget 2015 is high on political savvy, but light on policy innovation, exactly as one might expect at this stage of the political cycle.

Even comfortably staying within the EU’s 3% of GDP deficit limit will not satisfy the most strident and politically clueless of the austerity hawks, who insisted – in spite of changed ‘facts on the ground’ – on the full €2bn in spending cuts and tax hikes agreed to by a previous government at its lowest ebb. It will be plenty, however, for the European bean counters who have more to be worried about in terms of the deficit rules’ credibility when it comes to the big boys, France and Italy, who have yet to witness austerity’s autumnal embrace.

As for the rest of us, there is something for everyone, but for most, hardly enough to off-set the first water charges bill due in early 2015, and only a small fraction of the money taken from people’s pockets since 2008. This was not a giveaway budget, by any means, but every little helps!

By increasing child benefit by €5 across the board, the Labour Party is halfway to redemption on the charge that it reneged on its promise to protect the monthly payment from cuts if elected to government. Part-restoration of the Christmas bonus and other measures will also help limit further falls in the real disposable incomes of those on welfare.

The 1% cut in the top rate of income tax is costly, regressive, unnecessary, and will do little – despite claims to the contrary – to attract foreign executives, who can in any case avail of a more favourable tax regime (the so-called Special Assignee Relief Programme, which is set to be made even more generous in the 2014 Finance Bill). Its political value accrues to FG, by sending a signal to top earners that the government hasn’t forgotten about them.

The move to widen the income tax band, so that workers start paying the higher rate of tax at a higher level of income, was well flagged in advance. This is good policy, as the level at which the higher rate kicks in is an area where Ireland ranks near the bottom of the class, and addressing this is anomaly is far more pressing than the need to reduce the higher rate.

Raising the level at which people start paying the USC by €2,000 will be popular, with 80,000 low income earners now no longer expected to pay it, and will also improve work incentives by reducing the tax wedge for those on the minimum wage. Tinkering with the USC rates and bands may blunt some of the criticism about targeting tax relief on those who need it least, but at the cost of making the overall tax package a harder sell on the doorsteps.

While most people will not feel it directly in their pockets next year, there were also welcome announcements on hiring new teachers and building new schools to stem the rise in class sizes and on increasing investment in social housing to ease the supply crisis.

In a budget where almost everyone has something small to cheer about, the main losers will be smokers, who take a hit as usual. It remains to be seen whether breaching the psychological €10 a pack level will encourage more people to quit, to smuggle, or just to grumble. While the health benefits are obvious, and widespread smoking certainly increases the burden on the public health system, the distributional impact of hiking taxes on tobacco tends to be regressive as poorer people tend to smoke more.

Looking at the bigger picture, fiscal policy will do less damage to growth and jobs in 2015 than in any year since 2009. If recent economic momentum continues, the deficit and debt burden will fall faster than expected, leaving scope for one final crowd-pleasing budget before the next election. A late, late show indeed!

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