ANALYSIS:Late changes to the Budget as Government changes tack to arrive at €3.8 billion savings
COALITION MINISTERS erected at least half a dozen straw men in order to knock them down in the run-up to the Budget being unveiled today and tomorrow.
This weekend identified a few of the threatened budgetary items that have now been relegated to non-items. Ministers can, of course, then claim credit for having talked their Cabinet colleagues back from the ledge. Others will see more self-serving agendas, with Ministers floating cuts to the public that were never likely to be implemented.
The two most prominent rollbacks this weekend were a blanket reduction of €10 per child threatened in children’s allowance payments and Minister for Health Dr James Reilly’s warning about a €50 per annum medical-card fee.
Late changes to the Budget, some agreed as late as Friday, mean the way the Government will arrive at the €3.8 billion budgetary tightening has altered slightly. While there has been pervasive leaking, it is also likely there will be a few significant measures announced that have not been previously flagged.
The split between cuts and revenue-raising remains at €2.2 billion and €1.6 billion respectively. Some €755 million of the cuts will come from the capital Budget, leaving a target of €1.45 billion from the current budget.
On the tax side, the Government’s effective target is €1 billion, as €600 million of cuts announced in last year’s budget (mainly related to the universal social charge) will be carried over. While tax and VAT revenues have lagged behind target this year, that has been more than balanced by a €1 billion underspend on capital projects and in some Departments.
CUTS
GENERAL
There are a number of cuts from Minister for Public Expenditure Brendan Howlin’s public-expenditure review that will be applied across the board. Into that mix are the savings from the Croke Park agreement, as well as a suggestion that there be a 5 per cent cut in expenses across the public service. There are other minor initiatives, including the recently announced cuts in pensions paid to top-earning civil servants, which will yield €400,000 for the Exchequer.
HEALTH
The cut for the Department of Health next year is expected to be €200 million, but it will increase to €700 million because of the overspend in the HSE’s 2011 budget.
While the annual charge for medical cards is not likely to be included, it is expected that there will be increases in the per-item fee for prescription charges from the current 50c. There may also be new charges applied to AE units and the use of private beds in public hospitals. Reilly has already indicated that 40 HSE community homes will be closed. The department hopes the bulk of savings will come by over 3,000 HSE employees accepting early redundancy by the February deadline, in order to reduce pension payments.
EDUCATION
Minister for Education Ruairí Quinn confirmed early after the election that he would reverse his campaign pledge to roll back registration fees. The fees are likely to increase by €250 next year to €2,250. Controversially, similar increases are on the cards for the next three years. The abolition of maintenance grants for postgraduate students, and cuts in school transport budgets, have also been mooted. Teacher numbers may be cut which will increase teacher-pupil ratios but it is understood this has now been deferred until 2013.
ENVIRONMENT
The introduction of the €100 household charge, as well as increases in motor tax, will invariably mean a reduction in the Governments contribution to the local government fund. A slight decrease in the homeless budget is expected, as well as a reduction in the rental accommodation scheme.
SOCIAL WELFARE
The reversal of the blanket cut in social welfare will be seen as a major victory for Minister for Social Protection Joan Burton.
However, families with three or more children will be targeted with €10 cuts for each child.
The quid pro quo for Fine Gael is that the threat to make employers pay for the first four weeks of sick pay has been dropped.
The overall adjustment in Social Protection will now be closer to €500 million than €700 million. A number of other measures will still go ahead. They include broadening the PRSI base to include rental income, dividends and share income.
There may be cuts in entitlements to one-parent families, with payments being stopped at a much earlier age.
The changes in the redundancy payments system are likely to go ahead. Employers’ rebate will be cut from 60 per cent to 30 per cent. There are also cuts expected in a number of other schemes, including back-to-school allowance (the budget for which shot up over the past two years).
AGRICULTURE
Agriculture was one of the few departments to get an increase in capital budget. However, it has not been so lucky on the current side and is faced with a decrease of 20 per cent in its budget for next year. That will mean cuts in farmers’ payment schemes, including the Rural Environment Protection Scheme and the schemes for disadvantaged areas.
JUSTICE
A number of announcements have been made, including the closure of three Army barracks, the indefinite deferral of Thornton Hall prison and reductions in judges’ salaries. However, the bulk of costs in this big-spending department are for pay to the Garda, prison officers and the Courts Service. Like in Health and Education, most of the savings will come from early retirements in the services, reducing the overall numbers. There are also suggestions that up to 40 rural Garda stations may be closed as part of a consolidation scheme. Garda allowances and expenses may also be targeted.
FOREIGN AFFAIRS
The department has already announced the closure of three embassies: the Vatican, Tehran and East Timor. There has also been a reduction in embassy staff and downgrading of staff in smaller embassies. As of several weeks ago, the Overseas Development Aid budget – subject of cuts in recent budgets – seemed safe, but circumstances have changed in the meantime.
TAXES
The target is comparatively modest because of the €600 million windfall from the 2011 budget. However, as the Government promised there would be no increases in income tax rates or bands, it has had to look to indirect taxes to arrive at the €1 billion target.
The standard rate of VAT will increase 2 per cent to 23 per cent. However, the Government’s estimation of a €670 million yield from this measure is seen as over-optimistic given depressed consumer demand. The other certainty is a household charge of €100 on the State’s 1.6 million householders. That will yield an estimated €160 million.
Motor tax is also certain to increase, most sharply for the lowest bands (vehicles with the lowest emissions currently pay motor tax of €104 per annum).
Carbon taxes are also likely to increase from €15 to €20 per tonne. That will yield €108 million for the State. It will apply to liquid fuels, adding 1c to 2c to the price of a litre of petrol or diesel. It is not known if the charge will be applied to solid fuels such as coal and briquettes, which remain exempt.
There are a number of taxes both Coalition parties included in their respective manifestos that may also find their way into Minister for Finance Michael Noonan’s Budget tomorrow. They include an increase in the second-residence tax. Fine Gael suggested a €100 increase to €300 before the election, while Labour suggested the tax should be €500 per annum.
Both parties also advocated an increase in Dirt tax on savings interest from 27 per cent to 30 per cent. This move might incentivise savers to spend money.
Both parties also advocated increases in the rates of capital gains tax and capital acquisition tax, from 25 per cent to 30 per cent. There are potential revenues of €150 million per annum from these changes.
It’s also probable that excise duties on cigarettes and alcohol will rise, including a potential new charge or levy on off-licences, as much to curb excessive alcohol consumption as to raise revenues.
Another suggestion stemming from health-promotion motives is the introduction of a sugar tax (or fat tax) aimed at confectionaries and high-sugar drinks that contribute to obesity.
There are a large number of other indirect taxes which may come within the ambit of Noonan’s Budget speech tomorrow. They include further restrictions in the artists’ exemption; further scaling back of section 23-type property reliefs; a lower maximum cap on private-pension relief; an increase of online betting taxes; and a more robust domicile levy than the one introduced by the previous government (which yielded a disappointing €1 million).
The most costly measure is the decision to exempt those on low incomes from the universal social charge. At present, everybody who earns money, irrespective how little, is liable to pay at least 2 per cent in USC.