Forget a 'mini' Budget, this is looking like the real thing
PERHAPS it is not a bad idea, in these chaotic times, to have a Budget every six months. The annual pantomime is a bit of a relic anyway. Some countries regularly adjust their taxes and spending plans as required by changing circumstances, instead of just once a year.
But if one is going to change the system, one should try not to make it look like an accident. The Government has rather done so, with Finance Minister Brian Lenihan insisting stoutly until a few weeks ago that tax rises were off the agenda. Now they are on it -- by the end of this month. More than one person noticed that the Taoiseach still seemed to have difficulty uttering the words. To the extent that he was actually eating his words, they were bound to be hard on the digestion.
One has the impression that the Government has a particular political difficulty with tax increases. One can easily understand why. The public sector pensions levy was to all intents and purposes a tax hike, albeit a crude one, and look at all the trouble that caused. There may be memories of the PAYE marches in the 1980s. They were a response to attempts to close the last great hole in the public finances. But there is also a genuine argument that low income taxes and PRSI were a major reason for Ireland's past remarkable record in job creation.
And Mr Lenihan was correct when he said that raising taxes is not a good idea in what is expected to be the worst year of the economic depression (which is what it now is). Yet all these political and economic arguments have been swept away by the impossibly large budget deficit which is now opening up. At the root of this is the fact that government spending this year, after PRSI receipts, will be €55bn, while tax revenues look like being €35bn at best. In such circumstances, as with economic theory, normal political theory no longer applies. The Government needs to consider whether, in its mini-Budget at the end of this month, it looks on the bright side as much as possible, or applies both belt and braces to hold up its fiscal trousers.
The Government has promised the EU Commission that borrowing this year will be held to just under 10pc of economic output (GDP). Yesterday, there were more gnomic utterances from the EU Monetary Affairs Commissioner, Joaquin Almunia, to the effect that there is a rescue plan for any euro member country which finds itself in difficulty in financial markets. There will be no need to go the dreaded IMF (International Monetary Fund).
It must be assumed, as German Chancellor Angela Merkel has all but said, that any country which needs such a rescue will have to have done its own bit first. Ireland's "bit" is to keep this year's deficit to €18bn.
If we could mange it, we would start to look a bit less isolated than at present. The French government said yesterday that its deficit would be 5pc of GDP this year. Britain's may well be more. Keeping to the target might also begin to deter those international traders who are betting that Ireland will not be able to borrow what it needs on the markets.
But getting there will be very hard. As well as the shortfall of tax revenues of up to €3bn, the surge in the numbers on the Live Register means spending may be €1bn over target, according to Ulster Bank economist Pat McArdle. Last year, despite everything, there was no overshoot on spending.
So another €4bn will have to be found. By the Government's measures, that would bring the total correction since the October Budget to €8bn -- and all just to stop the situation getting worse.
To get some sense of the magnitude of the task, raising the two rates of income tax by two cent in the euro, to 22pc and 43pc, would raise €1.8bn. Only another €2.2bn to go. And it might not raise even that amount, because such estimates are based on a growing economy, not a shrinking one.
It may not be possible to have a "mini" Budget. Come April Fool's Day, it could look very much like the real thing. The old reliables of drink, tobacco and fuel may have to take a hit. Almost everyone now agrees, however reluctantly, that the capital programme will also have to be cut, despite the loss of jobs.
But, with three months of the year gone, the fear is that even these actions will not be enough and it will be too late to do much about the 2009 deficit by the time that becomes clear.
Perhaps the Government should have been more pessimistic, and hit the country with a full-scale crisis Budget, taxing most of the one-third of lower-paid workers outside the tax net, imposing some kind of property tax, and so on. But perhaps there is only so much a Taoiseach can be expected to swallow in one gulp.
