THE moves are generally in the right direction, although as is always the case on Budget day the scale of the changes is limited. A few key targets have been hit, although the general body of tax payers will not notice much difference in the pay packet at the end of the month. Whether the package really does represent the start of an assault on long term unemployment will depend on whether the Government is now willing to doggedly pursue this issue.
Facing into the Budget each year, governments make choices. As has been the case in every recent package, this year the current administration has allowed spending to increase ahead of inflation, albeit at a slower rate. Gross spending on providing services is to rise by 4.8 per cent the inflation rate is forecast at 2.25 per cent. As highlighted in the Dail debate after the Budget net spending on services which also takes into account receipts from PRSI and other areas is to rise by 6.2 per cent. (The PRSI reductions are the main reasons why the net total is rising more rapidly).
If rising spending is one constraint on Mr Quinn, the need to adhere to the Maastricht borrowing criteria was the other. The Maastricht rules treat funds moving from one year to another differently from the normal exchequer borrowing calculation. So while Mr Quinn's exchequer borrowing target of 2 per cent of Gross National Product looks low, this translates into 2.6 per cent of Gross Domestic Product using the Maastricht rules. As the Maastricht limit is 3 per cent, this is probably about as high as the Government wanted to go.
So Mr Quinn's room to cut tax and spending in the Budget was limited enough, and he clearly was not going to engage in any radical overhaul of the tax system. Looking broadly at the figures, he spent around £175 million in reducing taxes on incomes and business and PRSI, while some £97 million was added to spending measures already announced. Just over £40 million was clawed back through higher excise duties Mr Quinn did not want to increase these taxes any more for fear of fuelling inflation. Departmental balances of £38 million left over from last year and a £54 million reduction in net social welfare spending also helped to balance the books.
While economists may ruminate that the Budget will add to already buoyant economic growth this year, it is not likely to make a substantial impact on the overall level of activity. The amounts being put back into taxpayers' pockets are too small to have any impact on consumer spending. Mr Quinn will be hoping that the economy this year performs just as it did last year and that the rate of inflation remains subdued. What happens to interest rates in the months ahead will he a much more powerful influence on activity
So the Budget must be judged on whether it will address the key problems it sets out to tackle. One of these identified in the study conducted by Richard Bruton's Department was the lack of incentive for young unskilled workers to take up low paid jobs and thus get into the employment market. The increase in the levels below which incomes are exempted from PRSI and income tax will help and new measures have been announced to involve more school leavers in training schemes.
The range of measures to address long term unemployment must only be a start to addressing this issue. It remains to be seen how successful will be measures such as the new £80 a week subsidy for employers taking on the long term unemployed. The new and expanded measures to allow people to retain medical cards and other benefits such as child dependent allowance after returning to work are an attempt to deal with the trap which holds people in long term unemployment.
But clearly a sustained attack on long term unemployment will require further moves in these areas, as well as new approaches to a whole range of policy areas such as education. In terms of the social tax and welfare code, the key goal must be to ensure that as far as possible supports from the State are not tied to whether the person is in work or not.
The second goal of the Budget is to reduce the overall tax burden on work, particularly for the low paid. Some of the very lowest paid will benefit and the PRSI exemption limit, introduced last year at £50 and now increased to £80, is a useful reform to a charge which hits the low earners hard. The gains to workers on wages just below and around the average industrial average are small, and derive mainly from the increase the PAYE allowance and some PRSI relief. Middle income employees paying a substantial part of their tax at 48 per cent will gain from the increase in the standard income tax band, so the gains to taxpayers are unevenly distributed.
Business will welcome the reductions in employers' PRSI payments and the corporation tax measures, although again the benefits will be limited enough. The Government has recognised the costs being imposed by employers' PRSI, and the cumulative measures over the past two years will benefit labour intensive firms.
Finally, the changes announced to the way Budgets are to be introduced are very welcome. The moving forward of the Budget date to the late autumn of the previous year and the commitment to multi annual budgeting should improve the quality of Budget planning and debate. Perhaps they might also remove some of the hype surrounding Budget day.
