We had known it was coming, because the amount had been well flagged in advance to prepare us for the worst. But even so, to hear Minister for Finance Brian Lenihan spell out the detail of the cutbacks that lie ahead of us was still a shock last week.
We’ve been talking about budget deficits and billions in cutbacks for months now. In fact there has been so much talk, with no action, that an air of unreality had developed around our economic crisis.
But it’s real. And we’re about to experience just how real.
The time for talking is coming to an end, and the time for the implementation of draconian corrective measures is fast approaching.
Last week Lenihan confirmed to the Dail (Parliament) the scale of the cutbacks that are about to start.
The Budget next month will begin four years of drastic cuts with a €6 billion adjustment in the coming year, Lenihan said. That is a staggering amount in terms of our state spending and will deeply impact on the standard of living in Ireland.
But it won’t end with the Budget for 2011, which is now just weeks away. We have to keep cutting back for a further three budgets at least. Lenihan said that the cutbacks would continue with a further €3-4 billion being cut in the budget for 2012, €3-3.5 billion in 2013 and €2-2.5 billion in 2014.
These cuts will be cumulative. As any remaining fat is removed from state spending it will get harder each year to find new ways to cut. So it’s a very grim prospect.
All of this is designed to get our budget deficit, which this year will be around 12%, down to 3% of national income by 2014. As I have explained already here, we don’t have a choice in this because the markets won’t lend us the money to keep spending the way we have been.
We’re already on the point of financial meltdown, with the bond markets last week demanding almost 8% annual interest to lend money to Ireland. The government is refusing to borrow at such high rates, and fortunately we have enough funds to keep going until the middle of next year.
The hope is that by then the spending cutbacks will have convinced the markets that we are getting our financial house in order and that we are a good risk again. And that should mean the rates on our bonds will come down.
But it was worrying last week that even after Lenihan’s presentation of the four-year plan, the markets still wanted well over 7% on Irish 10-year bonds.
At the moment we’re being propped up by the European Union and they are dictating to us what we need to do, including the four-year program of cutbacks to get us to the 3% borrowing level that is the agreed maximum under EU rules.
The scale of the €6 billion adjustment that is to be made in the coming year is mind-boggling. You will remember that in the last budget a year ago the government implemented a €3 billion reduction, and that caused protest marches bordering on street riots. This year the government has to force through cuts that are double that!
Lenihan last week said that the €6 billion adjustment would be achieved by spending cuts and tax hikes in a ratio of three to one. So €4.5 billion will be cuts and €1.5 billion will be extra taxes.
This formula is accepted by the main opposition party Fine Gael and the other main party Labor is broadly in agreement, although it wants half to be in cuts and half to be in tax increases.
The bottom line is that all the main political parties accept that we have to get the budget deficit back to 3% by 2014. So even if the government changes, the reality we face won’t change because the cutbacks have to continue regardless of whoever is in power.
Lenihan said last week, “I am well aware that such measures will impact on the living standards of everybody. But our spending and revenues must be more closely aligned. This is the only way to ensure the future economic well-being of our society."
The gap at present is enormous, with spending at over €50 billion and tax revenue at just over €30 billion. Such a huge budget deficit cannot be sustained, and that is why such drastic action has to be taken.
When you add up it up, the four year program to reduce the budget deficit laid out by Lenihan last week comes out at around €16 billion. That deficit reduction will be achieved by a combination of spending cuts and tax increases, with most of it coming from cuts.
But it could be even worse. That is because our tax take over the next few years may not be as good as Lenihan is predicting.