ANALYSIS:The economy may be on an upward trajectory but there is more pain to come, writes PAT McARDLE
THE MINISTER for Finance’s statement that the “worst is over” is the main talking point of the Budget. In itself, this is testament to the sure-footed manner in which one of the toughest budgets was introduced. There were no slip-ups, no “children’s shoes”. While there has been an extremely negative reaction from some of those affected – witness the Pat Kenny phone-in on the day afterwards – this is coming from a relatively narrow section of the community.
The “worst is over” statement has been interpreted in a financial sense. In fact, the quote was as follows: “A Ceann Comhairle, the worst is over. The international economy has exited recession. Recent indicators suggest that economic activity in this country is turning the corner, and my department is now expecting a return to positive growth within the next six to nine months.”
The first point to be made is that there is absolutely nothing new in this. It is what every economist in the country has been saying for months. For example, last October, the Central Bank said the rate of decline would continue to moderate in the first half of next year “with the prospect of stabilisation followed by some recovery in the second half of the year”.
The ESRI said something similar and bank and stockbroker forecasters are, if anything, even more optimistic.
These views are not inconsistent with the projected overall decline in activity next year. The Budget was based on a 1.7 per cent fall in GNP in 2010 but this is an average for the year as a whole which incorporates some positive quarter-on-quarter growth in the latter part of the year.
However, this is not the way the Minister’s statement was interpreted by the public. The Dáil debate on the Budget may have had something to do with this. Richard Bruton immediately likened it to George Bush announcing “mission accomplished” in Iraq. Others took their lead from this and the media followed.
The Minister also had a hand in it. He went on to say: “The effort demanded of every citizen in this Budget is substantial, but it is the last big push of the crisis. Further corrections will be needed in the coming years, but none as big as today’s.”
He proceeded to say that having already provided for an adjustment of €1 billion in capital spending, he had pencilled in an adjustment in day-to-day spending of about €2 billion for 2011, “as strengthening economic conditions begin to lend a hand in closing the deficit”.
The fiscal task has become easier. There are a number of reasons. An additional year has been added to the correction period which now extends to 2014. This, however, postpones rather than eliminates pain.
More importantly, capital spending has been pared back, unemployment will not hit the highs feared last April and the debt service bill is reduced as the markets have responded favourably to the measures taken by lowering the premium we have to pay on our borrowings. The net result is that, having introduced measures worth €5 billion last year and €4 billion in the recent Budget, the amount left to be done is about €6.5 billion in toto. This is by no means small beer. It does, however, represent a near halving of the task which remains. Last April, the Minister envisaged another €4 billion of “cuts” in 2011, followed by €4 billion in 2012 and €3 billion in 2013.
These have now been revised to €2 billion, €2 billion, €1.5 billion and €1 billion in 2011, 2012, 2013 and 2014, respectively.
Politicians have relatively short time horizons. Lenihan was probably focused on 2011 when he needs to deliver the next €2 billion in “cuts”.
From his perspective, 2011 no longer looks like an abyss. It is hard to imagine where he would have found another €4 billion as originally envisaged but €2 billion should be possible. I suspect that it was this realisation, plus the need to give some hope to the hard-pressed punter, that prompted the more positive sentiment in the Budget statement.
So for the Minister the worst is indeed over, in the sense that the task in future years is less than that to which he has become accustomed.
In another sense, the worst is yet to come. It is relatively easy to pluck low-hanging fruit. That is what happened in the multiple mini-budgets earlier this year.
However, the task becomes harder as you cut ever closer to the bone. Moreover, for those on the receiving end, the pain will be cumulative.
Take the public sector. Already they have suffered two pay cuts. Would another cut next year, even a more modest one, be less or more painful?
It is curious to hear public sector workers argue against pay reductions because they have already borne cuts or, perhaps, are not responsible for the situation we find ourselves in. Their cousins in the private sector could advance the same arguments. The difference is that when push comes to shove, private sector workers lose their jobs irrespective of who is responsible or what has gone before.
There is little sympathy for those in sheltered employment and the Government may have to return to the same well in the next budget.
One way of approaching this is to look at where next year’s €2 billion might come from. Mr Lenihan took a breather from tax this year but this is unlikely to last.
It is possible that half the amount required in 2011 could come from the rejigging of the income tax structure, the abolition of tax expenditures as recommended by the Commission on Taxation and the introduction of a tax on property or wealth. It is highly unlikely that social welfare will be hit again and capital spending has already been cut. That leaves pay and other spending.
There is a need to make further pay savings. Ministers are already indicating that public sector reform is desirable instead of outright pay cuts. This could account for, say, half of the remaining billion with the other half coming from the McCarthy report menu.
The 2011 budget will also be difficult. However, it is likely to be less severe than its recent predecessors. In that sense, and only in that sense, is the worst over.