JIM POWER: Debt burden will need to be eased for us to recover

The annual budget has always attracted considerable attention in Irish popular discourse, but the attention devoted to Budget 2013 has reached a whole new level and has been speculated about almost since the minister for finance sat down after his budget speech a year ago.

This state of affairs is not terribly surprising, as the task of taking €3.5bn out of a struggling economy that has seen a total fiscal adjustment of around €24.5bn between 2008 and 2012 was never going to be easy or painless, and so it has proven.

Unfortunately, this persistent speculation has had a detrimental impact on confidence levels in the economy and has hampered consumer demand and business investment intentions.

The total consolidation amount was slightly lower than expected at €3.4bn. The composition of the adjustment was slightly different than had been promised. Current expenditure cuts totalled €1.44bn, capital expenditure cuts totalled €0.5bn, new revenue raising measures totalled €1.21bn and the carryover effects of revenue changes announced last year totalled €0.22bn.

Despite the change, it is still a hell of a lot of money to be taken out of an economy that is still struggling.

Heading in to the Dáil yesterday ahead of the budget, Michael Noonan promised that his offering would offer measures to stimulate employment in the economy. In the event the key measures aimed at helping small business and employment creation are included in a 10-point tax plan for SMEs.

The measures include favourable corporation tax treatment for start-ups, an increase in the cash receipts basis threshold for Vat from €1m to €1.25m, an improvements in the Foreign Earnings Deduction for work-related travel to certain countries and an incentive to hire workers from the ranks of the long-term unemployed. A fair amount of verbiage was also directed at measures to improve credit flow to SMEs, including a more vigorous and better-staffed Credit Review Office. Increased funding is also being given to state agencies tasked with job creation.

The reality is that in current financial circumstances, it was never going to be possible to introduce a vigorous job creation package. Hence the measures announced yesterday have to be welcomed, but the reality is that they are tinkering at the edges.

The likelihood is that for the vital SME sector, this budget will not alleviate any of the main pressures that they are trying to cope with and will in many ways exacerbate them. The key issues for the SME sector at the moment are lack of demand in the economy, difficult export markets, penal commercial rates and local authority charges, access to adequate and affordable credit, and commercial rents.

By taking more spending power out of the economy, demand conditions are likely to remain difficult. The other areas of concern have not been addressed in a manner that would make a significant difference.

The initiative to pay a subsidy to employers to take an unemployed worker off the live register is a positive one, and may encourage some SMEs to hire, but until demand conditions improve, hiring may be a bridge too far for many SMEs. Survival remains the main challenge for the majority of them.

Whatever way one looks at it, Budget 2013 will take massive spending power out of an economy where domestic demand is already under serious pressure. Many taxes have been increased and this will become very apparent over the coming days.

Unfortunately, once things settle down over the coming weeks and people become acclimatised to the latest crucifixion, attention will start to focus on next December when the minister for finance will be looking for another €3.1bn. God only knows where that money will be found, but we can be certain that consumers will be paralysed again during 2013 as they await with dread Budget 2014.

It is all very depressing. We can look forward to further increases in the tax burden and a further diminution in already badly damaged public services in the years ahead.

While the budget presented yesterday will exert a significant negative impact on the economy next year, the reality is that the key decisions affecting Ireland will be made outside of the country — namely the issue of external debt relief and the potential for recovery in what is a very depressed global economy at the moment.

The debt and borrowing numbers in the Irish public finances still make for very difficult reading, despite the pain that has already been inflicted in six tough budgets. To work through the public finance issues, Ireland’s sovereign and private sector debt burden will have to be alleviated. Until this happens the environment for domestic demand, job creation and the business sector in general will remain very challenging.

As a country, we will have to continue to rely on the kindness of strangers and continue to pray hard.