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Irish Prime Minister Brian Cowen and Minister for Finance Brian Lenihan

Tough budget is too weak

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Irish Prime Minister Brian Cowen and Minister for Finance Brian Lenihan

The size of the task facing Finance Minister Brian Lenihan this Tuesday was immense. The Irish economy is in real trouble, with tax revenue collapsing and state spending still up around the astronomical level it reached during our phony boom. 

The result is a yawning budget deficit that is getting worse by the day. Emergency action was needed to stop the country going bankrupt.  

Which is why Lenihan, the Irish minister for finance, introduced a supplementary budget on Tuesday to begin closing the gap between revenue and spending.    

But does his supplementary budget, already being described as "the toughest budget in the history of the state," go far enough?  Probably not, is the answer.  

It is timid rather than bold. It does the bare minimum necessary to keep the state afloat and to stop us being thrown out of the euro zone.  In relation to the size of the problem, it is a sticking band-aid rather than a cure for our disease. 

The size of the problem, as I said, is immense. This year the Irish government will spend around €65 billion.  The latest estimate is that it will take in around €34 billion in taxes.  The rest has to be borrowed, a level that is just not sustainable and is also way outside the rules of the European Union. 

To correct this situation the government has to cut spending and raise taxes.  It's that simple.  

But it's much easier to raise taxes than it is to cut spending, because cutting spending means chopping the huge payroll for state workers and trimming welfare payments, as well as cutting back on all the wasteful ways the government spends our tax money every year.  

And that is why I am saying that this emergency budget was timid, because Lenihan went for the easy option of raising taxes much more than he chopped back all the state spending this country can no longer afford. 

The state payroll and welfare payments together account for two-thirds of all government spending so cutting back in these areas has to be done, however painful.  

Already we have seen the reaction of people to welfare cutbacks, with angry street protests over attempts to charge those senior citizens who can afford to pay for health care. And we have seen state workers like school teachers out on street demonstrations, even though they earn one-third more than their colleagues in Britain.  

Next we will see protests by university teaching staff who earn double what their counterparts in Britain get, even though the international rating of Irish universities is very poor. 

The same thing is going on at all levels among workers who are paid by the state. Tackling the state payroll was essential in this budget, but Lenihan ducked the challenge, afraid of the power of the unions and of more street protests. 

He ducked it even though there was clearly a groundswell of support for such action from private sector workers who are losing their jobs in the recession and see their pensions being decimated on the markets.  In contrast, state workers have job security, high pay and generous guaranteed pensions.  

In the cutbacks announced by the government in February, the state clawed some of this back by getting state workers to pay a bigger (but still very small) part of the cost of their pensions. This should have been taken further in this budget to reflect the true cost of state pensions, but Lenihan did not have the courage to do so.  

It was the same on welfare.  Some desirable changes were begun, like in the child benefit payments that are currently made to every family in the country regardless of income.  In future better off families will not get these payments.   

There were other changes as well, like the ending of the early childcare allowance paid to parents of pre-school children which made sense in the boom years when we needed more parents back at work, but no longer does.  

But the overall picture is that the main welfare payments will not be reduced, even though they are among the best in Europe (our payment to the unemployed is nearly double what it is in Britain, for example).   

And the system is riddled with absurd stuff like paying child welfare to parents (mostly East Europeans) who work here but whose children live back in Poland where the cost of living is about one-third what it is here, and Irish child welfare payments are enough to live on for a week.  

A recent intensive survey by the state discovered that in one area the level of welfare fraud was running at 12 percent, but the real figure is probably a lot higher.  All of this points to the necessity of making serious reductions in the cost of welfare payments of all kinds to the state, particularly since the cost of living here is now falling. 

But again Lenihan failed to take decisive action, afraid of public reaction and being accused of hitting the poor and the weak. 

The facts are, however, that major reform of the Irish welfare system and payment levels is now essential and could benefit the genuinely poor and weak.  Major reform is needed because we can no longer afford the levels that were appropriate during the boom.  This emergency budget was the perfect place to start, but Lenihan tinkered rather than made dramatic changes. 

So instead of doing radical surgery on state spending, Lenihan brought in big tax increases (with more to come) to pay for all the spending we can't afford. The income levy and health levy were doubled (both are income taxes) and some of the stuff people can use to reduce their income tax bill (like mortgage interest relief) is being cut back. And there is more tax on the way, with Lenihan promising a carbon tax and some kind of  property tax in the future. 

Between all the measures announced, the gap between state spending and revenue will be reduced by €3.3 billion, on top of the €1.5 billion in savings it made in the February cutbacks.  

Tuesday's measures will increase revenue by €1.8 billion, while spending will be cut by €1.5 billion.  What this means is that instead of borrowing "a maximum"  9.5 percent of GDP this year, as it originally signaled to Europe, the Irish government will borrow well over 10 percent.

But Lenihan was at pains to say that this new borrowing target had European support, and that this week's supplementary budget was just part of what would be a five-year plan to get the Irish state finances back in order. 

Next year and in 2011, he said, the emphasis would be on more cutbacks in state spending rather than on more tax increases.  I'll believe that when I see it.

Also announced on Tuesday was the government's decision to set up a new body called the National Asset Management Agency to take over bad debts from the Irish banks, which means that the taxpayers will be taking between €80 and €90 billion off the books in the banks, thereby freeing up credit.  

This is being done even though we still don't know on what terms the agency will be buying the bad property and sites from the banks. My guess is that the taxpayer is once again going to get a raw deal.

"Fairness must be the cornerstone of all our efforts," Lenihan told the Dail (Parliament) in his speech.  And what he has done is fair, up to a point, with most of the changes progressive so that those who can afford most pay most. 

But fair is not enough.  The budget (as you will see from our detailed news report) was minimalist.  It will help somewhat to restore confidence in the markets, although I don't see it getting us back our Triple A rating any time soon, or reviving our economy or getting the millstone of state spending off our backs fast enough. 

"What is wrong in our economy can be fixed if we take the right course of action now," Lenihan said at the start of his budget speech.  

He may be on the right course.  But he's moving at a snail's pace.

The much heralded Tough Budget is not the kind of tough love Ireland needs. It's too weak to make a real difference.

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