Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

“Slash and burn”? Anything but! The need for realism in Budget 2012

A little over a year ago, I wrote about the “eight things on Ireland’s to-do list” when it came to Government finances. It outlined three taxation measures and five expenditure measures that would help a Government get the deficit back to manageable levels by 2015, while facing an interest rate above 5% on a growing national debt.

The three main tax measures will be familiar with to long-standing readers of the blog: increasing the amount of income tax the typical earner pays, introducing a Universal Social Charge, and bringing in a sustainable annual property tax. These were designed to bring total Exchequer revenues up from €51bn to about €58bn by 2015.

The job for expenditure was an even bigger one: to go from total spending of almost €70bn in 2010 to about €60bn. The reason that this job is so tricky is because €45bn of the €55bn in current expenditure in 2010 was spending on healthcare, education or social welfare, areas many members of the public most want to see protected.

Low hanging fruit

One of the eight things I had was reducing capital spending slowly over the period to a sustainable level of €4.6bn. This would save almost €2bn of the €10bn needed. Already, though, the estimate of capital spending for 2011 is €4.6bn. This means that in three short years, capital spending has been halved. Aside from those work on these projects, whose livelihoods we should not discount, the people who benefit from capital projects are “future us”: you, me and our children, using better roads, rail, or broadband, for example. Compared to the public servants that the Government has to work with every day, though, “future us” is a very easy target. The easy cuts have been made.

If the same scale of cuts had been made in health, education and social welfare, the government would have saved €20bn! Instead, spending in those three areas this year will be €2bn higher than in 2008, largely due to more people needing social welfare. The depressing conclusion is that, three tough Budgets later, all the “low-hanging fruit” has been picked, leaving just the more painful cuts needed to close the deficit.

Clearly, though, it isn’t as easy to cut spending in health, education and social welfare. That’s because the bulk of all this money goes directly into someone else’s pocket as income. What these departments need is a combination of natural attrition of staff and productivity-driven growth that delivers savings each year every year for five years of the order of 5%. This is on a completely different scale to what the Croke Park Agreement has currently planned. It is estimated that its efficiency measures in education would save 0.5%, one tenth of the savings needed in a single year.

Slash and burn?

Worryingly, there isn’t the first indication yet that the new Government has a grasp on the scale of transformation in public spending needed. Earlier this month, the Department of Finance published its briefing note to the new Minister – complete with blacked out paragraphs right out of Hollywood. It included yet more easy targets: there are plans to further cut capital spending to just €3.6bn. Amazingly, though, where one might have expected cuts of the order of €4bn in health and education over the next five years, there are cuts of less than €300m! Spending in education is actually projected to increase slightly. Given that, it’s almost surreal to see Ruairi Quinn, Minister for Education, come out today and say that cuts in education will not be ‘slash and burn’

Ireland's government finances, by major area, 2008-2014
Ireland's government finances, by major area (€m), 2008-2014

A comparison of 2008, 2011 and where we might be in 2014, both my own thoughts [RL] and those gleaned from the Department of Finance report [DOF], is in the graph above. Income is on the left, spending is on the right. The Department of Finance do not include projections in relation to taxation – but we can at least back out some round numbers, the shaded purple numbers on the left, based on the total for spending and the ceiling on the deficit.

Looking to Budget 2012

There are three things that worry me about the Department of Finance’s numbers.

  • The first – as mentioned above – is that they are still going for the easy options, cutting capital spending and increasing spending on education.
  • The second is that to compensate they are, even if only implicitly, planning for greater tax increases on a private sector already credit starved and hard-pressed with unemployment and negative equity.
  • Lastly, the only way the numbers tally as they do is because they are counting on social welfare expenditure to fall by almost €3bn. I had estimated a fall in welfare payments of €1.2bn, based on a 2% economic growth rate. What growth rates are they using?

Budget 2012 will be the first proper opportunity the new Government has to stamp its authority on the direction its finances take over the next few years. It must seize that opportunity and put in place realistic targets.

Last week, I appeared on Eamon Dunphy’s radio show. Someone texted into the show and referred to myself and others as public sector “bashers”. This came as a surprise to me. I want well-funded public services that deliver an excellent social return on the investment taxpayers make. Nor am I a public-sector-worker basher. I want those who work in services that are publicly provided to be well-paid. But we won’t be able to do these things if we can’t prove to ourselves and others that the Government is able to spend in accordance with the money it earns. And there is no indication yet that the new Government is aware of the size of the challenge.

  • Joseph ,

    I wonder how long we will have to wait before crushing realism comes home to this government? Everyone knows that FF left all the dirty stuff for the next administration to take the flak for so they might as well get on with the pain as early as possible in their lifecycle. I keep applying for jobs abroad but they are still hard to get hold of. Must get out of this country before the real train crash happens!

    • Charles Bancroft ,

      “If the same scale of cuts had been made in health, education and social welfare, the government would have saved €20bn!”

      You say that as if slashing, health, education and social welfare is a good thing?

      • Ronan Lyons ,

        @Charles
        I fear you may be putting a tone in there that doesn’t exist. A closer read of the article will reveal a number of clues that should help you. Even if I hadn’t written the final paragraph, (1) the fact that “only” €10bn in cuts are needed, not €20bn, (2) the inclusion of an exclamation mark at the end of the sentence, and (3) in particular my comments almost immediately after on the fact this money is overwhelmingly someone’s income would surely have given you occasion to think my stance on cuts is a little more nuanced than “cuts = good”.
        R

        • John Heavey ,

          Another excellent article Ronan but God it’s depressing. Hard to see anyway out of this messs unless there is genuinely huge waste and/or fraud (i.e. savings) to be made in Welfare and Health. Otherwise we’re in for strikes which will make things worse.

          • Machholz ,

            Nice post however with the introduction the Universal Social Charge,( you’re suggestion) the bringing in an annual property tax not to mention the proposed water charges, the new proposed toll on National roads, the selling of state assets, the ever increasing billions to bail out the toxic banks, and the constant increase in petrol prices ,I’m sure a few more taxes on the average worker is just what the country needs right now ,Never mind the lottery salaries the TD’s get and the pensions and perks the last 120 gangsters got when they left the Dail. What about the immoral and ** unjustified massive salaries of the top people in the various guanos .Until the government cuts these massive salaries down to the European norms at least, they are risking open revolt. With reference to your appearance on MR. Dunphy’s show I can only say you appear to be totally out of touch with the struggle ordinary people are trying to cope with and I believe it won’t take much more for the people to bring about civil unrest the likes Europe hasn’t seen yet if this government continue to look after the insiders and well connected .I am sure if I had you salary I wouldn’t mind paying more taxes .Have you noticed that the majority of so called experts that come on these shows are in fact been paid bloated salaries out of the public purse.
            I hope to God the IMF will force the government to cut these extravagant salaries and quick and then let’s see them call for more taxes!

            • Ronan Lyons ,

              @John
              It is unfortunately very depressing – I try to be optimistic in general, but on the government finances, I just can’t find good cause at the moment.

              @Machholz
              While I understand you bringing up the top salaries in various Quangos, etc., we need to appreciate that cutting them only translates into tiny savings in the grand scheme of things. Even if there were 1,000 people earning average salaries of the order of €250,000, halving that would save us no more than €125m. Not to be sniffed at, certainly, but only about 1% of all the savings we need… and I don’t think there are 1,000 salaries that high.
              Two questions for you:
              (1) Does your principle of ensuring salaries match European averages apply to other public servants as well?
              (2) Re “I am sure if I had you salary I wouldn’t mind paying more taxes.” I’m a full-time PhD student. I do some freelance and part-time work, I feel very lucky to be able to get by as I do, but I’m intrigued – how much do you honestly think I earn?! I’m not offended, just amused!

              Ronan.

              • Seamus Coffey ,

                Hi Ronan,

                Good post. I had a look at the recent expenditure figures with an update for the 2011 estimates here. I too agree that the bulk of the savings so far have been focussed on the “low-lying fruit”.

                I big problem as I see is that some of the “adjustments” don’t actually change the amount of revenue raised or expenditure incurred. The Stability Programme Update released on Friday gave a useful summary of the “austerity” measures of the past few years in Annex 5 (page 48). €1 billion of savings is attributed to the postponement of pay increaes agreed under the national wage agreements. Postponing the spending of money you never spent is not a saving. It achieves nothing in closing the deficit.

                The only way a deficit can be closed is if tax is increased or expenditure is reduced. Fiddling around the edges does not work unless these numbers change.

                I think people focus too much on departments headings like health, education and social welfare, particularly the former two. Three-quarters of current voted expenditure is a cash transfer to people. It is public section pay, pensions, and transfer payments. Cuts in “health” and “education” are misleading. If expenditure measures are to be used the government must give less money to people. The Taoiseach’s suggestion of no pay cuts “at all costs” is worrying.

                The Croke Park agreement cannot deliver actual savings. If the same number of people are working for the same wages how can there possibly be savings! Natural wastage is not a savings as those who retire stop getting a salary and start getting a penion. That’s not a saving, it’s just what happens.

                Even the much-maligned pension levy was not a saving. It is an “appropriate-in-aid” that the Department concerned gets to keep and spend. Net expenditure (a pretty useless measure) was reduced by the pension levy but gross expenditure was not.

                A deficit is a gap between two numbers. So far we have shown little apetite to actually change these. For the past three years the hope has been that the fairy godmother of economic growth would come to the rescue. This is not going to happen and we cannot sustain an €18 billion annual deficit. Some hard choices are going to be necessary if we are going to achieve the €10 billion of planned adjustments over the next three budgets. All the “low-lying fruit” has been picked.

                • Thriftcriminal ,

                  I have an alternative solution (in the vein of Dean Swift). A cull of the over 65s. Hang on, wait a second, give it a chance, there is inheritance tax to be gathered by the government, reduction in pension costs, inheritance clearing the debts of the next generation and it could be carried out by cutbacks in the health sector. Oh, and the VHI would get a more favourable demographic.
                  It’s win-win (sort of).
                  I’ll call my party Dignitas and launch my campaign shortly.

                  (tongue in cheek. Really. No it is. I promise)

                  • Tommy ,

                    “we need to appreciate that cutting them only translates into tiny savings in the grand scheme of things.”

                    Hi Ronan – Good article, however I hate this soundbite about cutting top salaries. Its not about how much it saves rather than showing that we are in this together. It baffles me why anyone would need a pension above the average salary never mind 5/6 times avg salary. Moreover many in receipt of this benefit were direct contributors to the current state of the economy.

                    Ref: Quangos. Do we really need them. This article suggests they cost 13b. If this is true, theres your magic bullet. I think I can survive without the advise from the NCA telling me to “Shop Around”
                    http://www.independent.ie/business/irish/bord-snip-lines-up-big-quango-cuts-1806512.html

                    • Don ,

                      “introducing a Universal Social Charge”
                      So YOU are the reason I can’t feed my kids 7 nights a week, and why my wife and I go hungry twice a week?

                      Great job. Just hope I don’t run into you in some dark alley somewhere.

                      • Ronan Lyons ,

                        @Don
                        It is most unlikely that the USC is taking enough from your income to deny your and your wife four meals a week. You would have to be earning €50,000 or more for that to be even a possibility, in which case the question has to be asked what are you prioritising ahead of food for your wife and family.

                        I would contend that understanding the true nature of your current predicament is key to overcoming it. What is much more likely is that your income has suffered for other reasons: loss of one of the household’s jobs, or of overtime or some other factor related to the economy, rather than taxation. While it’s easy to blame a small charge like the USC, it really is the door being closed over slightly long after the horse has bolted; Irish workers pay significantly less income tax than most other European countries and until we correct for that, we will not be able to fund our public services.

                        Incidentally, I do not appreciate threats of physical violence, however implicit. I have noted your IP address.

                        R

                        • Just like that! 200,000 jobs and the Government’s magic trick | Ronan Lyons ,

                          […] not without major fuss such as international defaults), so we can set that aside. And as I’ve pointed out before, there really is no more scope for cutting the capital budget. More importantly than that, provided […]

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