| 9.3°C Dublin

Brendan Keenan: Harsh reality is cuts can't be put off forever

BACK in the days when extreme parenting was normal, and not a TV show, parents would warn naughty children: "Keep quiet, or I'll give you something to cry about."

It might be like that this year. We think the banks and their protected bondholders have given us great grief but the pain, so far, has been largely psychological.

Last week's Exchequer returns on government revenue for the first three months gave a taste of what is to come -- and what might be to come. There was €3bn in capital payments to Anglo Irish and Irish Nationwide. At current bailout interest rates that costs the taxpayer almost €200m a year.

It is the first of many such payments. Under the present arrangements, they might go on for 12 years or more. There was much discussion on where to put them, and they have ended up as capital spending in the government accounts.

If you are the Government, that is not a bad place to hide them. The returns make it look as if we are spending €6bn a year on public investment. But half of it is for busted banks. Real investment in public capital is half what it was last year.

It is now less than three per cent of national income. That does not seem enough for Ireland's inadequate public infrastructure, so we will have to get the most out of every cent.

It falls to two Labour ministers, Ruairi Quinn and Pat Rabbitte, to do something about the poor returns which their departments seem to get from capital spending. If they can succeed, they will not have let the crisis go entirely to waste.

Capital spending has had to be cut the more savagely because, as ever, current spending on day-to-day services is proving impervious to cuts.

Despite a reduction of 14,000 in payroll from the crude and damaging jobs embargo, current spending rose by 6.5 per cent in the first quarter of the year compared with the same period last year.

The harsh reality is that, at some stage over the next few years, current spending will have to start falling. No one really knows how this is to be done.

The EU and IMF are in town for their quarterly review. The expectation is that we will get a fairly clean bill of health this time, because the overall deficit is on target. But they can hardly avoid mentioning that most tax revenues are below target and that only buoyant corporation taxes are keeping the figures in line.

The irony can hardly escape our foreign lenders. The Irish Government says our attractive corporation tax rate is designed to secure investment and jobs. The Europeans see it as a way of collecting what should be their tax revenues to allow the Irish spend beyond their productive means.

At present, with net investment stagnant, the European argument looks the more plausible.

At the very least, for their sakes and our own, it should be an objective that corporation tax revenues should form part of the necessary primary budget surplus, before interest payments, so that Ireland can show that it could balance its books without corporation tax, and that most of the revenue from it is paying down debt. That might silence President Sarkozy.

Such a surplus is a long way off, but the spadework must be done now. Whether or not the €24bn for the banks is enough, it should at least be enough for quite some time, and we can start to think about other things.

There is not much doubt about what those other things should be. There is considerable confusion over the Government's plans on taxation.

On the spending side, anybody one talks to from the public sector talks about the damage to services being done by the replacement embargo. The immense, radical task of re-organisation and redeployment seems hardly to have started.

By most calculations, the country is about €9bn a year short in its capacity to stabilises the public finances. I say "capacity" because they will not actually stabilise until growth resumes. But as presently structured, the finances will not balance even when growth resumes.

This is what I mean about having more things to worry about than banks and their bondholders. What now is the Government's policy on how much of the potential €9bn comes from new taxes and how much from properly planned job losses and reductions in services and payments?

That was easier to assess during the election campaign than it is now. The Taoiseach is asking for more "flexibility" in the borrowing terms. He may be tempted by the attractive idea that, if only we could ease off now, and let growth resume, it would be easier to make the corrections later.

It is an even more tempting idea as the prospect of rising interest rates threatens another reduction in household disposable income, but the figures don't allow it.

A correction of €9bn would snuff out any recovery, unless it was done over a very long time indeed. One thing we can be sure of is that we do not have a long time, or very much time at all.

Sunday Indo Business