The view on here is that there is only a 50:50 chance that the Coalition will actually survive the next four months, as Budget 2013 hoves into view at the start of December. An Taoiseach Enda Kenny has already announced it will be the toughest budget for this government term – you might have assumed he was referring to a term which would naturally end in 2016, but both the deteriorating economic outlook, forecast by the European Commission last week and internecine wobbles in the Coalition itself, suggest that this administration’s term might not end naturally on the 100th anniversary of the Easter 1916 Rising.
This blogpost examines this year’s pre-budget kite-flying – politicians suggesting areas for cuts or new taxes, and then gauging public and other reactions.
The kites (so far):
Property tax: the €100 flat household charge/tax for 2012 remains defiantly unpaid by between 39-50% of eligible households depending on whose figures you believe. The Don Thornhill “expert report” on next year’s property tax was delivered to Cabinet over a month ago, but has not been published. Somehow, a public perception of the tax generating €500m per annum or an average of €300 per household, has been allowed develop. As things stand, we are likely to have a property tax based upon bands of the market value of a home, but the calls for a site valuation tax or indeed Professor Brian Lucey’s call for capital gains tax on profits on the sale of home in his column in yesterday’s Irish Examiner all show that it’s all to play for before a scheme is decided.
Water charges: In recent days, the impression has been allowed develop that we won’t have metered water charges before 2014 – Denis O’Brien’s Siteserv will be disappointed as it would have expected to have been a major beneficiary of the contract to instal meters. But meters mightn’t be installed in apartment blocks, will there really be a free water allowance, who will pay for the installation of meters. What will the average annual charge be?
PRSI (pay related social insurance): The incoming Government promised no changes to basic social welfare rates or income tax. But a line of least resistance might be tinkering with PRSI rates which are applied to income, much in the same way as income tax. The Government claims that the fund which pays out unemployment and pensions is in deficit.
Corporation tax rate: during the week, you might have been surprised to hear conservative FG politician and banking expert, Peter Mathews calling for a 2.5% increase to bring our corporation tax rate up to 15%. Deputy Mathews explained he was speaking in a personal capacity, but when a politician as pin-striped as the South Dublin TD puts the corporate tax rate on the table, you can conclude that he is not on a solo run.
Croke Park: with health workers making up 40-50% of Ireland’s public sector workforce, it was inevitable that Minister for Health, James Reilly would come under most pressure to deliver cuts and he claims that the payroll cost in his various departments represents 70-90% of his budget. Something has to give if he is to deliver savings, and it looks as if it will be the CrokePark agreement.
The flyers (so far):
Phil Hogan, “Big Phil” is probably surprised himself that he has been landed with the most contentious new measures in this administration, the property tax and water charges. There is no easy way to get average households to hand over the best part of €1,000 per annum, so Phil needs to launch lots of kites to see where the weak points might lie so that he can pursue the line of least resistance
James Reilly is coming under constant fire as his department comes under most pressure to deliver savings. Cuts to agency staff and overtime are not masking the reality of frontline services being cut, particularly to the most vulnerable in our society.
Ruairi Quinn, after health, the biggest spending department and Ruairi has recently launched his kite to introduce means-testing of third level grants, means-testing which will include assets such as farms and businesses.
Joan Burton, so far Joan has just launched her PRSI kite claiming that there is a deficit in the social insurance fund, which may mean that PRSI contributions from employers and employees may have to rise (see window-dressing justifications below)
Enda Kenny has so far shown himself to be a masterful chairman of the Coalition. Phil Hogan’s fiasco with the household charge, James Reilly’s fiascos with the HSE board and overspending, Alan Shatter’s blighting of the Irish commercial property market with the Upward Only Rent Review issue have all somehow been papered over and not allowed topple the centre right/centre left coalition. No mean feat, but the forthcoming tribulations will test the chairman’s abilities to breaking point.
Brendan Howlin, the man most responsible for reform of the colossal public sector where salaries, pensions and allowances are still eye-wateringly high to many in the private sector and to commentators across Europe, has remained quiet, defending the Croke Park deal which according to the IMF will mean “nonetheless, as a share of GNP, the net exchequer [public sector] pay and pensions outlay in 2015 is projected to be 0.4 percentage points below the 2008 level, representing a relatively modest decline”
Michael Noonan, the most experienced minister in the Dail might have been expected to be the most active kite flyer but because income tax has been taken off the table, the Limerick veteran can sit back and watch the entertainment between public sector and welfare departments unfold.
So as the kite-flying season progresses, there are some home truths on here which, it is hoped, will help improve the quality of debate as the countdown to Budget 2013 continues:
1. The deficit between what we generate in taxes and what we spend on the public sector and welfare needs to be closed. As part of the EuroZone with a fixed currency, this country has no practical option but to close the gap. The alternative is default. The only questions are when, what and how much.
2. This Coalition inherited a crisis in which it had limited culpability from its previous role in opposition. You can blame this Government for decisions and actions from March 2011, but before that, our political system means that FG and Labour are largely blameless. And if FG and Labour are not to balance the books now, then what are the alternatives?
3. The Memorandum of Understanding with the Troika is not fixed. It can be changed by agreement between Ireland and the Troika, particularly if Ireland suggests a substitute measure “of equally good value” and convinces the Troika to accept the change. And the Troika is composed of reasonable people. The Troika are always contactable but the next review in October 2012 is likely to coincide with many of the Budget 2013 measures being agreed. This is what the current version of the Memorandum says about Budget 2013, but take note of the caveat at the bottom: changes can be made.
4. The Government will try to use every old trick in the book to justify new taxes and cuts. The general truth is that new measures are needed to close the gap, and the justifications that you will be presented with, are little more than window-dressing – “the household charge and property tax are needed to fund local service” Rubbish, if the Exchequer wasn’t reducing funding to local authorities then the new taxes wouldn’t be needed.
5. The Government will try to shift as much of the blame for the new taxes and cuts onto others, and may portray them as cardboard villains – Fianna Fail, the Troika, the Revenue Commissioners, the deficit in the social welfare fund, HSE chief Tony O’Brien. However, it is the administration in power which makes the choices, and it is the Government which fairly assumes responsibility for its own actions.
6. Although there is a spectrum of views, it is my view that most economists support cuts to the public sector and the welfare budget ahead of increases to taxes and cuts to the capital programme. Here was ECB president Mario Draghi speaking in May this year “The second area is what we can do at the euro area level to create jobs, basically by increasing investment and enhancing infrastructures. There are many proposals, such as increasing the European Investment Bank (EIB) action and redirecting the EU funds towards the low income areas. When we talk about infrastructure and fiscal consolidation, it is certainly much better to consolidate through the reduction of expenditure, especially current expenditure and not capital or investment expenditure, rather than through increases in taxes.”
7. If there are to be further cuts to public sector, then salaries need to be cut, which in turn means that the Croke Park agreement needs to be abandoned before it naturally expires at the end of 2014. And if it is abandoned, you can expect strikes and protests in response.
8. If there are new taxes, they need to be implemented in a way which minimises the impact on the economy. Both France and Italy have recently made changes to increase taxes on the wealthy. In the UK, coalition partner, the Liberal Democrats, has called for a time-restricted wealth tax. On the other hand, the UK, in the depths of a recession, has cut the top rate of income tax from 50% to 45% and cut its corporation tax rate from 28% to 24% – this is not Tories recklessly looking out for their own, tax increases tend to deter investment and spending and economic growth, so new taxes need to be carefully considered. And if any quarter in coming months suggests a wealth tax on the super-wealthy then they need be able to pass the “Sunday Times richlist” test whereby they can point at individuals on the list, and say how a wealth tax will affect them. Corporate holdings, ownership in trust, offshore assets and ability to relocate to other jurisdictions can all hinder a wealth tax, but that doesn’t mean we shouldn’t be trying to get wealthier individuals to contribute more.
9. Unemployment of 310,000 representing 14.9% of the workforce as part of a Live Register of 460,000 in receipt of employment-related benefits is not socially or economically sustainable. Ireland is building a nightmare for itself in future by not exhausting every avenue to deal with unemployment. The unemployment rate of 4.4% in 2007 tells us that as a society, the general problem is not the level of benefits, but the absence of opportunities.Remember the “Five Point Plan” on which FG was elected in 2011 “Point One – Protecting and creating jobs. Because jobs and opportunity are the best chance of keeping our best asset – our young people – at home. We plan to create 20,000 new jobs a year over the next four years. How? By cutting employers’ PRSI, by creating a welfare system that encourages work and by investing an extra €7 billion from State pension funds and from the strategic sale of state assets into developing the key infrastructures that will make our economy competitive for the future. In doing so, we can, by 2016, make Ireland the best small country in the world in which to do business.”
10. The €3.5bn budget adjustment required in December 2012 is part of a series which will see an additional annual €3.1bn adjustment in December 2013, an additional annual €2bn in December 2014. All told, we are going to be worse off by €8.6bn by 2015 compared with today, that’s an average of €5,000 per household. And if economic growth falls below forecasts, then even bigger adjustments will be required. As big as these adjustments are, they are small compared to the €70bn pumped into our banks, and the current negotiations with our European partners about reducing the cost of the bailout are critical to our future, the negotiations won’t obviate the need to get our budget to balance, but they can provide a cushion which ultimately can make or break our society.
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