A return to growth is a hypothetical solution; it's time to get real about reducing the deficit, writes GARRET FitzGERALD
TO ENABLE us to continue to borrow the tens of billions currently needed to keep us afloat we have had to commit ourselves to a combination of spending cuts and tax increases adding up to €26 billion between 2008 and 2013 – on top of which we may have to borrow as much or more again to save our banking system.
While the final €7 billion of this €26 billion recovery programme, to be found in 2012 and 2013, has yet to be allocated between tax increases or spending cuts, it seems likely that over the whole five-year period increased tax revenue will have to produce at least €10 billion of this total (almost €6 billion of which has still to come), with spending cuts of up to €16 billion – of which €12 billion has still to come.
These are huge figures for a State which this year looks like having tax revenue of only about €33 billion and current spending of €46 billion.
For, even if we can manage to cut current public spending by over one-third by 2013, the burden of taxation will also have to rise by 30 per cent. (The figures on which these conclusions are based have been verified by the Department of Finance.)
It is of course possible that, if we could secure significant cuts in our grossly inflated level of private and public sector earnings (which during the past decade we rashly raised to levels well above those of any of our competitors) a combination of an early global recovery together with rapid growth in what would then be a more competitive economy after 2011 could somewhat alleviate the later stages of this programme of austerity. But that must remain a hypothetical possibility. Whatever alleviation of our lot might prove possible under very favourable conditions in several years’ time, at the present stage we can afford no relaxation of the 2010-2011 stage of our recovery programme, especially given the disappointing end-July tax returns, which suggest that by the end of the year tax revenue may fall short by a further €1 billion.
What proportion of this €26 billion recovery programme has already been secured by steps taken during the past 12 months? The answer is about €8 billion, or 30 per cent of the total, with a further €11 billion due in the next two years.
While it is fair to describe the McCarthy report’s €5.3 billion of proposed cuts as a menu from which the Government can draw in order to find the €3 billion cuts it needs in the next two budgets, it could be necessary thereafter to return to that report to find additional cuts towards the further €7 billion of expenditure savings or tax increases needed in 2012 and 2013. However, the extent to which further cuts in public services would be needed in those years would depend upon whether further measures to reduce public service pay and pensions can be brought back into the equation.
It is indeed possible that this public service pay issue will in any event have to come up for review in the context of this December’s budget, with a view to avoiding or perhaps postponing some of the McCarthy cuts.
In this connection, much may depend upon the outcome of the study comparing pay rates here and in countries with which we have to compete. This is a long overdue research project which, if it had been undertaken at the beginning rather than at the end of the present decade, might have helped us to avoid the pay splurge of recent years.
The figures mentioned above, and summarised in the table below, provide the background against which to assess the seriousness of the reactions by a wide range of interest groups to the McCarthy report. There are, of course, criticisms that can be made about several aspects of that report – and I shall later address some of these – but the fact is that there is an air of total unreality about most of what has been said and written by many of those who have attacked these proposals and who are still in absolute denial about the scale of the crisis we currently face.
So far as I am aware, none of the interest groups that have attacked aspects of the proposed cuts has been willing or able to suggest any alternative means of saving our economy and society. We are at present a country of ostriches. It is time for everyone to wake up to reality.