Cuts dominate agenda as government adopts Fianna Fáil strategy
The previous government’s fiscal adjustment targets are being maintained for the most part and there is no suggestion of any serious renegotiation of the EU/IMF deal.
The lofty wording in the document that the parties have been granted a mandate to renegotiate the deal would seem to be totally at odds with the fact that all they are committing to is a reduction in the interest rate on the deal.
The scale of the financial commitment by the state is not mentioned. The total debt exposure of the Irish state could cost between €5 and €10 billion a year in interest alone. A reduction of the interest rate below 5.8% which will probably be very modest will not in any way lessen the fact that Ireland has no realistic possibility of paying. At the end of 2010, our national debt without the deal stood at €93bn. The deal adds a further €67.5bn on to this figure, bringing it to €160.5bn. This amount would need to be repaid plus the interest every year.
None of this seems to worry the political parties. Their priorities are to: stop any further downgrading of our sovereign credit rating, which explains why there is no serious suggestion of a radical re-negotiation; to delay further recapitalisations until the banks are stress tested; for the government to sell its stake in the banks as soon as possible; rid the banks of the surviving directors who contributed to the banking crisis; improve decision making and transparency in NAMA and provide more ‘affordable official’ lending to the banks, rather than emergency measures.
These measures are necessary but any government should pursue these objectives. They will do little for the economy, however. Also, it is difficult to see how the government can stop any downgrading of the country’s credit rating, which may well happen if the public finances deteriorate as a result of its failure to countenance any serious stimulation of the economy.
The proposed Economy and Recovery Authority will be geared to investing in broadband and energy grids alongside upgrading the water networks. These will be slow to develop and €1.9bn over four to five years will have a negligible effect on economic growth.
However, the government’s fiscal adjustment may very well hinder a strong economic recovery. The partners will stick to the previous government’s budget, taking €6bn out of the economy this year. Next year, it will take a further €3.6bn out of the economy. However, the previous government planned to make this up by cutting €2.1bn from expenditure and increasing taxes by €1.5bn. Given that the incoming government has pledged not to increase taxes, this will mean that it will cut €3.6bn next year and more than likely, €3bn each year from then until 2015.
These cutbacks are well signalled in the document. It certainly plans to remove tens of thousands of from the live register through a clampdown on welfare fraud. It will make 25,000 public sector workers redundant by 2015. It will “go beyond the recommendations of An Bord Snip Nua” to rationalise the public service.
It will eliminate ‘non-priority’ spending and ‘non critical functions’; It will force all social providers to make cuts and it will not bailout distressed mortgage holders beyond a modest increase in mortgage interest relief.
The Labour Party doesn’t seem to have got the proverbial look in when it came to the critical fiscal planning end of the document. Its alternative budget last December was to have a 50/50 divide between tax increases and spending cuts. This document is simply all spending cuts. These measures will dampen the economy, will leave unemployment stubbornly high in the years ahead and will spur emigration.
The economics of health delivery in the document are geared firmly towards the full privatisation of healthcare. This is the Fine Gael model of universal privatisation of health which will pay for GP and hospital care. Under this model, the hospital insurance fund will reward more efficient hospitals who treat more patients and smaller, less efficient hospitals will close down. This ‘money follows the patient’ practice will force hospitals to discharge patients more quickly in return for funding. This emphasis on cost cutting is necessary, given that the government does not collect any dedicated funding for the purchase of the health insurance.
This is the antithesis of the fairer model of Universal Social Insurance where a small payroll tax gathers the funding which is then ring fenced for health and which purchases insurance for all. As such, it is not subject to the vagaries of the public finances. A recent study by TCD showed that a 4% gross payroll tax could fund a free health care model for all in addition to geriatric care. This model operates in France and Germany and is far sounder. However, taxes are anathema in this programme.
Finally, this article is written from the perspective of one who believes in putting people first. Some might categorise this value system as social democracy and Keynesian. Others might consider it socialistic or left wing. I have no problem with the appropriation of any of these terms to my work.
* Tom O’Connor is a lecturer in Economics and Public Policy at Cork Institute of Technology.
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