‘Legacy cuts could worsen budget’

Despite the Government lowering its headline target from €3.1bn to €2.5bn, so-called legacy cuts could increase the real adjustment made via tomorrow’s budget announcement, an economic think tank has warned.

Dr Tom Healy, director of the Nevin Economic Research Institute, said: “Whatever adjustment is announced on Tuesday will take further money out of an economy already on its knees in terms of retail sales, employment, and debt.

“Any reduction in that adjustment is to be welcomed.”

As far back as July, the institute was calling for the 2014 adjustment to be closer to €2bn than €3bn, while it has also suggested spending cuts could be ignored in favour of raising additional income tax from the top 10% of households, something opposed by the likes of Ibec.

The institute chief warned yesterday that the targets quoted by the Government are unlikely to be the reality.

“Last year, the Government’s headline figure for current spending cuts was approximately €1.5bn. In fact, they announced over €2bn in current spending cuts over a full year.

“The difference is accounted for because some of the cuts kick in gradually over time,” Dr Healy said.

He added: “Legacy cuts and taxes can thus effectively increase the adjustment in subsequent years.

“The real impact of Tuesday’s adjustment on households, communities, and the economy may, therefore, end up being considerably more than the headline adjustment figure.”

Dr Healy said it is important that both the pre and post-budget debates are not solely based on the headline figures, but also take into account “the effective adjustment and its impact on the economy, including ‘legacy’ cuts and increased taxes”.

“Every year, the minister for finance announces a ‘fiscal consolidation’ of a given amount,” he said.

“While some of the changes made to achieve that amount take effect from the following January, others kick in more gradually.”