Heard enough? Part 1: Mr Lenihan's cheap talk

In a series of 3 post I will look at the speeches delivered by Brian Lenihan, Mary Coughlan and Brian Cowen to their party ardfheis this weekend.

Tax increases part of economic solution - Lenihan
Based on Irish Times report from February 28, 2009, 20:31


“Higher taxes for everybody will be introduced in Ireland, the Minister for Finance, Brian Lenihan has declared, ‘Yes, the wealthy groups will have to pay. But everybody will have to pay something,’ the Minister told the Fianna Fáil ardfheis.”

Back in August 2008 and later in the annual edition of Business & Finance, I predicted exactly this outcome and timing for the tax increases announcement.

The sad part, of course, is that were we to cut the waste choking our public sectors, we would have had no need to raise taxes. Once again, since late July 2008 I offered proposals that would have provided requisite and ample capital repairs to the banks while reducing the burden of this recession on the households. Brian Lenihan decided instead to sacrifice the financial security of private sector workers in order to appease his protected constituency around the Liberty Hall.

There was one truth in what Mr Lenihan was telling his party: no matter how much he taxes the rich (aka anyone earning over €100,000), the tax impact of such measures will be minimal.

Why?

Firstly, per Minister Lenihan, “two in every hundred people earn more than €200,000 a year, and they pay 28 per cent of all the taxes; while six in every hundred earn over €150,000, and they contribute 28 per cent of the total; while 6 per cent earn more than €100,000, and they pay nearly half of the Exchequer’s returns." Raising their tax bill by 10% will yield less than 3-4% of the current returns, or around €1.4bn. A chop change for Mr Lenihan’s public sector cronies. At the rate of spending to which our public sector became accustomed, the entire 10% tax hike would evaporate in 24 days!

Secondly, any tax increases will lead to a wholesale tax optimization drive by anyone outside the PAYE system – and that covers the majority of the Lenihan's ‘rich’. Taking an assumption that some 3/5 of the 'rich' own their business or professional practice and they can reduce their tax exposure by a modest 20%, a draconian 10% hike in taxes will yield well below €1bn in added revenue.

One should acknowledge the fact that after some 8 months of continuous failure to govern, Mr Lenihan finally offered a flaccid apology to his party (the country is still waiting for one, Brian): “if we could have foreseen the extent of the international crisis, we would have done things differently… There is little to be gained in beating ourselves up over this."

But he reversed even this attempt at humility by charging the country for the deficit financing that he and his predecessor in DofF have pursued. Let's be honest, Minister, it was you and Brian Cowen who decided to award lavish wage increases to the public sector. The country did not ask for the wages of the ESB workers to be hiked to above €80,000 pa on average. Nor did it ask for e-voting machines, €250K+ contracts for consultants, pay rises for Ministers and senior civil servants, an army of paper pushers you've hired for HSE, billions wasted on white elphant projects around the country in attempts to buy votes in advance of each election, and so on. The blame for this mess is your Government's.

"We have to get on and do what we can and do it in a united way.” Oh yes, Minister. United we stand: you with your aristocratic salary, drivers, cars, pensions and so on, your colleagues and immediate subordinates enjoying most of the same, and the people you are going to tax out of their homes, childcare and schooling money, the elderly whose meagre incomes you are going to butcher with higher VAT and other charges. Spare us your whingeing, Brian – take a pay cut yourself! A 50% cut would restore your wages and pension in line with those in other advanced democracies.

“We have an €18 billion hole in the public finances,” said our well-informed Minister. Actually, the hole is more like €21bn and that was before we add new unemployed to welfare rolls. NTMA admitted this much when it said last week that we will have to borrow up to €25bn in 2009. Where were you, Minister, when they made this announcement?

“The world is looking on,” said the Minister. It no longer does. Last Friday the world sold some 90mln shares in BofI and AIB. The world holds no belief in you and your Government and neither does the country. Why? You did nothing to address the real crises for some 8 months since you took the reigns of the Exchequer in July 2008. Between July 2008 and today you've repeatedly insisted that your Government will implement at least €2bn in savings this year. Your Department has built this into the budgetary forecasts for 2009-2013. To date, you've deliverd a puny €1.1bn in savings. The world is no longer willing to be fooled by you!

“We need to persuade those who might invest here that we are capable of taking the tough decisions now to get our house in order.” Too late to sob, Brian. The numbers of those who would consider investing in this country is now standing so dangerously close to nill that even companies with substantial capital already allocated to these shores are cutting their operations and laying off workers. After years of your and your colleagues waffle about 'competitiveness', 'productivity', 'education', 'knowledge economy' they have no trust in this Government.

He went on: “We voted through the Bill that gives effect to levy that will see public servants pay on average 7.5 per cent to the cost of their pensions. …The public service pay bill accounts for one third of all expenditure”. So let’s do the maths. That 7.5% levy, net of tax deductions, is going to take only 1.5% of the total Exchequer expenditure or ca €700mln. But in July, September, October, December 2008, January and February 2009, you, the Minister, went on the record claiming the cuts will add up to €2bn on top of €440mln that you promised to save (and also did not deliver) in 2008!

What a farce!