Tough Budget went for tax hikes and held off attack on spending

ANALYSIS:FRAMING HIS emergency Budget, Brian Lenihan was haunted by the memory of Ernest Blythe, the finance minister in WT Cosgrave's first government in 1923, whose political reputation never survived cutting the old age pension in the 1920s, even if he gave it back.

But Lenihan has made his own history.

He has taken decisions that will cost taxpayers billions, and made it clear that even tougher ones are to come in December’s budget and the ones afterwards.

Fianna Fáil TDs cheered Lenihan’s Budget to the rafters last October only to find the package blowing up in their faces in the days subsequent after the attempt to curb the over-70s medical card collapsed.

Yesterday, they clapped rather than cheered and studied carefully the details in search of the political timebomb, the simple issue around which public opposition can unite, the issue that could destroy their damaged fortunes.

And there are plenty of possibilities.

Perhaps the double Christmas social welfare bonus that will be cut, saving €82 million. Even more, his clear warning that rates could be cut in his next budget just weeks before Christmas threatens political turmoil.

And the middle class – whose members are the most likely to vote, remember – is going

to scream loudly, hit as it is by extra income and health levies, cuts in childcare benefits and mortgage interest reliefs.

Landlords have not suffered as much as expected. Their tax reliefs have been cut fractionally, and Lenihan commits to cutting rent supplement next time, but does not say by how much.

Tax exiles were not mentioned, though it is known that the Department of Finance is working on plans that will see the light of day by the time the Budget morphs into the Finance Bill. Politically, it would have been better if these had been ready yesterday.

Equally, the fact that the new toxic bank assets super agency will soak up to €80 billion of bad property loans will be incomprehensible to most of the public, though it, or something like it, is necessary to get credit moving again.

In particular, the decision to include loans offered by Irish banks for foreign properties offers a target a mile wide for the Opposition, and they will make full use of it in coming days.

For weeks, the Cabinet has debated the options in detail unlike any previous cabinet. Eventually, it decided that it could not cut more than €3.5 billion out of the economy this year, lest it choke what life remains in it – and it had to do it more by tax rises than cuts.

But a stimulus package, regardless of the Opposition’s demands for one, was not possible: a ship cannot be righted until the crew has first managed to stop new water coming in. And Ireland is still taking water on board.

It’s a judgment call on which everything depends. If Lenihan is wrong, the economy will go off a cliff and taxes will collapse. If he is right, Ireland will hit a bottom, and a bad one, but one solid enough from which we can rebuild.

However, he shirked the toughest options. Spending will be the major target next year, he promised. Reform in the public service will happen next year, he promised. These are not easy options: they mean sackings; an increase in school class sizes; the closure of hospital wards; and the spread of potholes on rural roads. This pain will not be shallow or short.

Politically, the Government’s figures on this occasion – the fourth attempt since October to get the sums right – have to be correct, since it cannot return to the Dáil if it is to retain any credibility.

However, there is no guarantee that that can be avoided. In the last week, Taoiseach Brian Cowen and Lenihan have repeatedly offered different figures for tax revenues this year.

Last Sunday week, Cowen compared revenues with 2002/2003 statistics: a figure which would offer €32 billion at most. Then the Government said its €34 billion forecast remained. On Monday, Lenihan said €33 billion. Yesterday, he said €34 billion.

Now, the Government will have to sit back and wait to see whether the hard decisions will cause people to put a lock on their wallets completely – or whether the catalogue of bad news, however unpleasant, offers a degree of certainty.

PAYE earners will fork out €1.8 billion more this year in extra income taxes, PRSI and doubled levies, while mortgage interest relief will disappear for those owning homes for more than seven years.

The doubling of the health levy was not expected by most, while the increase from €52,000 to €75,000 in the PRSI ceiling was at the far end of expectations. And the lowering of the €100,000 levy threshold will bring tens of thousands in upper middle-class Ireland into the cruel 4 per cent embrace of the supertax.

In a full year, such changes would cost PAYE earners €3 billion; but there is little to believe that the cost will stop there when Lenihan next stands up in the Dáil with a budget speech in his hand.

The scale of the impositions is stark and shows that it is middle to high earners who will bear the major pain: a middle-class couple with two children will pay €4,000 more in tax and levies, as well as lose mortgage tax relief.

Some of those people will also be employed by the State and already furious about the scourge of the pension levy, and many with children will have seen cuts in their childcare benefits.

And the reductions will be visible before Fianna Fáil and the Greens take to the streets in earnest to campaign for the European and local elections in June. Few in the trade would envy them their task.

One of the juicy fruits of the Celtic Tiger, the €480 million childcare supplement, will be halved in May and ended in January, and replaced by a year of pre-school that will cost some one-third of the bill.

“This is an example of how a programme can be reshaped and made more effective at a lower cost to the taxpayer. We need to see more such initiatives in the public sector,” said Lenihan.

For weeks, State officials have obsessed about the lump-sum worth of 1½ years of salary that they receive on retirement, amid fears that the Government would tax it.

Yesterday, Lenihan once again talked about public sector reform but did not deliver upon it – though his deliberately crafted threat to the tax-free nature of the lump sum will make many consider their options.

And, make no mistake, it was designed to do so.

For months, the Government has been accused of failing to offer leadership. Yesterday, right, or wrong, it certainly took tough decisions.

It can only pray that voters will not savage them for it.

Mark Hennessy is a Political Correspondent of The Irish Times