Over the past few days, as Budget 2010 has sunk in, the commentators have been out in force. For example, in today’s Irish Times, Fintan O’Toole calls the Budget nothing less than a war on the poor, arguing that huge increases on taxes on the wealthy were the missed opportunity of the Budget, an opportunity the Government would never take given its ideological bent. He concludes:
The Government must be amazed at how easy it has been to sex up its dodgy dossiers of half-truths and declare war on the poor.
Over in the Examiner, in more reasoned tones, Fergus Finlay argues that we are “the first democracy ever to decide the poor must pay our debts”. He makes a passionate argument against the reduction in disability allowance from €10,828 to €10,192 a year. However, eloquent though it is, his article makes no suggestions for how else we might dig ourselves out of our hole, just a criticism of the particular way chosen.
I don’t think I’d be doing a disservice to either writer, though, if I said that very few are surprised at their criticisms of the Budget. It is my hope on this blog to never let prior beliefs get in the way of good facts and therefore this might make the reading here a little more unpredictable. So how did the Minister do in last week’s Budget?
As I see it, there were three overarching goals in the Budget: (1) to make a substantial dent in the huge fiscal gap, (2) to preserve public services to the greatest extent possible, and (3) to manage expectations.
Reducing the fiscal gap
The budget deficit for 2009 is projected to be about €25bn. At first glance, the Budget’s figures for 2010 don’t suggest a huge improvement – the deficit will be almost €22bn – particularly when one subtracts the one-off €4bn payment for Anglo-Irish Bank that’s included in the 2009 figure. However, it’s a testament to severity of the Exchequer crisis that a deficit of (only) €22bn next year is an achievement. This is because gross spending on social welfare (unemployment) and debt servicing (the deficit) will increase from €23bn to almost €26bn next year. All other gross spending will fall from €49bn (ex-Anglo) to less than €44bn. This breakdown of spending is shown in the graph below.
Next year, the deficit is still going to be a stonking 11% of GDP but it’s at least heading in the right direction.
Preserving public services
For all that some commentators give out about the nature of the Budget, they would presumably – at least I hope – be an awful lot angrier if the Government had got its necessary €1.5bn savings in the public sector wage bill by cutting teachers, nurses and gardaí and closing marginal schools, hospitals and police stations. The adjustments that were made were done, as should be the case in a recession by the public sector, on the intensive rather than extensive margin. Cutting rates of pay was, for a whole host of reasons, the only sensible option when it came to tackling the public sector wage bill. After the pensions levy and these cuts within the space of a year, I would argue that the wages of public servants deserve to be frozen for the next three years. Nonetheless, current expenditure in health, education and the rest of the public sector is going to need to decrease by 5% a year for the foreseeable future, meaning reform is a priority.
The necessary cuts to pay have been made and the stage is now set for much less painful – but equally necessary – public sector reform.
Before the budget, Minister Lenihan announced that future budgets were not going to be so tough. He then started his Budget speech with the following bold claim:
Today, I can report that notwithstanding the difficulties of the last eight months, we are now on the road to economic recovery.
While he did not promise a return to boomtime growth, I believe his only serious mistake in the Budget was to present the impression that with the worst Budget out of the way, the average punter can look on future Budgets with less dread. He must know this is wrong. The average punter is a private sector worker earning about €35,000 and paying hardly anything in income tax.
The tax take next year will be somewhere close to €32bn. By 2015, the Government will need taxes to come in closer to €40bn, an increase of 25% in a short number of years during which we’ll have little in the way of economic growth (at least not what we’re used to). In particular, we can no longer afford to tax average earners less than 5% of their income (whichever one of two ways you look at it). With our tax rates already among the highest in the world, this means that tax credits (tax free allowances to those still in pre-2005 mode) will have to fall. The Minister obviously has an important role is signalling and setting expectations, but he also has a responsibility to be honest to the average punter.
The worst Budget is out of the way only for public sector workers. For taxpayers in general, this was a let-off.
This was a bold Budget, one that tackled one of the power brokers closest to Government, the public sector unions, head on. I read in the Sunday Times about a young public sector worker living in rented accommodation in Tallaght, who will be €4,250 worse off in 2010 than in 2008, off a base income of €34,000. Even leaving aside falling prices in food, clothes and household equipment, the annual rent for the typical two-bedroom property in Dublin 24 has fallen from €15,300 to €11,000, a saving of €4,300. People need to keep the broader perspective in mind. Next year, we will not enjoy 2007 lifestyles, but we will also not have to put up with 2007 prices.
Overall, despite the caveat with regard to future expectations, given the scope for fudging and passing the buck, this Budget should be welcomed.