We are in the realm of modest gain

Michael Noonan and Brendan Howlin sought to deliver a little something for a lot of people yesterday, but no one will feel wealthy after their fourth budget.

After years of painstaking cuts, however, nobody should feel any poorer either.

That said, we are in the realm of modest gain. If relentless retrenchment since the crash took close on €30 billion from the economy in the space of a few years, the goodies are now counted in millions.

The net decrease in taxation is €418 million; and the net increase in day-to-day expenditure is €429 million. This still marks a big turnaround. The Government planned a further €2.1 billion retrenchment only months ago, so the fiscal swing is not far off €3 billion.

Budget 2015 does not appear overly indulgent, but the plan is not without risk. Ireland is heavily exposed to conditions in the ever-volatile outside world. Yet the budget deficit is targeted to hit 2.7 per cent in 2015, well below the 2.9 per cent required under European agreements.

Noonan has also left himself some headroom.

The plan is predicated on 4.7 per cent GDP growth this year and 3.6 per cent growth in 2015, both lower than forecast by external analysts.

Political reality

The budget comes as the Coalition angles for re-election within 18 months. In defiance of those who say the Government would be far better to continue cutting the deficit, hard political reality demands some kind of a recovery dividend in the here and now.

In an implicit response to the argument that he should use “windfall” gains to pay down debt, Noonan said some surplus income from the Central Bank will be used for that very purpose.

The deficit would go to 2.5 per cent next year in the absence of such measures, he said.

This is the backdrop to income tax cuts. As the local economy stirs to life, the core objective to is provide a further spur to growth through a boost to domestic demand. While economists argue that capital investment delivers a bigger “multiplier” impact on growth, Howlin said a big social housing initiative inject €2.2 billion into sector in the next three years.

Sliding scale

The income tax package embraces a reduction in the top rate to 40 per cent from 41 per cent, long a priority for Taoiseach Enda Kenny, as well as a sliding scale of reductions in existing universal social charge (USC) rates and a widening of thresholds.

Special manoeuvres via a new elevated USC rate are included to avoid inordinate advantage at annual income exceeding €70,000. The core objective is to direct the benefit of recovery towards low- and middle-earners, although many paying the new 8 per cent USC rate would not consider themselves wealthy.

In sum, the key principle is that the benefit of decreasing income tax is capped.

It is not beyond the bounds of logic to see the new higher USC rate as a kind of a third income tax rate, and to foresee that it is here to stay. From the perspective of the public finances, the great benefit of the USC is that it captures income that can otherwise be sheltered by high earners.

Lower down the income chain, an increase in the entry point threshold for the lower universal social charge will take 80,000 workers off the levy altogether.

Families benefit

On welfare, this is the first budget in five years in which no benefit is cut. While the Christmas bonus will be partially restored to welfare recipients, the gain from the €5 increase in monthly child benefit rates in 2015 and 2016 is not confined to people who depend on the Department of Social Protection for their income.

This will benefit every young family in the land.

The Government came under intensive business pressure not to eliminate the “double Irish” tax scheme. It resolved, however, that pre-emptive action was preferable to being forced into change by the international community.

To those who would say there is nothing going on here but aggressive tax planning, Noonan made the rather salient point that 1,106 multinationals based in Ireland employ 166,000 people.

Both Ministers reiterated the mantra that the economic turnaround will not be sacrificed at the altar of political expediency. One year earlier than foreseen, this is the budget in which the Coalition brings down the shutters on ever-increasing austerity.

This is but the opening chapter in a new phase. The next chapter depends on continued recovery.