It’s that time in the election cycle when political party backrooms quietly begin compiling manifestos for the next general election. While the coalition could run until March 2025, there should be a decent chance of an election being held sometime next year.
The large budget surpluses predicted for the coming years are changing this game. And here, of course, we must make the legal caveat about the vulnerability of this – figures from this week show that the top 10 companies pay 57 percent of all corporate taxes, and employees of multinationals pay more than half of all income taxes. But for now, the official figures are what counts, and they provide 65 billion euros in surpluses in the years up to 2026.
With the treasury overflowing with money, the political parties are faced with a question: how do you spend the loot? It will be very interesting to see what Sinn Féin does. An important part of the party’s economic program is higher taxes for the better off, for example a 3 percent ‘solidarity levy’ on incomes above €140,000. It has also called for a wealth tax and higher estate taxes. For the party, taxing the wealthy has been an important counterpoint to helping lower and middle-income earners; it is a central part of the “change” that is central to the party’s political message.
But what now? The extra money the party wants to spend on housing and health, for example, could be paid for from the proposed surpluses. That is not to say that spending the extra money would be wise for any government. It wouldn’t. But the political realities certainly make it difficult to propose large tax increases for any segment of the population, at least in the short term.
Scrapping – or delaying – plans for tax increases for the better off would have a number of benefits for Sinn Féin. It would undoubtedly make their efforts to bring in large companies much easier. And it would defuse accusations from the governing parties, especially Fine Gael, that Sinn Féin was “devastating the economy” and driving investment away.
But how would this play with his base? Much of the party’s coverage is that Ireland is run to the benefit of the better-off, to the detriment of less well-off families and “working people”. And Sinn Féin can safely assume that the richest will not vote for it anyway. The political calculation it must make is how its tax plans will play with the center, some of which it must win if it is to have a realistic chance of running the next government. How does it calibrate its move to the center with the need to still appear radical?
The question of 65 billion euros: how to spend the huge budget surplus
And the economic calculation is, what would this mean for foreign direct investment? For years, the multinational industry and the Industrial Development Agency (IDA) have pushed for generous tax treatment for companies and their employees – including special tax deductions for their senior executives. And the success is so great that the IDA generally has what it wants.
‘Go ahead if you like, Minister, but we cannot guarantee that this will not affect future investment’ has generally been enough to win the argument. Jobs, and more recently taxes, are a powerful currency.
Because Sinn Féin, if it gets into government, will need the fiscal bonanza to keep going. A lot of time has been spent talking to multinationals. It needs them to keep investing and contributing tax revenue to spend on housing, health and so on. And indeed, to pave the way financially towards the ultimate goal of a united Ireland.
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The true impact of higher personal taxes on the wealthy, or an end to the special tax relief scheme for senior executives, on investment is difficult to predict. These would be factors that companies would consider in terms of future investment plans, but much would depend on the extent of what was actually implemented. Sinn Féin’s charm offensive may have calmed multinational headquarters for now, but what they actually do would be closely watched. Anyway, some of his plans may be changed during coalition negotiations. And the voter’s judgment will be based on whether it can deliver on housing in particular.
The budget surpluses also change the calculations for the other parties. An important indicator for all parties will be what is in the October budget and what the opposition is saying about it. More cautious government figures — including two budget ministers Michael McGrath and Paschal Donohoe — will advocate for some money to pay down the national debt and for some to go into an expanded national fund to help pay future bills. But politicians will demand a generous budget package and more investments in housing, for example. Prudence doesn’t seem to have won many extra votes in the last general election. But the coalition will not want to give up its reputation for fiscal responsibility, at least not entirely.
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Donohoe and McGrath’s management of the budget through Covid and the extraordinary recovery of the economy have made state finances strong. In the years leading up to 2030, tax revenue – and the tax base – will have to increase slightly to pay the bills of aging and climate change, despite projected surpluses.
The question for Sinn Féin in this context is whether it will stick to its plans for tax increases for the well-off. Eliminating local property taxes and freezing carbon taxes is also promising. Both cuts would be mistakes: reducing the tax base and requiring the money to be found elsewhere. But tax increases – even for the wealthy – are a hard sell in this era of large surpluses. Sinn Féin will have to decide whether to stick or spin.
