The emergency 2009 Budget
AFTER MAKING three false starts in the past nine months in its efforts to regain control of the public finances, the Government can not afford another failure in presenting an emergency Budget. The question of whether it produced a budget to live up to its harsh billing will be parsed and analysed over coming days. Yesterday’s painful financial exercise might well be compared to a major operation performed on a patient without an anaesthetic; the first of five such operations the patient must undergo before being restored to full health.
The Government would appear to have inflicted parity of pain in the tax and spending measures that should save €3.5 billion this year. Those best able to bear the burden of higher taxes will do so. A degree of fairness has been established which should help secure broad public acceptance of the austerity measures. Mr Lenihan also announced that Government and Oireachtas would accept a proportionate share of the burden of economic adjustment.
Government must lead by example, but it has been slow to do so. Belatedly, Mr Cowen has cut the number of junior ministers, and the Government has curbed extra payments to politicians for work on Oireachtas committees. The Review Body on Higher Remuneration in the Public Sector has been asked to review the pay of Government Ministers and others. It hardly needs a review group to point out the obvious: that the Taoiseach – who is paid more than either the German chancellor or the French president – like his Ministers, are hugely overpaid relative to their peers elsewhere.
The challenge facing the Minister for Finance yesterday was to be brave and bold. He needed to tell the electorate that they would take the pain to ensure a recovery. He may not have succeeded in that task. No previous government has ever faced a fiscal crisis of this magnitude: a 2009 level of spending is being financed by a 2004 level of income, with the budget deficit widening as tax revenues collapse, and as higher unemployment pushes up spending in an economy that is likely to contract by 8 per cent this year. In the circumstances €3.5 billion was the minimum the Government could raise, via higher taxes and lower spending, to achieve a projected deficit of 10.75 per cent. That is marginally above the 9.75 per cent deficit target the Government agreed with the European Commission in January.
It is arguable, on first reading, that Mr Lenihan should have been braver and bolder yesterday, by relying more on spending cuts and less on tax rises. In failing to achieve a better balance he may well have slowed the pace of economic recovery, and made next year’s budget a much more challenging prospect.
The Government’s most controversial proposal is to transfer an estimated €80 billion to €90 billion of bad loans from the banks to a National Asset Management Agency. What remains unclear, however, is what price the Government will pay for these assets and how the taxpayers’ interest will be protected. Persuasive answers must be provided to these questions in the coming days.