Analysis & Overview

Thursday 31 July 2014

Seamus Coffey: It’s clear the Government has no overall vision for where it wants to take the country

Published 05/12/2012|17:33

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THE two halves of Budget 2013 have finally being presented to us. In introducing the Budget it was indicated that there would be €1.5 billion of tax increases and €2 billion of expenditure adjustments.

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The taxation measures introduced are expected to have an impact of €1.1 billion in 2013, with the full impact occurring once the 12-month property tax and changes to pension limits become effective in 2014.



Brendan Howlin delivered what is classed as the public expenditure element of the Budget but contained within that are many revenue-raising measures. In health, increased prescription charges for medical card holders and increased charges to private patients are expected to raise over €100 million next year and €150 million in 2014.



It is also the case that a lot of what is counted as expenditure adjustments are actually revenue-raising measures. The largest specific expenditure cut is the €136 million that is expected to be saved from the reduction in Child Benefit.



Most of the €1.2 billion of adjustment in current expenditure is under the anomalous banner of ‘unallocated savings’. This includes pay savings to be delivered under the Croke Park Agreement, as well as unidentified efficiency, administration and procurement savings. The overall objective is to try to contain current expenditure rather than reduce it.



In its second Budget, it is clear the Government has no overall vision for where it wants to take the country. The Budget is an exercise in arithmetic rather than one that has any social and economic objectives in mind. The objective is to hit the deficit targets set out by the Troika and to do so by the minimum amount possible.



For 2012, the deficit turned out to be around €500 million larger than was planned last December. However, because of upward revisions by the CSO to data from earlier years, the deficit target, which is set as a percentage of GDP, will still be hit. This backstop will not be available in 2013 if the slippage continues.



The budget of the Department of Health appears is of most concern. The limits set out for 2012 will not be achieved and measures to rectify that overshoot and to hit the 2013 limit will be introduced.



It is hoped that some of this will be achieved through revenue raising measures though attempts are increasing revenue from private patients have fallen short for each of the past two years. It is also hoped that close to €500 million of savings under the headings of drug procurement and pay-related savings.



Savings on drug procurement have been included in each of the past three Budgets but have ever only been partially delivered on, while no indication is given for what the pay-related savings will actually entail. The cuts to home help hours in the latter part of 2012 are reflective of efforts to achieve these savings, but with €300 million of savings targeted in 2013 it will require measures with a much greater impact to be introduced.



It is clear that rather than announce explicit cuts the intention is to try to put the squeeze on as much as possible in the background with changes to the practices of the civil and public service. These can deliver some savings in the early stages of an adjustment programme but these sort of measures have been repeatedly announced since the first package was unveiled in July 2008. There is a limit on what can be achieved through efficiencies in the absence of explicit expenditure-reducing measures.



Outside of the cut to Child Benefit, there are few expenditure measures that will have a broad impact. There may be some specific groups who will feel the brunt of what are minor changes in the greater scheme of things but very relevant for them.



As with all recent Budgets there are yet further cuts to capital expenditure with another €500 million reduction targeted for 2013. In 2008, capital expenditure was close to €10 billion. In 2013, it will be under €3.5 billion. Public capital expenditure has been slashed by 66pc at the expense of maintaining current expenditure.



Capital expenditure is an easy target because the victims of the cuts are unknown, even to themselves. If a road project, a new school or waterworks improvement is cancelled, it is hard to identify the losers from that decision.



Which contractor would have got the job? Which construction workers would have got employment? It is impossible to tell.



The biggest component of the Budget is undoubtedly the Property Tax. From an economic perspective this is less efficient than a Site Value Tax and following the disaster that was the €100 Household Charge this year it will be interesting to see how the implementation of this progresses.



The budgetary strategy of the last two years has been to introduce measures that will raise revenue. Last year’s VAT increase and this year’s Property Tax seem set to achieve that. On the expenditure side the capital budget continues to be decimated while we are left in the dark about how most of the current expenditure savings will be reached. It is clear that a strategy of putting pressure on individual ministers to contain expenditure in their departments will be implemented.



This can only get us so far. Much has been made of the fact that this Budget gets us 85pc of way through the total adjustment necessary to bring the deficit under the 3pc of GDP limit by 2015. It seems that the Government are hoping for an uplift in growth in the next few years that will help achieve the targets rather than explicitly having to outline measures to achieve it.



If this growth does not materialise the gains to be made from “efficiency and administration savings" will diminish and the nettle of closing of the deficit would have to be grasped. With a huge majority in the Dail, the Government had the chance in its first two years to make some hard yards towards the 2015 deficit target, clearing the way for a more moderate approach in the run-up to the next general election.



What we got is a salami-slice approach without any clear vision. If the hoped-for growth materialise in 2014 then this is a strategy that may just pay off. If this growth is absent, then the coalition will be faced with real difficulty. By next December, that general election will be, at most, just over two years away.



The country may be 85pc of the way through the adjustment process and has seen improvement in some measures. However, holding a coalition together through the last 15pc, in the absence of help from the growth fairy, will require a change to a strategy that has so far been absent.

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