independent

Saturday 19 April 2014

Roisin Burke: No escaping horror of three more years of slash-and-burn Budgets

You thought this Budget was bad? There are still at least two more austerity budgets to come. All the easy options are gone, and the Government must find the 'least worst' way of spreading the burden

'THIS really is a menu for a restaurant you wouldn't want to eat in," is how KBC economist Austin Hughes describes the waves of slashing that lie ahead in the next several austerity Budgets.

"It's about choosing the least horrible options off that menu."

There are two more, possibly even three – depending on who you talk to – more hairshirt horror Budgets ahead. Many think 2016 will also require a stringent fiscal adjustment.

"All easy options are well gone," Hughes says. "The Government has to find interesting new, indirect sources of pain."

At least €3.1bn has to be gouged out of the economy in Budget 2014, according to Finance Minister Michael Noonan. But that figure is based on wildly optimistic growth forecasts of almost 7 per cent in GDP between now and 2015, hence it could be millions more if the economy goes any further Pete Tong.

What more can be axed? "It's going to be again death by 1,000 tax reliefs rather than a big cut," says Hughes. "Painful though it's going to be, spreading the burden through different measures even if they're coming out of the same family wallets again, is probably the 'least worst' option."

Hughes says further savings in public spending will need to be found, in child benefit and welfare payments, motor taxes, medical card eligibility, further curbing of various reliefs and broadening of the tax base.

The Croke Park Agreement ends in 2014.

"Public sector cuts have to be considered, but it's not as black and white as a lot of commentary suggests," says Hughes. "Maybe look at issues like increments, but also at putting pay on a sustainable path. Get effective savings, rather than a 5 per cent pay cut that results in a 10 per cent quality reduction."

For Budget 2014, roughly €1bn of adjustment will come from the tax take, but €500m of that carries over from measures taken in Budget 2013. Economist Jim Power says it is not that difficult to come up with that half million.

"Increasing PRSI by a percentage point or a further Universal Social Charge would raise a significant amount of it," he says. Wednesday's PRSI change will raise €283m in a full year.

"This Budget's capital gains tax change will raise an extra €51m and the alcohol increases will raise €150m. It will be further measures like this. There's a lot more heavy lifting to be done but a lot has been accomplished. I expect the approach will be a lot of different small measures."

But while tax adjustment might be fairly straightforward, making spending cuts where they're needed in 2014 is more challenging.

"Cutting social welfare rates by 3 per cent would raise around €400m," says Power, but these and other measures are a political hornet's nest.

"The problem with public expenditure cutbacks is that public sector pay accounts for 30 per cent of current spending. Public sector pensions make up 6 per cent and Social Protection is 38 per cent. The Government has committed not to touch pay or social welfare rates, so that puts 70 per cent of public spending off limits – so far."

Other deeply unpopular slashing would raise significant income for the State.

"We spend over €1bn on child benefit. If you give it only to those who need it by taxing it, you would save €400m," Power argues.

"Taking money out of an economy is going to be painful by definition, so what you have to try and do is pursue the less painful – though equally unpopular – measures, such as removing child benefit from those who don't need it, rather than hitting respite care or fuel for the elderly, for example," Power says.

According to Power, water taxes are going to feature in Budget 2014, raising "a few hundred million".

Wicklow independent TD Stephen Donnelly has also been running the numbers.

"We should be seriously looking at introducing the financial transaction tax, which would bringing €750m, according to the European Commission," Donnelly says.

"And I think Croke Park has to be looked at, particularly higher public servant pay."

Donnelly says that €1.1bn worth of tax exemptions could be axed. "There are €11.5bn of them, a lot of which are productised for high earners. So cut, say, 10 per cent of them," he suggests. "They apply across a myriad things, from profits from lottery winnings to offshore fund-related tax exemptions to rent and mortgage interest relief.

"The other big one is social welfare – we've got to make it cheaper for employers to hire people."

Donnelly thinks a return to third-level fees is probably necessary.

"But I would propose a 0 per cent or nominal interest long term loan, only kicking in when the graduate earns over a certain amount."

Both Jim Power and Goodbody Stockbrokers economist Dermot O'Leary think another slasher Budget beyond 2015 is on the cards.

"We think the deficit target for 2015 won't be reached," says O'Leary. "It may take a year longer, meaning there could be another austerity Budget in 2016."

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