The age of Irish austerity will not be short-lived
ANALYSIS:The budget suggested the reasons for not cutting faster and deeper were political rather than economic
These are not good times for those of an optimistic disposition. At home, things have been grim for the best part of half a decade. In Europe, recession has returned and the euro’s foundations are still not built to last. In the US, politicians are putting recovery at risk as they fight over the federal budget.
The fighting in Government Buildings and around the Cabinet table in the run-up to Wednesday’s budget was far less intense than in Washington, and it was mostly for show. The Coalition partners met the budgetary targets they are obliged to meet under the terms of the State’s bailout, and they did so (again) by spreading the pain so as to minimise the risk of confrontation with any powerful grouping or those with vested interests.
Opportunity-in-crisis radicalism is not the way things are done here. Even the property tax, which is the most radical departure in the budget package, is designed to generate just €250 million next year. To put that in perspective, the cash raised from the tax will cover just one euro in every 280 the Government has committed to spending next year.
The salami-slicing approach to regaining control of the public finances has economic as well as political logic. Austerity dampens economic activity, and the more of it there is the less growth there will be, all other things being equal.
But the Government is trying to have it both ways. On the one hand it has rejected the suggestion of the independent budgetary watchdog – the Irish Fiscal Advisory Council – that it do more to reduce its deficit and debt. In making that rejection, Minister of Finance Michael Noonan said larger adjustments than planned would harm growth, with knock-on consequences for tax revenue.
On the other hand, Wednesday’s budget analysis shows the €3.5 billion package to be introduced in 2013 will have limited revenue-dampening effects. All this suggests the reason for not cutting deeper and faster in the hope recovery comes sooner was political rather than economic.
Large scope for cuts
Without in any way downplaying the difficulty cuts of any kind cause for those whose income diminishes because of them, the scope for cutting is large. What’s more, the narrative to explain a more radical route to State solvency is strong and straightforward when the full bubble-to-bust period is considered.
In 2002, the year the property bubble began to inflate, the State spent some €44 billion. Next year the Government has pencilled in spending of €70.4 billion.