THE VALUATION of bad bank loans and the extent to which taxpayers are exposed to losses arising from their purchase will influence public attitudes to government for years to come.
If there is any hint of a special bailout for builders or bankers, terrible damage will be caused to the political system. The Government is right to argue that we need cleansed and functioning banks to allow business to function and to protect existing jobs. But it should not be at a cost of transferring responsibility for crazy lending practices to the public.
Minister for Finance Brian Lenihan did the easy part yesterday when he announced details of a National Asset Management Agency that will buy up to €90 billion of property and development loans at a discount. The discount will vary according to the property, its location and development potential. That process must be transparent. And it should be conducted at arms length from the bankers, builders and valuers who got us into this mess in the first place. Valuations should err on the side of parsimony in a falling market. And the Government should complete a clean-out of top banking executives and board members. While these individuals remain in place, a public perception of golden circles and unaccountable behaviour will retain its potency.
If the Coalition parties hoped Fine Gael or the Labour Party would put on green jerseys in responding to the Budget, they will have been disappointed. A hammering in the local and European elections seems inevitable as the Opposition parties stoke the fires of simmering public unrest. And while the Government remains under pressure for its mismanagement of the economy and its failure in the Budget to achieve a better balance between tax increases and cuts in public spending, it will be hoping by the next general election to have travelled sufficiently far along the road to economic recovery to dim the electorate’s memory of past mistakes. It is a high-risk strategy but the only one open to it.
The Government’s most politically astute action involved the removal of all 20 ministers of state from office with a commitment to reappoint 15 after the Easter break. A new benchmarking system for higher-level public servants, based on EU government comparisons, is certain to bring down inflated salaries. And an early retirement package may shrink the public service.
On top of that, circumstances may yet conspire to minimise the pain – at least in the short term – of what has been an extremely harsh budget. If the cost of living falls by 4 per cent this year, as Mr Lenihan expects, then lower income earners may emerge relatively unscathed while those on social welfare could actually benefit.
But hard times lie ahead. The tax base cannot be restructured quickly or without pain. And while the EU Commission welcomed “decisive, broad-based action”, only time will tell whether it has been effective. Efforts have been made to ensure that those earning most will pay most in taxes. But income is only one form of wealth. And the Government will have to spread its net much wider if it is to convince the public that fairness lies at the heart of its approach. That will mean more pain.