News Brendan Keenan

Saturday 23 August 2014

Rising expectations could make next Budget most difficult of all

Brendan Keenan

Published 22/05/2014 | 02:30

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THE Cabinet's Praetorian Guard. That was the description of Communications Minister Pat Rabbitte in a recent interview in the 'Sunday Independent'.

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The Praetorian Guard, of course, were responsible for protecting the Roman emperor. But they had an unfortunate reputation for doing away with their charge if they thought he wasn't up to the job.

Mr Rabbitte perhaps is better likened to a Roman Consul; sent out to do battle when the barbarians are at the gates. On the other hand, some on his own side may have detected, in that interview, the sound of a sword being loosed in its scabbard.

But enough of the classical metaphors. What we can say is that Mr Rabbitte has had a key role in maintaining relations between the coalition partners. He keeps in close touch with Finance Minister Michael Noonan. His comments on budgetary strategy are therefore worthy of note.

Whether they are a warning to Fine Gael, or even the Labour Party, or just an early attempt to maintain good relations before there is any fracture, is a matter of conjecture. But they do illustrate the growing difficulties for a Government faced with rising expectations but with severely limited financial leeway.

Everyone is jumpy before elections. While denying that he was doing any such thing, Mr Noonan as good as promised last week that the reduced Universal Social Charge rate will be extended in October's Budget.

Once tomorrow's elections are out of the way, nerves will have to calm and serious thinking begin. Mr Rabbitte thinks it should start as soon as possible.

This time, the kind of spats which preceded all the troika Budgets have the potential to bring down the Government. In many ways 2014 will be the most difficult Budget of them all. The troika certainties are gone and next year's Budget will be an out-and-out election special. But what to do in October?

Mr Rabbitte wants an early decision on how much leeway the Government has. Curiously, he seemed to go on to say that it had no leeway at all – at least as far as further correction goes.

On tax, he argued that it is not acceptable that citizens become liable to the top rate of tax at the average industrial wage and singled out the USC. On spending cuts, the public understood that the Government has difficult decisions to make but had run out of tolerance. Water charges "had better be the last piece of the austerity jigsaw".

No doubt this is an accurate description of the reaction politicians got on the doorstep during the campaign. But there is every doubt as to whether the Government is in a position to say goodbye to austerity just yet.

It is possible that it is in a position to do nothing – or at least very little. This, as we know, is the view of John FitzGerald of the ESRI. He thinks the €500m due from water charges would be enough to keep the public finances on track. But even that figure is beginning to look shaky as ministers nibble away at the water proposals.

Besides, they are not being asked to do nothing. They are being asked to provide substantial reliefs. Clearly, the marginal rate for income tax and USC is under review. The appetite for spending cuts has all but disappeared, and now there are wage demands as well.

The terms from the public sector union Impact are particularly interesting. A possible claim for a 6pc rise depends upon the Government reaching its target for a deficit of 3pc of GDP. That may be deemed a responsible attitude by the union, but it gives the impression that reaching 3pc is the end of the road.

There has been so much fuss about this inherently meaningless figure that one can understand why such an impression might have been created. In fact, we are entangled in a forest of targets, of which the 3pc is just one branch.

The most important may well be the spending ceiling set out under eurozone rules for indebted countries. Government spending is supposed to be frozen – as it is in the Government's own plan – until the elimination of any underlying deficit when the economy is growing normally.

I have mentioned before that there is huge disagreement about what that means in practice. Arguably, we have already eliminated it, in which case public spending could rise in line with economic growth, but, officially at least, the EU commission says we have not.

There is some room for some sleight of hand.

Charges for public services and indirect taxes in some cases count as spending cuts. They have already done so, which helps explain why the official figures for the balance between lower spending and higher taxes do not accord with everyday experience.

But the only way to avoid what would be a very disappointing Budget may be to openly spurn Brussels' calculations and say that the bulk of the original €2bn correction is no longer required.

There would probably be a fearsome row. The ink is hardly dry on the new eurozone rules but the credibility is uncertain. The French are looking for another delay and internal EU politics are so febrile that enforcement of the rules by the commission seems hard to credit.

But the dangers of an Irish demarche would be immense. These rules are the price Chancellor Merkel extracted for agreeing to thoroughly unpalatable measures like ECB promises to buy government debt.

Around half of the fall in Irish borrowing costs, and the increase in its credit standing, are due to the implicit German backing, via the ECB. Despite all the talk, we are in no condition to go it alone and stand on our own in the markets.

Even the optimistic budgetary analyses from institutions such as the ESRI are predicated on a continuing eurozone recovery. That is far from guaranteed. A senior fund manager argued in last week's 'Financial Times' that investors have become far too bullish about the indebted states. Markets tend to do that, but they then swing back.

A dispute between Dublin and Brussels could be just the thing to cause them to swing violently. Even without that, an Irish Government reversing fiscal engines could be badly caught by a renewed crisis which was not of its making.

If the Irish people really have had enough of cuts, they are in a dangerous dilemma. Disaster may have been averted but the problems are far from solved. Depending on how they are handled, or mishandled, disaster could yet return.

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