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Column We need to stop taking money out of people’s pockets

Yes, we’ve got a deficit to deal with – but making ordinary consumers pay is hurting the wider economy as well as our wallets, writes Aaron McKenna.

Aaron McKenna wrote for about the ‘Lost Decade’ Ireland is facing into, and why we need a new vision for the nation to bring us through it. In this sixth part of his series on ways forward he looks at the government’s options for cutting the deficit – and why we shouldn’t be their piggybank.

LIKE IT OR not, Ireland has to continue tightening its belt to cover the massive gap between taxes taken in and what government spends to fund its daily operation. But not all austerity is equal, and we need government to take a different approach to its expedient-options-first policy of recent years.

We need to tax less and to cut more. More nuanced, we need to cut smarter than the blunt-force injuries weak-willed politicians have been imposing on our services. We need to take less money from people’s pockets so that they can create the jobs we so desperately need.

The distinction between which parties wanted to increase taxes or cut spending was important when our votes were up for grabs, but it has largely subsided from view. For all the talk of 50/50 or 70/30 splits, the real plan is to cut spending by 11.3 per cent between now and 2015 and increase tax revenues by 25.8 per cent.

The increase in tax revenues of €8.9bn per year, from €34.4bn in 2011 to €43.3bn in 2015, will be a mix of planned new taxes, like property and water taxes, combined with hoped-for economic growth heaped on top of the tax increases we’ve faced in recent years.

The marginal rate of income tax hits 50 cent in every euro at just €32,800. That means if you earn the average industrial wage of around €36,000 the government will take €1,600 of the €3,200 you earn between those figures.

‘That’s before they get to your house, your car, your shopping…’

That’s before they get to your house, your car, your shopping, brushing your teeth and all the rest. The plan is also for further income tax increases, probably by widening the bands, according to the documents passed between government and the troika.

On the other side the government plans to cut its gross current voted expenditure by €6bn a year, from €53.2bn to €47.2bn. While this may seem like a big drop it’s actually only going to be €5bn less than the government spent in 2007. Government hasn’t been very good at containing itself, at least not nearly as good as it has been at taxing people. The government deficit in the period 2011-2015 is bigger than the amount it will spend in any single year, period.

Government has to run hard to stand still. It took out €3.8bn in tax increases and spending cuts from Budget 2012 and will take out another €3.5bn in Budget 2013. But spending on debt interest in particular is soaring over these years, and is among the factors preventing government from getting its deficit down.

We will pay an additional €1.8bn this year to service our debts, €2.3bn on top of that the year after and an extra €900m in 2014 and the same again in 2015, having gone from paying €5.4bn in 2011 to €10.4bn in 2015 to service the national credit card.

The more we borrow to pay for the day to day running of the state the more we end up having to cut for longer to pay back the interest on the loans. Repudiating promissory notes for banking debt that doesn’t belong to us would not dig us out of the hole, though the ECB should be told to get stuffed on them anyway.

The more we increase taxes to pay for these debts the slower the growth and the circular cluster bombing continues.

‘Not every euro is equal’

Cutting government spending, advocates of continuing deficits will say, also takes money out of the economy. They’re right. But not every euro is equal or as well spent as the last, a theory that works on the ideal that the last euro government spends is as effective as the first one.

This is where we need to get smarter both in the cuts we make and the way government spends our money in general.

When you earn a euro and take it to a shop and spend it on something the business takes that cash and pays its staff and the supply chain to deliver it, takes a profit and usually reinvests it. It’s better if you buy a product made in Ireland, but in any case you and the business are fairly efficient with that euro.

When the government takes a euro off you in tax it first takes a collection fee (Revenue). This is followed by immediately discounting part of your euro to pay the interest on the euros they’re borrowing to continue deficit spending, which will be 25 cents in every euro you pay in tax by 2014.

Government then takes another administration fee to figure out how it wants to spend your money before finally allocating what’s left to programs, which themselves have not all that usually efficient management structures and fees.

By the time a few cents of your euro reaches, say, the health service it has to pay for all those managers everyone seems to think are so ineffective yet remain in post.

True all the people in the process spend the money they receive, but it’s altogether inefficient and it is more costly thanks to part of each euro spent having been borrowed, raising the interest bill.

Spending on bureaucracy just to keep people in jobs is also not the point – when I pay taxes to cover healthcare and education I want nurses and teachers for my money, not acres and acres of paperwork talking about health and education, the theoretical virtues and organisation thereof.

‘We could all get out of this mess quicker if government stopped being so weak-willed’

Studies, including one in 2009 from Harvard University, have shown that taxes harm growth twice as much as government spending cuts thanks to the ‘efficiency’ with which you spend your cash versus government.

We could all get out of this mess quicker if government stopped being so weak willed and took decisive action on waste, bureaucracy and misdirected efforts. We could also avoid the absolutely indiscriminate dismantling of our public services if we got past the ludicrous idea that ‘Whomever leaves, leaves, and if that’s a third of our midwives and no overpaid managers so be it.’

We need to set our goals for the state – good healthcare and education, safety on the streets and so on – and get rid of anything that’s surplus to requirement. That could be any one of the 850 quangos or so we have, or it could be layers of over burdensome administration that sits aside from actual service delivery.

Yes we will have to curtail services, but it is being done in a shockingly haphazard fashion today with no rhythm or rhyme to cuts made. We don’t have a plan because the mandarins of old politics can’t get their head around pleasing special interests and onto the actual results our tax money produces.

If government wants to grow jobs it ought to do three simple things: Firstly, grow a pair. Secondly, take a hatchet to government waste and bureaucracy, not nurses and gardai. Thirdly, stop raising taxes and outline in as precise detail as can be managed to people what will happen in the foreseeable future so that they can have the confidence to spend their money today.

Politicians need to realise that our wallets are not simply the untapped portion of their piggy banks.

Aaron McKenna is Managing Director of the e-commerce company He is also writing a book on the future of Ireland to be published later this year.

You can read his previous pieces on the way forward for Ireland on here.

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