Why Simon Harris will really struggle to move the dial on income tax in the Budget

The Coalition is to set out its Summer Economic Statement on Wednesday, signposting the size – and some of the composition – of October’s budget. So as you try to keep an eye on the All-Ireland hurling final, the World Cup final, the rugby and the British Open this weekend, there will be lots of budgetary wrangling going on in Government.It’s the first budget that will be delivered by Simon Harris as Minister for Finance. Last weekend, writing on his Substack, Harris made clear what his priority would be. There would be, he said, a “meaningful personal income-tax package”. “Simply put,” Harris wrote, “this is my top priority as Minister for Finance.”It has been a long time since we heard a Minister for Finance say that personal tax cuts were his highest priority. You’d have to go back to Charlie McCreevy for that.READ MORENot to be outdone – you’d almost think the two leaders of the Government were in competition with one other – the Taoiseach reiterated the promise in the Dáil on Wednesday.“There will be a taxation package on income tax for families,” Micheál Martin said. He was responding to the Independent TD Michael Lowry, who had warned: “Workers are being unduly punished by the tax system. The people in the squeezed middle, the workers who keep our economy moving, need a meaningful tax package in October that allows them to keep more of their hard-earned money.”This is a sentiment that many TDs around the Government parties share. It echoes the concerns for “the people who get up early in the morning” that helped Leo Varadkar win the leadership of Fine Gael in 2017. [ Strong tax returns of €50bn strengthen Government’s budgetary position ]But, as Varadkar and everyone else who has been in government found out, when budget time comes there are many competing demands for the resources that substantial tax cuts demand.In other words, spending big on tax cuts demands restraint on spending increases elsewhere. To put it mildly, that has not exactly been the hallmark of this Government or the last one. Is there any reason to suspect that will be different now?I’ve been thinking on the role of tax cuts in politics lately as part of research for a summer podcast series on the Rise and Fall of the Progressive Democrats (PDs), which is coming on the Inside Politics podcast in the next few weeks.Tax cuts, funded by a mixture of spending cuts, shrinking the public sector and privatisations, were the PDs’ signature policy when the party was launched by Des O’Malley, Mary Harney and Michael McDowell in the middle of the 1980s in the midst of a decade-long slump marked by recession, inflation, unemployment and emigration.O’Malley promised large cuts to personal income taxes – reducing each of the then three rates (58, 48 and 35 per cent) by 3, 5 and 4 percentage points each. He also pledged to abolish the 7.5 per cent PRSI rate completely. It struck a chord with voters fed up with being strangled by sky-high taxes: in the PDs’ first election in 1987 they won 12 per cent of the vote and 14 seats.With Fianna Fáil between 1989 and 1992, the PDs were part of a government that cut the standard rate of income tax (there were only two rates by that stage) by 5 percentage points while the top rate was reduced by 8 points.When the PDs were back in Government in 1997, with McCreevy (philosophically a PD, even though he never left Fianna Fáil) in the Department of Finance, they reduced the standard rate by 6 points to 20 per cent by 2002, and the higher rate by 6 points to 42 per cent. Corporation tax came down to 12.5 per cent from a general rate of 32 per cent. Capital gains tax was halved, from 40 per cent to 20 per cent.At that time, the tax cuts didn’t have to be paid for by cutting public spending. They were paid for by runaway economic growth, so the Fianna Fáil-PD governments were able to increase spending and cut taxes. Famously, after McCreevy halved capital gains tax, the receipts doubled. Re-elected in 2002, however, Bertie Ahern declared that the era of McCreevy tax cuts was over. The PDs were massacred at the subsequent election, losing three-quarters of their seats.What political lessons can we take from all of this?There are three, I think. The first is that promises of tax cuts need to credible. When O’Malley promised big cuts in the 1980s people believed – because of his record of standing up to Charlie Haughey and because he had made change in the State’s economic and fiscal policies the raison d’être of the new party – that he would do what he said. In the successful 1992 and 2002 elections, the PDs could point to their record of tax-cutting in office. Their record gave them credibility.Second, the cuts need to be large: look at the scale of tax-cutting that the PDs implemented (latterly with McCreevy). This is not a point here and a point there – it is a substantial and palpable change in taxation policy.Third, they must be the priority: in other words, you have to be sufficiently committed to tax-cutting that you are prepared not to spend money on other things. For governments that have been a long time in office, this can be especially hard.There is a view in Fine Gael that there is a bunch of PD-type votes out there which a clear tax-cutting, people-who-get-up-early, etc, agenda might attract. Maybe so. But I am not sure that this year’s touted €1.5 billion tax package – out of a total budget day package likely to be in the €9 billion to €10 billion range – will move the dial all that much, especially when you’re spending more than that on a new public-sector pay deal. It looks more like Bertie Ahern than Charlie McCreevy.