Spectre of budget looms large on the horizon

The Government said two weeks ago that Budget 2011 would be unveiled on December 7, which is 11 weeks away from tomorrow.

And the realities of what that dark December Tuesday afternoon might bring were brought more sharply into focus last week as the Minister for Finance Brian Lenihan indicated the previously-signalled €3 billion package of cuts should be regarded as a minimum.

That immediately sparked fears about just how draconian this year’s instalment of austerity could be, with some speculation that it could end up being as large as €4bn. That latter figure was, however, quickly played down by the Government, which leaves one thinking that something in between is what is being considered.

Naturally, all of this has triggered renewed debate about where the axe is going to fall in this budgetary round – which will be the fourth since October 2008 as the Government’s programme of fiscal correction enters its third year.

The minister had already announced €1bn will come from lower capital spending. However, it is worth highlighting that the monthly Exchequer returns for August show capital spending is running some €800 million (24%) lower than had been budgeted for by the Department of Finance for this stage of the year.

Maybe the observed shortfall will be made up over the remaining months of the year so that the planned €6.4bn figure for the full year will be reached.

The Government reiterated its capital spending plans amid much fanfare in July with the publication of its Infrastructure and Investment Priorities strategy document.

However, the extent of the pullback so far this year looks large, even allowing for timing issues, and thus might be an indication that Mr Lenihan wishes to retain some flexibility in terms of what this area could contribute to further savings if necessary.

But even if capital spending were to face a further chop of say up to €500m to around €5bn – which would represent a 46% cumulative reduction from the 2008 peak of €8.9bn – that still leaves something of the order of €2bn to be found elsewhere.

The McCarthy Bord Snip Nua report should be of further assistance to the minister. Recall that Colm McCarthy identified potential (non-wage) savings in day-to-day spending of €5.3bn. Given that last year’s Budget announced a €2bn cut in current spending on top of the €1bn linked to the cut in public sector pay rates, that would suggest there is a menu of further options perhaps totalling over €3bn to be explored from this source.

The McCarthy report identified the potential for reducing numbers employed in the public service by over 17,000, for example, which would deliver full-year payroll savings of €700m.

And it does appear to be the case that the Department of Finance is implementing a very tight public service numbers policy at present, so a lower worker head count is an area likely to make a contribution to the overall consolidation effort.

In addition, recent soundings from Mr Lenihan suggests there will be some taxation element to this year’s package. Bringing some lower-income taxpayers into the tax net would contribute to a necessary widening of the tax base.

And if implemented, such a change would almost certainly be accompanied by some further hikes on higher income earners on both progressive and equity grounds, as well as by perhaps some reduction in social welfare rates to curtail disincentive effects arising from interactions between the social welfare system and the labour market.

However, in keeping with the international praise for his efforts last year (where virtually the entire €4bn package came from spending reductions), the recommended course of action for the minister would be to achieve as much as possible on current spending, so as to minimise any further rise in the overall burden of taxation facing the economy.

Simon Barry is chief economist Republic of Ireland with Ulster Bank Capital Markets


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