You are viewing the content for Thursday 10 December 2009

A move in the right direction

RATHER like a terminal illness, no matter how rational the expectation, the final act is somewhat shocking. This budget was comprehensively leaked to the media over the past week.

Yet, the impact of welfare, pay and spending cuts still causes a shudder, however much anticipated. It was clever politics to prepare the ground of worst expectations in advance. No one can say they weren’t warned.

This budget marks a turning point in our willingness to confront the unsustainability of our public finances. The analysis and talking has been endless, while national insolvency looms. Reports from the EU Commission, OECD, ESRI, Commission on Taxation, Bord Snip and IMF have all reiterated the compelling logic of reducing public expenditure. At last, the talking has stopped and the action has started. The Finance Minister deserves support for his political determination and courage. Despite detractors within Government and rebelling vested interests, he has had the bottle to persevere. This is only because he has no choice. Our fiscal structural deficit cannot be resolved by international economic recovery.

At this moment of dread, trepidation and fear, the worst feature of this budget arithmetic is that it will only achieve a stand-still situation. Interest charges on our national debt will rise from €2.6 billion to €4.6bn next year. Added to this will be the demand-led extra social welfare costs. The successful implementation of €4bn of savings will still leave the exchequer deficit in the same sorry place this time next year. The runaway train is no longer accelerating but we have yet to halt its advance, let alone turn it around.

All the receipts from excise duty will be required just to pay the interest on our burgeoning public debt. At this rate the national debt will be set to rise from €35bn in 2007 to €100bn in 2011. The imbalance between spending and taxation of €2bn per month could not continue. Future servicing costs will be a welter burden on the next generation of tax payers. If we accept a similar budget next year, there is the realistic prospect of future economic growth putting us on a proper trajectory.

The much-heralded public sector pay cuts of €1.3bn have been instigated. There will be the predictable protests and revulsion. ‘Fairness’, like beauty, is in the eye of the beholder. Because pay represents 33% of total current public expenditure, it was unavoidable that bench-marking payments are now reversed. Ireland has a transparent salary league table with the other 15 states who are members of the euro zone. We can compare like with like – whether it’s the judiciary, nurses, teachers or the police. In fairness, the Taoiseach and his colleagues have led with the sharpest adjustment. In the absence of a currency devaluation, painful pay adjustments are unavoidable.

The tragedy of this budget is that it has taken the Government precisely two years to respond to the global credit crunch and consequent economic depression. The 2007 and 2008 budgets were disastrous.

The previous welfare increase of 3.5% has been reversed with a 4.1% cut now. Given annual deflation of 6.8% in the cost of living, the logical equitable measure would have been to freeze welfare rates for two years. Cowen and company lost the plot in the autumn of last year with their budget and pay deal (with a 6.5% wage hike). Many commentators said so at the time.

The welfare reforms favour administrative expediency above fairness. The 10% or €16 cut in child benefit is an arbitrary blunt measure. Either taxation or means testing of child benefit to higher earners would have been more reasonable. Middle class mothers have prevailed in this debate. The old-age pension of €12,000 a year has been preserved intact. The pressures on young parents, with costly mortgages are undoubtedly greater than many senior citizens. They invariably own their own homes. Political pragmatism rather than fair play has driven welfare reform.

The recent Prime Time Investigates programme has exposed rampant welfare fraud. Immigrants are systematically carrying dual identities in welfare and paid employment. They use the names and PPS numbers of returned immigrants to claim for phantom recipients. When the cheats are exposed, there is minimal recovery. A policy of zero tolerance is now required to deter these endemic scams. The rent allowance scheme, costing almost €500m appears out of control. The significant drop in residential rents has not been reflected. Substantial reform is required to both this and the mortgage income supplement scheme. Landlords and banks need to have reduced exchequer subventions.

The taxation debate has featured the need for higher taxes on top earners. The logic of abolishing the previous PRSI ceiling of €75k has been compelling. The absence of change here is surprising. Employee PRSI has long since ceased to be a real social insurance fund. It is a tax or levy by any other name. When PAYE, PRSI and levies are combined, our top marginal tax rate is 54%. This exceeds that applying in most of our competitor countries.

In total, 48% of all income tax is paid by the top 4% of earners. The Robin Hood rhetoric has a superficial appeal, but lacks substance. The decision to maintain marginal rate tax relief on pension contributions for the present is well justified. Pension funds are underfunded, unattractive and taxed on the way out. Knee jerk responses are counter-productive. Instead a cap of €2m for eligible tax relief on any individual pension should be applied.

The carbon tax of 5 cent per litre on motor fuel is a sop to the Greens. It won’t stop the floods or remedy climate change. Broadening the tax base by water charges would have been preferable environmentally and economically.

Brian Lenihan has adopted all the tricks of the trade of creative accounting. The banking crisis will require recapitalisation in 2010. Anglo Irish Bank will certainly require a cash injection of €4bn. No mention was made of this in the Minister’s speech.

We can anticipate daily rituals of protest marches outside the Dáil gates in Kildare Street in the weeks ahead. Similarly, the Dáil plinth will portray TDs wrestling with their consciences and demanding constituency favouritism. Crucial Independent Deputies’ votes have been nurtured with sweetheart deals. This soap opera can run on, provided the Government avoids a significant u-turn.

Any fault line created by back-tracking can only undermine the international fiscal credibility of this Government. Fine Gael and Labour will dance an adversarial jig, but they too know that if they were in power a similar series of budgets will be unavoidable. Bertie’s previous election adage, "A lot done – more to do" was leading us over a cliff. The same maxim still applies. Now we are starting to move in the right direction.