Ireland prepares for Scrooge Christmas as budget axe set to fall


Published Wednesday, December 9, 2009, 9:56 AM

The axe is about to fall. On Wednesday of this week the Irish Minister for Finance Brian Lenihan will present his Budget for 2010 to the Dail (Parliament), and it is going to be the toughest since the foundation of the state.

A huge lump has to be cut out of state spending in Ireland to stop the country going bankrupt. And that means cutting back sharply in ways that are going to severely hit the living standard of every person in the country.

It's going to be a Scrooge-style Christmas here. Instead of Ho! Ho! Ho! we're just going to have Ho! Ho!, or if he really swings that axe, maybe just a single Ho!

It's worth reminding ourselves how deep the hole we are in actually is, and why such drastic cutbacks are necessary.

This year total government spending in Ireland will be at least 54 ($79.4 billion and total tax revenue will be around 32 ($47) billion, leaving us a massive deficit of22 ($32) billion. That means that we are now borrowing between one third and one half of everything the state spends.

You don't have to be an economist to see that borrowing that high cannot go on without the country going bust within a few years.

So what's gone wrong? We've gone from boom to bust in just two years, thanks to the global financial crisis and the collapse of the Irish property bubble which caused Irish tax revenues to plummet.

Our problem is that during the boom years state spending here soared as tax revenue rolled in. Now that it's gone into reverse we have to cut back, and that is extremely difficult.

We would already have gone bust except that we are part of the European Union. The European Central Bank has rescued us, giving us the money to prop up the Irish banks and to pay for much of the day to day spending of the state.

But to get this money we had to agree with the EU that we would sort out our financial mess over the next four years. We need to get our deficit down to around 10 ($15) billion in that time, which would be an acceptable level in the medium term.

And that means severe cutbacks in each of the next four years, starting with an agreed 4 ($5.9) billion reduction in the budget deficit next year.

There is general acceptance that there is limited scope for further tax increases, so cutting state spending is the only way we can go. The EU knows that. The government knows that. And everyone here knows that.

So where is the money to come from? State spending in Ireland divides into three roughly equal parts -- one third on welfare, one third on state pay and one third on everything else.

In fact this year, thanks to soaring unemployment, it was 38% on welfare, 34% on state pay and pensions and 28% on everything else.

That means it is impossible to cut state spending significantly without taking chunks out of welfare payments and state pay.

Up to now, those two areas have been the sacred cows that could not be touched. But given the crisis we are now in, that has to change.

From the hints given by the government in the past week, about a billion will be cut from welfare in the budget. Another 1.3 ($2) billion will be cut from the state pay bill.

A new carbon tax (on petroleum products and fossil fuels) will bring in about half a billion. And more cuts in other areas of spending will then produce the required 4 ($5.9) billion reduction in the deficit next year.

It's easy to say it quickly like that. But it's going to be very painful. And the unions representing the state workers have been fighting it every inch of the way.

Last week there were intense negotiations between the unions and the government to try to avoid pay cuts. The unions came up with a compromise under which all state workers would take 12 days unpaid leave in the coming year, which would reduce the state pay bill.

But this idea led to public uproar. Hospitals can barely cope at the moment, so how could staff take an extra 12 days holiday?

We already have the shortest school year in Europe. Crime is as bad as ever. So how could teachers and the police take even more time off?

The unions were also promising a complete transformation of state services, giving better services for less money. But they have been promising that for years in the various national pay deals which gave them big pay increases, and they have never delivered.