Sunday 23 November 2014

David McWilliams: Budget is yet another botched job from our impotent Government

Published 06/12/2012 | 17:00

JK Galbraith, the great American economist, said that the key job of a leader was to "understand the anxieties of the people, and do something to ease these anxieties". The Budget is an opportunity to set out the stall of any leadership, to articulate a coherent policy and to get on with those policies that might assuage the anxieties of the people.

When judged from this standpoint, this Budget is an extraordinarily confused piece of financial gymnastics where the gymnast performs all sorts of tiny contortions, unconnected moves and ultimately lands unbalanced, pleading that the judges see some choreography after all the clumsy footwork.

If anything, it heightens the anxieties of the people because the people who have been hit most are mothers dependent on child benefit, homeowners already in huge negative equity and those who are paying PRSI which has been increased. In fact, one of the greatest myths from yesterday is that income tax has not been increased. What is PRSI, if not a tax?

The Government does not seem to understand that the ticking time bomb in this country is the problem of mortgage arrears, which is primed to go off as taxes rise and incomes fall. This Budget makes the average young worker considerably worse off. These are the very people who are part of the 128,000 who are in arrears, unable, not unwilling, to pay their mortgages. This figure is rising. Their anxieties must be heightened this morning.

There is a real sense that yesterday's Budget was a botched job coming from two discordant partners that ends up satisfying no one. One measure pulls bits of the economy one way and then, just when you felt there was momentum in that direction, another measure pulls other bits in the opposite direction. For example, raising PRSI, which increases the cost of labour and will act as a disincentive to employing people, runs counter to any measures which may encourage SMEs to take on more people. These are basic things which any joined-up government would see straight away.

That said, it is not as if the Government has an easy task. The choices facing it are not between good and bad ones, but between bad ones and worse ones. Once it accepted the notion of five austerity budgets without mortgage debt relief or any concomitant link to a debt deal in Europe, it tied its hands behind its back. When it comes to the really big decisions, rather than respond to the anxieties of our people, the State responded to the anxieties of our so-called partners.

Ultimately, the Cabinet is responsible for this choice and this fundamental choice leaves the Government impotent.

An economy can only grow if its own people spend more or if foreigners spend more on goods we produce.

There is no way any informed economist can argue that this Budget will contribute to economic growth in any meaningful way. The opposite will be the case; the ongoing fiscal contraction at a time when there is a vicious "liquidity trap" allied to a massive debt overhang in the economy will lead to higher unemployment, higher emigration, lower economic activity and ultimately, as we saw on Tuesday night, lower and lower revenues, demanding yet more cuts and tax increases next year.

The anxieties of the people – centred on huge unsustainable mortgage debts and squeezed incomes – remain unaddressed.

In short, in terms of who is paying what, mothers, the average worker, their families and homeowners will have to cough up, while developers and land speculators get off scot-free.

The property tax, based on the value of homes, targets people's dwellings while the thousands of hectares of zoned land, the developers' legacy, gets away unmolested. So the property tax is limited to the small fry, while the big guys get away. Labour voters are entitled to feel uncomfortable because if anyone tells you there is no wealth in the country, just examine the deposits in the banking system.

Given that we are dealing with bad choices and worse choices, can we say with any certainty which way the Budget will nudge an already battered domestic economy? What will this Budget do to incentives?

Last night, hours after the Budget, there was a long queue at the till of the local off-license worthy of a particularly jittery Holy Thursday night. What that tells you is that people respond to incentives and if a government hikes up excise duty on booze, and wine in particular, people will bring forward their purchases to avoid the tax.

So expect long queues outside Sainsbury's in Newry this Christmas, expect fewer houses to change hands, expect people to spend less because taxes on labour have increased and so too have taxes in the average home. Richer workers, who tend to spend more on imported goods, have been, despite all the conflicting leaks, left largely unscathed.

This is another deflationary Budget, which will take more and more money out of an already weakened economy. In terms of the split between tax hikes and spending cuts, we got €1.43bn in new taxes and revenues and €1.94bn in spending cuts. Both will drag demand.

In terms of "understanding the anxieties of the people", the most charitable analysis would be hard-pressed to find the political leadership in this, the one chance a government has every year to set out its vision.

David McWilliams' new book 'The Good Room' is out now.

Irish Independent

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