The Irish government’s new budget plan, released this week, is a remarkable document. Faced with a huge deficit, skyrocketing debt and unemployment north of 14%, Brian Cowen’s government has responded with a plan that reads like a list of political impossibles: It calls for spending cuts, tax simplification, labor-market deregulation, public-sector job cuts and reductions in the number of "free" government services. The Cowen government’s plan, in other words, gets most of the big questions right by doing a host of things most politicians assume can’t be done.
Whether that government will survive to implement it is another matter. Mr. Cowen faces a revolt within his coalition, which at this point would have to consider itself lucky if it survives much past Christmas. Then there’s the European Commission and International Monetary Fund, both of which want to sign off on Ireland’s tax and spending plans as part of their force-fed rescue package.
Let’s hope neither domestic opposition nor the country’s would-be benefactors abroad feel the need to tear up this week’s plan. In most respects, it’s very good.
Consider just one point in the budget plan, in which the government states that it "must increase the numbers paying tax." The U.K., as part of its own austerity plan, raised the personal allowance by several thousand pounds, narrowing the tax base and relieving more people of the burden of paying any income tax at all. Ireland is now going in the opposite direction, bringing more people onto the tax rolls at the bottom of the income scales. At the same time, it is simplifying the tax code by eliminating or scaling back special-interest tax breaks and credits, which grew like topsy throughout the tax code during the boom years. Last year, it eliminated the mortgage-interest deduction. Next year, a further 10 tax credits are due for abolition, and a half-dozen more are set to be scaled back. At the same time, the government is proposing to eliminate the fiction that payroll taxes, health-care contributions and public-pension payments go into different pots of money.
As a result, the Irish government projects that it can raise €2.5 billion in income-tax revenue over four years without raising income-tax rates, though the plan does call for raising the VAT to 23% from 21%. The government also is proposing to lower the minimum wage by one euro an hour, to €7.65, a sacred cow of the welfare-state crowd if ever there was one. Simultaneously, it will cut welfare payments so the lower minimum wage doesn’t induce people to quit work for the dole. Then it proposes to revisit restrictive national wage agreements that keep pay artificially high in certain professions.
All in all, the government’s blueprint combines intellectual clarity with political courage. Now, if they can implement it, the Irish might stand a chance of coming out of its current mess stronger than it went in.