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Archive for July 30th, 2011

Budget 2012

This entry is probably as welcome as advertisements in August for Christmas 2011, but yesterday the Department of Finance published a document  (EDIT: a searchable, copyable version of the document has been made available by the politicalworld.org website here) which sets out in more specific terms what this Government intends doing in Budget 2012 which is now a mere four months away. The document published by the Department was a revised agreement with the EU and IMF, and makes forthcoming commitments more specific.

There is to be an “adjustment” in 2012 which will cut government spending and increase taxation. As we all know by now we have a large deficit to close, so that this country can stand on its own two feet without relying on lenders and the general commitment is to cut the deficit in the next four years. In addition to the closing the deficit and achieving a balanced budget, the Government has accepted responsibility for losses in part of our banking sector and has committed to repaying bondholders in certain banks. The 2012 adjustment is required for those two reasons – balancing the budget and dealing with our banks.

The total adjustment for 2012 is “at least €3.6bn”. On 6th July, Minister for Finance Michael Noonan indicated that an adjustment of €4bn might be needed. There has been some debate about whether some part of the €800-1,200m saving in bailout interest resulting from the July 21st EuroZone summit might be used to cushion the adjustment required, but the response from Minister Noonan has been in the negative and that an adjustment of “at least €3.6bn” is still required.

So what do we know today that we didn’t know last week? We know that the adjustment is to comprise €1.5bn of new tax and €2.1bn of reduced Government expenditure. For political fans this seems to represent a victory for FG (and indeed FF) policy over Labour’s – Labour wanted a greater amount of the adjustment to come from tax. The general economic argument is that when cutting a deficit, cuts are preferable to taxes.

So where is the Government going to get €1.5bn of new tax? We know from this week’s announcement on the so-called household charge that €160m is to be raised by levying €100 on each household in the land, with some limited concessions. And the rest will come from

(1) lowering personal income tax bands

(2) lowering credits

(3) a reduction in private pension tax reliefs (at present pension contributions in general reduce taxable income, meaning contributions can save upto 41% tax that would be otherwise payable)

(4) a reduction in general tax expenditures (or allowances). What could be up for grabs here? Perhaps extending or increasing VAT, increased excise duties on alcohol or cigarettes.

(5) a reform of capitals gains and acquisitions tax. We’re not generating much capital gains tax at present because there is reduced economic activity and many assets have lost, rather than gained, value.

(6) an increase in the carbon tax, so dearer petrol, diesel, heating oil and natural gas.

So the above relates to taxation (which includes levies, customs and excise duties, household charges). The larger part of the “adjustment” is to come from savings to the social welfare budget, the public sector and capital programmes. What benefits and payments will be targeted (see here for current rates of payment)? We don’t yet know but Minister for Social Protection, Joan Burton has signalled rent allowances and payments by the Government to utility companies would be examined. An Taoiseach, Enda Kenny said on the 100-day anniversary of the formation of the present Government that social welfare would not be cut – RTE reported “speaking later on RTÉ’s Six-One News, Mr Kenny said that the Government had decided to make a commitment not to increase tax or cut social welfare to allow people to plan their lives.” It is difficult to see from here how that commitment can be kept.

Then there is a commitment to cut public sector numbers and also to cut public sector pensions. This despite a commitment reported by the Irish Times “There are to be no further pay cuts for existing public servants and no further compulsory redundancies in any government department or agency” So voluntary redundancy and what seems to be a cut to the pension arrangements of new joiners. It is difficult to see how either will contribute significantly to the €2.1bn target.

And lastly there are to be cuts to capital expenditure. So roads, schools, hospitals and infrastructure generally.

We have had three austerity budgets so far, and there is a feeling that the “low-lying fruit” have been picked – apologies to anyone who feels that imposing a universal social charge and income levies, not to mention other cuts and charges, is “low-lying fruit”. The forthcoming adjustment will take place against a background of increasing interest rates and elevated unemployment -14.2% presently but expected to stabilise or fall slightly this year. The latest economic forecast from the Central Bank of Ireland, published yesterday, was for the economy to grow modestly this year by 0.8%, its forecast for 2011 of 2.1% is down from the Government’s own 2.5%.  So the forthcoming budget is expected to eat into living standards more so than previously and I think that is what is meant by no longer being able to pick “low lying fruit”. The Central Bank came out yesterday and called for an early indication from the Government as to where cuts and taxes will fall, so that people can have some degree of confidence in planning their economic lives. That seems like good advice because from this perspective, despite the information published yesterday, it is unclear as to how the Government is to achieve the mandated adjustment for 2012.

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