Lenihan must turn focus to job creation and enterprise stimulus

 

ECONOMICS:WITH THREE budgets under his belt in little over 14 months, Minister for Finance Brian Lenihan has reached about the half-way point in the fiscal juggling required to restore our economic and fiscal stability, writes DAVID KENNEDY

It is timely, then, to reflect on the appropriateness of the aggregate measures taken to date from a business perspective and to anticipate what the second half of the turnaround programme should entail.

The challenge facing the Minister has been well documented. Put simply, between 2005 and 2010 we would, without correction, have experienced a €30 billion deterioration in our fiscal position. A €6 billion surplus in 2005 would have become a €24 billion deficit in 2010, reflecting a reduction in tax revenues of more than 20 per cent from €39 billion in 2005 to €31 billion in 2010, and an increase in day-to-day expenditure of more than 66 per cent from €33 billion in 2005 to €55 billion in 2010.

The measures announced to date have targeted approximately €14 billion of the shortfall. Most of the pain has been borne by the public sector through a combination of the pension levy in April and Wednesday’s pay cuts, and by taxpayers, particularly the higher paid, through the progressive taxation changes to PRSI, health and income levies introduced over the previous two budgets.

Overall, the changes have been appropriate to the challenge of restoring fiscal stability and international confidence.

However, as a number of commentators have highlighted, more is warranted in the area of job promotion and enterprise stimulus.

Admittedly, our fiscal position inhibits our capacity to introduce a major stimulus programme. The enterprise stabilisation fund, job subsidy scheme and employers’ jobs incentive scheme announced on Wednesday are welcome, as are interventions to promote the retail sector and other sectors such as tourism, farming and the green economy.

But in aggregate they represent a relatively minor stimulus package relative to the level of intervention elsewhere.

And while our capital investment programme is seen by the Government as a form of stimulus, it is not serving to create additional jobs or reverse the recent trends in unemployment.

In contrast, British chancellor Alistair Darling’s pre-budget report focused on a jobs stimulus package. In committing to invest in dynamic sectors such as digital, bio and low-carbon technology, Darling announced a multibillion-pound investment in these areas and significant tax incentives to promote the smart economy, as well as extending a small and medium-sized enterprise (SME) loan guarantee scheme to provide ongoing funding for small businesses.

This has weakened our relative attractiveness for mobile international investment and renders it all the more important that we adopt similar measures.

The Minister’s suggestion that this Budget was the last big push of the crisis can perhaps be rationalised by reference to the relatively blunt instruments

of change that have been applied over the last three budgets.

The income, health and PRSI levies, and the pension levy and pay cuts in the public sector have had a fairly broad application. Now that these changes are in the bag, the areas for attention over the next three years are likely to be more focused.

Firstly, the further broadening of the tax base to alleviate the structural deficiencies that have become apparent will be addressed. Signs are that the Minister is on the right track in this regard.

The introduction of a carbon tax is welcome. The clear signalling of future water charges and a property tax and Lenihan’s acceptance that a simplification of the income tax code is appropriate show that the structural deficiencies can be addressed without unduly affecting competitiveness.

Genuine reform of the public sector is the second major challenge for the next three years.

While pay cuts in the public sector were probably necessary, there is little to be gained from further across-the-board cuts.

Reasoned and significant reform of the public sector can ensure that further blunt pay cuts are avoided. We are indebted to a great many public servants who work diligently in the public interest. But, as evidenced by recent anecdotal commentaries in the media, the system gives some public service workers the opportunity to swing the lead and then slip into comfortable pensions on retirement.

This would not be accepted in the private sector and it should not be accepted in the public sector.

Reform that emphasises hard work and links performance measurement with reward can ensure that further public sector pay cuts are avoided, while maintaining public services, restoring fiscal stability and supporting competitiveness. A private sector ethos must be applied to this reform.

Thirdly and most importantly, with almost €14 billion of adjustments under his belt, the Minister should now act on his confidence in our ability to overcome the current crisis, by committing to a significant enterprise stimulus package focused squarely on creating jobs and entailing a multibillion-euro commitment from the Government. Properly targeted, this should not weaken our fiscal outlook.

For example, it could include dramatically accelerating infrastructure projects in education, water and telecoms and utilising private financing initiatives to transfer the risks on such investment to the private sector.

Likewise, targeted tax incentives focused on exports and research and development to counter advances announced by the UK could create jobs without challenging fiscal stability.

And finally, greater commitment needs to be made to small businesses through an SME loan guarantee scheme similar to the one in the UK, and through further incentivisation for business start-ups to help foster the confidence that the Lenihan spoke of on Wednesday.


David Kennedy is head of advisory services at KPMG