With taxpayers spared pain it was inevitable poor would pay

 

Hard to see how welfare cuts can be justified in one of the world’s most under-taxed countries

ALTHOUGH NO one is actively celebrating the achievement of a further €4 billion fiscal adjustment, that is, of course, the most important feature of the Budget. To this should be added the further €3.5 billion of fiscal adjustments for next year that had already been secured as a result of the carry-forward effects of budgetary decisions taken earlier this year. So the cumulative impact of these adjustments upon the out-turn of 2010 will now be €7.5 billion – or almost 2.5 per cent of forecasted GNP.

Moreover, this €7.5 billion follows a similar fiscal adjustment of €8 billion achieved within the current year. Our general government deficit at the end of 2010 should now be €18.7 billion, or 11.75 per cent of GDP. Without the corrective steps taken during the past 14 months our shortfall would be close to €30 billion.

The accumulated €15.5 billion fiscal adjustment secured during the past 14 months has saved us from national bankruptcy. However, this has been achieved at the cost of considerable distress for many, especially social welfare beneficiaries other than pensioners. But also, of course, workers in the public sector who are now receiving a backlash offsetting much of the artificial boost to their earnings effected earlier in this decade.

The fact that so much of the cost of this adjustment has been borne by those worst-off and so little by the better-off reflects the Government’s policy reversal of three months ago, when it abandoned its plan to raise through additional taxation the bulk of the additional €4 billion fiscal adjustment required in 2010. With taxpayers being spared further pain, it was inevitable that those on social welfare would be asked to pay.

The argument for cuts in social welfare derives from the fact that in October 2008, in the face of an expected 2.2 per cent rise in the cost of living in 2009, social welfare payments were raised by 3.2 per cent, with the aim of at least maintaining the purchasing power of those concerned.

In the event, the cost of living (measured by the Harmonised Index of Consumer Prices, which excludes mortgage interest) has instead dropped by 2.8 per cent over the past 12 months. This means that, on average, the purchasing power of social welfare payments has risen by about 6 per cent. It is this situation that led the Government to decide on a cut of just over 4 per cent in social welfare payments next year. But, in practice, things do not work out as neatly as that. First of all, the cancellation of this year’s Christmas bonus has had the effect of reducing the annual social welfare payment by 2 per cent. Changes in housing supplement payments have further hit many in the social welfare category.

It is hard to see how, in what I have recently shown to be the most under-taxed country in the developed world, the Government can justify taking €750 million from social welfare recipients, while refusing on what seem specious grounds to address our €4 billion tax revenue shortfall.

A quite separate aspect of this year’s budgetary process is the fact that a key aspect was handled with great clumsiness. Eight days before the Budget, on a proposal by the Taoiseach, in the absence of the Minister for Finance, a majority of the rest of the Government reluctantly agreed to authorise negotiation of a public service holidays proposal as an alternative to the cuts in public service pay. Just how and by whom this was communicated to the union leadership is not clear, but it led union negotiator Peter McLoone and others to claim a breakthrough that was not immediately challenged by the Taoiseach.

Then, two days later, Fianna Fáil backbenchers rejected this proposal, which the union leaders had by then convinced themselves was in the process of being agreed by some Government negotiators. This debacle could make much more difficult any resumption of talks on repeatedly promised, but never delivered, public service reform.

There have been suggestions that this unhappy outcome may have owed something to a duality of Government negotiators, respectively from the Department of Finance and that of the Taoiseach. This may or may not be true – but I am certainly aware from my own experience that rivalries and tensions can arise when the Taoiseach’s department seeks to engage in activities that are the prime responsibility of a line department such as Finance or Foreign Affairs.

In the negotiation of the Anglo-Irish Agreement, I succeeded in avoiding any problem of this kind by arranging that our cabinet secretary, Dermot Nally, would lead a team that would be composed exclusively of Foreign Affairs officials, without any other participation from the Taoiseach’s department. That arrangement worked perfectly because it avoided conflict between officials of the two departments.

Of course, almost everything in the Budget had been leaked to the media in advance. But one item, new to me at least, was the announcement that “a new universal social contribution will replace employee PRSI, the health levy, and the income levy. It will be paid by everyone at a low rate on a wide base as a collective contribution to public services”.

Does this gnomic statement presage a future requirement that pensioners will have to start paying the health levy and PRSI contributions, from both of which they are currently exempt? On RTÉ on Thursday I tried, but failed, to persuade Tánaiste Mary Coughlan to clarify this, which increased my suspicions of what is being planned.

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