€4bn package will mean 'hugely deflating budget'

PUBLIC DEBT:THE GOVERNMENT'S proposed €4 billion package of tax increases and spending cuts will make for a "hugely deflating budget", ESRI economist Ida Kearney said at a conference yesterday.

Nevertheless, she was in favour of such a package because the public debt was growing so rapidly.

“We need a budget of consolidation. We need to cut again.”

She told the Budget Perspectives conference that the proximate cause of the crisis in the public finances was the “absolute collapse in tax revenues”.

However, using tax increases to bridge the gap between income and expenditure was difficult as it was hard to get more money out of the economy in the time needed.

She said the budget would be deflationary. It would dampen consumption, increase unemployment and prolong the recession. However, it would stabilise the public finances.

There was a need to broaden the tax base but at the moment the level of public expenditure was not affordable.

She did not consider it would be “feasible” to try to raise more than €1 billion of the €4 billion needed through tax increases.

To achieve the required cuts in expenditure, she suggested cuts in public sector pay, in hours worked, a 20 per cent cut in child benefit, and savings through public procurement.

The “single quickest way” to restore growth was through a general wage cut.

Prof Alan Matthews, of Trinity College, Dublin, asked if the adjustments required might not be phased over a longer period.

“We think no,” said Dr Kearney. “We think consolidation has to happen now, and it has to happen fast.”

There were “too many risks involved” in doing it over a longer period of time.

She also referred to the “massive contingent liabilities” that were on the Government’s books.

Siptu economist Marie Sherlock questioned the idea that workers needed to accept pay cuts to restore competitiveness.

“Competitive at what?” she asked, pointing out that many manufacturing jobs had gone and needed to be replaced by other types of work.

“Whatever way you want to slice it or dice it, Ireland is a high-wage economy,” Ms Kearney responded.

Fine Gael’s George Lee wanted to know where the stimulus package for the Irish economy was?

“A fall in costs is a massive stimulus to an exporting economy,” Ms Kearney replied.

Later, the general secretary of the Civil, Public and Services Union (CPSU), Blair Horan, said he would caution the ESRI against offering “simplistic solutions” to the economic crisis.

“I think you are just inviting industrial conflict,” he said, speaking with passion from the floor.

He said the problems being experienced by the Irish economy arose from the embedding of inflation after Ireland joined the euro, not from wage inflation.

He said only former taoiseach Garret FitzGerald (who was at the workshop) had warned about the dangers of this at the time. The ESRI and the Central Bank both had a “credibility problem”.

Even on housing, the ESRI had produced models during the boom suggesting there was “no problem”.

“We all know it is a crisis” but he had a difficulty with people “looking for simple solutions”.

Referring to the ESRI’s view that there should be public sector pay cuts but that the low paid should be protected, he said there were “too many people on low to average income in the public sector to but to leave the low paid out of it”.

The crisis the State now found itself in was caused by “political failure”, he said. Personal debt levels were such that people would resist wage cuts.

Dónal de Buitléir, who was secretary of the previous Commission on Taxation established in 1980, said it and the more recent commission’s report bore very many similarities.

He said if many of the recommendations of the earlier commission had been implemented “we might be in less difficulty”.

He said there was a “difficulty with implementation” in Ireland.

The implementation of tax reform needed a minister for finance who would “champion” the move, and a head of government that supported him.

Reform was best introduced as a big package rather than through incremental moves, with all vested interests being attacked at the same time.

Taxing Issues:

Politicians should do what is good for the country and not wait until after the next election

- TCD economist Philip Lane on tax reform.

Ireland has an implementation problem generally with reports

- Dónal de Buitléir, secretary to the original Commission on Taxation in 1980, former assistant secretary of the Revenue Commissioners and member of the HSE board, on the taxation commission report.

Child benefit could be taxed next year and any cuts introduced this year restored

- economist Tim Callan of the ESRI.

The OECD has found property tax to be the least distortionary of all taxes

- Tim Callan.