Writing about the economic crisis in Ireland these days is like trying to catch a falling knife. Just when you think you’ve grasped it, it slices through your hand and plunges even further downwards.
In this column last week we discussed Taoiseach (Prime Minister) Brian Cowen’s speech to the annual convention of the Fianna Fail party on the previous Saturday night. He talked about the 2 billion euros that has to be cut from government spending this year, which has caused ferocious opposition among the state workers who will take the pay hit.
Cowen pointed out that private sector workers were being hit all the time, and said we all have to share the burden of the recession. He warned that the government would continue to take whatever tough decisions might be necessary to prevent us going over a borrowing requirement of just under 10% of GDP this year, a level he has agreed with Europe as an absolute maximum. (Under European Union rules it’s supposed to be below 3%.)
That was the Saturday night position. But just a few days later, on Tuesday of last week, the government was presented with the latest figures on tax revenues. They were so bad that the Cabinet decided that an emergency budget would have to be introduced immediately.
Tax revenue was so far down in the first couple of months of this year that as well as taking 2 billion euros out of state spending, the gap between state spending and tax revenue this year would have to be closed by an extra 4 billion. So the cuts went from 2 billion to 6 billion euro in just a few days!
This 6 billion adjustment is to be achieved by a combination of spending cuts and increased taxes, the government said, and the details will be announced in an emergency budget in a few weeks. A week may be a long time in politics. The way the Irish economy is going these days, even a few days is an eternity in which everything can change.
Given the uproar even 2 billion in proposed cuts has caused, what a 6 billion adjustment is going to do to the public mood can be imagined. It’s going to be rough, and some very senior people in the security services here have already been discussing how mass demonstrations and riots might be handled.
So if you are late catching up with the latest chapter in Ireland’s riches to rags story, let me put in context for you what is happening. Just a few years back, while the Celtic Tiger was still healthy, we had budget surpluses every year.
All that has now changed drastically. Ireland’s open economy, heavily dependent on the foreign companies that set up here, has been hit harder than most by the global recession.
On top of that we had a property bubble that was a bigger proportion of the national economy — and taxes — than anywhere else. So when that burst, tax revenues started to collapse much faster than in other countries.
Just a few weeks ago, the Irish government put forward its plan to stop the country going bankrupt. We’re going bankrupt because of the huge gap that opened up between state spending and tax revenue over the past two years.
Government spending this year will be 57 or 58 billion euro, while tax revenues (according to last week’s figures) now look like being 34 or 35 billion, at best. That gap has to be bridged by borrowing, and borrowing at that level is unsustainable. So major changes have to be made, and quickly.
Taxes have collapsed so fast that we are now back to the amount of tax revenue that was collected in 2003/2004. But since then state spending here has gone up by at least 50%.
That level of state spending is now considered to be the norm, and suggesting that it must be cut provokes outrage. So we have a big problem.
The government plan announced a few weeks back came up with a solution. It involved cutting 2 billion out of state spending this year and closing the gap by another few billion each year over the next few years by a combination of cutting state spending and raising taxes.
Within four or five years that would get us back to a borrowing requirement of maybe 7% or 8% of GDP. That would be manageable, and sometime in the future, when the global recession ends, we might be able to balance the books again.
That was the plan a few weeks ago. We were told there was no need for a mini-budget.
But instead of the 18 billion deficit this year that Cowen talked about 10 days ago, we are now looking at a deficit of 22 billion or more. The extra 4 billion gap is a result both of falling revenue and increased spending on welfare payments for the growing army of jobless.
The tax revenue figures for the first two months of the year are so bad that the government last week decided it could not wait until the next annual budget at the end of the year to rebalance our revenues and spending. So there will be a mini-budget at the start of April that will make major changes to bring in extra taxes and cut state spending and close the emerging gap.
There is no alternative if we are to stay below the 9-10% of GDP borrowing level that we have agreed with Europe. Failure to do that would further erode our standing in the financial markets and make it increasingly difficult for the state to borrow the money needed to pay the day to day bills here.
The end of that rocky road would mean a visit from the International Monetary Fund (IMF) which would sort out our problem by slashing state spending on a scale that would be scary.
So all eyes have now turned to what the emergency budget at the start of April will contain. Major hikes in taxation are certain, plus cutbacks in many state programs that now benefit many middle class families. And that has started an intense and angry national debate about where state money goes, and how much tax different people pay.
One example of this is the fury and derision directed at U2 in the past couple of weeks because of the way they dodge paying part of their taxes here. Their high profile last week (in London and then New York, but not Dublin) with the launch of their new album only made this more intense.
While the four “working class lads from Dublin’s Northside” were having a street named after them in the Big Apple, people here were demanding to know more about their taxes.
For about 20 years they have been probably the biggest beneficiaries of the artists’ tax exemption scheme introduced here way back by Charlie Haughey. But a few years ago an earnings limit of 250,000 per person was made part of the scheme. Any artist who earned more than that would have to pay tax.
Whereupon U2 (who each have earnings of several million a year) transferred the companies that deal with their artistic earnings out of the country to avoid the tax.
That was bad enough at the time. But it is even harder to stomach now when the government needs every tax euro it can get, particularly when you remember that the U2 boys paid no tax here on their artistic earnings for so many years.
There is another dimension to this as well, which really angers people here. Because of the fall in our tax revenue recently the government has been forced to slash the amount we give to the Third World. Yet at the same time Bono, who avoids paying a good deal of his tax here, continues to lecture us all on Third World debt.
U2 is just one example of the hypocrisy that goes on in Ireland on money matters. As the specter of much higher taxes looms for ordinary people here in the coming emergency budget, expect a lot more questioning in the coming weeks about how much tax wealthy people in Ireland do or do not pay.
People here are also starting to ask a lot of questions about how the state spends its money and how much waste is going on. An example of this is the public reaction a week ago when the Minister for the Arts Martin Cullen was making a trip across the country by helicopter and a door fell off (it was an Irish Air Force chopper) and they had to make an emergency landing.
Instead of being thankful that the minister was unharmed, the reaction immediately was to question why he was making the trip in a helicopter at all. Why was he not in his state car? Or on a train?
Was his trip really that important? (No, it wasn’t.) Do we really need a minister for the arts when so much is being cut back? (No we don’t.)
There may be no line of the horizon, but there’s a lot of taxes.