AN Irishman’s notion of foreplay has been described as “Brace yourself, Bridget”. This aptly applies to next week’s budget. The yawning gap between public expenditure and revenue has grown over the past two years and is now at crisis levels.
Political inaction in most policy areas can be relatively harmless. However, business decision-making cannot afford such delays. This is the last chance for the Government to restore order to the public finances. Failure to do so will result in our creditors determining our fate.
The Government is not alone in preparing a budget for 2010. Commercial companies go through the same process each November. Across a range of sectors businesses have had a torrid 2009. For the past 18 months revenue has declined 20% on average. This twin squeeze on gross revenue and profits has resulted in drastic management action. The smart survival moves have focused on preserving cash flow. These have included:
* Pushing out the payment time to creditors.
* Sharp cuts in payroll costs (eg, overtime, allowances, pay rates and staff numbers). * Renegotiation of property costs (despite legal obligations).
* Arranging new supplier discounts.
* Reducing stock inventory levels and seeking alliances to obtain synergies.
These actions have staved off examinership and receivership. Banks are not providing the elasticity of more credit to survive the recession. The common theme of all these manoeuvres is that they both reduce costs and provide liquidity. They have one other significant downside – they are limited to being emergency responses and cannot be extended further.
Many enterprises are literally clinging on by their fingertips. Heavy depreciation and amortisation of balance sheet assets results in paper losses. Higher taxation will cause significant extra job losses and business failure. Indigenous business has never been more fragile.
Finance Minister Brian Lenihan has the same dilemma. Two years ago, his predecessor predicted that tax revenue for 2008 would be €56bn. The recent pre-budget estimate for tax revenue for 2010, on a no policy change basis, is €30.8bn. Brian Lenihan’s previous two budgets in October 2008 and April this year introduced measures to increase tax revenue by €6bn. Despite rate increases, new levies and extra taxes, the total tax take actually fell by €9bn.
Higher spending taxes only succeeded in driving shoppers across the border to the North. Increased capital taxes yielded less returns due to the disappearance of profits and gains. Even worse for the exchequer, some €1.6bn is now due in tax refunds for losses being offset against previous taxes paid. This budget will shape Lenihan’s political legacy. Each of the 1,400 budget submissions paddles its own canoe of special interest. Individually, they contain some merit. The motor industry seeks a car scrappage scheme, which would stimulate extra VRT receipts.
Reductions in stamp duty on property could help clear some of the idle housing stock which overhangs the market. The 15,000 surplus hotel bedrooms could be closed down, restoring order to the market, through the abolition of the tax clawback on capital allowances.
Employers’ demands for a reduction in PRSI and an extension of the employment subsidy scheme would preserve jobs. All of these marginal adjustments are less obligatory than the one overriding national imperative – Government must be downsized.
Lenihan must perform drastic liposuction to the obese state apparatus. This will be painful. The results will transform our prospects. Colm McCarthy’s Bord Snip report has to be the driving force of change. Systematically, with the benefit of inside knowledge, this report set out rigorous reduction of public expenditure of more than €5bn.
The guiding principles were:
* Value for money.
* Eliminating waste.
* Restoring focus to the singular delivery of services
* Targeting resources to where they are most needed.
The concept at work was “zero-based budgeting”.
One of the defining features of our current lack of political leadership, both within government and opposition, has been the sidelining of these recommendations. Throughout the summer and autumn, from the Tánaiste to backbenchers, the Bord Snip agenda has been undermined. Senior civil servants, self-serving quangos and vested interests have prevailed over political cowardice.
We must confront excessive layers of bureaucracy and rationalise the 800 state organisations. Otherwise we risk reducing the trickle of tangible benefits that cross the counter of public administration to the ordinary punter. The mandarins won’t reform themselves. It can only be restructured through decisive political direction. Lenihan is the last hope for immediate transformation. Cowen and the Greens barely acknowledge these realities.
The Department of Finance has sought an average public sector pay cut of 6.85%. This can be implemented fairly by exempting earnings below the industrial average wage and weighted against higher earners. A pro rata reduction could apply to state pensions. The sacrifice required can be implemented in an even-handed manner and on an emergency basis for a finite period of two years to meet the current fiscal catastrophe.
Weeks of negotiation with public service unions have resulted in an understanding about the medium-term need for a contraction of public sector numbers. The recruitment embargo, coupled with flexible redeployment, can achieve reorganisation over a five-year period. To obtain savings in 2010, a compulsory unpaid staff leave scheme has emerged based on 12-14 days per year. This has the superficial attraction of payroll savings.
THE underlying assumption behind this proposal is that if this level of work output is taken from the system, then there will be minimal impact on services. Are staff underemployed? If so, there should be rationalisation.
I am deeply sceptical of this scheme. It is a classic ‘smoke-and-mirrors’ solution. It gives the temporary illusion of reform without achieving it. Replacement staff in hospital wards and school classrooms may result in extra overtime or temporary substitution. Staff rosters on the ground may not achieve target savings. There are no lasting tangible cost reductions in the areas of pensions, increments or allowances.
Solutions based on preserving partnership, political compromise and avoiding conflict are top of Cowen’s agenda. The mirage of public sector reform is preserved. Meanwhile, there will be real cuts in payments to jobseekers under 23. Steps will be taken to ensure immigrants can return home to keep the live register under 500,000. Despite increased redundancies, rampant emigration is restraining the jobless statistics. The Greens will get their carbon tax and a concession on child benefit cuts. The Government can survive Dáil votes and pray for global economic recovery. No doubt some perennial green shoots will soon be detected. The circus continues. Don’t hold your breath for lasting solutions next Wednesday. It was always an unequal contest between the national interest and staying in power.