The budget made the wrong calls — and now we have to pay the price

MIDDLE-INCOME Ireland is set to receive the bills for a decade of excessive Government spending. Significantly less take home pay will be a reality from May 1 for ordinary workers.

Budgets are about political choices. The balance is between the three options of tax hikes, spending cuts and extra borrowing. This budget chose the two wrong alternatives — higher debt and savage taxation.

Bertie Ahern convinced us we could cut taxes and spend more. We then found this wasn’t real or sustainable economic progress. Instead it was tax revenue based on transactions on over-valued and un-required property. More than €5bn of annual tax receipts were a windfall gain rather than recurring public income. In the process of trying to rectify those errors, we have abandoned the policies that helped create the Celtic Tiger.

By imposing extra taxes on work, we increase the cost of employment and make Irish goods and services more expensive and uncompetitive. The single biggest tax lever of this and last October’s budget has been the income levy to generate €1.5bn. It disregards family dependents, mortgages and other outgoings. Administrative expediency has resulted in the abandonment of considered, enlightened taxes.

The worst consequence of this measure is that it will accentuate our unemployment crisis.

This is a budget of deferred decisions, masked under the heading of a “multi annual consolidation plan”. Current expenditure is to be cut by €0.9bn this year, whereas in 2011 it is to be reduced by a total of €4.2bn.

Capital spending is to be cut by €0.6bn this year, while in 2011 the adjustment is €2.4bn. Similarly, on the tax side increases are e1.8bn this year but are to rise by a further €3.25bn over the next two years. We are threatened with the taxing of child benefit, a new property tax and a carbon tax. Despite 10 cabinet meetings, they have deferred these decisions until after the local and European elections.

The range, depth and volume of budget analysis can obfuscate basic common sense. Ireland’s crisis in the public finances is dead simple. The Government is trying to sustain a level of public services, financial supports and welfare at a total gross cost of €64bn — whereas state income is only €36bn.

No external force obliges us to spend €21bn on welfare, €7bn on capital spending or €19bn on public service personnel. The standards in our health service, schools, transport and security services are those which are politically acceptable to government ministers. They lecture us plain folk about belt tightening and reduced standards of living. Yet it is they who refuse to implement the solution to the imbalance in the state’s coffers. Tax revenue even after this budget has been raised again by €2bn.

When will the Government learn that we cannot afford our present level of public expenditure? This is an exact replica of the budgetary paralysis in the 1980s. We will suffer the same painful adjustment eventually. The current budget deficit of 11% is unsustainable. Last year 12% of our total tax take went to pay the interest on our national debt. We face the prospect of this doubling within two years.

Our national debt is rocketing from €30bn towards €70bn. This means future budgets will have to be more severe because we are back loading the fiscal problems.

We’ve lost our AAA rating and are being charged higher penal interest rates. We are in breach of our Euro fiscal obligations.

This budget fails to enhance our credit worthiness as a sovereign state. Yet again FF and the Greens have fudged rather than confronted the excessive cost of Government.

Let’s fast forward to the end consequences of failure to attain credible public finances. Unacceptable continuing massive current budget deficits and exchequer borrowing requirements will lead to further erosion in our credit rating. This will increase our interest costs.

This would be followed by the bond market declining to fund us. Ultimately the European Commission, ECB, German Bankers or the International Monetary Fund (IMF) could be called in as a lender of last resort. Their preconditions will mean that they effectively supplant the budgetary role of the Minister for Finance. How would they do things differently?

They don’t have to garner votes or popularity. Their singular objective would be to increase the repayment capacity of the country therefore they would fund productive rather than social expenditure. They would implement tax strategies that would insist on improving our competitiveness.

Some believe this is actually what happened in 1989.

Was it the shadowy hand of the IMF that forced Haughey and MacSharry’s cutbacks? We watch the incompetence of the Department of Finance, who cannot forecast the time of day let alone the economic weather. Perhaps we could be better served with bankers conducting our fiscal correction rather than a hapless Government.

Given the acknowledged need to widen the tax base, I agree with some recent innovative tax proposals. A tax on texts is interesting. With 10 billion text messages sent each year a 2 cent charge could have raised €200m.

A FLAT registration fee on tax exiles of €300,000, would force these big players to decide whether they are Irish or not. Restricting all personal tax reliefs to the standard rate of tax seems eminently fair, relative to conferring greater benefits on those who maximise their tax shelters.

I have never really understood the PRSI ceiling on employees’ contributions. The principle of a social insurance fund started out as a contribution system (with old fashioned stamps). This was to indemnify workers against the risks of illness and unemployment as well as providing for a pension in old age. With the abolition of pay related and other benefits, it has in effect been another tax on earned income. It is irrational that heretofore incomes of more than €52,000 per annum were marginally charged less than smaller salaries. This change of the threshold to €75,000 is a missed opportunity. There is an equity case to abolish the PRSI ceiling.

I have consistently advocated that public expenditure, both capital and current, needs to be cut by €7bn. Where has Bord Snip gone? We have to reduce public service numbers by 20,000 through a severance and redeployment personnel plan. It will take five years of the recruitment embargo to achieve this through natural wastage. Over the past seven years non-frontline administrative posts across the public service have increased by more than 25,000. There isn’t the tax revenue to support these posts. The biggest budget bombshell was the extent of the rescue of the banks from their bad debts. This is the ticking time bomb of this budget. I do not trust any state agency to start valuing toxic assets. This may become a vehicle to let failed bankers and developers off the hook.

This issue deserves our full attention — I’ll outline next week the extent of the Government’s highest stakes gamble.


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