The government needs to generate capital quickly and so the obvious options that it can take are to cut capital spending or raise taxes. It certainly cannot cut current spending as it’s well-known that the health system and various other public services are in dire straits at the moment.
Access to appropriate health care services needs to be tackled vigorously. European countries such as France and Britain have a health system which is basically free to all citizens. The question put to the government is why is this not the case in Ireland?
The problems facing the government with regards to health is the fact that it is still a two tier system and the private sector is subsidised by tax payers. In 2001, the estimated net cost to the state of an in patient bed in a major teaching hospital which is designated for the private sector is €319 per day and the estimated cost to other acute hospitals was €219 per day. The private sector is allocated 20% of the beds in public hospitals but only contributes 11% of the cost of running these hospitals. The two tier system gives consultants an incentive to occupy many of the hospital beds with private patients. However, tax payers are spending €165 million annually to subsidise the hospital stays of private patients. (Figures from sinnfein.ie)
The price of prescriptions is another problem for the government and citizens alike. Drug costs for the General Medical Services Scheme are set to exceed 2002 estimates by 30%.
A few recommendations to improve the health system are to raise the VHI and BUPA premia. €6 million will be injected into the health service in 2004 and this money should be used to eliminate waiting lists and inequality in the health service. In his recommendations, McCreevy is set to raise the premia by 10%.
To extend the medical card to those in full time education, people under 18 and over 65 is a policy for which many parties are lobbying. It has been documented by the National Youth Council of Ireland that third level students are not accessing medical assistance due to financial constraints. The small number colleges with student medical facilities are grossly under-funded and understaffed. Many students are living away from home for the first time ever and are setting lifetime health patterns and habits. Now is the time to instil responsibility for good health management by extending the medical card to all young people in full time education up to 21 years.
Another idea would be to increase the level of PRSI contributions and ring fence this money to spend in the health sector, in addition to the sum committed for 2002 linked to a medical/health inflation index.
Finally, the removal of tax incentives for private medical care would be another option for the government. The savings from this initiative could be ring-fenced for additional spending in the health sector.
The Celtic Tiger boom has come and gone but the housing crisis is still here and worse than ever. The government will cut spending on local authority housing by 5% despite waiting lists soaring by 23% in the previous three years.
The problems within this sector are rising prices, rising rents, evictions, homelessness and a record of 54,000 households waiting for social or public sector housing.
Each year at least 8,000 households go onto the waiting list. If current government strategy is implemented, it will be at least 14 years before the lists are cleared. This does not take into account the increasing immigration flows or the cutbacks in spending built into this year’s budget estimates.
A few recommendations to improve the housing system would be to reinstate the first time buyer’s grant and quash cuts in the provisions for local authority and social housing programmes. Funding should be increased at least in line with building inflation.
Capital Gains Tax should be increased to its 1997 level of 40%. There should be a further increase in CGT on speculative owners of multiple dwellings.
Statutory control of rents in the private sector should be implemented. Laws should be brought in to set standards for accommodation.
Finally, a code of practice should be drawn up to ensure there is no excessive profiteering by private developers of infrastructure.
A recent household budget survey showed that in 1995 the top 10% of earners had a disposable income that was on average 11 times greater than the incomes of the lowest earners. By 2000, this gap had widened with the wealthiest 10% earning 13 times more than the lowest earners (Figures from NAPSU).
The National Anti Poverty Strategy Unit of the Department of Social and Family Affairs has issued guidelines (the 'NAPS guidelines'), which are to be used by government departments for poverty proofing policy proposals. According to the NAPSU, the primary aim of the poverty proofing process is to identify the impact of the policy proposal on the poor so that this can be given proper consideration in designing policy. Their recommendations for the budget are to change the income tax system. If those on the minimum wage were removed from the tax net and if the tax burden was eased on the lower paid, the incentive to work would be increased. Just over 23% of those returning income for tax purposes pay 74% of all income tax. Accordingly, changes to income tax affect some sections of the population more than others and do not affect those not paying tax. All income generated in the state should be liable to general taxation irrespective of the residency of the individual. Tax avoidance measures should be eliminated so that the wealthy in the state cannot dodge paying their taxes.
IBEC recommends that bands and tax credits are increased and that there should be no additional income tax levies introduced or any increase in existing levies. IMPACT suggests that there should be no further reduction in the standard or higher rate of taxes. The consensus seems to indicate that tax rates will not be touched and that any increase in tax bands and credits will be minimal. If there is an increase in the tax bands, this should be done in line with inflation in order to prevent people being pulled into the fiscal drag. A recent article in the Irish Times recently stated that inflation in Ireland is at its lowest, falling to 2.3% last month. Therefore, if the tax band is increased, it should be increased by 2.3%.
Tax revenues are slowly falling. Last December, the Department of Finance was projecting exchequer deficits of €2.9 billion in 2003 and €3.7 billion in 2004. Yet the government will award many public service workers an average 9 per cent pay hike. This will cause trouble for the Minister for Finance, Charlie McCreevy. According to Economist correspondent, Eamonn Quinn, the cost of benchmarking in just two years would more than offset the proposed €2 billion cost of building a metro link running between the airport and Dublin city centre. Paying the benchmarking recommendations will inevitably lead to cuts for the big-spending departments of health, education and social services. These are the same departments that employ the health workers, teachers and administrators for whom it has been recommended that pay awards be made. The benchmarking study was set up in December 2000, when the economy was in a different gear. It was to address the issue of staff forsaking careers in the public services for better-paid jobs in the private sector. The government had agreed with public service staff unions that a quarter of any pay rise -- about €300 million, as it turned out -- would be backdated to last December. The rest would be paid following negotiations between unions and government in the run up to any new partnership agreement. Even accounting for the €300 million cost of benchmarking in 2002, government finances will not dip into the red this year. The minister has repeatedly said so. A €500 million shortfall in taxes and the "potential additional cost" of benchmarking this year will be plugged by Central Bank profits, falling EU budget contributions and other unspecified monies, the department predicted.
With regards to PRSI, IBEC and the Institute of Tax recommend that there should be no increase in employers' PRSI. However, IMPACT urges that the employers contribution rate should be increased other than in situations where the employer is making a minimum contribution into a pension fund for employees. According to the Sunday Business Post, the Agreed Programme for Government promises to 'keep down taxes on work in order ensure the competitiveness of the Irish economy and maintain full employment'. Recent comments made by Mary Harney reiterate this, so employers' PRSI might escape untouched on this occasion. The Minister may take this opportunity to complete the much signalled simplification of the PRSI process by overhauling the system of employees' PRSI and levies. Any changes to the system are likely to be done in such a way as to result in a tax neutral position.
Cigarettes, alcohol and diesel are to rise in price again this year. The VAT rate is set to change from 12.5% to 13.5%. The government recommends:
- 20 cigarettes to increase by 50c
- Spirits to rise by 20c per standard measure
- Alco pops to increase by 35c
- Diesel to rise by 3 cents a litre
Many would feel that it is not fair to charge smokers, students and drivers more money than necessary for goods. It is a well-known fact that alcohol is expensive in Ireland at the moment, as are cigarettes at over €6 per pack. It is forecasted that consumer price inflation will rise by 4.8%. These price hikes will certainly generate enough money to help reverse the government’s spending spree last year. However, IBEC proposes that there should be no increase in indirect taxes, including VAT and excise duties on petrol and alcohol. It is expected that further measures may be introduced in the guise of 'environmental taxes'. According to the Business Post, a number of politically sensitive possibilities have surfaced in the run up to the Budget including the removal of exemption for profits from forestry investments, introduction of tax on child benefit and benefit in kind on car parking spaces. It is clear that the government need capital quickly. If the proposed spending goes ahead, there will be general government deficits, amounting to €913 million in 2004. Economists predict that the shortfall, accounted by borrowing next year, will be between €2.2 and €2.5 billion. The government may be able to escape borrowing this year. However, the costs of benchmarking will make it almost impossible to balance the national accounts if the economy fails to return to the boom times.
In conclusion, it appears that the government will have another hefty bill to pay at the end of 2004. To raise taxes is not really an option for them for reasons already stated. Expenditure will need to be reduced if the government want to keep their head above water. However, this seems unlikely. Capital spending will remain on the back burner for another year as the government try to improve the state of the health system. If the health system is not improved, the sufferers will be those on low income and those who cannot afford to go private. However, the Minister has stated that the education, social welfare and health sector will get nearly two thirds of all available resources. All others will feel the pain of cuts. The only option facing the government is to borrow again this year. Or maybe it’s time that the government consider introducing authority taxes. Whatever measures are introduced it is clear that the minister will have to perform a major juggling act to keep everyone happy.
