Ordinary Irish suffer yet again as savage budget cuts will hit poorest

By: John Spain | Published Wednesday, December 19, 2012, 6:39 AM | Updated Wednesday, December 19, 2012, 6:39 AM

A Santa Claus protester held up a sign at a protest in Dublin last month.

This is budget week in Ireland but the bad news -- and it's going to be very bad news -- won't be revealed until Wednesday afternoon when the Minister for Finance Michael Noonan reads his Budget 2013 speech to the Dail (Parliament).  

So it will be after this column has gone to bed when the gory details of the Budget 2013 nightmare will emerge.  Of course we do know roughly what's going to happen, since we are no longer masters of our own economic sovereignty.  

That privilege belongs to the Troika (the EU, ECB and IMF) who lent us the bailout money to stay afloat three years ago and now lay down the law on our stony pathway back to fiscal balance and sustainability.

To meet the target for 2013 in the Troika's plan for Ireland, we have to reduce our budget deficit in the coming year by another €3.5 billion.  The government has said already that two thirds of this adjustment will be achieved by spending cuts, and one third by tax hikes.  That much is clear.

Also clear is that there will be a property tax, one of the things that the Troika is insisting on as a way of providing a steady revenue source for the state, like in the U.S. and most other countries in Europe.  

Part of the reason Ireland is in this mess is that property taxes here only applied when a property was sold, so when the market collapsed so did state revenue.    

Another change the Troika are keen to see is a targeting of welfare benefits so that only those in genuine need will get them; under our present system some welfare payments, like child benefit payments, are universal, going to all families regardless of income.

So we know the parameters of this budget. We even know some of the likely measures it will contain thanks to leaks to the media in the past few weeks as the coalition partners in the government, Fine Gael and Labor, have struggled to agree on what to do.  

As long as we follow the broad guidelines set down by the Troika and hit the target for next year's reduction in our budget deficit, the government is free to work out the small details of the spending cuts and tax hikes by itself.  

That's what the Troika says.  But, as always, the devil is in the detail.    

One reason this budget is so difficult is that over the last few years each annual budget has cut spending and found new ways of adding extra taxation.  There are no easy options left.

Some of the most obvious waste in spending has been stopped.  Hidden areas that could yield extra revenue have been exposed and taxed.   Most of the low hanging revenue fruit has already been picked as we tried to cut the deficit by a few billion over the past few years.  Now on top of that we have to find another €3.5 billion in cuts.  

Another reason getting the figures in this budget to add up is so difficult is because of the rash promises made in the election two years ago by Fine Gael and Labor. Fine Gael promised no income tax increases, while Labor pledged that core welfare benefits would not be cut.  Clearly, since we are now scraping the bottom of the barrel, something has to give on these promises.  

We have one of the most generous welfare systems in Europe, with benefits paid at very high levels.  Welfare for those out of work is more than one third higher than similar payments in Britain, for example. The basic state pension here is also much higher than in Britain and in most other European countries.  

Other state payments here -- like the aforementioned child benefits – and payments in many other smaller entitlement programs, are extraordinarily high in comparison with other countries.

An example would be statutory maternal leave from work, with an Irish mother entitled to 42 weeks leave from her job after having a baby, 26 weeks of which is paid for by the state at a rate of around €250 to €300 a week and may be topped up more by her employer.

The last time I looked there was no mandated maternity leave with pay in the U.S.  I'm not saying that is a good thing, but the contrast with Ireland is striking.

The bottom line here is that Ireland has become very much a welfare state on European lines in recent decades, and over the recent boom many of these entitlement programs and payments were inflated supposedly for social reasons but in reality to buy votes in elections.  

This has resulted in a situation in which some lower income families here find it as rewarding (and a lot easier) to live off the state than to hold down jobs.

By the time you add up the value of unemployment benefits, rent allowance, fuel allowance, other allowances, free family health care for those out of work and other payments, it is hard for employers to match the value in pay.  Plus staying home saves travels costs and other expenses.  

Saying this here is heresy, of course, because it challenges the orthodox perspective; one economist who was foolhardy enough to do so last year was bitterly criticized.

But the evidence is all around us and the effects on our society are clear.  

The trouble with entitlement programs paid at a high level is that they quickly become the norm for those who receive them. Cutting the level of payments leads to a ferocious backlash and accusations that the vulnerable are being targeted.

We have already seen this here in the “grey power” reaction when the government tried to take free health care away from better off pensioners who could afford to pay for their own medical needs.

Any objective assessment of Ireland's welfare system and other state programs which give people entitlements to services which some could pay for will show that they are very generous by the standards of other countries.

The simple truth is that the country cannot afford this anymore.  And we cannot go on borrowing to pay for it.  So reductions are inevitable.  

If the Labor Party insists that "core" welfare payments cannot be cut, then higher eligibility requirements to reduce the number getting payments will be needed.  

The other big item on the spending side of the budget equation is the pay of state workers here, which is protected under the Croke Park Agreement.   This agreement was supposed to deliver efficiencies that would allow the government to cut costs by reducing numbers while maintaining pay levels.  

It has not worked, no matter what the unions say.  Pay levels here for middle and senior workers on the state payroll (civil servants in government departments, doctors, nurses, teachers, police, and so on) all remain high by European standards and take no account of the state being bust.

It has now emerged, for example, that teachers here are entitled to an extra six weeks paid maternity leave on top of that outlined above, despite the fact that they already get long summer holidays when the schools are closed!    

On the revenue side of the budget equation, there is now widespread acceptance that we are at, or close to, the maximum level at which income tax can be applied here.  Our top rate is 41 percent, but there are two additional "social" taxes applied to income which bring it to well above 50 percent.  

The top rate kicks in at a relatively low level of income, equivalent to around $40,000 for a single person.  As a single person, anything you earn above that level, you lose about half of it in tax.  

As if that was not enough, all the other indirect taxes, like sales taxes, motor vehicle taxes, fuel tax, levies on pensions savings and insurance policy taxes -- there's a tax here on almost everything you do apart from breathing -- have all been ratcheted up over the past three years as the government tries to squeeze more and more revenue out of ordinary people.

And of course the property crash has left a lot of people in negative equity, struggling to pay high mortgages for houses that they cannot sell even if they want to.

What all of this means is that in this budget the government needs to show a new approach and some new thinking.   It's not enough to tinker with the present tax and spend structure anymore.  Radical reform and change is required, particularly on the spending side.

The Irish state -- government, civil service and all the rest of it -- is now much bigger than the country can sustain.  How many non-governmental organizations (quangos) with staff on the state payroll and with guaranteed state pensions can we afford?

There are hundreds of them and, despite promises, only a handful have been wound up. How many embassies do we need?  How big an army?  The population of Ireland is only half the size of London, yet we have to carry the expense of an entire country, one led by politicians with serious delusions of grandeur.
There is no sign of us tackling any of the sacred cows in Irish life.  An example would be the costs associated with the pretence that we are reviving the Irish language.

We go on paying teachers to spend hours every day teaching compulsory Irish in schools even though no European languages (or Chinese, or Russian) are taught in Irish junior schools and companies like Google have to import hundreds of workers here as a result to fill jobs in customer support services.

And we go on paying for not only a full Irish language news service but an Irish TV station, even though research shows that the audience is tiny.

I have nothing against Irish.  It is just one example of the many sacred cows in Irish life which cost a fortune and which we can no longer afford.  Long may Irish continue, but it has to stand on its own legs and so do all the other sacred cows we have here, instead of being supported by the taxpayer.

Any serious examination of Irish public life shows up wide areas of very expensive government activity which really have no place in a country that is broke.

Our Arts Council, for example, had a budget this year of over €60 million to promote the arts.  Close to €1 million was spent on a week of Wagner concerts in Dublin.  

Again, I'm all for the arts, but are the people who stand over this kind of thing living in the real world?

In an effort to save money, while continuing to pay obscene pensions to retired bankers and top civil servants, the government has cut the number of home help hours to families with disabled children, elderly people who need round the clock care and so on. In doing so they are undermining a program designed to keep such people out of hospital by helping families to look after them at home.

But then these vulnerable people -- and the family members who look after them -- are not among the sacred cows of Irish life. That's what is wrong with our attempts to reform our state finances.  

Mean, miserable cuts and extra taxes are loaded on to ordinary people here while the lofty pretensions of the Irish state carry on regardless.  To change this requires a fundamental shift in thinking at the top.  

Bold, radical moves to curtail state spending while protecting the vulnerable are possible.  But they would require the wholesale slaughter of sacred cows.  

That makes it very unlikely that we will see any real change in approach in this week's budget.  What we are likely to see is the status quo in Irish society -- and their pay, often state pay, and guaranteed pensions - being protected as much as possible.

Meanwhile, all the middle income people will be forced to pay even more to keep the circus on the road.  They will be forced to pay more even though research this year showed that, after paying all their essential bills, 1.8 million people here had only €100 a month left over for themselves.

The gigantic elephant in the room in this debate is, of course, the repayments the country is making on the banking debts that were "guaranteed" by the state, which means they were transferred to the taxpayer.   Just to deal with the two worst banks involved, Anglo and Irish Nationwide, is costing us over €50 billion.

The two had €31 billion in debts, mainly to foreign bondholders, and we borrowed the money to pay this back.  The bondholders have now all been paid back and we're scheduled to pay that borrowing back over 20 years or so, at around €3 billion a year (the interest bill is around €19billion).  

The last government was railroaded into this by the ECB, because they feared a collapse of any Irish banks would cause financial contagion across Europe.  There is no moral basis for it whatsoever.  The two banks are now closed.

The bondholders should have been burned. Instead this huge unsustainable debt was loaded on to Irish taxpayers.  

The other banks here, between them, have had another €30 billion pumped in so they could pay their debts, and again the Irish taxpayer ends up carrying the can.  

So all the pain that will be unleashed this week to narrow the budget deficit by €3.5 billion will be unnecessary suffering because we will be sending roughly the same amount out of the country in debt repayments.  And this is set to go on year after year, until 2030 and beyond.

Last week Greece was given another debt forgiveness package by the Troika. But this government has managed to get nothing for Ireland.  

So we go on paying.  Is it any wonder so many young people are leaving?