'Tax the rich and stop the waste' is an illusion

In the early years of the 18th Century, the colony of Virginia enjoyed an electoral franchise more extensive than in most parts of Europe at the time. More than half of (white) adult males could vote, and they voted for popular candidates who made attractive promises. This brought the Lieutenant Governor, one Alexander Spotswood, an appointee of the Crown, into regular conflict with the elected assembly, notably on the matter of balancing the latter's expenditure ambitions with an unwillingness to impose taxes.

Spotswood opined: "The mob of this country, finding themselves able to carry whom they please, have generally chosen representatives of their own class, who as their principal recommendation have declared their resolution to raise no tax on the people, let the occasion be what it will."

Spotswood got fired, but democracies remain as vulnerable as ever to populist surges. It is easy to garner votes through promising low taxes and difficult to secure popularity through the reduction of expenditure. Since both government and media appear to have concluded that Ireland has solved its budgetary problems, the pre-election auction is already under way. The electorate is about to be serenaded with promises of reductions in taxes from right, left and centre of the political spectrum. There will be no mention of reductions in current spending. That noise you hear in the background is the public capital programme revving up for another merry jaunt off the balance sheet.

Unfortunately, the Government's budget remains seriously unbalanced and the substantial national debt continues to rise. In round numbers, the Irish state owes about €100,000 per adult taxpayer and the Government's plan is to increase this figure to about €105,000 per adult taxpayer through 2015. That is if things go well. Good-news bulletins from the Government parties should be intercepted with innocent queries about the date when they propose to call a halt to this Rake's Progress. Opposition parties and candidates who offer tax cuts and increased spending programmes should be asked the same simple question. When, precisely, do you propose to stop the borrowing binge?

The Irish economy finally appears to be in the early stages of recovery, a tribute to its extraordinary resilience in the face of incompetent management by a political class which has delivered two deep and prolonged recessions since 1980. Two lost decades. There is something comical or sinister, according to taste, about the recent proposals to include the diaspora, those folks who have found somewhere with better economic management to live and work, in the Irish electorate. Three senators, according to one political aspirant, are to be elected by a grateful diaspora.

A better approach would be to pursue policies likely to limit the numbers of diasporites in the years ahead. The first and essential building block in a sane policy is to get government spending in line with government revenue as quickly as possible. The propagation of the illusion that this task has already been completed - in which large elements of the Irish media are complicit - is a potential disaster. The country's largest trade union has been reported, without criticism, as favouring a 5pc pay increase all round, and the abolition of the Universal Social Charge, currently yielding €4bn per annum. And free water. The gap between government revenue and government spending has to be closed at some stage, and the sooner the better. All proposals, and there will be plenty more, to increase spending and to cut taxes should be treated with the deepest scepticism.

Of course tax impositions are already burdensome, and there is a political constituency for anyone promising relief. But given the continuing plans to borrow and the imperative to close the deficit, the only responsible route to tax reductions is the thorny path which leads through further expenditure cuts. Unless you believe in 'tax the rich' magic. There will be little objection to taxing these fortunate citizens, but it is throwing sand in the eyes of the public to pretend that they are sufficiently numerous to relieve the rest of us from facing grown-up decisions. If you would like to have tax cuts, which categories of public spending would you like to see cut?

It is a fact insufficiently acknowledged that governments, by and large, do not waste vast amounts of money. Every cheque has a payee's name on it. One man's waste is another man's income. If Government ministers had been whiling away their time incinerating taxpayers' money, this would already have been stopped. Ireland has been through an extended period in which the profligacy in public spending has at last been addressed. There are plentiful opportunities for further cuts, but none that will be popular. It is an evasion to pretend that tax cuts can be funded through the painless elimination of 'waste', or through the imposition of extra taxes on the unidentified rich.

Almost all current government spending goes on health, education, social welfare and housing. If you would like to face lower taxes in the years ahead, you must also accept that dole and state pensions are too high, that small hospitals should be closed, that class sizes should rise and that the 300,000 people who work in the public service should be paid less. If you object to any or all of these measures, then you should stop daydreaming about tax cuts.

Any state which absorbs, through taxation or borrowing (deferred taxation), and re-circulates 40pc or 50pc of national income, is not engaged merely in redistribution. If such a large portion of the national income was being taken from the rich to assist the poor, the poor would rapidly change places with the rich. Modern European democracies are engaged in robbing Peter to pay Peter in substantial degree. Circular transfers from and to middling socioeconomic groups, imposing taxation on, but delivering transfers to, the average citizen, account for the bulk of government activity. If the government did no more than tax the seriously rich and redirect the proceeds to the seriously poor, the government would be a pretty small organisation.

When the canvassers come knocking, they will bear gifts. They will promise no more expenditure cuts and beguiling reductions in the burden of taxes. Any credible programme of tax reductions needs to pass two tests. These are (a) how soon does the budget deficit disappear with the promised tax reductions?, and (b) through what magic can taxes be cut without expenditure reductions?

A political party, old or new, offering tax cuts needs to offer also serious reductions in old age pensions, dole payments, public service pay, hospital closures, larger school classes, higher college fees, and small-print items like fewer ghost garda stations and fewer unpatronised train services. No such political party appears to be on the horizon. The electorate will likely have to choose off a menu of non-credible programmes built around 'tax the rich and stop the waste' evasions. No serious reductions in the burden of taxation on middle-income earners can be financed without reductions in public expenditure, the bulk of which ends up providing income and services for the very same middle-income earners.