Despite harsh nature of budget, there is still a lot of pain to come

BUDGET 2010 is quite an extraordinary budget. It is one of the thinnest budget books seen in some time and the speech was very short. It is dominated by expenditure measures, with little of immediate interest on the tax side. For example there was no change in tax bands, allowances or rates, but there is a promise of tax pain to come further down the road.

Most of the budget had also been leaked over the past couple of weeks, so the Government appears to have done a reasonably good job in managing expectations and there is little in the budget that should come as a shock to anybody who has been observing the budgetary debate in recent weeks.

Having said that, an awful lot of people will be considerably worse off come January 1, particularly public sector workers.

The decision to cut public sector pay by 5% on the first €30,000 of earnings is harsh, particularly as many of those earning below €30,000 pay no tax. So for somebody earning €15,000, the net wage is the same as the gross wage, so the 5% cut is severe.

The key priority of the budget had to be to stabilise the public finances. The notion that we could continue to borrow €460 million per month, which is what we have done in the first 11 months of 2009 is simply not a sustainable proposition. As promised Brian Lenihan has made a fiscal adjustment of just over €4 billion. The breakdown of the bulk of this is €1bn coming from payroll savings, €760m from social welfare cuts, just under €1bn in the day-to-day running cost of the country, and €961m in capital spending cuts, with this mainly due to lower tender prices. The €2.1bn targeted from reductions in the day to day running of the country has many aspirational elements and is relying more on achieving efficiencies rather than real cuts.

On the taxation side, the much-vaunted carbon tax has been introduced. This is clearly just a revenue raising measure rather than a real environmental commitment. Some very modest stimulatory measures were also introduced. These include a reversal of the VAT increase introduced in the October 2008 budget, a car scrappage scheme and reduced excise duties on alcohol. The reduction in the VAT rate from 21.5% to 21% will hardly set the world alight – a significant cut would have been required to stimulate activity. The car scrappage scheme is a good idea, but €2,000 would have been more effective.

Given the deep economic malaise in the Irish economy, these measures will not do a lot to lift growth, but a little is better than nothing. The reduction in excise duty on alcohol is a retrograde step and will just further fuel the deeply ingrained culture of alcohol abuse in this country. From a social order and health perspective, this is not a good move, but has been motivated by the cross-border shopping craze.

Budget 2010 is harsh, but there was no choice. Ireland must reduce the deficit to 3% of GDP by 2014, and it was always vital that Budget 2010 would be consistent with that objective. It is likely that over the next couple of days, international observers will look in at Ireland now and conclude that the Government continues to take corrective action to stabilise the public finances. This is badly needed in the context of the vast amount of money we are now borrowing.

The assertion made by the minister for finance that we have turned the corner and that the worst is over does not sit that comfortably with me. It is hard to believe that we have turned the corner. While we saw no meaningful changes in direct taxation, there is a promise of considerably more pain. We are now promised a site valuation tax, metered water charges, further carbon tax measures, and a new universal social contribution, which will replace employee PRSI, the Health Levy and the Income Levy in 2011.

All in all, the budget should be viewed reasonably positively from an economic perspective, but there are negative social consequences.

However, the best contribution the Government could make to the social agenda would be to get the economy growing in a sustainable way as quickly as possible.

Despite the harsh nature of the budget, there is still a lot of pain to come and we can be certain that this time next year, we will be struggling to come up with another €4 billion in fiscal adjustment. There is no choice however, and at least the minister is now addressing the key issues in a reasonably strong manner. Some measures to stimulate employment, such as cutting employers’ PRSI would have been welcome, but we can’t have everything.

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