We are paying a heavy price for the unsustainable cost of government

Over the past two weeks the Government has spun the message that previous fiscal targets are to be relaxed. An exchequer annual deficit of 9.5% or €17.5bn could stretch to 12%. We are now embarking along the same road as the 1980s

ONE of the best pieces of business advice I ever got was from Fergal Quinn. “Always focus on your cash flow,” he said.

Regardless of whether a business is expanding rapidly, retrenching or consolidating — you have to ensure in all circumstances you have sufficient cash to get through the following six to 12 months. This advice applies equally to the Government.

The most vital yardstick by which this emergency budget will be assessed is that of the international bond market. Ireland’s AAA rating has effectively been lost already. The premium above the German borrowing rate has fluctuated from 284 to 220 basis points. If this differential rises further we can safely conclude there is not a financially credible plan to stabilise the Government’s finances. The verdicts of Standard & Poor’s and Moody’s (rating agencies) are critical.

Over the past two weeks the Government has spun the message that previous fiscal targets are to be relaxed. An exchequer annual deficit of 9.5% or e17.5bn could stretch to 12%. We are now embarking along the same road as the 1980s. The interest on debt is already absorbing 12% of all taxes.

As the state’s debt escalates from e30bn to e70bn, more of our tax revenues will be absorbed in interest payments. We should never forget that by 1988 all our PAYE went to service interest on the national debt. It is not a case of deferred pain. Instead it is added severity of pain beyond 2013. This recession is set to officially become a “depression”. The qualifying criterion is a 20% reduction in GDP over a rapid period. This is on a par with the US depression in 1930 and modern day declines in South America, Japan and the Nordic countries in the 1980s and 1990s. By now we nearly all accept the extent of our economic problems. However, we have not digested the consequences for Government services.

Proposed tax hikes have been leaked to the media. The direct taxation on incomes agenda suggests possible tax rate increases from 20% to 22% and a new top rate of 48%. The 40% of earners outside of the net are in jeopardy of losing their tax exemption status. Alternatively, the income levy could be doubled to 2% up to e100k, 4% up to e250k or 6% above this. All of these will inevitably increase the cost of employment thereby ensuring that we exceed 500,000 in the number of jobless.

Last Sunday, the Taoiseach referred to “widening the tax base”. This could mean a new property tax or additional carbon taxes. Perhaps new charges for household water or the reintroduction of third level college fees are planned. Last October, the Government invented 17 new tax measures. They are now following the same agenda. This is the wrong approach. It will fail.

Imagine Dunnes Stores clothing department faced, like the Government, a 20% reduction in revenues from sales. In the face of weakening demand, lowering economic output and fragile consumer sentiment, the last measure they would take would be to increase their prices and margins (Brian Lenihan said in January there would not be another budget as further adjustments would have to come on the spending side).

Since the October budget, spending taxes have reached a point of diminishing returns. Shoppers are driving even further from the south to avail of the 6% VAT differential in the North. Unemployment has risen by 50,000 as more businesses fail to retain competitiveness. Investment is at a standstill. The patient is in intensive care- extracting three pints of blood won’t help.

The Taoiseach is correct when he explains that tax revenues have reverted to 2002 levels. I fail to understand why he can’t follow the logic of his own diagnosis and set out a path to downsize government to 2002 levels. Despite three previous attempts at fiscal stability the Government have utterly failed to cut public spending. In fact, total state expenditure is still on the increase.

There is no escape from the necessity for public services and entitlements to contract. Expenditure before the 2002 general election was under e30bn. That’s approximately what we can now afford. The Government seem incapable of confronting a significant severance and redeployment scheme within the public service. Endemic waste is still prevalent in the public sector.

A typical story: A car dealer had been decimated by a 63% annual reduction in January car sales. January and February are a garage’s equivalent of a corn harvest in August to a tillage farmer. When asked how he could survive, he replied that he was fortunate to have signed up the OPW on a property lease for a newly constructed office block. The appalling feature of this story is that in the two years since then, the building has remained idle and unused. How many more such empty properties are we paying for?

The Taoiseach and Government should tell the public that the National Development Plan is to be abandoned. A e4bn ceiling should be placed on the public capital programme for each of the next five years. This would save over e4bn this year. The e5bn Metro North plan must be aborted. It has the potential for a significant cost overrun and shortfall on passenger projections.

IT IS projected that total welfare this year may exceed e27bn. It is a farce that we are paying e7m a year for up to 7,000 children who reside abroad. There is clear evidence of cross-border welfare abuse. Universal benefits and entitlements are no longer affordable. €52m alone is being spent on accommodation for asylum seekers — this excludes EU immigrants legitimately living here. We cannot sustain the cost of €800m on Overseas Development Aid.

With 357,000 employed in the public sector, a wholesale cull of quangos cannot be deferred any longer. Out of the 112,000 working in the Health Service, 34% are nurses, whereas 16,000 are administrators. No proposal has been tabled for a severance package for unnecessary bureaucrats — even worse, no imaginative retraining and redeployment programme has been proposed to transfer staff. Meanwhile, the management of every business in this country has been preoccupied with reforming their personnel.

The latest example of “rip off” is evident in education. In our seven universities senior academics, deans and provosts are due another 8% special pay award. On average they lecture less than eight hours a week. Our top 50 dons share a e10m bonanza. Low productivity, almighty salaries and minimal accountability rule OK.

Populist measures to ensure greater tax equity such as a crackdown on tax exiles are welcome and overdue. They are being used to sugar a pill of an extra e3bn in taxation. The Government, the body politic and the Department of Finance seem devoid of the cost management skills to reduce public expenditure by e7bn. Until we confront the unsustainable cost of government we will have an endless series of budgets with a spiral of yet more borrowing and taxation. Is there anyone in Government buildings prepared to get down and dirty on behalf of the taxpayer?