The humiliating vista of outside economic intervention prompted Brian Cowen to bow to the inevitable and decide to introduce an emergency budget – but why did it take so long?
NOEL DEMPSEY brought the house down at the Fianna Fáil Ardfheis last Saturday night, denouncing bankers and defending the honour of his party. Amid the tumultuous applause the audience didn’t appear to notice the Minister’s chilling warning that Ireland was facing the previously unthinkable prospect of losing its economic sovereignty.
In an effort to explain the dreadful dilemma facing his Government, he said: “We are making choices. Hobson’s choices. Choices between bad and worse. But if we are not brutally effective, quickly, in fixing our finances, others will do it for us. If that were to happen we could protest but nothing would change. If outsiders dictate our economic policies we won’t be worried about a pension levy. We’d be looking at pay cuts, or more even, at job losses and job cuts.”
Dempsey was clearly referring to possible intervention of the EU, in the shape of the European Central Bank (ECB), or even the International Monetary Fund. Either would insist on a savage programme of public spending cuts to sort out our finances that would make the Government’s cuts to date seem insignificant.
That humiliating vista prompted the Taoiseach to bow to the inevitable and announce on Tuesday the Government’s intention of introducing an emergency budget, designed to raise €4.5 billion for the exchequer this year. In a full year that amounts to tax increases and spending cuts of €6 billion. It is a truly enormous and frightening challenge for the political system.
What is really puzzling is why the Government took so long to come to the obvious conclusion that tax raising measures, and drastic ones at that, would be needed this year. For weeks the former taoiseach, Garret Fitz-Gerald and other leading figures had been preaching about the need for an emergency budget and the creation of a broad political consensus on what should be done.
The Opposition leaders, too, voiced their support for a new budget, even if they were cooler about the idea of joining a consensus to underpin an unpopular Government. Despite the clamour Cowen refused to commit himself. Last Saturday night he passed up an ideal opportunity to talk directly to the people of the country in his televised ardfheis address and spell out the stark reality in clear and simple language.
Either something happened to change his mind by Tuesday or he couldn’t resist playing the old party political game of trying to keep his opponents guessing until the last possible moment about his next move. The Taoiseach has insisted that he didn’t know the full scale of the problem until the Government was presented with the exchequer figures on Tuesday morning but that doesn’t really hold water. The Department of Finance is in a position to know how the tax-take is coming along from day to day and in current circumstances it is hard to believe that a very close eye was not being kept on the figures.
An alternative theory is that Cowen was told in Brussels last Sunday that the support currently being provided for the Irish banking system by the ECB would no longer be forthcoming unless his Government acted resolutely to keep its borrowing this year to the 9.5 per cent target supplied to the commission at the beginning of January.
ONE WAY OR another, by Tuesday afternoon the Taoiseach announced in the Dáil that the 9.5 per cent target would be met come what may even if he still doggedly refused to use the B-word for budget. Later in the day Minister for Finance Brian Lenihan confirmed the decision and emphasised that the Government would work with its partners in the euro zone, the European Union and the international community to address the public finances.
It was a clear acknowledgment that if the Irish political system fails to deal with the current situation, others will do it for us. In the same speech he invited the Opposition parties to “set aside their political differences and support whatever Government action is needed for the good of the country and of its people”. Fine Gael, Labour and Sinn Féin were invited into the Department of Finance to be briefed by officials the following morning. It was an offer they all accepted. The Lenihan approach has presented the Opposition with a dilemma. They would like to see the Government continue to roast on the spit of outraged public opinion but they all know that the country’s future is on the line as never before, so they will have to at least give the appearance of being constructive.
One impediment as far as Enda Kenny and Eamon Gilmore are concerned is that they both feel that Brian Cowen has never made any attempt to engage with them, outside Dáil exchanges, since his elevation to the Taoiseach’s office. Gilmore referred to this in a speech in Limerick last weekend and Kenny has similar views.
Both were stunned by a briefing to them by the Taoiseach on the Lisbon Treaty before the crucial EU summit last December. They were ushered into the taoiseach’s office where Cowen simply read out a briefing note about the Irish position, and before they knew it the meeting was over and they were out the door with hardly a pleasantry exchanged.
While Lenihan has a much better relationship with politicians across the political divide they are unlikely to give him too much political cover for his budgetary measures. So far Fine Gael have been most forthcoming, suggesting items such as an increase of 1 per cent in the basic and top rates of tax, a new higher rate and a carbon levy, as well as a continuing public sector pay freeze. Labour and Sinn Féin have also promised to come up with ideas but, as Lenihan said in the Dáil on Thursday, the Government will ultimately have to make its own decisions.
The biggest revenue-raising item in the emergency budget will inevitably be higher income tax. A rise of at least 2 per cent in the lower rate and a bigger increase in the top rate look inevitable. However, there are huge administrative difficulties for employers and the Revenue Commissioners in changing the rates when the tax year is already well underway. 2009 would have to be divided into two tax years with all the extra administrative work that would involve.
The likely solution is that for the remainder of this year more income tax levies, which can bring in the extra revenue at the push of a computer key, will be imposed. The budget should spell out how these levies will translate in terms of tax rates from the beginning of next year. There is an argument for applying this formula to all current levies and merging them into the tax bands.
One tax change, already clearly signalled by the Taoiseach, is that many of those on lower incomes who are now outside the tax net will be brought in. A rise in the basic 20 per cent rate would automatically trigger a reduction in the current threshold of €18,300, below which people now don’t pay tax. This would happen through the automatic readjustment of tax credits.
AT THE OTHER END of the scale, the better-off will be also be hit harder. In recent weeks Lenihan has emphasised that most income tax already comes from the middle and high income earners. The 6 per cent of income earners on €100,000 a year and over contribute 47 per cent of all tax, while the 1 per cent who earn over €200,000 pay over 20 per cent of income tax.
People in these categories will undoubtedly be asked to pay more, but there has been a clamour in recent weeks for some mechanism to tackle the super- rich and particularly the tax exiles who flaunt both their wealth and the fact that they are non-resident for tax purposes. Getting at this small group of “high net worth individuals” will be extremely difficult and could even be counter- productive, but something may be done for the optics.
A LEVEL BELOW the super-rich are the wealthy Irish residents who have been able to avoid tax through a range of shelters. In recent years, many of these mechanisms have been closed down and those that remain cover investments in private hospitals, nursing homes, creches and an area in the midlands called the Shannon corridor.
Over the past two years, significant progress has been made in finding ways to tax the rich. The 2006 budget set out a scheme to ensure that high earners paid at least 20 per cent of their income in tax through the restriction of reliefs.
A suggestion that has provoked debate is that tax relief on pension contributions should be abolished or curtailed. While it was clearly wrong that rich people were allowed to squirrel away millions through pension investment vehicles, most of the tax relief forgone by the State benefited people on middle incomes saving for their pensions.
The exchequer loses close to €3 billion a year through tax relief on pensions, but the bulk of this comes from employer contributions and the tax exemptions that apply to the operation of occupational pension funds. If tax relief were abolished, employers would have no incentive to contribute and if occupational pension funds were taxed most of them – already under severe strain – would simply collapse. The outcome would be to destroy the entire private pension system leaving everybody, apart from the wealthy, to rely on the State pension.
Another €3 billion benefit given by the State also poses a dilemma.
That is the figure in tax-exempt income paid out in child benefit. There is no rational reason for the exclusion of this income from the tax system, just as there is no rational reason for the absence of a property tax. Both issues have provoked political controversy for decades and will have to be faced up to once and for all.
They are unlikely to feature in the budget in a few weeks but should be tackled in the 2010 budget later in the year, following the report of the Commission on Taxation. Third-level fees also fit into this category. In the short term, next month’s budget will undoubtedly raise revenue through increases in excise on alcohol and cigarettes. Beer and spirits will take a significant hit for the first time in a decade, while petrol and diesel are also likely to rise significantly in the guise of a carbon tax. Tax increases will provide a substantial slice of the €4.5 billion but the other side of the coin is that a range of spending cuts will also be required.
The €20 billion social welfare bill will be scrutinised closely, but cutting benefits will be the last resort. While deflation of up to 5 per cent is expected this year, and it may be even greater in 2010, the public has still not got to grips with the concept and there would be fierce resistance to cuts.
Cuts in the National Development Plan are also inevitable and big flagship projects such as the Dublin Metro and the Western Rail corridor simply cannot be afforded. The savings that can be made this year will depend on contractual commitments.
One cut that the public would love to see is an end to the symbols of extravagance in the political system. A thorough cull of junior ministers and Oireachtas committees, real cuts in TDs’ expenses and a slimmed-down Dáil with around 120 members would set a good example of the scale of change that needs to acceptED.
One outstanding symbol of profligacy in Irish politics is the fleet of top-of-the-range cars provided for the personal use of Ministers and senior judicial figures. Even more extraordinary is that all former taoisigh and former presidents get a State car for life. It takes 77 Garda drivers, working on a week-on, week-off basis, to cater for this indulgence and a radical slimming down has long been required.
Everybody from the Opposition to the social partners have stressed that fairness must be the hallmark of the approach to the crisis, but politicians know from bitter experience that most Irish people’s idea of fairness is that somebody should be asked to pay more. That is why the politicians themselves must lead by example.
