ANALYSIS:The review will serve as a rough guide for households navigating the next few years. But the policies outlined will challenge everyone at every level, writes HARRY McGEE,Political Correspondent
THIS GOVERNMENT has enjoyed a honeymoon probably without precedent in Irish politics. In recent months opposition politicians, especially sackcloth-attired Fianna Fáilers, have predicted it would end on December 6th, when Minister for Finance Michael Noonan presents the Coalition’s first budget.
The rationale is as follows: no longer will Fine Gael and Labour in government be able to use the excuse that they have inherited a mess from the previous government and have no choice in their decision-making. With its own budget, the Coalition will have to be judged by its own terms.
It has been a strategy of the Government for many months to brace the electorate for a very tough budget. Michael Noonan has uttered the need for €3.6 billion or more in cuts so often that if the phrase were a tyre its treads would be worn out.
Taoiseach Enda Kenny’s “state of the nation” address in the week before the budget will also be part of this conditioning exercise. While the effect of that will not inure the Government from criticism – especially of some of the more biting cuts – its bank of political credit may last into 2012.
In other words, December 6th is not the moment when a relatively popular government becomes an unpopular government (a la the last government’s disastrous decision to axe medical cards for over 70s in its emergency budget of October 2008).
Yesterday’s exercise was to set out the medium-term fiscal strategy – in other words, to fulfil a promise that it would spell out what the adjustments there would be over the next four years and how they would be allotted between cuts and taxes.
The overall adjustment of €12.4 billion is some €600 million higher than the adjustment previously forecast for the period.
Some €7.75 billion will come from cuts with the balance of €4.65 billion coming from taxes. In their respective election pledges, Fine Gael promised a ratio of three to one between cuts and taxes, while Labour held to a 50:50 split.
This meets their different positions more or less halfway, giving a two to one ratio.
A key political argument of the Coalition is it would bring an element of predictability, and allow citizens and companies to plan. But the overall figures are at best indicative – as they are subject to the turbulence and volatility of the global economy.
In a sense, this document is only a guide, not all that different from the last government’s national recovery plan from November 2010, with its own four-year projections. They got two weeks out of it before the IMF and EU came into town.
Noonan confirmed yesterday that the adjustment this year would be €3.8 billion, the amount needed to reduce the deficit to 8.6 per cent of gross domestic product (GDP) next year – a target which was a sine qua non of the bailout agreement with the EU and IMF.
And though more modest than last year’s draconian adjustment of €6 billion, it nevertheless involves a massive task. Noonan has consistently pointed out that the low-lying fruit has all been picked, making the process even more difficult. The split for 2012 is roughly the same: €2.2 billion in cuts and €1.6 billion in tax.
However, a quirk of the taxation system whereby PAYE operates a month in arrears means there is a bonus – a carryover of €600 million from last year’s budget. The means the Government needs to find €1 billion in new taxes. Noonan again insisted yesterday there would be no increases in income tax rates, bands or credits. That means the taxes will all be indirect. They will include an agreed increase in the top rate of VAT to 23 per cent; as well as the new household charge announced by Minister for the Environment Phil Hogan. Noonan also said the EU would press for further increases in carbon taxes.
Another condition of the EU-IMF memorandum, though one not mentioned by Noonan, is for changes in capital acquisition tax and capital gains tax.
On the expenditure side, the other major commitment given by Government is that there will be no cuts in social welfare rates.
Yesterday’s strategy disclosed that capital expenditure would be cut by €700 million next year. Noonan accepted it would mean several major flagship projects would not get off the ground but when asked if Metro North was one, he would not specify.
“It is up to the line Ministers to announce [what’s not going ahead],” he said. “I would not deprive from them the pleasure of announcing that.”
But the reality is that to avoid cuts in social welfare, Minister for Public Expenditure Brendan Howlin is going to have to deliver big with his comprehensive review of spending and the promise of finding alternative departmental cuts.
Beyond that, the Government cannot escape austerity measures. Noonan accepted that yesterday.
“This budget will be hard on people,” he said. “I expect them to say it’s very tough. But if I can, I will get them to say at least it will be fair.” The first Tuesday in December will be the judge of that.