FINALLY, THE extent of the economic crisis is being communicated in blunt terms to the public. Taoiseach Brian Cowen broke with long- established custom, as the Cabinet prepares an emergency budget, to warn that living standards will fall by 10 per cent in the next two years. Taxes will rise, public spending will be cut and reforms will be introduced within the financial and economic systems. It will not be a pretty or a painless exercise. But official delays in responding to the emergency have already made the situation worse.
A structural imbalance of €18 billion a year has appeared in our public finances because of the collapse in property taxes. Public borrowing to fill that hole simply cannot be sustained. At the same time, raising taxes to plug the gap would exacerbate conditions in an economy that is already shrinking rapidly. A balance must therefore be found between reductions in public spending, higher taxes and prudent borrowing. If it is to be successful, the defining elements of the package must be fairness and a determination to protect employment. Those sections of society that gained most from the economic boom should be levied according to their means; people in State employment must recognise their particular responsibilities and the living standards of the least well off should be protected.
Special pleading by teachers to be exempted from the effects of Government cuts sends a damaging signal. It certainly does not reflect the need for communal solidarity articulated by Mr Cowen. A five-year recovery plan is likely to leave no section of society untouched. The recession has had catastrophic consequences for tens of thousands of workers who have lost their jobs or been placed on short-time working. It would be an intolerable injustice if, in seeking to protect pay and conditions within the public service, such job losses were to accelerate.
Mr Cowen’s special press conference has helped to condition public opinion to expect harsh, but necessary, budgetary measures. It had the added advantage, from Fianna Fáil’s point of view, of diverting attention from the Labour Party conference. Such is the stuff of politics. Orthodox economists are likely to favour more radical reductions in borrowing and spending. But this budget will be more than a textbook exercise. Its success may depend on support from the social partners, who have re-entered negotiations.
Protecting the livelihoods of people under pressure and giving hope to communities can be a more productive response to recession than the crude, slash-and-burn approach favoured by the International Monetary Fund. That was shown by Malaysia when the Asian economic bubble deflated. In much the same way, Germany provides assistance for companies to retain workers, rather than see them join the dole queue.
Distinguishing between cutting fat and muscle can be difficult. But it is a vital component in this exercise. The Government’s fiscal response was wrong or inadequate on two previous occasions. This time around, it must get it right.