A milestone was passed during the week when we learned that total tax revenues had finally passed their precrash levels. The total of €47.8 billion finally beat the previous 2007 record. So why do we all still feel less well-off ? If tax is back, why hasn’t the feelgood factor come with it?
The quick answer is simple enough – the universal social charge (USC). Other burdens on our incomes have also increased: car and health insurance costs have shot up, for example, and householders must also now pay an annual property tax. This all cuts the income we have to spend in the shops or save. But for most people, the dreaded USC has taken a much bigger chunk of their change.
People don’t feel better off because they aren’t. Politically, these has put the Government – and many others in the developed world – in a tight spot. The “normal” economic world of rising incomes and prices and generally increasing disposable income has come to a shuddering halt. Here in Ireland we have seen a kind of stagnation in living standards for many.
No one is quite sure what happens next. The old Irish political tactic – using growth to make people better off, at least in the short term, by cutting taxes and pushing up spending – does not work any more. The money is not there.
Who would be in government when real living standards for so many are just stuck? Stand back and look at what has happened. You couldn’t quite call it Ireland’s lost decade; the past few years have seen some real positives, notably rising employment. But it is remarkable how in many ways we are still crawling from the wreckage of the crisis.
Look at what we earn. Average hourly earnings at the start of 2008 were €21.53, according to CSO figures. They are now €21.55.
We are, on average, getting paid roughly the same as we were precrisis. Of course this hides big disparities – for example many tech workers have received significant increases over the past couple of years. Others lost their jobs.
In more normal economic times, static earnings would have meant a significant drop in spending power due to the impact of inflation.
But the other extraordinary thing about the last decade is the complete absence of inflation. The consumer price index now is pretty much at the same level as it was in early 2008. So our real earnings now are, on average, roughly the same as they were when the trouble hit.
Significant hit
Here is where the USC comes in, along with an extra bit of PAYE income tax. PAYE is now a bit ahead of 2007 levels. But the big hit on our incomes has come from the USC, which, on a back-of-the-envelope calculation, is now taking about €2,000 a year from the average person at work, despite the reductions in the last two budgets. This accounts for more than 75 per cent of the total increased tax and charges on our incomes since before the crisis. Add in an average €300 bill for the household property tax and the hit is significant.
No wonder consumers are still spending less than the boom days, when spending in the shops, car forecourts and – crucially – on new homes led then to a VAT haul some 14 per cent ahead of what was collected last year. Meanwhile stamp duty on house sales and capital gains tax paid on the proceeds remains a fraction of what it was in 2006-2007.
It is the surge in corporation tax that has allowed overall tax to return to pre-bust levels. It has soared from €4.6 billion two years ago to €7.3 billion now.
With a small number of big companies responsible for a lot of this tax, this leaves us exposed not only to changes driven by the Trump administration in the next few years, but also by the health of a small number of companies – and the decisions they make.
The Government says it is confident that this tax-take is based on firm foundations and on higher profitability. But international tax planning also appears to be a key factor and changes in company decisions here may either turn into a risk or an opportunity over the next couple of years.
Spare cash
It is a backdrop that makes it hard for the Government to be seen to “deliver”. During the boom, extra taxes allowed big leaps in spending. Money was poured into services and into public pay increases. We all paid less tax.
Now, tax revenue growth is slow and – apart from the self-employed payments – was behind target towards the end of the year. There is not much spare cash. When there is a trolley crisis, the Minister for Health has to fall back to the old tactic of “calling in” in the Health Service Executive. He doesn’t have a pile of money to throw at the problem. Nor can Government credibly damage the carrot of big tax cuts – particularly in a political environment where all the pressure is on improving services.
So we will keep paying the USC or something like it. Living standards will edge up with economic growth, but we won’t be back to the days when people were buying apartments in Bulgaria.
In good times, tax revenues will allow spending to rise a bit and, if growth slows, it will all tighten up again. We will all continue to grumble about public services. The days of boom in the public finances are over. Let’s hope the days of bust are gone too.