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  • irishtimes.com - Posted: September 3, 2008 @ 8:48 pm

    Emergency Budget or just a bit of bud-nipping?

    Harry McGee

    The British chancellor of the Exchequer Alasdair Darling gave the most spine-chilling quote of the year last Saturday when he said that Britain was facing its worst crisis in 60 years.

    Tonight Finance Minister Brian Lenihan was asked his opinion on it at a briefing for political correspondents. He dismissed it but did accept that from a financial and fiscal perspective it’s the biggest challenge the Government has faced since Ray MacSharry was in ‘Mac the Knife’ mode back in 1987.

    Fiscally, moving the Budget forward by seven weeks will not make all that much of a difference. It’s Budget 2009 and the Finance Bill that implements its measures also says 2009. That means that the fiscal measures can’t be introduced until January2009.

    Granted, any increases in excise duties will come into effect immediately but they won’t really affect the overall financial performance for 2008.

    Which is disastrous, not to put too fine a point on it. Taxes €5bn lower than expected (and maybe €6bn). A full-on property slump.

    So why the need to shift everything forward for seven weeks?

    Well, the decision is political. It is an unprecedented move and is probably designed to show that the Government is doing something, is taking action, is ready to make the tough choices that will have to be made.

    Lenihan gave no indication of what measures he will take. He attributed the dramatic downtrun to property but also to the international credit crunch. His focus on the liquidity problem where banks won’t lend to banks gave rise to some speculation that the Government might intervene and back-up or guarantee loans for homebuyers. There are economists like the excellent Alan Ahearne in NUI, Galway who say that there should be no intervention, that the property market needs to be left alone to correct itself, no matter how painful that is.

    A few other hints? Lenihan referred to every 1 per cent rise in public sector pay costing €180 million. That’s a no-brainer. Wage restraint/freezes will be the order of the day.

    Otherwise we’ll wait.

    Today Dermot Ahern called for cooperation from the opposition parties.

    Will they cooperate?

    For the answer to that, see the response that Michael Bailey gave to Jim Gogarty when he asked whether they should ask Ray Burke for a receipt for the £30,000 bungs they gave him.

    • Dan Sullivan says:

      Gas that when asked on RTe if this early budget would mean more cutbacks that Brian Lenihan replied by talking about minister’s having to clear their diaries and roll up their sleeves. So, they’ll be doing work for change eh! Err… and I suppose no chance of answering the actual question Brian?

    • In the analogy Ireland PLC, where the cabinet is the board and Lenihan the CFO, it seems ludicrous to take tax money which is in very short supply and use it to put together a package of incentives for the construction industry. I often feel that talk of “confidence” has come to replace real monetary decision making in Ireland. However incentives for house buyers can only succeed if those same buyers are confident enough in the Government to go against their current mindset and all indicators in the house market. Does the Government really believe it has that power to inspire that confidence? Is it willing to take a gamble with diminishing tax receipts in a climate of cutbacks and pay-freezes to boost a sector that should never of been allowed to become the one of the keystones of the Irish economy that it was? In my own home village in Galway a builder had the banks come after him, buyers were unsure as to the legal status of houses, some of which they had paid deposits on. It’d take a lot to convince people in those kind of conditions. The suspicion arises that any incentives package for builders and buyers will run up against the facts of balance sheets and fear of unemployment around the country.

      I find the budgets being brought forward bizarre in that if between budget 2009 and the coming into effect of the policies unveiled the crisis appears to deepen, will they throw it out and draft a new one or will they sit on their hands and pray to the ECB gods and the American consumer? They’ve already had to effectively admit that one cutback package has been ineffective and far from enough in light of the trend in public finances, and abandon it. Either way it’s going to risk them looking even worse than they will when they have to wield the knife.

    • Harry says:

      Actually, Alan Ahearne, the NUI Galway economist is really interesting on the property tax. He is a strong believer in allowing the property bust play itself out with NO state intervention. He argues that this will only continue to distort the true value of the market and prolong th pain.
      He has spoken of ‘zombie’ companies, those that are artificially kept alive by the banks even though they have no hope of generating enough income to repay their loans. His message here is also simple and unsentimental… banks just have to ball in the loans and then live with the consequences.

    • Dan Sullivan says:

      People will re-enter the market when they think it has reached bottom. There is a lot of talk that the banks are carrying or rolling over non-performing loans to developers but that will show up on the books eventually. It is suppliers and sub contractors that are being hit right now and have been taking the pain over the summer. Only when we see the developers and builders themselves feeling pain will we know that the economic gallstone is nearing its exit point.


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