Brian Cowen got a standing ovation in the Dáil for his 2007 and 2008 budgets, but the IMF sees little to celebrate in them, writes STEPHEN COLLINS,Political Editor
THE MOST damning aspect of the IMF report is the way it details how the Government’s budgetary policy went off the rails in 2007 and 2008, generating the huge structural deficit which now poses such an enormous challenge to the country.
The report says that the pre-election budget of 2007, introduced by Brian Cowen as minister for finance, was nominally in balance but in fact contained a structural deficit of 8.75 per cent of GDP, when temporary sources of revenue generated by the asset price bubble are stripped out.
It says that the expansionary post-election budget of 2008 was even worse, containing a structural deficit of 12.5 per cent of GDP when temporary revenue is taken out of the equation.
The budget debates for both of those years illustrate just how far out of touch with reality the Government had become, with Brian Cowen getting a standing ovation from his colleagues on both occasions.
The Opposition response to the budgets was mixed, with some insightful criticism mingled with demands for more public spending increases and tax cuts than those being introduced by the Government.
Budget 2007
The budget announced to the Dáil on December 6th, 2006, by Brian Cowen contained the first tax cuts since the election of 2002 coupled with significant increases in social welfare benefits, a substantial increase in mortgage interest relief for first-time buyers but no change to the stamp duty regime, which the PDs had been calling for.
The main features were:
- A cut of 1 per cent in the top tax rate to 41 per cent;
- A widening of the bands and increased credits, adding up to a package of tax cuts that took €1.25 billion out of the exchequer;
- An increase in the contributory old age pension of €16 a week to €209.30;
- An increase in the non-contributory pension of €18 a week to €200;
- The lowest social welfare rate was increased by €20 to €185.80 a week;
- Child benefit was increased by €10 to €160 a month.
“Taken together, these changes will reward work and increase disposable income. They will help workers, most obviously those on low and middle incomes and will, I believe, be welcomed by all,” said Mr Cowen in his budget speech, which took place five months before the general election.
He added that if returned to office, the Government would cut the top rate by another 1 per cent to 40 per cent. The minister boasted that the Government had quadrupled child benefit since taking office 10 years earlier and had also introduced the Early Childcare Supplement.
“When account is taken of social welfare increases I am announcing today we will have provided increases since 2002 of 42 per cent in social insurance pensions, of 56 per cent in the lowest social welfare rates and of 36 per cent in child benefit.
“I am satisfied that, in present economic circumstances, this budget is fiscally sustainable, economically appropriate and socially responsible,” he added.
In response, Fine Gael finance spokesman Richard Bruton said that the reality for people on low incomes would not be changed by the budget and he accused the minister of not fulfilling the promise to cut taxes.
“The Government’s policies have not been inspired by the needs of young families, but by the needs of developers who have dominated the Government’s thinking on housing development with the cheapest option of sprawling relentlessly out to far-flung towns and villages becoming the norm where young families cannot get childcare, transport or facilities.”
“The Government has doubled its dependence on the construction sector to support its revenue. A total of 25 per cent of every tax euro spent by the Government comes from the construction sector. We are not in a strong position; we are, in fact, in a vulnerable position,” said Mr Bruton who also identified benchmarking as displaying a lack of competence.
Labour finance spokeswoman Joan Burton responded by saying the tax justice agenda had been stalled for the three budgets since the last election.
She told the Dáil: “I thank the minister for today’s reductions, but he should not expect people to cheer too much.
“He built up the reserves to pay for these cuts by a vicious regime of hidden increases, stealth taxes and charges in the last four years.”
She added that it was a typical Fianna Fáil-PD budget that benefited the wealthy few rather than the hard-working many.
Budget 2008
As minister for finance, Brian Cowen unveiled another expansionary budget in December 2007, following Fianna Fáil’s three-in-a-row election victory the previous summer.
It featured:
- An income tax package worth over €500 million;
- Changes in stamp duty regime to help home buyers which cost another €180 million;
- A welfare package costing the exchequer just under €1 billion; this included:
- Increases of €12 in the contributory pension to bring it to €223 a week, and €14 in the non-contributory pension to bring it up to €212 a week;
- Social welfare rates were increased by €12 to €197.80 a week;
- Child benefit was raised by €8 to €203 a month.
- The early childcare supplement was increased by €100 to €1,100 a month.
“Budget 2008 has been framed against the most challenging backdrop experienced in a considerable number of years,” Mr Cowen told the Dáil. “Growth is moderating, the international financial markets have been turbulent and the global outlook is uncertain.”
Describing it as a hit-and-miss budget, Mr Bruton welcomed reform of stamp duty, but said it should have been introduced six months earlier to help boost a slowing property market. He also maintained that the vulnerable were not being looked after.
Mr Bruton expressed worry about the overall thrust of the budget, saying: “The alarm bells have long been ringing about the way our public finances are being managed. People want to see change.” He also questioned public pay increases. “What we should have been presented with today was a decision to suspend the big pay increases and make them conditional on performance.”
For Labour, Ms Burton said the budget constituted a frank admission of economic incompetence on the part of the minister who had to change the stamp duty regime for the second time in six months. “The mismanagement of the housing market is written all over the budget. The increased borrowing and limited tax and social welfare packages reflect the hit the exchequer and the economy have taken from the property slump.”