Eerie echoes of current crisis in 1983 budget files

The budget files for 1983, released by the National Archives, have a “back to the future” feel about them. Then, as now, the main preoccupation was controlling government borrowing through reductions in the public service pay and welfare bill.

One of the big news stories of January 1983 was the declaration by Labour leader and tánaiste Dick Spring that he would not accept the target adopted by minister for finance Alan Dukes of reducing the current budget deficit to £750 million in the budget to be unveiled in February. Instead, he suggested a figure closer to £900 million.

Henry Kissinger
In his memoirs published in 1989, the then taoiseach Garret FitzGerald revealed that he independently had come to the same view as Spring and had even consulted Henry Kissinger about whether Ireland's financial reputation would suffer if a £750 million target could not be met.

Dukes was forced into a public climbdown for his first budget, which had been well in train when he took office in December 1982 but, curiously, there does not appear to be any reference in the files to the entire episode.

More curious still is that in the budget deliberations for 1984, which started in the spring of 1983, the figure of £750 million resurfaces as the maximum possible deficit for 1984 and nobody around the cabinet table appeared to quibble with it.

The first item in a key file entitled “Budget 1984” is a note to the taoiseach from the then cabinet secretary Dermot Nally dated February 11th.

“Decisions on the 1983 estimate have done little or nothing to ameliorate the position which will face the government when they are dealing with the 1984 estimate. It would be highly desirable that the Minister for Finance should be asked to bring before the government soon an indication of just how serious the 1984 position will be and an indication of what sort of expenditure cuts are possible.

“These are above all else necessary if order is to be restored to the public finances and levels of taxation made possible which will enable the country to be competitive in international trade,” wrote Nally. He focused on the cost of borrowing, the cost of social welfare, simply to maintain the existing rates through 1984, and the potential cost of the public service pay bill.

“These figures are of orders of magnitude. They will be counterbalanced to some extent by the higher full year yield from this year’s tax increases but the size of the gap, even at this stage, and from these limited statistics, is such, I think, as to make it essential that work start now on examining current public expenditure root and branch.”

He pointed out that four departments – Health, Social Welfare, Environment and Education – accounted for more than 50 per cent of current expenditure while Environment and Industry and Energy accounted for more than half of capital spending.

In the light of Nally’s note, the government decided on February 11th to ask Dukes to submit proposals for the 1984 budget within a fortnight. In fact it was April before an aide memoire from Finance on the prospects for 1983 and 1984 went to cabinet.

That aide memoire made depressing reading. “Expenditure in the first quarter was significantly higher than in previous years while tax revenue was marginally down,” it said.

Missed targets
The document went on to list a shocking record of missing budgetary targets over the previous years. In 1979 the overrun on the current budget deficit was 81 per cent, in 1980 it was 55 per cent, in 1981 it was 56 per cent over target and in 1982 it was 46 per cent.

“The sustained and growing level of overrun on target deficits which were in themselves high by any standards, has by this stage, stretched credibility, and the credibility that is important here is that to international agencies and our foreign creditors on whom we must rely for essential future flows of funds,” it said.

Memorandum
A memorandum from Finance for the cabinet meeting on April 18th reinforced the point. "Despite rapidly rising levels of taxation, excessively high public expenditure in Ireland had led to a massive build-up of national debt and debt service costs particularly over the past ten years."

At that stage, one-third of current revenue was going to pay the country’s debt and no scope remained to undertake counter-cyclical measures.

The memo pointed out that half of all public spending was going to fund the pay and pensions of public servants and it strongly recommended a progressive reduction in real pay rates, a drive to minimise overtime and a more vigorous approach to reducing numbers employed and to redeployment. “Early retirement or redundancy schemes must also be considered,” it said.

Another echo of present day concerns is that health featured largely in the memo on the basis that it represented 7.3 per cent of gross domestic product, which was one-third higher than the EU average. “As two-thirds of all health expenditure is on pay, a real reduction in pay levels would have a very important impact on costs.”

By the end of June, Dukes had decided on a firm strategy. In a memo to government on June 28th the minister requested government approval for his proposal that the deficit on the 1984 current budget should not exceed £740 million and that the total exchequer borrowing requirement in 1984 should not exceed £1,600.

Tax burden
Dukes sought a commitment from his colleagues to reduce borrowing to 11.5 per cent of gross national product for 1984, a reduction of two percentage points on 1983. He emphasised that reducing current spending was better for the economy than cutting capital spending.

“The real burden of taxation has increased substantially and real take-home pay has been cut sharply in recent years. Generally speaking the levels of direct and indirect taxation have for the moment reached saturation levels,” said the memo, which made a strong economic case for cutting expenditure in preference to increasing taxes.

In another echo of the present, the minister told his colleagues that his proposed cuts were the minimum necessary in the circumstances and would require hard decisions and the full co-operation of all ministers.

Minister for health Barry Desmond pointed out that the figures proposed by Dukes would mean that social welfare beneficiaries would only get a 4.5 per cent increase in 1984 at a time when inflation was running in the teens.

In a note of July 8th marked “secret”, Nally recorded that the government had agreed to the £740 million figure, with the minister for finance mandated to implement it.

In a memo dated September 9th, Dukes told colleagues that plans to introduce tax credits would have to be deferred and that the budget for the following year would contain no change in the net level of taxation.

“There is now an extremely strong case for cutting taxes . . . the reality is that reductions on one area will have to be balanced by increases in another.”

He pointed out that the then VAT rates of 35 per cent at the higher level and 23 per cent at the standard level were "exceptionally high by EEC standards". Dukes pointed out that some 30 per cent of the VAT base was at the zero rate, which meant that if a single rate applied to all goods and services it could be cut to
14 per cent.

On September 13th, the government agreed that a report of interdepartmental committee on the feasibility
of a withholding tax should
be brought forward as soon
as possible.

The file on budget 1984 closed with a note from Nally.

“This memorandum has been long enough on the agenda. It could perhaps be withdrawn with a request to the Minister that in due course he come forward with current budget proposals.”