The first budget cut is the deepest for the Irish public


Given the cutbacks in last week's budget in Ireland, the reaction so far has been surprisingly muted.

It was the toughest budget ever here, with welfare payments cut, the earnings of everyone on the state payroll cut for the second time in a year, and other reductions in state spending that will have a negative impact on the standard of living of almost every citizen.

It was the kind of budget that should have caused uproar. But it didn't.

Why? Well, there are several reasons.

The main reason is that the government had conditioned people to the bad news over the past two weeks. Almost all the cutbacks in the budget had been leaked to the papers in advance, drip-fed to the media in a deliberate softening up process. So when the full details were revealed on budget day the shocking news was no surprise, and not much of a shock either.

The other reason people accepted the cutbacks so calmly was that by now everyone here understands that our budget deficit has to be fixed or else the country will go bankrupt. It's been explained so often in the past few months that everyone here gets it.

We're spending $78.5) billion this year and only taking in $46.5 billion in taxes. No business or household can have a gap like that between spending and income and hope to survive more than a few years. And a country is no different.

Our problem stems from the massive expansion in state spending here during the boom years. The Irish state is still spending at that level even though tax revenue has collapsed over the past two years.

That means state spending now has to be cut back severely, and that was what this budget was all about. The government has not run out of compassion. It has run out of money. And it is a tribute to the good sense of most people in Ireland that they understand that, even though the cutbacks are distressing for some.

As I have explained in this column already, since our property bubble burst in 2008 and our tax revenue started to collapse, we have been paying half our bills with money borrowed from the European Central Bank. To keep the support of the EU we had to agree a program to reduce our budget deficit, and the first step was a €4($5.8) billion cut in the deficit in this budget, to be followed by more billions in cuts each year over the next three or four years.

This program was agreed by our government, but the main opposition parties also accepted it because there is no alternative. We can argue about the detail of how to reduce the deficit, but the need to cut it right back is accepted by everyone, even the Labor Party and Sinn Fein.

In headline terms this year's budget made $5.8 billion worth of savings as follows (in round figures) -- $1.5 billion each from the state payroll, welfare, capital programs and departmental spending.

As predicted here last week, the state payroll cuts were led by Taoiseach (Prime Minister) Brian Cowen and his ministers, with pay cuts of 20% and 15% respectively, although this included the previous 10% voluntary pay cut they took a year ago.

In spite of this example, the loudest immediate reaction was from state workers (teachers, nurses, police, army, civil servants, etc.), some of whom are already threatening to strike.

One can understand that they feel sore since they have already been hit with a 7% cut within the past year. Their pay will now be cut as follows – 5% on the first $43,600, 7.5% on the next $58,000 and 10% on the next $80,000 with a top rate of 15% on those earning in excess of $291,000.

It's a substantial further cut, and it will be hard for the 40% of state workers who are low earners, a lot of whom would be young and would include those who bought into the property market during the boom and are now in negative equity.

But overall there is little public sympathy for them because they have what workers in the rest of the economy don't have -- secure jobs and guaranteed pensions.

And there is also the inconvenient fact that pay for state workers was on average 20% higher than pay for workers in the rest of the economy, and also that most state workers had a 35-hour week, whereas private sector workers were on average doing a 38 hour week.

In spite of this, there is a good chance of strikes by state sector workers in 2010 as the cuts start to bite. A lot of them are in cloud cuckoo land because the rest of the country will be enraged if they shut down services. So the government has a difficult few months ahead.

The other part of the budget which caused the most grief was the cut in welfare. Again, one can have sympathy with those at the sharp end. But the exaggeration of the size and effect of the cuts by the usual lefty commentators was hard to take.

The fact is that Ireland has a generous and extensive social welfare system. The cuts are relatively modest and are only a little ahead of the fall in the cost of living.

Let's look at some examples. The payment to those out of work (what Americans call welfare, we used to call the dole and now call jobseekers allowance) was $297 and is now $285 a week. That's a cut of $12, or about 4% -- hardly enough to warrant the cries of outrage and despair that were heard last week.

There were also cuts in child benefit which is paid for every child in the country and is not taxed or means tested. The payment was cut by $23 a month (down from $241 to $218 for the first child).

A family with three children was getting $778 a month and will now get $708. Again, difficult for some families but manageable for most. But the reaction from some lefty commentators was off the scale.

The media here lapped it up, featuring examples of single mothers with four or five children and calculating how much they will lose. Of course no one dares ask politically incorrect questions like why a single mum has four or five kids or where the father(s) are, and why they are not paying maintenance.

The fact is that a single mum with no job and four kids will (even after this budget) be getting a one parent family payment of 196 euros a week, plus child benefit of $999 a month and will also probably be getting other payments like rent allowance (typically around $1,308 a month), fuel allowance (to pay for heating in winter), back to school allowance (for clothes and books for the kids at the start of the school year) plus other payments as well if she can show she needs them. It would be usual for a family like this to be getting $3,634 - $4,361 a month in state handouts.

No one is saying it should not be like this, but some of the reaction to the cuts in welfare in the Budget -- averaging 4% -- were so hysterical that you would think we had no welfare system left at all.

That said, there are some sections of the public (like those who care full time for a disabled relative and get a carer's allowance) where even a cut of 4% is very hard. It would have been better to tax the child benefit going to well off people than do that, but there are complex administrative and legal reasons why this is difficult to do in the short term.

Another cut that attracted a lot of comment was the change in payments for the young jobless. Those aged 18 and 19 get $150 a week. Those aged 20 and 21 used to get $296 a week, but that has now been chopped to the same $150 a week, unless they take part in retraining schemes run by the state.

It has been pointed out that there is a long waiting list for some of these training schemes, and that the cut is forcing these young adults back to live with their parents or else into emigration.

There is some truth in this. But it is also true that some of the young adults in question were making little attempt either to get retrained or to find a job, either in Ireland or abroad. They were choosing not to take low paid jobs (the kind now being filled by foreigners) because they preferred to live on their $296 a week handout.

It is important for the state not to encourage this mindset, which can all too easily translate into a long-term attitude. All through the boom there were thousands of long term unemployed here.

We could afford it then. We can't afford it now.

A wider argument about the budget was that in general it hit those on low incomes and reduced benefits to those with no incomes instead of taking much more from the high earners. But marginal taxes for middle and high earners here are already over 50%, and pushing them much higher will drive key people out.

Putting very high taxes on a few people was never going to solve our problem. Action had to be taken on the spending side and that meant cuts. And by spreading the cuts across all benefits, it was possible to keep the reduction to an average 4%.

In a country where welfare benefits only ever went one way -- up -- it has been a shock. But it's not nearly as bad as you might think reading the headlines here.

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