News Brendan Keenan

Wednesday 24 September 2014

Lots of special offers but how do we pay the bill?

Published 04/09/2014 | 02:30

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The targets we have now are external, agreed/imposed according to taste, by the Eurozone

The shopping list gets longer by the day. Like some demented male in a supermarket, the government keeps snatching goodies off the shelf and chucking them in the trolley marked "Budget 2015."

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Recent reports suggest it has even begun to demonstrate that most unfortunate of supermarket behaviours, putting things back on the shelf, in this case children's tax credits, and replacing them with something else.

Missing is any suggestion of what the bill will be on October 15. There is a distinct impression that it is already more than can be afforded, especially in the longer run. Even more noticeable by its absence is any idea of what sort of dinner this hotchpotch of ingredients is supposed to create.

In theory we can make a bit of a stab at how much is in the purse. The government can plausibly forecast 5pc growth in the value of output (GDP) next year, well up on the original 3pc estimates. This, plus CSO revisions, means the value of GDP will be about €15bn more than the figure published last October.

That would allow a deficit of around €6bn, and still meet the agreed deficit target of just under 3pc of GDP. There will be many who will want Michael Noonan to do exactly that, but it seems more likely that he will seek to set a lower deficit target - perhaps 2.5pc of GDP.

His task in persuading his colleagues around the Cabinet table will be more difficult than even a few months ago. The mood music in Europe has changed, with the Italian duo of ECB president Mario Draghi and prime minister Matteo Renzi leading the chorus for looser policies - also known as less austerity. (Such are the ways of politics that the Italian foreign minister is expected to get the job of EU foreign policy supremo because Chancellor Merkel is saving her powder for a fight with Mr Renzi over fiscal policy).

This gives Irish spending ministers more clout in arguing for no reduction in the deficit target. The difference between the two is close to €1bn. The thing to remember is that even the higher figure still represents a reduction of €2bn in government borrowing in 2015. Analysts reckon that growth will take care of most, if not all, of the adjustment, but that is still a contractionary Budget, not a "giveaway."

This is not the impression being created. It difficult to know what impression is meant to be created. It is reasonable enough for the government to make the most of the economic recovery and claim that the late Brian Lenihan's premature prediction has come true - the worst is over.

It will also be possible to have some attractive items in the Budget, on both spending and taxation, while hiding in the small print those unattractive items which will have to be included to compensate. But, apart from the also reasonable aim of improving the coalition's standing in the opinion polls - to what end?

One impression which is being created is that, now that the worst is over, the crisis is resolved, and it is 2007 again. It is not. Unless this is understood, and policy set accordingly, it could easily be 2008 again, or something very like it.

It is not just that national income is still some €10bn below its 2007 peak, although that is a critical statistic. Nor that Ireland's deficit and debt combination is the worst in the euro area. It is that the economy of 2007 was grossly distorted by the bubble. It is hard to think of any greater folly than the idea that we should return to that particular arrangement of taxation and spending - not just the percentages but the details of how money was raised and spent. Yet if there is any semblance of a strategy, that seems to be it.

There is an explicit promise to reverse many of the public sector pay cuts (although not the job cuts), and for increments to remain inadmissible evidence. There is a general acceptance that it is "unfair" that new entrants are paid less than staff who enjoyed bubble-blown incomes financed by borrowing.

We are told we should not set public sector against private, but this is a debate which cannot be avoided. There is no gainsaying that public sector pay and employment from at least 2000 greatly outstripped the country's ability to meet the bill and still provide first-class services.

Ideally, this should be a debate inside the public sector, not between it and the private. Someone needs to say that too rapid a return to pre-crash earnings will condemn government workers, as well as the rest of the citizenry, to under-staffing, shabby buildings, shoddy equipment and inadequate services.

Unless taxation rises significantly, that is. Some public sector champions are honest enough to admit that this is so. The Nevin Economic Institute did a useful job last week, reminding us that there is more than one kind of tax, and it might be fairer to cut VAT than income tax, although USC is getting a run as a compromise candidate for the pruning shears.

Nevin senior researcher Micheal Collins was wary of talking about tax cuts at all and its trade union sponsors seem likely to concentrate on wages. Having one set of protagonists demanding higher pay, while another insists on lower taxes, risks repeating the old follies, even while everyone is still condemning them.

One of them is the relentless focus on personal income. There is the essential restoration of a capital programme able to stop the country again slipping into decrepitude - to which must now be added some kind of house-building programme. Meanwhile, and another five government terms will be enough to bring the old age costs in health and pensions which no-one has the faintest idea how to pay for.

From the end of the 1980s crisis, every finance minister had some set of targets for the size and growth of public spending. Any of them, if adhered to, would have prevented much of the present disaster, but all were abandoned once any sign of surplus appeared.

The targets we have now are external, agreed/imposed according to taste, by the Eurozone. They are draconian, and there are too many of them, and it is not clear what force they will have in the end. No doubt they will be met in Budget 2015 but, unless we take political ownership of some domestic version of them, there could eventually be a very nasty scene at the checkout.

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