THIS weekend marks the official holiday exodus of our public policy makers.
The Galway race festival and bank holiday weekend herald the start of politicians putting their brain in neutral and chilling out. While relaxing over the month of August they need only focus on one fundamental event — the December budget. Politics always follows economics. Last year there were multiple hurdles of Nama legislation, Lisbon II referendum and renewal of the Programme for Government. Now, there’s only one show in town.
The national agenda will inexorably move on from banks, bust and blame. Securing recovery is the priority. Ministerial guff about “turning the corner” and “the worst is over” will be displaced by autumn reality.
The global economy is edging into growth. Capital markets, investment activity and export opportunities are all improving slowly. That’s the real economy. Our problem remains the catastrophic and unprecedented imbalance in our public finances. The 2011 current budget deficit will exceed €30bn, almost 20% of GNP. Even discounting the once-off costs of Anglo and Nationwide, the government is spending €20bn more than it is extracting in revenue.
Since the summer of 2007, the painful shock and awe of recession has incrementally washed through society. The first wave hit building workers, estate agents and furniture stores, quickly followed by motor trade, hotels and retail sector. Mortgagees, immigrants, school-leavers and public sector workers have by now had their pockets and prospects diminished. What’s next? The worst austerity package of cutbacks and tax hikes. The country’s creditors are already seeking a premium 5.6% charge on ten year loans. Unless we radically cut the deficit, these costs will rise.
The body politic is at a crossroads of courage. Since the credit crunch struck, this government has had unparalleled analysis. Quarterly ESRI and Central Bank bulletins pinpoint preferred macro policy options. Commission on Taxation, Bord Snip Nua and now Local Government Efficiency Review group have provided detailed action plans. IMF, OECD and umpteen private organisations have incessantly spelled out the necessity for stable public finances. Ministers can no longer be paralysed by information overload. They have exhausted alibis for inaction. The navel gazing must end. National politicians must now step up to the plate of implementing fiscal measures that will repulse voters.
The enormity of this challenge extends beyond the Government Dáil benches. The perilous unpopularity of what needs to be done will ensure that voters appreciate the depth of the fiscal crisis.
Opposition parties have basked in the sunshine of adversarial opportunism. By pointing to 13 years of FF rule, they scored a direct hit in apportioning blame on Cowen and company. It was always a political slam dunk that FF blew the boom. Eaten bread is quickly forgotten. Any TD will confirm that past favours for constituents are irrelevant. The ongoing service you provide for them is what matters. Labour and FG have avoided any specific harsh medicine. An election will force their hand, before voters cast their ballot.
Professor John Fitzgerald of the ESRI has cogently argued that we should front load the pain in 2011. Factoring in the deflationary effect, they argue €4bn of adjustments are favoured. Given €1bn of savings in the public capital programme, this means €3bn of reductions in the current account. It is imperative we don’t have “funny money” solutions. These could include smart con tricks such as: using capital receipts from privatisation or asset sales as revenue; reductions in contributions to the National Pension Reserve Fund; once off cash flow modifications or illusory unspecified administrative savings.
On the grounds of urgency, election timing and investor confidence — early pain ensures greater gain. The extent of the deficit means parity of pain between spending cuts and extra taxation. The tax base has to be widened. Taxation on incomes is the primary source of revenue. A myriad of exemptions, allowances and credits can be altered to yield a billion in extra cash. The relief on pension and property investments can be amended from the marginal rate to the standard rate. Tax credits have effectively removed 40% of workers from PAYE liability. Expenditure taxes of excise and VAT are much more sensitive to diminishing returns from higher rates. Expect thinner pay packets next year.
The Department of Finance stands accused of poor preparation to facilitate an extension of the tax base. Despite years of forewarnings, they have yet to devise a method of taxing or means’ testing child benefit. Either measure would ensure a more effective targeting of €2bn to needy families. Similarly, the bureaucracy to provide for residential property tax or metering of household water consumption has not been put in place.
Our most important department of state is proving not fit for purpose. It’s their job to provide the ways and means of policy implementation. On the spending side, these mandarins have opted for expedient convenience rather than comprehensive reform, eg slide rule flat rate percentage cuts and levies.
Significant expenditure reductions are unavoidable. On a pro-rata basis, social welfare, health and education will bear the brunt of the burden, by virtue of simple arithmetic. The Croke Park deal prohibits further pay cuts, but will facilitate a reduction of 40,000 public service positions over the coming years. The recruitment embargo and subsequent staff redeployment will be a slow burner. Given a higher tax take on the lower paid in employment, there will be consequences relating to the reduced incentive to work if welfare is not adjusted — resulting in a five-day week for those on the live register. Pensioners have enhanced purchasing power in recession due to deflation. Future pensioners will look back in envy at the terms of current private pension benefits.
The pace of rationalisation and mergers in more than 500 quangos needs to be immediately quickened. Talks about talks must be replaced by intensive integration and consequent contraction. Efficiencies and streamlined work practices in public offices is still not apparent. Absenteeism has yet to be confronted. Colm McCarthy outlined the cost of the current teacher substitution schemes. There is little evidence of adjustment. Extra stealth charges are on the way. Anticipate increases in: VHI premiums; bus & rail fares; administrative application fees; third level education costs and bills from local authorities (especially refuse collection). Householders look likely to be liable for a new unified levy — domestic rates by any other name. The sugaring of this bitter pill will be along the lines of the 1% income levy. It was introduced as a crude once off temporary measure, with promised future integration. That PRSI agenda will also be revisited and consolidated. The net outcome of these amendments will be the pilfering of your every pocket.
As our politicos relax and cogitate, they need to ponder the responsibility of their role. Collectively, they have to forfeit popularity. This will come as a congenital culture shock. If they fail to rise to the challenge , they will condemn the country to a decade of stagnation. It’s time for them to earn their crust.
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