This budget will be tough but worst is yet to come

 

ANALYSIS:This budget, and the following three or four, will have to see public spending cut to the bone and taxes raised until the pips squeak, writes PAT McARDLE

Severities should be dealt out all at once, so that their suddenness may give less offence

– Niccolo Machiavelli

IN A previous article, I attempted to shed some light on the confusion that exists between the banks’ bailout and the fiscal situation. The key point is that an enormous fiscal correction is needed in addition to the recapitalisation and provision of liquidity to the banks.

After the banks, the size of the total cutbacks required is the second great issue and the public is not properly prepared for what is to come. To a considerable extent, the Government is to blame.

For the record, the April budget showed required adjustments of €16.35 billion over the four-year period to 2013. In the meantime, the projected 2009 General Government Deficit (GGD) has risen by about €1.4 billion as both tax revenue and spending undershot. The total challenge is, therefore, now closer to €18 billion.

However, the Government has steadfastly focused on just the next year. While each battle in a war is critical, one is unlikely to win the war without an overall game plan. Increasingly, Budget 2010 looks like a battle even if now, at last, there is general agreement that a €4 billion package is needed.

There is insufficient acknowledgment that this is just the first of four or five equally tough budgets. No, I tell a lie. Inevitably, they will become tougher as spending is cut ever closer to the bone and taxes raised to levels that make the pips squeak.

The Government, perhaps daunted by this reality, seems unable to focus beyond the next budget. This short-termism, in turn, is evident in media comments to the effect that the plan is to get the €4 billion done and hope that an economic upturn will take care of much of the rest.

Missing in this analysis is the fact that the €18 billion is already predicated on an upturn and a mighty strong one at that, with growth hitting 4.5 per cent by 2012.

At the other extreme, Michael O’Leary has said that, were he in charge, he would do most of the heavy lifting in the first year. This reflects the private sector model where if you find a cancer you excise it and move on. If you are not able to do this, the business goes to the wall.

However, public sectors are different. Ireland is not the only country in this predicament, though we are in a bigger mess than the rest with the possible exception of Greece.

Only recently, the European Commission set out an extended timetable for correcting the fiscal deficits in the member states. We began our correction last year, earlier than anyone else and along with the UK have until 2014 to finish it, one year after the rest. The principle of an extended correction is well established; the Government is right to spread it out but should do so in a sensible manner.

The grounds for future action should be laid this year.

As it is inevitable that we will have a property tax before this is finished, the announcement should be made now and the preparatory work begun. In Northern Ireland, they valued every property in nine months. We should be able to do it in a year giving useful employment to redundant valuation professionals in the process.

There are other examples. There should be an early announcement that the retirement age will rise by six months every year, bringing it to 70 by 2020.

Finally, it is always tempting to play God and outline one’s personal budget. Though it may seem strange after what I have said above, I would introduce a holding budget to give me time to concentrate on the bigger issues and prepare the unions for what is to come.

The objective would be a neutral, unobjectionable, budget; one which left nobody worse off but, at the same time, reduced the deficit by at least €4 billion.

The predictions in the recent pre-budget outlook show consumer prices falling by a combined 5 per cent this year and next. It follows that to stand still, non-interest spending should be cut by a similar percentage. Special pleading that recent price falls reflect interest-rate movements are no more than an attempt to change the rules of the game – we heard little of them in the past when the consumer price index was boosted by rising interest rates.

A 5 per cent reduction in net current voted spending equates to €2.2 billion. Acquaintances in the building sector tell me that tender prices have fallen by 20 per cent. This yields another €1.2 billion savings on capital spend.

Finally, the income tax burden will fall unless all bands, credits and allowances are reduced by 5 per cent – another €600 million. Already, we have secured €4 billion.

There is another €300 million to be got by unwinding last year’s social welfare increases. These were granted by accident as it was thought that inflation would be positive in 2009. Thankfully, economists do not decide social policy. However, failure to unwind it would mean that social welfare recipients would be the only ones to experience a real increase in income. After that, I would get another €500 million from the carbon tax and . . . sorry, is that you Michael, or is it Niccolo I hear calling?


Pat McArdle is Irish Timeseconomic commentator and a former chief economist with Ulster Bank. This is one of several pre-budget pieces that will be published in the run-up to December 9th

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