Perceptions and reality at odds over Budget

Economics: Much has been made of the caring and compassionate character of Mr Brian Cowen's first budget. It has been widely greeted as a model of social equity and favourably compared with the budgets of his predecessor in this regard.

It has been adduced as the clinching piece of evidence in support of the proposition that the Government has learned the lessons of last summer's elections and shifted to the left. It has been dubbed the "Inchidoney Budget" and the "Seán Healy" budget with the result that that modest padre has been compelled to take to the airwaves to deflect the cascade of plaudits directed at him. Two more budgets like this, we are told, and Fianna Fáil will be a shoo-in at the next general election. Does any of this stack up? Or is it mostly the result of suggestible commentators lapping up some clever spinning? Let's take it from the top. First of all, a reminder of what a budget is. It's a statement of the Government's spending and revenue-raising intentions for the coming year.

So, it is much more meaningful to base judgements on the Government's overall spending and taxation plans than on the comparatively modest changes announced on Budget Day. Granted the latter are important in shaping perceptions (mostly disproportionately so) and we'll return to them later. But first, how does Budget 2005 measure up in terms of the big picture.

Take the three big "social" spending areas: social welfare, education and health. The gross current expenditure allocations for 2005 (including the changes made on Budget Day) envisage increases of 7.4 per cent, 10.7 per cent and 8.9 per cent respectively under these headings. In each case, the spending increase for 2005 is lower than the average increase that occurred during Mr Charlie McCreevy's term as minister.

Taking the three categories of spending together, the nominal increase envisaged for 2005 is just under 9 per cent while the corresponding annual average increase for 1997-2004 was 12 per cent. Adjusting the two figures for inflation does not materially alter the picture.

What about tax? Well, under Mr McCreevy, the tax burden, broadly defined to include PRSI contributions and the Health and Training Levies, declined. But the decline, as I've pointed out before in this column, was very slight - from 35.2 per cent of GNP in 1997 to 34.9 per cent in 2004 - and, as a matter of special irony, significantly less than the reduction effected by his predecessor, Mr Ruairí Quinn.

What does Budget 2005 envisage on this score? Well, surprise, surprise: the brand new left-leaning FF/PD administration is planning to reduce the tax burden by about 1 percentage point of GNP next year (and to reduce it by a further 1 percentage point over the next two years).

So, judging by the behaviour of the big spending and revenue aggregates, there is little to support the notion that Budget 2005 marks a regime change of the sort claimed. Perhaps perceptions to this effect derive from the package of measures announced on Budget Day and, in particular, from a judgement that the mix of social welfare and tax changes this time around was tilted more decisively towards low-income households than previous packages. It should be pointed out here that a rigorous judgement on the distributional consequences of the latest budget will in due course be carried out by the ESRI. In the meantime, I will make do with some crude measures.

Take the balance between the cost of the social welfare measures and the cost of the income tax reductions. Budget 2005 contained social welfare increases with a full-year cost of €874 million and income tax reductions with a full-year cost of €682 million. The ratio of the former to the latter might be used as a crude index of how caring a budget is. Mr Cowen's first budget scores 1.28 on this measure.

By the same measure, Mr McCreevy's budgets of 2002, 2003 and 2004 score 1.70, 2.85 and 2.20 respectively. His 2002 budget is especially interesting in this regard because the tax package he unveiled that year had a price-tag similar to that of the latest budget (€ 634 million), but the social welfare package, with a full-year price-tag of just under € 1.1 billion, was considerably bigger than that contained in Budget 2005.

Of course, it is true that Mr McCreevy's earlier budgets were heavily tilted in the other direction. In each of the budgets of 1998 through to 2001, the income tax package was much bigger than the social welfare package, sometimes, as in 1999 and 2000, by a factor of over two-to-one (yielding a score of less than 0.5 on my compassion index). This makes the 2002 budget significant for another reason, because it seems to mark a clear regime change, the kind that is being claimed, with a lot less validity, for Budget 2005.

One of the merits ascribed to Budget 2005 is that the benefits of the income tax cuts will be distributed progressively (the biggest percentage gains in disposable income will accrue to the relatively low-paid). However, this does not mark a change in policy or differentiate it from recent budgets. The budgets of 2003 and 2004 produced a similar pattern of gains.

Moreover, it must be acknowledged that the ability of a Minister for Finance to deliver a package of tax cuts with this feature owes a lot to reforms instigated by Mr McCreevy, in particular the introduction of tax credits.

Finally, a word on social welfare payments, another area where post-budget commentary has suggested that Mr Cowen has broken new ground in terms of generosity. Again, perceptions and reality are at odds here. Take the old-age pension as an example. The increase planned for next year is 7.2 per cent in nominal terms, or a real 4.6 per cent when allowance is made for the official forecast of 2.5 per cent inflation next year. Mr McCreevy announced real increases greater than this in each of his budgets of 1999 through 2002.

Jim O'Leary currently lectures in economics at NUI-Maynooth. He can be contacted at jim.oleary@may.ie