Only three departments escape cuts in Lenihan Budget


ANALYSIS:Early in his speech, the Finance Minister Brian Lenihan described the extraordinary events that have rocked the global economy this year and observed that nobody had foreseen the speed with which the global and domestic downturn would gather pace, writes HARRY McGEE, Political Staff.

There was no such sense of unpredictability with Lenihan's first Budget today. From the moment in early September the Government announced it was bringing the Budget forward by two months, the general public has been “softened up” for exactly the kind of a hairshirt package that Lenihan unfurled over the course of 40 minutes on his feet today.

To be sure, the brutal, tough and savage adjectives all applied. Pointedly. There are sharp reductions in current spending for most departments in 2000 allied to the first real increases in income taxes – albeit labelled as temporary levies – for all workers.

And if that was not all, the almost forgotten “old reliables” make a return. With a vengeance. There were substantial increases in excise duties on petrol, on cigarettes and on the 2008 equivalent of a pint of plain, the bottle of wine.

The rationale is brutal in its maths and in its simplicity. Lenihan says that in 2009 he must keep the General Government Deficit to €12 billion or 6.5 per cent of GDP in 2009 (down from 7 per cent this year). That means an additional €2 billion in taxes must be raised next year.

He accepted this is an extraordinary demand: "€2 billion is a very substantial amount of money to seek in any one year, but circumstances are such that there is no option," he said.

But, having said that, there were few surprises. Tax payers have braced themselves for an 'in extremis' response to an unprecedented situation. For once the cumulative – and copious - leaks about where the scalpel would be wielded have proved unerringly accurate. Nearly every measure that has been predicted in the media has come to pass. VAT increases.

The universal availability of medical cards for Over 70s. A 10 per cent reduction in ministerial pay. Closure of army barracks. The jettisoning of the decentralisation programme. There were a couple of surprises – the 8c leap on a litre of petrol (but not diesel) and the steep 50c increase on a packet of 20 cigarettes.

On a political level, paradoxically, one of the major criticisms the Government may have to deal with is that it did not go far enough. It kicked a few of the possibly tougher choices – a complete review of universal child benefit availability; third-level fees; public service reform; a carbon levy – to touch, much of it under the cover of the report from the Commission on Taxation, not due until September 2009.

However, there is no doubting the extent of the impact of the new levies, charges and indirect taxes. Unusually, all workers (including the low-paid) will be asked to pay the one per cent levy with those earning over €100,000 being asked to pay 2 per cent on their income above that level. In addition, there is a half per cent increase in the higher rate of VAT, sharp increases in excise duties, as well as a new airport departure tax, as well as a 2 per cent increase in CGT. A&E charges are doubled to €100 while betting tax is also double to 2 per cent.

Predictably, the main opposition parties rounded on the Budget as an inadequate response to what they described as a self-inflicted predicament. Fine Gael's Richard Burton claimed it threatened to turn a recession into a depression while Labour's Joan Burton excoriated the social welfare increases as paltry.

However, it is indubitable that Lenihan did not have a huge range of easy options at his disposal. The opening position for the State's finances did not make for pretty reading. Lenihan confirmed today that negative growth – or recession – will continue in 2009, with GDP declining by 0.75 per cent. Unemployment will correspondingly increase to 7.3 per cent, creeping up to and above other European states. The only bright note is that inflation will steady at 2.5 per cent.

The approach adopted by Lenihan was set out in the early part of his speech. He repeatedly said he was eschewing any soft option in favour of the following philosophy.

"The Government will reduce public expenditure as much as possible on the current side and as much as sensible on the capital side," he said.

In that context, only three departments will benefit from higher spending, social welfare (which gets an increase of €515 million bringing its overall budget to nearly €20 billion); health and education. But the rises they will receive are marginal, just sufficient to keep pace with the cost of living. And the increases in social welfare budgets are making provision for the growing number of unemployed.

And on the capital side, motorways and Luas projects are priorities. And while Government sources said Metro North was safe, significantly, he made no explicit mention of it in his Budget speech.

The agreement by all ministers and junior ministers, as well as departmental secretaries general, to a salary cut of 10 per cent is more than gestural. It is the political equivalent of top bankers agreeing to forego generous bonuses. Interestingly, Lenihan expressed a hope that "other public servants and leadership and senior positions" would follow suit. It was noteworthy that he also hopes to begin widening the HSE voluntary redundancy scheme for surplus middle management to the public service in November this year. That is a very early date, and perhaps a signal that the Government is prepared to grasp the nettle of reform of public service pay and staff numbers with immediate effect.

Indeed, Lenihan's description of the current situation was unusually blunt. "Our public servants – (and) teachers, doctors and nurses – enjoy very favourable pay and working conditions by international standards. As economic conditions worsen, those enjoying protected status need to contribute in a broader sense to the greater good of the wider economy.

"Payroll costs are a function of staff numbers. One of the most limiting factors… is the lack of flexibility in re-allocating staff resources to the areas of greatest need. This has to change. We can no longer afford the increases in numbers…"

Strong stuff. It will remain to be seen if that language will be translated into deeds after November.

The new income levy will generate up to €1 billion of the €2 billion target Lenihan has set for increased tax revenue next year. The remaining increases will come from a .5 per cent increase in the higher rate of VAT; a surprisingly high increase of 50c on excises on cigarettes, plus a 50c increase in excise for a bottle of wine. Beer, spirits and cider remain the same. However, there is an 8c increase on the price of petrol, though diesel remains unaffected.

Motor tax is also increased by between 4-5 per cent and betting tax is doubled from 1 to 2 per cent. In addition, a new travel tax is introduced, with a €10 surcharge for every departure from Ireland (€2 for domestic flights).

DIRT and capital gains tax are both increased (up from 20 to 22 per cent). In addition, a new €200 flat levy is introduced for work car parking facilities as well as a new €200 levy for second homes, holiday homes and for owners of private rented accommodation.

But €500 million (or a quarter) of the overall tax take increase will come from a trick of the loop. In a once-off measure, Lenihan is bringing forward the dates for the payment of corporation tax and capital gains tax.

Ray McSharry (in his infamous hairshirt Budget of 1987) used the same sleight of hand when he introduced withholding taxes for professional services to the State.

There were expectations that the child benefit scheme would be one of the principal victims. In the event, the changes are relatively minor. Early childcare supplement will cease when the child reaches the age of five and a half years and for 18-year-olds in education from January 2010.

The much-flagged review of medical cards for over 70s also came with a slight sweetener – an annual cash grant of €400 for those deemed ineligible.

You suspect the big changes will come next September from the Commission on Taxation.

"Universal entitlement irrespective of means does not target those in greatest need," said Lenihan, signalling that more changes are afoot further down the line.

The last truly astonishing Budget was the one delivered in 2003 by Charlie McCreevy when he announced decentralisation. Well, the sorry saga that unfolded on that controversial decision came to a halt today when Lenihan announced that 5,140 staff earmarked for almost 30 locations will not now move, pending a review in 2011.

For the second year in a row, the main minority party in Government, the Greens, does not seem to have got the desired delivery. The carbon levy has been deferred for another year. The incentive for those cycling to work, plus small charges for parking spaces and holiday homes seems quite trifling. The increase in petrol prices is geared more towards revenue-generation than a cleaner environment.

Environment Minister John Gormley announces his Carbon Budget at noon tomorrow – if the party is to escape sharp criticism, he will need to be able to show something other than promises to get carbon emissions below 70 million tonnes of CO2 equivalent per annum.

It was not hard to find the glimmers of light in such an unremittingly hairshirt exercise. On the housing side, there is an increase in the mortgage interest rate from 20-25 per cent for first-time buyers and a decrease in stamp duty for commercial property from 9 per cent to six per cent. There is an increase in tax credits for research and development. And of course there is a €7 increase in pension payments as well as increases in fuel allowance.

However, all of these have been swamped by the extensive series of cuts, of reform, of deferrals and of delays as well as by increases in taxes, charges and levies that now face the country's taxpayers.

But given the projections for next year – and the prevailing fear gripping the global economy - you suspect that it will be more of the same when Lenihan stands up to deliver his second Budget in 14 months time.