| OVERALL ASSESSMENT
Budget 2010 is an unusual budget. It is one of the smallest budget books seen in some time and the speech was very short. It is dominated by expenditure measures, with little of immediate interest on the tax side. For example there was no change in tax bands, allowances or rates, but there is a promise of tax pain to come further down the road. Most of the budget had been leaked in the weeks leading up and there is little in the budget that should come as a shock to anybody who has been observing the budgetary debate in recent weeks.
A lot of people will be considerably worse off come January 1st, particularly public sector workers. However, the key priority of the budget had to be to stabilise the public finances. The notion that we could continue to borrow €460 million per month, which is what we have done in the first eleven months of 2009 is simply not a sustainable proposition. As promised Brian Lenihan has made a fiscal adjustment of just over €4 billion. The breakdown of the bulk of this is €1 billion coming from payroll savings, €760 million from social welfare cuts, just under €1 billion in the day-to-day running cost of the country, and €961 million in capital spending cuts, with this mainly due to lower tender prices. The €2.1 billion targeted from reductions in the day to day running of the country has many aspirational elements and is relying more on achieving efficiencies rather than real cuts. How effective this will be in achieving savings remains to be seen.
On the taxation side, the much-vaunted carbon tax has been introduced. This is clearly just a revenue raising measure rather than a real environmental commitment. Some very modest stimulatory measures were also introduced. These include a reversal of the VAT increase introduced in the October 2008 budget, a car scrappage scheme and reduced excise duties on alcohol. The reduction in the VAT rate from 21.5% to 21% will hardly set the world alight – a significant cut would have been required to stimulate activity. The car scrappage scheme is a good idea, but €2,000 would have been more effective. Given the deep economic malaise in the Irish economy, these measures will not do a lot to lift growth, but a little is better than nothing. The reduction in excise duty on alcohol is a retrograde step and will just further fuel the deeply ingrained culture of alcohol abused in this country. From a social order and health perspective, this is not a good move, but has been motivated by the cross-border shopping craze.
Budget 2010 is harsh, but there was no choice. Ireland has given a commitment to reduce the General Government deficit to 3% of GDP by 2014, and it was always vital that Budget 2010 would be consistent with that objective. Given, what we have observed in Greece this week, this is a vital consideration. It is likely that over the next couple of days, international observers will look in at Ireland now and conclude that the Government continues to take corrective action to stabilise the public finances. This is badly needed in the context of the vast amount of money we are now borrowing and the cost of that borrowing.
The assertion made by the Minister for Finance that we have turned the corner and that the worst is over is open to doubt. It is hard to believe that we have turned the corner or that there is not worse to come. While we saw no meaningful changes in direct taxation, there is a promise of considerably more tax pain over the next couple of years. We are now promised a site valuation tax, metered water charges, further carbon tax measures, and a new universal social contribution, which will replace employee PRSI, the Health Levy and the Income Levy in 2011. We are promised that this new payment will be applied at a relatively low rate on all income. The magnitude of that rate is not yet clear. There is clearly more tax pain to come.
All in all, the budget should be viewed reasonably positively from an economic perspective, but there will be negative social consequences. However, the best contribution the government could make to the social agenda would be to get the economy growing in a sustainable way as quickly as possible. Increasing taxes in a significant way would not achieve that, as has been demonstrated over the past year, so the focus had to be on expenditure measures. Despite the harsh nature of the budget, there is still a lot of pain to come and we can be certain that this time next year, we will be struggling to come up with another €4 billion in fiscal adjustment. There is no choice however, and at least the Minister is now addressing the key issues in a reasonably strong manner. Some measures to stimulate employment, such as cutting employers’ PRSI would have been welcome, but we can’t have everything.
JIM POWER
DECEMBER 9th 2009
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