If I were to characterize the public mood now towards future Government intentions to balance the budget and eliminate the deficit, I would say there was trepidation. On the 100-day anniversary of taking office the Taoiseach Enda Kenny standing alongside his coalition partner, Tanaiste Eamon Gilmore ruled out increases to income tax or reductions to welfare in Budget 2012, which is now just five months away. And yet we knew that we had to make additional cuts or raise taxes totaling €3.6bn in 2012 – that’s over €2,000 per Irish household. Despite Enda Kenny’s sugary words we want to know where the austerity axe WILL fall, not where it WON’T fall. There seemed to be a lack of honesty.
Yesterday, Minister for Finance, Michael Noonan was probably the first senior minister to broach the truth. Speaking to RTE following the publication of the June 2011 Exchequer Statement, he indicated that the adjustment needed in 2012 would be in the order of €4bn, up from €3.6bn “The job isn’t even half done yet. Next year, even though the overall figures are about two-thirds of this year’s adjustment, it may be more difficult to achieve … A lot of the low hanging fruit has been picked.” He apparently didn’t provide a reason for the greater austerity, but the most likely reason is a downward revision to economic growth in 2012 which will mean less taxes, more unemployment, more welfare.
But Minister Noonan’s options for further austerity are limited. Given that consumer spending and credit availability continue to be issues, he will probably not be able to touch VAT or stamp duty. Our corporation tax arrangements are being defended in Europeto the last. So that really leaves stealth taxes and cuts to the public sector.
Stealth taxes include property, water and community charges and to date there has been (perhaps deliberate) confusion over plans – will there be a flat tax on property or water in 2012, no water charges without meters, a free allowance of water, site valuation taxes – will the household cost be €200 per annum or €1,000? Cuts to the public sector must still be delivered in the context of the Croke Park Agreement and progress here to date has been glacial. Changes to senior salaries in the public sector are unlikely to yield any major savings in the context of a €4bn hole – 500 staff taking a €50,000 cut would amount to savings of €25m per annum – from the point of view of fairness it’s significant, financially it’s just a token.
The present plan agreed with our bailout partners is to reach fiscal near-balance in 2015. Some economists have argued in favour of a shorter period in which to balance the budget, Morgan Kelly probably being at the extreme, and Colm McCarthy being examples. Others have suggested a longer timeframe than even 2015, eg Sinn Fein. Enda Kenny famously said that he didn’t want to administer a “lethal injection” to the Irish economy by a shorter or immediate balancing of the budget. But the moment of truth is fast approaching, and the truth is that between now and 2015 we will have 13% compound growth in GDP and we will have some emigration (though the Census last week has thrown confusion on present migration patterns) and both of these should cushion further austerity but it will be a pretty flat cushion and the signs are that GDP growth will come under pressure and emigration mightn’t take as much strain off the dole queues as previously expected.
The view on here tends towards a shorter balancing of the budget BUT to accompany changes with better competition oversight to ensure prices in the economy reflect present circumstances – given that our costs are 118% of the EU average and our incomes just 102%, there is plainly scope to have a lower cost economy – and a proper personal bankruptcy regime to deal with legacy debt. But perhaps the greatest gift that a dose of truthfulness might bestow is to expose the massive continuing cost of funding our banks, remember that some €7bn of bonds will be repaid in Irish banks this year and €20bn in 2012 which dwarves the fiscal adjustment in 2012, be it €3.6bn or €4bn. Given the continuing stance of the ECB and the likelihood there will be no short-term resolution of Greek debt that might benefit Ireland, and given the approaching self-declared deadline for recapitalizing the banks, perhaps now is the time for a dose of comprehensive truth of what austerity will mean for the next four years. Immediate balancing of the budget might or might not be lethal but a dose of the truth can only make us stronger.
NAMA Wine Lake 
Can you outline how you would reach €4bn through stealth taxes and public sector cuts?
Say the water charge and propert tax are €300 each for the 1.7M irish households, thats €1bn.
If you dont touch pay ‘ala’ corke park, then on an average public sector pay of €50K, you would need 60,000 redundancies to give you a €3bn saving.
However most of these people would move on to benefits so the actual saving would be well below this even if you could reach the headline figure!
i am struggling to see how the goverment sums add up???
@Karl, to start with I would outline the taxes and cuts needed in the next 4 years, based on current GDP projected growth (13% compound) and a hi-lo estimate to give people a range. I would then set out the banking costs and the calculations which show compliance with ECB wishes, yields a better result than non-compliance.
If we are to have another €10bn of austerity in the next four years, even taking account of economic growth, then maybe we should set our priorities now.
How would I reach the adjustment? Assuming we get over the bank/bondholder hurdle and accept there will be €10bn of austerity, then 1/4 from increased taxes and 3/4 cuts to welfare and the public sector. And in the public sector I do not see how services can be preserved at a level we want for our society unless we employ more people for the same or less money. If any of this is done without tackling costs in the economy or legacy debt, it might well break society. We know that people are at or beyond the limit, so changes that reduce income need to be carefully considered. And again, I come back to bondholder debt and the cost of bailing out the banks – the calculation might be that the demands made on the finances of citizens are such that it becomes better to defy the ECB and not repay bondholders. It’s a big complex debate, but the information is not in the public domain.
I agree that there is a strong case both morally and economically to force Bondholders to sahre the pain. However we all know that ECB do not favour this course and they are currently holding the pursestrings on the bailout funds. While Michael Noonan may well raise the issue of burning Bondholders he is fully aware that taking a solo run here would lead to major problems and realistically cannot take this course of action. The 4B must come from a mix of Tax changes/increases and Public Sector cuts (assuming the SW budget will not be cut). These measures will in turn create further difficulties for the economy and the Bank loan losses. Economically because the additional funds taken out of the system will force the populace to cut back on spending. Interest rate and tax increases will also reduce ability to service borrowings and lead to higher bad debt levels. While we might ctiticise the Governmant for some of these decisions I really don’t see too many alternative options available that will not lead to greater difficulties. Those who are proposing options such as burning the Bondholders or cutting back on SW need also to address the consequences of these actions because they all do have consequences and unfortunately none of them appear to be bringing the country towards a long term sustainable position.
Bondholders have already shared in the pain. But it is still in the media’s interest to state they haven’t. The question is should they share more of the pain.
@jj, subordinated bondholders have shared in the pain, that is true. I am not aware of a single senior bond being redeemed at anything other than par though obviously in the secondary markets at present losses are being made eg the Anglo bond redeemable in November 2011 is presently trading at 80c in the euro.
is this now a rhetorical question. Perhaps morally there is a case to be made for paying sinior Bonds at a discount but given that the consequences of taking such actions are severe are we not now limited to a commitment to par repayment. Given that these same Bonds are trading at 80% of par at the moment why are they not being purchased by the Government in the secondary market? or am I being naive?
The Minister’s claim of a €1bn improvement since last year is pure and other rubbish. The underlying position is actually worse. To get a true ex-banking position, if you are deducting the promissory notes, you would need to net off the €500m in non voted capex incurred at this stage last year (money “invested” in EBC, INBS and NAMA).
In addition there is €595m in income under “non tax revenue” from the Bank Guarantee, at this stage last year it was zero. It didn’t hit the exchequer statement until October 2010. This is artificially boosting the position at this stage of the year.
Finally the capital budget has been cut to ribbons, €1.3bn spent from €1.8bn.
Combining these factors the true underlying position is actually €440m worse than last year.
(PS the Central Bank surplus of €670m is based on the profit it makes from lending to the banks, what happens when it finds the collateral it accepts for these loans is worth much less than its nominal value, re-capitalise the Cental Bank?)
@ NWL,
Perhaps using the tools + resources which are at our disposal would help generate a small income stream from other sources.
For example….
We have a oversupply of property at the moment, estimates of 30,000 dwellings which make up ghost estates, there are apartment blocks lying empty, i.e. south Dublin, and various others on commuter lines ie.Adamstown.
This is a resource, so how do we use it?
Well there are numerous disasters occuring all over the world, notably the Tsunami disaster in Japan.
If Ireland were to offer 100,000 dwelling units to the Japanese social welfare system at a low rate. Displaced homeless Japanese citizens could be relocated to Ireland and placed in these empty apartment blocks / dwellings. The displaced persons could be given a temporary 12 month visa, and they would be supported by the Japanese social welfare system. The dwelling would be rented to the Japanese social welfare system at a reasonably low rate. The cost of transporting the displaced Japanese citizens would be bourne by the Japanese Govt etc.
Ireland would benefit in a number of ways.
1) Money from social welfare which originated in another country would be spent in Ireland, not in the country of origin.
2) A spending stimilus would be generated as the previously empty dwellings would have to be kitted out with furniture, broadband, and other communications.
3) A rental income stream would be generated by leasing the dwellings to another countries social welfare sytem, this may be small.
4) Irelands reputation as a nice place to be, a caring country and various other incalculable spin offs would be enhanced.
Obviously safeguards would have to be put in place to ensure that the project works at all levels to the mutual satisfaction of the stakeholders.
One countries misfortune might just be an oppertunity for Ireland to gain a few hundred million in return for providing humanitarian assistance.
It may be too late for this idea to assist the Japanese who have suffered from the Tsumami, but no doubt other disasters will occur.
The point I am making is if money has been invested in Irish Property, then lets get this property working for some return on the investment.
Sporthog
Well done on that proposal. We need many such proposals. If only to get the Irish ‘elite’ away from the idea that Ireland ( a different entity altogether from the Irish ‘elite’) can recover by restarting to sell finished houses to each other.
Good suggestion Sportshog! Even if they got the houses for free it would be a big benefit to the country and would be massive marketing opportuity to a huge amount of japanese turists.
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What is so wrong with raising income taxes anyway? My understanding was that balancing a budget requires cutting expenses and raising income.
The government didn’t have a problem with the USC, so what’s the problem with an increase in the income tax rate?
Seems to me that Ireland is Freedonia and we are living out a real life version of Duck Soup.
Given the scale of the burden still required to be imposed on the citizens surely its time for all of us to wise up to the fact that recapping the banks to the extent as requested by the CBI is plain daft.
History tells us that Generals love fighting yesterdays battles and wars. The Regulator and the CBI are busily fighting ‘The Regulation Wars’ at the time the soldiers are already dead in the field i.e. the banks. This is a complete waste of time and money.
We simply need to do one very basic thing and that’s go back to the ECB/IMF and declare RoI a Basel III free zone – we don’t have functioning banks so why the need to have them capitalised to the extent that’s suggested. End this nonsense.