Awaiting the 'unknown unknowns' in budget

 

Dirt tax, old reliables and VAT set to be hiked but Michael Noonan will have to do more than that to find €3.8bn

THE POLITICAL class is not known for its discretion and major policy documents are, as often as not, extensively leaked before publication.

The annual budget statement each year has proved, in the main, to be the exception. Charlie McCreevy’s announcement of decentralisation in December 2003 for example came as a bolt from the blue to everybody, including the majority of his colleagues.

Turning to the first budget the Coalition will present next month, there is a fair quota of “known knowns” at this stage, to borrow the Rumsfeldian expression.

However, given the need for a gargantuan €3.8 billion adjustment (admittedly €2.2 billion less than last year), it’s certain there are also elements that will remain “unknown unknowns” until Michael Noonan unveils it to the Dáil on December 6th.

At the launch of the mid-term review two weeks ago, Mr Noonan disclosed the split for the budget – €2.2 billion in cuts, €1.6 billion in taxes.

It was also confirmed there would be no increase in income taxes or cuts in direct social welfare rates: two traditional bedrocks of hairshirt budgets.

The challenge on the tax side will be less arduous. Because the PAYE system is operated a month in arrears, it means there is a carryover of some €600 million because of the huge ramp-up in income taxes last year.

That means the target figure from new taxes is €1 billion. The memorandum of understanding with the EU-IMF-ECB troika was specific in relating to new taxes. It has specified an increase in the top rate of VAT to 23 per cent (which will garner €670 million); the imposition of property charges (the new €100 household charge will yield €160 million); and an increase in carbon taxes (a €5-per-tonne increase will yield €108 million).

If all those are implemented it will bring the Government close to its target of €1 billion. Other possibilities include increasing deposit interest retention tax (Dirt) on savings from 27 per cent to 30 per cent. That was a manifesto pledge of both parties and would raise €40 million. There has also been strong speculation that the old reliables – cigarettes and alcohol – will be in line for hefty increases.

On the cuts side, there are much larger gaps that will probably not be disclosed until December 6th but already the shape is apparent. It has been confirmed that €755 million will be sheared off the capital budget.

The balance will come from the current side and already it is apparent that the bulk of this will come from the Department of Social Protection. At just short of €21 billion, it has the largest budget of all departments and the troika has stipulated that it implement a total of €2 billion in cuts between now and 2014.

The ask in this budget is a mammoth €700 million and that task will be made harder by a commitment not to cut primary social welfare rates. Minister Joan Burton and her team have had to fish around for imaginative solutions. Some proposals have already entered the public domain. They include a broadening of the PRSI base to include rental income, dividends and share income. Changes in eligibility to one-parent family payments are also on the table. Entitlements would end once children were settled in education. Such a proposal will be controversial.

The department is also looking at two other radical proposals. One would make employers pay for the first four weeks of sick leave. The second would cut the rebate available to employers for redundancy payments from 60 per cent to 30 per cent. The measures could save €200 million.

While no information has been disclosed, child benefit might also be targeted for cuts to make up the shortfall.

Possible cuts in other big spending departments have also been flagged. Minister of Education Ruairí Quinn will take a hit over a pledge on student fees that he can no longer fulfil. Other changes that have been mooted are the abolition of grants for post-graduate students; cuts in the school transport budget; and a possible reduction in teacher numbers from 57,000 to 55,000.

In health, cuts of €400 million have been mooted, although it is likely the HSE will be asked to implement a service plan. Some 60 per cent of costs relate to pay, and the bulk of cuts will come from non-replacement of staff but local and community health services will also be affected.

In justice and defence, four army barracks will be closed. It is likely some rural Garda stations will close and efficiencies will be sought in the courts service, prison services and the Garda, the latter which has a €1.4 billion budget.

The most obvious cut in foreign affairs would be to the €500 million-per-annum budget for overseas aid. The department has tried to protect this budget. Elsewhere, there has been a reduction in embassy staff, expenses and entertainment allowances. Three embassies – the Vatican, East Timor and Iran – have been closed and smaller embassies like the one in Bratislava are run by a single staff member.

Environment is another big-spending department. One likely target for cuts is the local Government fund. Small decreases have also been mooted in the long-term rental accommodation scheme and in the homeless persons budget.

Agriculture and fisheries got a small increase in capital budget but must sustain a fall on the current side from €1.37 billion to €1.13 billion. That will have implications for some farm payment schemes, which will not sit well with farm organisations. Minister Simon Coveney will move to protect smaller farmers that are reliant on the State for income.

The department’s other big focus on the agriculture side is its ambitious Food Harvest policy.