A week ago we thought the Government would have to fill a €3 billion hole in the public finances, but Minister for Finance Brian Lenihan has hinted it might be more. So where might he find the money, asks Dan O'Brien, Economics Editor
WHEN BRIAN LENIHAN rises to speak in the Dáil on December 7th, much of the adult population in this country, and no small number outside it, will be listening intently. At this juncture, little is known about what he will say. By all accounts, he is unsure himself, as many of the arguments, both political and economic, have yet to be had.
A week ago, one of the few aspects of the 2011 Budget considered to be set in stone was the size of the adjustment to be made. The Government had never wavered from its target, set out last year, of narrowing the massive gap between spending and revenues by €3 billion (from €20bn this year to a hoped-for €17bn next). But even that was thrown into doubt last weekend when Lenihan suggested that the deficit-narrowing plan may have to be more ambitious, possibly because of slippage this year, meaning that more may be necessary in 2011 to remain on track if the final destination of a near-balanced budget by 2014 is to be reached.
As of now, it is certain that €1bn will come from already-discussed cuts in capital spending, which is to say investment in things such as infrastructure. As published during the summer in its revamped and downsized National Development Plan, the Government will spend €5.5bn next year on building and maintaining schools, hospitals, theatres, roads and railways. That is almost €1bn less than it has budgeted to spend this year.
That leaves €2bn to be found from other spending cuts and tax increases, or more if Lenihan deems it necessary to go beyond the €3bn. With so little certainty about the December 7th denouement,
The Irish Timeshas done some back-of-the-envelope calculations on the options Lenihan will mull over in the months ahead.
SPENDING CUTS
Of the expected €2 billion adjustment on the non-capital side, most will come from reductions in spending. The Government believes that evidence from other countries shows this to be the most effective means of balancing the budget. On that basis, it is likely to seek €1.2bn to 1.5bn in cuts. The following are some necessarily rough estimates as to how such a figure could be arrived at.
NATURAL WASTAGE
Public sector pay bill
Potential savings: €225m
Following big cuts in the incomes of public-sector workers over the past two years, the Government promised to give State employees a break in 2011 under the Croke Park deal. But with a hiring freeze in place, the 6,000-7,000 people who retire annually are not being replaced. As many public servants have recently retired early to avail of better terms, the numbers departing will be lower in 2011. If it comes to 5,000, and with average public-sector salaries standing at around €45,000, natural wastage could save €225m (although much of this would be offset by pension payments).
DEEPER CAPITAL CUTS
Potential savings: €250m plus
Although the capital spending budget has already been set out for 2011, it may be revisited, particularly if Brian Lenihan decides that he needs to make an adjustment in excess of €3bn or if he finds he can’t square the circle politically. With a budget of €5.5bn, which is still large by international standards, the temptation to trim another €250m or more may become irresistible.
WELFARE
Social transfers – such as jobless benefits, pensions and childrens’ allowance – are the single biggest item of Government spending, accounting for well over one-third of the total. Given that the second-biggest item – public sector pay – is untouchable under the terms of the Croke Park deal, the Government will almost certainly be looking for further cuts here.
Children’s allowance
Potential savings: €250m
On a rough estimate, every €1 sliced off child benefit per month would reduce the annual bill by €14m. It would take a huge weekly cut of €18 a week to reduce the bill by €250m next year.
Unemployment benefits
Potential savings: €350m
Unlike children’s allowance, the cost of jobless benefits has soared owing to the huge increase in unemployment. Another back-of-the-envelope calculation suggests that for every €1 that is shaved off weekly payments, the total annual bill comes down by €50 million. Thus, a €7 reduction in unemployment benefit could generate about €350m in savings.
Pensions
Potential savings: €500m
Spending on pensions paid by the State is more than €9bn annually. Almost one-third goes to retired public servants, more than half goes to those who made PRSI contributions during their working lives and the remainder to those on the basic non-contributory pension. A cut in public service pensions of 10 per cent could bring down the pensions bill by upwards of €250m, while a €10-a-week reduction in contributory and non-contributory pensions could yield something similar.
TAX INCREASES
The Government looks set to seek an additional €500 to €800 million in tax revenue in 2011. It is difficult to predict the revenue-raising impact of new taxes and tax increases, because these affect people’s financial behaviour. For example, a doubling of the VAT rate would not double VAT revenue, as people would spend less generally and avoid the higher tax by, perhaps, flocking to the North to shop.
WIDENING OF TAX BASE
Potential earnings: €300m
There was a time when the Government boasted about how many people it was freeing from the tax net. No more. Following the collapse of property revenues, everybody will pay more tax in the future, including those on lower incomes. The widening of the tax base involves cutting tax credits. If the personal and PAYE tax credits were both reduced by €100 (large enough to bring those on the minimum wage back into the net), as much as €300m could be generated in increased income tax revenue next year.
PROPERTY TAX
Potential earnings: €150m
Officials in the Department of Finance are cock-a-hoop at the success of their holiday home tax. After years of watching every revenue stream go from torrent to trickle, the new €200 property tax introduced last year is generating gushing revenues.
Book-balancers in Merrion Street are eyeing greedily the amount that even a small tax on the country’s 1,800,000 first homes, or principal private residences, would generate. A flat €100, with some exemptions, could yield €150m.
Although property taxes are as common around the world as VAT, experience here shows they are unusually politically toxic, thus making this the tax of very last resort for the Government.
WATER TAX
Potential earnings: less than €50m
The Department of Finance estimates that 1.1 million homes are in theory eligible to pay water tax.
As the idea of installing meters has not got off the drawing board, the only possible option for next year is a flat tax. A €50 charge, again with some exemptions, would generate less than €50m. Given that this would be a mere drop in the bucket of the overall adjustment, the Government may decide it is not worth the grief.
