Decks cleared for budget

 

ANALYSIS:THE COLLAPSE of the pay talks has put the Minister for Finance in a strong position and increased the certainty surrounding today’s budget. We can now be fairly certain that the vast bulk, perhaps all, of the €4 billion deficit-reduction package will come from cuts in spending, writes PAT McARDLE


The situation regarding future budgets was even more uncertain. In essence, the unions failed to realise real pay cuts were required. Moreover, the productivity improvements offered for future years have been bought and paid for many times over, not least in benchmarking. This lack of realism and the insensitivity of some comments provoked the sleeping beast of the general public.

Pay cuts of €1.3 billion are now a done deal. However, this may not be quite as painful as it sounds. Last Friday, the Taoiseach was careful to say that the €1.3 billion referred to the reduction in the 2010 pay bill compared with 2009.

There is a carryover from the public sector incentivised early retirement scheme (ISER) of about €300 million; the net amount to be found today is, therefore, €1 billion which is 5 per cent of the gross pay and pensions’ bill or 5.5 per cent of the net bill; hence the 5-6 per cent range mentioned over the weekend.

These are averages – we can expect lesser reductions at the bottom and more at the top. The ISER had no impact on pensions, present or future, as it was categorised as a funding contribution. Logically, cuts should flow through to pensions though it is unclear how people on pensions linked to these scales will be affected. There has been much speculation about social welfare. As far as the Government is concerned, it is a residual, to be spared as much as possible.

Some things are clear. Old age pensions will not be touched as the Government does not want to rattle the grey brigade again. But child benefit is for the chop. The quote in the April 2009 budget was “. . . the Government has decided that child benefit will be means-tested or taxed in the budget for next year”. This is as it should be, given its inequitable nature. It would be preferable to tax it, but this does not seem to be possible.

An average 10 per cent cut would yield €250 million but here, again, those on lower incomes will be spared while the higher echelons will suffer more.

Other social welfare payments will be reduced by about 4 per cent yielding €0.6 billion. Clearly, the figure will be below the 5 per cent wage cut. “An Bord Snip Nua” felt reductions up to 5 per cent were justified. Remember, social welfare rates were raised last year when it was thought inflation would be a positive 2.5 per cent in 2009; so they have fared better than most.

The social welfare task may be eased by base developments. The forecast for the average number on the Live Register in 2010 will be much reduced by comparison with April, given the better trend of late. It is unclear how this has been taken into account in the aggregate White Paper estimates published last weekend. It could be good for another €250 million, boosting the total social welfare savings package to €1.1 billion.

We are still €1.6 billion short of the €4 billion target.

Capital spending was not slashed in the White Paper as some reported. Voted capital services were projected at €6.9 billion in 2010, up from €6.8 billion this year. Last April, the Minister envisaged cutting capital spending by €0.75 billion. It now looks like this may be exceeded. The fall in tender prices alone would justify cuts of up to €1.25 billion.

Part of this could be used to fund a stimulus, as could some of the receipts from a carbon tax, possibly a housing retro-fit scheme or a jobs package. A car scrappage scheme is less likely.

If the net saving on capital spend is €0.75 billion, we are left with a residual amount of €0.85 billion to be cut from non-pay, non-social welfare, day-to-day spending. This represents a reduction of almost 6 per cent and will be taken from the menu provided in the “Snip Nua” report.

The broad outlines of the budget are clearer than usual. The detail will inevitably confound some of the speculation. One thing I would like to see is a medium-term focus. Given this is the second of five tough budgets, it would be useful to see forward planning. For example, what savings can we expect from falling staff numbers over the medium term? What is the minimum size of the public sector required to run the country? Will a property tax be necessary? Will further pay or social welfare cuts be required? Will capital spending have to be eliminated completely?

At the moment, people are saving a lot because they face an uncertain future. Hiding the bad news from them or, perhaps, upping the Dirt rate further to discourage saving, is not necessarily the best approach.


Pat McArdle is The Irish Timeseconomic commentator