Noonan’s lower budget target still leaves Ministers trying to square the circle

The lowering of the adjustment for this year’s budget has made the task for some Ministers much easier but for others – especially those for whom pay takes up over 80 per cent of their department’s expenditure – the task of finding extra savings has been difficult.

The split between cuts and revenue in the budget is roughly two to one. The €600 million reduction in target to €2.5 billion has also been shared along the same ratios, with €200 million less needed in revenue, and €400 million in cuts across the 15 Government departments.

Property tax
While Minister for Finance Michael Noonan's target is €900 million, most of the heavy lifting for this year's budget was done in December 2012. His decision to delay the introduction of property tax until July 2013 has resulted in him being placed in a much easier position when drafting this year's budget.

The full-year effect of revenues for the property tax will only become apparent in 2014. It was earmarked to raise €250 million in 2013 for six months. That’s €500 million for 12 months, giving Noonan a €250 million head-start for 2014.

The second knock-on from last year's budget is what Labour got as a quid pro quo when it failed to convince Fine Gael to introduce a new USC rate for those earning over €100,000. It was a completely impossible sell last year, primarily because it could not be introduced until 2014. The proposal was for a substantial cut in tax relief for pension pots that delivered pensions over €60,000 in income. The net effect for the exchequer is a total of €250 million in extra income next year on foot of a budgetary decision taken a year ago. Other carry-overs amount to a further €100 million.

Philanthropy proposal
So those two items have already secured €600 million of Noonan's target, leaving him only €300 million to go. It's not a straight equation though. He may have to introduce some incentives in sectors that need stimulus, particularly construction, IT, finance and agriculture. There is a philanthropy proposal that will give extra residence rights to rich tax exiles that will be very unpopular with Labour but which Noonan likes.

Notwithstanding that, Noonan will not have to announce any big new tax like property tax or the 2 per cent hike in VAT this year. The budget will be made up of a string of smaller adjustments, perhaps on the capital gains and acquisitions side, on excises, on duties and on other indirect measures.

The 9 per cent VAT rate for tourism may be retained but there will be no lowering of the rate for the construction sector.

On the spending side, all the focus is on the big-spending departments, particularly Health, Social Protection and Education. Specific details have not been nailed down because of the delays in arriving at the figure for the health over-run. But even in a standstill position (if it did not need a supplementary budget), Minister for Health James Reilly will have to secure €430 million in savings in 2014. Some €270 million must come on the non-pay side and that will be made up mostly of savings on the drugs bills to manufacturers, more charging for private facilities in public hospitals, and cuts in some services. The pay-side cuts of €150 million are governed by the Haddington Road agreement but concerns have been raised that the extra hours committed to by nurses and other professionals are not been adhered to and the expected savings have not fully materialised.

Minister for Social Protection Joan Burton has argued that the lower target should result in her department's cuts of €440 million being reduced to less than €300 million. Her rationale is that the better overall economic picture was helped by €150 million less being paid out in social welfare because the numbers on the Live Register dropped. Core rates of welfare payments can't be touched so most of the department's savings will be found in reductions to the myriad of the supplementary welfare payments available. A cut in child benefit rate is highly unlikely although there may be some savings here centred around eligibility.

Scale of adjustment
For Minister for Education Ruairí Quinn, the target remains around €100 million. With pay taking up such a huge proportion of his department's budget, the only area where that scale of adjustment can be made is by tackling the pupil-teacher ratio in some way. It's not expected there will be an across-the-board increase, although it will affect some sectors more than others. The other area where Quinn may look for cuts is in grants.

The cuts in Environment will amount to about 17 per cent, and it is likely that most of it will be centred on further reductions in housing provision. That said, it is highly probable that services to homeless people will be protected.

Recruitment campaign
In the Department of Justice and Defence, many of the savings from the Haddington Road agreement have translated into changes of rosters, hours, overtime pay and working condition for gardaí, prison officers and defence force personnel. One complication is that Minister for Justice Alan Shatter has been given permission to launch a Garda recruitment campaign.

All the changes will be impacted if the health overrun is bigger than anticipated.