Expenditure Cuts versus Tax Increases

With all the kite flying going on, there seems to me to be some confusion in the government and media about what a cut is and what is a tax increase.

In my mind a cut is whereby the government decreases its actual expenditure or mandated expenditure; while a tax increase is a measure that increases government revenue.

For instance:

• A €50 charge on medical cards is a tax increase, as it increases revenue, and is also mad.
• The pension levy on the public sector, or super pension levy on the 100 odd on more than €100k pensions, are tax increases on a particular group of workers
• Transferring sick pay from the state to employers is a tax increase, on employers, as the expenditure does not change, just who bears it. Abolishing it would be a cut.
• A rise in government charges for whatever service (for instance court fees) is a tax increase, as the underlying expenditure continues.
• A €500 call out fee for the fire brigade is not a cut, but a tax increase.
• A decrease in the teacher pupil ratio is a cut.
• A reduction in child benefit is a cut.

The vast majority of kites flown to date would fall under the tax increase definition. The national accounts support this confusion whereby fees paid direct to departments are netted against expenditure. For instance the TV license is reported as income by RTE, and not expenditure (subsidy) by the government on broadcasting/culture.

The same would apply many other fees. In fact the Exchequer statements, as a result, represent only a part of the states real income and expenditure.

The government has in fact increased current expenditure substanially since the crises began. Capital expenditure of course , which is easier to cut, (and the definition of what is capital is also a bit suspect), is down massively.

The issue is this: the government states that 2/3 of the adjustment will be expenditure cuts, and 1/3 tax increases, but given what has been “suggested” it looks more like 80% tax increases/20% cuts.

One of the other disastrous legacies of the 14-year run of the Bertie and Clowan show (featuring McCreevey as a special guest) was the simultaneous narrowing of the tax base as property-related taxes increased and increases in state expenditure.

All state expenditure has to come from taxes or borrowings. And borrowings are just deferred future taxes with an associated small increase in current taxes to cover interest payments.

Now, when tax income is reduced, continuing large-scale state expenditure funded by borrowing or attempts to raise more taxes makes no sense.

A cut is where current state spending stops and there is no attempt to substitute the removed state spending with a levy/tax from another source. The product/service being funded state spending ceases.

The individual can then do without the product/service or take action to obtain it.

Where the product/service previously funded through state spending does not cease, the cut exists in name only. Forcing employers to pay for the first four weeks of sick leave where the state stops this payment is not a cut. It is just a transfer of a state-retained obligatory spending.

There is still simply too much state spending. Pure cuts without any attempt at substitution are needed.

Cuts are hard, nasty, unpleasant and difficult. Too many interest groups claim an exception: public servants, pensions, so-called front-line emergency personnel, special needs assistants, drugs programmes, literacy programmes, overseas aid - the list just goes on.

The 2% VAT increase will be a disaster. As an attenpt to raise more taxes to fund continuing unustainable state spending, it will fail. This is not scare mongering. It is just simple fact.

The simple fact of price elasticity will take affect. Price elasticity is a fact: there is a change in demand caused by a change in price. You could call it the Ryanair affect. The VAT increase is being brought to you by the same genius civil servants who were in power thoughout the profligate overspending of the alleged boom.

So: cut the public service numbers, cut public service wages (call it Benchmarking 2.0), cut public service pensions, stop paying annual increments. Cut rates. Remove medical cards. Eliminate rent allowance. Reduce social welfare payments, especially unemployment benefit/assistance.

The Dept of Health states that the net cash effect of the 853m budget adjustment will be 183m. The difference betwen the two figures is taxes, sorry, charges.

It’s the same with most of the budgets, hardly any cuts in expenditure, buts rise in “charges”.

The Government using this logic could eliminate local government spending by taxing, sorry charging, every house in Ireland 2k

The reformed property tax in 2013 is expected to raise €1k per house, that will cover 50% of it.