THE GOVERNMENT is expected to cut spending immediately after warnings that the country is plunging into a recession, but does not expect to make changes to the tax regime until December’s budget.
Finance Minister Brian Lenihan vowed to take “prudent and resolute action” to deal with problems facing the economy after warnings contained in a report by the economic think-tank, the ESRI.
Mr Lenihan could not confirm precisely what action would be taken, saying he would make a decision after next Wednesday’s half-year revenue receipts become available.
Accepting that the government is on “red alert” the minister said: “The crucial figures for us will come out next Wednesday when we have our mid-term revenue receipts, when we know what we have got in our own bank this year at the department of finance. Then we will decide what action we need to take.”
Mr Lenihan said any changes to taxes could wait until next December’s budget, but indicated some spending cutbacks would be implemented immediately.
“On the spending front, if we are to take action, we have to start taking action now because the reality is you cannot reposition spending for 2009 unless you start taking action in 2008,” he told RTÉ Radio’s News at One.
“I am saying there’s a serious problem and we have to recognise it and deal with it,” he said.
The Government will also continue to invest in capital projects. “We have to look at where we need to invest in the future. We need to invest in those projects that will give us a real return in the future,” said Mr Lenihan.
He said: “As far as the operating costs of Ireland are concerned they have to proceed on a sustainable basis. We can’t have a situation where we spend more on current services than we can afford. We have to ensure that the operating cost of this state is sustainable.”
“If we take the necessary corrective action now we will put our economy on a sustainable path for the future.” When the international situation improves, we will be in a position to take advantage from it, he said.
Mr Lenihan said it would not make sense for the Government to borrow €11bn next year, as was suggested in the ESRI report.
Fine Gael spokesman on finance, Richard Bruton, described the ESRI report as a “damning indictment” of Mr Lenihan’s tenure as Finance Minister.
He said the legacy of Fianna Fáil’s 11 years in power is a country where “rip-off prices are the norm and where frontline services are being slashed”.
Mr Bruton said: “The consequences of Brian Cowen’s neglect were to turn a €2 billion surplus into a deficit of €8 billion and rising, which has totally destroyed the Government’s room for manoeuvre in the public finances.”
Five options for the Government:
1. Cut spending on services:
With less money to spend, there will be less to spend on services. But cutting spending on health service, which costs €16 billion a year, and education would cause political problems.
Economist, Dr Alan Barrett, said cutting on services should be done gradually and recommended “a very, very slow pace of growth in expenditure over the next number of years”.
Dr Barrett said next year’s budget should keep services provisions at the current rate and provide for no additional services.
Economist Jim Power said: “We need to cut out anything that is not a priority but front-line delivery of health and education cannot be cut”.
2. Cut capital spending:
The Government could stop spending money on infrastructure such as roads and public transport. But it would be advisable not to cut spending on the National Development Plan in important infrastructure.
The Taoiseach said yesterday the Government will proceed with the capital programme, to position us well for when the economic upturn comes about.
Mr Power said: “The Government needs to look closely at the National Development Plan and start stripping back in areas that would not be a priority. We have to clearly look at stuff that is nice to have but not essential.”
3. Wage restraint:
Containing pay to the country’s 370,000 public service workers is the only way the Government can avoid savage cuts to spending on health care and education.
Pay talks are under way and Dr Barrett said there must be “very severe pay restraint”. Mr Power said there should be a total pay freeze in the public service as long as the economy continues to slow.
This will prove unpopular with unions, but economists believe it is the price they have to pay for job security, as job losses continue to haunt private sector workers.
It was suggested in the ESRI report that the Government should borrow up to 4% GDP next year, which would amount to €11bn to run the country’s finances next year. This would breach European borrowing guidelines of 3%. Finance Minister Brian Lenihan said there are “grave difficulties” with this option and it would not make common sense.
“There are restricted amounts which a prudent government should borrow at the outer limit. We can’t go back into the position of saying we can fund our day-to-day expenditure by borrowing,” he said.
“It would send out a very, very negative signal about Ireland if we were to breach the norms good economies practice in relation to borrowing.”
5. Review the decentralisation plan and get rid of quangos:
Labour leader Eamon Gilmore yesterday asked if would make sense to proceed with the €1bn decentralisation process given the economic circumstances. But the Taoiseach said that the plan has been a success.
There are more than 400 so-called quangos, or government bodies and agencies which Labour have repeatedly said are a waste of money.
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