OPINION:There have been calls that the public should be spared pain, which should instead be visited on those who caused the crisis. But no feasible reduction of expenditure can disregard social welfare, health and education, writes COLM McCARTHY
THE MOST important component in the special group’s report is in the first volume. It is an attempt to explain the background to the public finance crisis which led the Government to conclude that a reduction in spending is necessary.
Briefly, the annual deficit will reach close to 11 per cent of our national output this year. This enormous sum must be borrowed in the international capital markets. In the absence of corrective action, the deficit would rise next year as interest costs mount and as more citizens join the large numbers reliant on social transfers.
The Minister for Finance spelt out, at the time of the supplementary budget in April, a programme designed to stabilise the deficit and then to reduce it to 3 per cent of national output by 2013.
This can be achieved only through reductions in current and capital spending, through increases in tax revenues, or some combination of these measures. The alternative is to try to borrow huge amounts indefinitely, risking our access to the capital markets and censure from the European Commission.
The Minister’s programme has been approved by the commission even though it involves a relaxation of the normal deficit-correction rules in the euro zone. We have also received about €130 billion in liquidity support to our shattered financial system from the European Central Bank in Frankfurt. Both of these developments are relevant to consideration of the second Lisbon Treaty referendum in October.
The fiscal retrenchment required is painful, especially so against the background of a weak international economy, the exchange rate appreciation against sterling, and the consequences of the near-collapse of the Irish banking system. Anger at bankers, developers, politicians and others deemed responsible is inevitable.
There have been calls that the public at large should be spared the pain, which should be visited instead on those who caused the crisis. But insolvent banks and bust developers are improbable sources of extra tax revenue, and a full year’s pay bill for every politician in the country is less than a single day’s borrowing at current levels.
Anger is not a policy.
The special group’s report is focused almost entirely on current exchequer spending, the bulk of which is accounted for by social welfare, health and education. There is no feasible programme of expenditure reductions on the scale required which excludes these three areas.
The responses to the report have included pleas for blanket exemption for major expenditure programmes and assertions that certain areas were targeted. The group was required under its terms of reference to consider every area of spending and we did so.
We did not target anyone – or if you wish, we targeted everyone, since there can be no exemptions from scrutiny given the scale of spending reduction required.
Some critics have asked why we did not recommend cuts to the capital programme, or further cuts to public service pay.
We were not asked to review capital spending, although we stretched our terms of reference a little for reasons explained in the report.
There is a separate review of the capital programme under way in the Department of Finance. Nor were we asked to consider pay levels in the public service.
The Government has already initiated a pay review for top-level public officials, whose terms of reference do not preclude consideration of reductions. The work of this review is expected to conclude in September, and the Special Group suggested a similar exercise be conducted for all other grades in the public service.
On Tuesday evening in Glenties, Co Donegal, Labour Party leader Eamon Gilmore, George Lee of Fine Gael and Minister for Finance Brian Lenihan attracted an attendance of 900 people to a debate on economic policy. The audience had to pay €5 a head to get in, many had to stand, and all stayed until 11pm.
The general public are not just convinced about the extent of the crisis, they appear to me to be fully engaged in debating solutions, a process which will proceed through the autumn.
The Oireachtas Committee on Finance, which is chaired by Michael Ahern TD, will begin consideration of the detailed measures contained in the special group’s report early in September, and is seeking submissions from representative bodies and from the general public.
The Department of Finance expects to release the draft Nama legislation on its website by the end of next week. A revised version is then planned by the end of August in the light of reactions, and a Bill will be ready for consideration by Dáil Éireann in September.
The Commission on Taxation’s report will be submitted to the Minister for Finance in mid-August and considered by the Government early in September.
It seems to me from the reaction to date that the public appetite for expenditure cuts would be enhanced if there were further reductions in salaries for those in top public positions: this is within the remit of the review group due to report in September.
There have been calls also for tax increases on the highest income earners in all sectors, sometimes accompanied by exaggerated estimates of what such measures might yield. Taxation options will no doubt be considered in the run-up to the December budget, in the context of realistic estimates of the yield from rate increases.
There are strands in the Irish commentariat which resort instantly to hyperbole or bad-mannered personal abuse in the discussion of national policy questions, and there have been numerous examples of both in the reaction to the special group’s report.
Irish agriculture had a bad year in 2008 and is having another one in 2009. The Special Group proposed significant cuts in several agriculture programmes, conscious that the sector is not doing well, but conscious also that cuts must be contemplated across the board.
This week’s edition of the Farmers’ Journal is naturally critical, but contains an accurate summary of the measures as they affect farming and a measured, temperate editorial response.
Some commentators in more highfalutin newspapers could learn a little about their craft for just €2.40, at a newsagent near you.
Colm McCarthy is an economist with University College Dublin. He was chairman of the special group, also known as “An Bord Snip Nua”