Welcome to the farce of long-term non-reforms

AS Peter Drucker once said: “Effective leadership is not about making speeches or being liked; leadership is defined by results not attributes.”

By Drucker’s measure of leadership, Budget 2012 is a complete failure.

The budget was launched with much pomp and circumstance. But in the end, the highly emotive language of “change”, “long-term thinking” and “fundamental reforms” served to cover up the return to the failed policies of the previous government. No real change took place and no real reforms were launched.

While much of the attention is focused on the specific headline measures, especially those applying to the poor and unemployed, very little analysis has been deployed to cover the budgetary dynamics — the raison d’etre of the current austerity drive.

According to the Budget 2012 ministerial duet of Brendan Howlin and Michael Noonan, public expenditure reductions envisioned under the budget will amount to €1.4 billion in current spending and €755 million in capital investment cut.

These are gross savings that will have second-round effects of reduced associated tax revenues, and thus, their impact on deficit will be lower than envisaged.

Capital savings will come from mothballing a handful of white elephants carried over from the Bertie Ahern era, but these will cost jobs and neglect in existent capital stock. Coupled with changes to capital gains tax, capital acquisitions tax and DIRT, these measures will depress investment in the economy that continues to experience collapse in this area. Yet absent investment means there can be no jobs.

Perversely, the Coalition thinks the only capital investment worth supporting is that in property. The economy, based on high value-added services, and knowledge and skills of its workforce, is fully incentivised for another property boom and fully disincentivised to invest in skills and entrepreneurship.

The latter disincentives arise from the upper marginal income tax rate of 53% for all mortals and a special surcharge to 55% on the self-employed. Never mind that self-employment is usually the first step towards entrepreneurship and business investment.

Short-termist reductions in one-parent family and jobseekers’ benefits are counter-productive to supporting large groups of single parents in their transition to work. In the place where real reforms towards workforce activation should have been deployed, we now have an “all stick and no carrot” approach.

The health budget is one of three mammoths of the fiscal ice age, with spending this year projected to reach €12.83bn, up 10.5% on 2010 levels. Instead of rationalising management systems at the HSE, the area where the bulk of waste resides, the budget is achieving “savings” by charging middle-class insurance holders more for the very same services. A new tax, in effect, is now called “savings”.

This approach to accounting for sovereign funding and expenditure flows creates an illusion of something being done about the constantly rising expenditure while avoiding challenging operational and structural inefficiencies in public sector spending.

Budget 2012 is a small insight into a collapsed capability of a leadership system unable to cope with fiscal pressures and incapable of change.

Nothing else highlights this better than the host of new taxes that accompany the incessant drone of the “jobs, jobs, jobs” refrain from the Government.

Take the illogical hikes in VAT and fuel-related taxes. A 2%-3% increase in the cost of shopping in Ireland, coupled with increases in the cost of petrol and diesel, and a massive increase in tobacco taxes will triple the incentives for consumers to flee the Irish retail sector in favour of the North and to transact in the black markets.

None of these substitution effects are priced into Government budgetary projections, despite the fact that an error of omitting direct substitution effects of tax increases would have been a fatal one for an undergraduate student of economics.

The entire exercise looks like the repeat of Brian Cowen’s grand strategy of waiting until something turns up and rescues us. Thus, behold the rosy budgetary projections for 1.6% GDP growth in 2012, published just days after the OECD confirmed its forecast for 1.0% growth and the ESRI published its outlook with 0.9% growth projection.

These differences are material. Should the budgetary assumptions on growth fail to materialise, the cuts and revenue measures the Government envisioned will fall far short of what will be needed to keep the headline general government debt to GDP ratio at bay.

Karl Marx famously remarked that history repeats itself twice, first as tragedy, second as farce. Based on government policies over the last four years, history ultimately blends into a farcical tragedy once leadership failures become a norm.

Welcome to the farce of the long-term fundamental non-reforms of this new Government.

* Dr Constantin Gurdgiev is Adjunct Lecturer in Finance at Trinity College, Dublin