THE €1bn pay cut hurled at public-sector workers in last Wednesday's Budget could be the least of their worries.

When the next Budget is unveiled in a year's time, as much as 30,000 of their jobs could be on the line. The decision of Finance Minister Brian Lenihan to cut the salaries of public servants by between 5 and 15 per cent got him a quarter of the way towards his €4bn savings target for 2010. The introduction of a carbon tax, as well as cuts in social welfare, child benefit and tax relief for higher earners also helped.

But Mr Lenihan still has to dredge up at least €7.5bn of savings between 2011 and 2014 -- and €3bn of this must be nailed down in 2011. To achieve his target for 2011, economists believe job cuts in the public service are inevitable. And that's just one whiff of the pain to come after we see through a gloomy 2010.

PUBLIC-SECTOR

JOB CUTS

"Another public-sector pay cut is absolutely out of the question going forward," says Jim Power, chief economist with Friends First. "What the Government will try to achieve in 2011 will be cuts in the public-sector pay bill, rather than pay cuts. By the end of 2011, you could have 30,000 job cuts in the public sector. That would achieve savings of about €1.2bn for that year."

Rossa White, chief economist with Davy, agrees that Mr Lenihan is unlikely to chop pay in the public service again. "He will have to look at numbers, possibly around the 20,000 job-cut mark," says Mr White. "That would save about €1bn. You wouldn't see that €1bn savings immediately in 2011 because of the cost of redundancies; but in the long term, it would reduce the state deficit."

PROPERTY TAX

Mr Lenihan was pretty clear last Wednesday that a property tax is on the cards. The amount of tax to paid by property owners will be based on the value of the site on which their property is built.

As a result, urban dwellers -- particularly homeowners in Dublin -- are likely to bear the brunt of this tax. When this tax will kick in is anyone's guess.

"Considerable groundwork will need to be done before a site-valuation tax can be introduced," said Mr Lenihan in his Budget speech. "Work will shortly begin on the registration of ownership and the valuation of land."

Economists believe that an annual property tax could raise about €1bn a year. Mr Power believes the new tax could be introduced before the end of 2011, after which, stamp duty will be eliminated.

WATER CHARGES

Water charges could also rear their ugly head in 2011. Although households will get a certain amount of water free, they will be charged for the amount of water used over that, according to Mr Lenihan. It's unclear, however, exactly how much money water charges could raise.

Mr Power believes water charges could raise €0.5bn a year. But if the charges encourage people to use less water, the amount raised could be only a few hundred million euro a year, said Alan McQuaid, chief economist with Bloxham Stockbrokers.

HIGHER TAXES -- FOR EVERYONE

With more than half of Irish workers paying no tax, Mr Lenihan has made no secret of his intention to bring the lower paid into the tax net.

In his Budget speech last Wednesday, he outlined his plan to simplify the tax system in 2011. This plan includes a new universal social contribution which will be paid by everyone and a system of tiered tax rates -- with those earning most paying most tax.

This new tax system could push up income-tax rates in 2011 or 2012. "The standard 20 per cent rate of tax could go up to 24 per cent and the higher rate could move from 41 to 45 per cent," says Mr McQuaid.

"A third income tax rate of 54 per cent could be introduced for those earning more than €150,000."

Not everyone believes the Government can increase taxes or lumber more of the country's tax burden on to the higher paid. Already, about 4 per cent of workers pay almost half of the income taxes collected by the State.

"From a competitiveness point of view, there's no more scope for higher taxes," says Mr White. "The higher rate of tax already kicks in on earnings of about €36,000 -- that's lower than the average wage in the country, which is currently €41,000."

SPENDING CUTS

The €3bn savings target for 2011 includes €1bn already earmarked for cuts in capital spending. While certain ambitious projects, such as Metro North, could be stalled, the collapse of the property market could be a blessing in disguise for state projects.

As tender prices have fallen by between 15 and 25 per cent, much of the €1bn in savings could be achieved by renegotiating contracts with existing suppliers and contractors -- rather than by cancelling projects outright.

Mr Lenihan has also announced his intention to save €980m in day-to-day spending in 2010. This includes a prescription charge of 50¢ per item for medical card holders from next April.

If the State continues to stamp out inefficiencies in the public service going forward, €1bn in savings a year on day-to-day spending could be up for grabs from 2011 onwards.

QUANGOS

D-Day for the quangos could well be 2012. Like 2011, the €3bn savings target for 2012 includes €1bn of cuts in capital spending. This means that at least €2bn of savings have to be found elsewhere.

To hit this target, Mr Lenihan is likely to listen to An Bord Snip Nua's calls to abolish certain quangos and the merging of state agencies. Those set for the chop could include the National University of Ireland, the Western Development Commission, the Law Reform Commission, the Family Support Agency and the Irish Council for Bioethics. There could also be a move to outsource more public services in 2012.

"The State could outsource payroll and IT in the public service to cheaper private contractors," says Mr White.

PENSIONS

Tax relief on pensions is likely to be hit some time in 2012, according to Mr Power. Indications so far are that pensions tax relief for higher earners will be chopped from 41 to 33 per cent.

TWEAKING

The savings target for 2013 is €1.5bn while a €1bn target has been set for 2014. With the Government running out of options from 2013, it will have little choice but to tweak services to save money, according to Mr McQuaid.

"The Government might raise excise duties, tweak allowances, cut back on beds in hospitals, cut back on class room sizes, or reduce the benefits paid to public-service workers," says Mr McQuaid.

"The need for drastic action won't be so great going forward. A lot will depend on how the global economy is at that stage."

DOOMSDAY 2014?

Even if the Government hits its €11.5bn savings target by 2014, if the Irish banks aren't back on their feet by then our state finances could be in an even sorrier position than they are today.

The State has already pumped €11bn of taxpayers' money into Anglo Irish Bank, AIB and Bank of Ireland. More and more billions could be needed.

"The €4bn savings target for 2010 -- and the targets set for the years after that -- don't take into account any money we may need for the banks going forward," says Professor John Cotter of the UCD Michael Smurfit Graduate Business School.

"The targets are artificial and based on the idea that nothing will change. But we will increase our national debt and our deficit if we have to put more money into the banks."

Whatever the prospects for our banks and economy, the battle to get our country back on its feet could take a lot longer than four or five years.

"This year, the tax take will be about €33bn and our spending will be about €57bn," says Mr Power. "Even if you assume that over the next three years, our economy returns to 5 per cent growth -- which is in itself unlikely, the most you'd see the tax take rising to would be €45bn. So you'd still be left with a €12bn annual shortfall. That means we'll have to continue to cut spending and increase the tax base going forward."

Last week, Mr Lenihan did his best to convince us that Wednesday's Budget would be one of the harshest for a long time -- but it might only be the tip of the iceberg.

Originally published in