Leo Varadkar’s suggestion yesterday [May 15th] that tax rises may be necessary following COVID-19 is just the start of what is set to be a difficult period for the next government – whatever its political makeup.
With Fine Gael and Fianna Fáil having already ruled out increases to both income tax and the Universal Social Charge in their jointly published framework document, which aims to facilitate negotiations between other parties, Varadkar yesterday pointed to potential increases in carbon tax down the line. Indeed, this very tax increase was specifically mentioned in the document itself and therefore should not be a surprise to any of the ever-dwindling number of their potential bedfellows. Mention of this tax increase could quite easily be construed as a flirtatious glance towards the Green Party, and would align with the three negotiating parties’ commitment to decreasing our carbon footprint in the future. Separately, Varadkar stated that Fine Gael do not support an increase to the 12.5% corporation tax rate, which is widely seen as vital to sustaining Ireland’s level of foreign direct investment.
However, with the carbon tax forecast to only raise roughly €500 million this year, it is unlikely that an increase in this tax alone would sufficiently finance the aims of the next government, as outlined in the framework document. An increase in government borrowing could be an option, with the document stating that the next government could seek to “prioritise capital investment by borrowing, if necessary, to stimulate demand domestically; grow employment; respond to social need; and improve our national health, transport, education and housing infrastructure”, but an expected deficit of €30 billion next year may make this a tall order. The Taoiseach’s faith in a remedy of borrowing alone appears to be less than steadfast, with Varadkar stating yesterday that “we can borrow very cheaply now but it will be a foolish person to assume that will always be the case in the next five years”.
The creation of a larger, more interventionist state with a greater emphasis on public services, similar to that outlined in the framework document and in the Green Party’s April 30th letter to the two parties, would present an enormous challenge to the public finances should there be an attempt to maintain roughly the same fiscal policies as there were pre-COVID-19.
It was Labour’s lack of faith in the three negotiating parties’ ability to create this society without tax increases which led to Alan Kelly formally ruling out entering negotiations to form a government. In a letter to the leaders of Fianna Fáil and Fine Gael, the Labour leader stated that “it is now clear to us that you have adopted a united position on future fiscal and economic policy that is at odds with the approach of the Labour Party.”
“While it is your stated goal to achieve a ‘well resourced, properly functioning and responsive State’, our view is that it is premature and unrealistic to rule out using taxation to achieve this. Such a stance does not match with the vision you outlined to us”, he continued.
Labour’s refusal to enter the talks, while expected, should serve as a stark warning to the Irish electorate regarding the credibility of the framework document and other suggestions that Fianna Fáil and Fine Gael have taken a sharp turn to the left. With stated missions such as “universal healthcare”, “housing for all”, “a better quality of life for all”, and “supporting young Ireland”, you would be excused for thinking that the framework document was actually the Labour Party’s utopian manifesto. Surely had Labour any faith at all in the potential government’s ability to create such a society they couldn’t turn their back on this?
Alas, it seems Labour do not have any belief in their ability to do so.
This leaves us with three broad scenarios, assuming a government is eventually formed. Scenario one: through some economic wizardry the vision as outlined in the framework document is fulfilled without an increase in taxation or a cut in spending, thus creating a far more egalitarian society than the one we had pre-COVID-19 – but with so many promises to increase spending, not to increase taxes, and to provide such a high standard of public services, it is virtually impossible that all promises will be left unbroken. Scenario two: the framework document proves to have been overly optimistic and, as is likely, tax increases will be necessary to fulfil its aims. Scenario three: the framework document proves to have been little more than an exercise in wishful thinking and few or none of its missions are achieved.
It looks like Labour are putting their money on scenario three. Going on the two main parties’ past form, I think I’d be doing the same.