Seamus Coffey: The government may have squandered the political capital of first year in office
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AFTER two days we are finally through the €3,800 million of expenditure cuts and tax increases that comprise Budget 2012. We already had details of the €750 million of capital expenditure cuts we yesterday we were led through €1,450 million of expenditure cuts and today we got €1,600 million of tax increases.
That seems like a straightforward way of reaching the €3,800 million total but there are some issues that should be considered. The target for tax increases includes a €600 million carryover from the measures introduced by the late Brian Lenihan in last year’s budget.
These tax increases were announced last year but won’t have their full effect until next November when the 2011 tax deadline passes. This means that Michael Noonan introduced measures with a net effect of €1,000 million and picked up the €600 million from last year to reach his €1,600 million total.
On the expenditure side there also was a carryover of around €400 million from measures introduced last year. Inexplicably though this €400 million was not included as part of the total and Brendan Howlin announced €1,400 of new expenditure measures yesterday.
To further confuse things Minister Howlin announced increases in third level fees, school transport fees and charges for private beds in public hospitals. These highlight some of the anomalies and quirks in our system of public finances which is a relic of the 1870s. Some steps are proposed to reform this but a complete overhaul is required of a system that has revenue measures appearing in the so-called expenditure budget.
The overall target for the 2012 Budget is to get the deficit down to 8.6% of GDP down from the 10.1% forecast outturn for 2012. The Four Year Plan laid out by the last government proposed that a €3.6 billion budget this year (inclusive of all carryovers) would be required for next year.
We have just had a €4.2 billion budget (inclusive of all carryovers). There was also about €600 million of interest savings on EU loans announced last July that was not factored in at the time the original forecasts were made. As growth projections have tumbled downward reaching the 8.6% target has required more and more to be done.
Excluding the impact of the mid-year 0.6% pension levy, tax revenue for 2011 is almost €1 billion lower than was forecast at the start of the year. This year’s deficit is set to be €15.6 billion. The changes introduced over the last two days aim to bring that down to €13.7 billion.
Although we are introducing substantial expenditure measures they are adjustments of expenditure rather than reductions in expenditure. This year’s budget has around €450 million of measures targeting social welfare payments. In 2011, social welfare payments will total €20,030 million; next year they are forecast to be €19,942 million – a fall of just €88 million.
In 2009, social welfare payments were €19,959 million. Payments next year will be 0.08% below that.
While there have been cuts they are being offset by increases elsewhere. Growth in the numbers entitled to pensions will add over €300 million to the social welfare budget. Child benefit has been subject to cuts for third and subsequent children but the overall level of child benefit expenditure is still forecast to increase slightly in 2012 as a result of the record number of births taking place.
Although €450 million of expenditure measures have been announced there has been no reduction in overall social welfare expenditure. Rather, the same amount of money is being spent but it is going to more people so, on average, people are getting less. Individually people are suffering the effects of austerity but collectively we are spending as much as we always did.
The remaining expenditure cuts announced yesterday appeared mainly under health and education budgets. For these two areas the largest expenditure item under each of them went largely unscathed – public sector wages. Some minor changes to allowances and overtime will be introduced but pay rates remain unchanged. The cuts in these areas are falling heaviest on the services rather than the staff.
As has been the case for all of the current austerity drive, capital expenditure faces the most severe cuts. In 2008 capital expenditure was almost €9 billion; the €0.8 billion of cuts for 2012 will have seen this reduced by half to €4.5 billion. As most of this is the cancellation or postponement of construction projects that have not yet begun the victims of capital expenditure cuts are unknown, even to themselves.
This budget did not have the headline measures introduced over the past three years that had the potential to spark protests on the streets. There were no public sector pay cuts, no broad cuts in social welfare entitlements, no increases in income tax or imposing income tax on the lower paid. The largest measure introduced over the two days was the 2% rise in the standard rate of VAT while the USC liability of those earning less than €10,000 was actually reversed.
This budget appears to have been an effort to do as little as possible in as many areas as possible to reach the 8.6% deficit target. It is not clear if the “salami slice” approach taken will be successful. It might get the deficit to 8.6% of GDP next year, but there is no way a similar approach will reduce the deficit to less than 3% of GDP by 2015.
Unless there is a miraculous turnaround in economic growth the big ticket items of the public finances will have to be addressed. These are social welfare payments and public sector pay on the expenditure side, and income taxes and the collapse of capital and wealth taxes on the revenue side.
For many there will be relief that these areas survived this year’s budget. For the government they have squandered the political capital that the first year of office may have offered.
Seamus Coffey lectures in economics at UCC
