Tax cuts to stimulate economic activity

Figures published by the National Office of Statistics prior to the presentation of Budget 2011 show that government revenue from personal income tax increased to €365 million in 2009 from €324 in the previous year, an increase of some €40 million or nearly 13 per cent. During the same years, the average number of gainfully employed persons increased marginally from 151,600 to 152,000. This means, therefore, that the per capita annual tax bill of those in gainful employment rose from €2,137 to €2,401.

This increase of €40 million in income tax revenue obviously had an adverse effect on disposable income and this is reflected in a decrease in government revenue from VAT and excise duties which dropped from €813 to €785 million. The figures quoted are not indexed for inflation so that if one were to build in an inflation rate of three per cent, consumption in 2009 dropped by nearly €50 million or six per cent. It is therefore hardly surprising that many commercial enterprises complain of difficult times. Profits were also stagnant, with corporate income tax remaining virtually unchanged at €390 million.

I therefore believe that there was a very strong case for the Minister of Finance to try to stimulate economic activity by cutting taxes and pumping €50 million back into the economy. I think it was the American model that showed how a reduction in taxes encourages greater fiscal morality so that some of what is given away, so to speak, comes back in higher revenues. Higher consumption also generates higher government revenues from direct and indirect taxes.

I would not be surprised if the minister was worried about how to finance any tax cuts. I am confident, however, that if he were to look at government expenditure with a fine toothcomb, he would find the ways and means of neutralising most if not all the €50 million. The government recurrent expenditure is expected to reach just over €2,500 million in 2009 so that a cut of €50 million represents only two per cent of the total projected expenditure.

The UK government recently engaged the services of Philip Green (a fashion tycoon) to advise how to cut its recurrent expenditure bill.

Perhaps our government should do the same and call on independent cost-cutting experts to suggest how to reduce the operating cost of our public sector. It would be money well spent.