Finance meetings will keep Ministers busy over summer as hunt for €3bn in cuts begins, writes NOEL WHELAN
IT IS a year, almost to the day, since Colm McCarthy’s “An Bord Snip Nua” report was published.
The publication of the McCarthy report and the ensuing coverage ignited an intense public consideration of last year’s budgetary choices about two months earlier than might otherwise have been the case. By last July a broad – although not universal – consensus had emerged among commentators, economists and politicians supportive of the Government’s intention to reduce the public deficit by €4 billion. There then followed, however, months of public argument about what form those cuts would take. Few thought last July that bald reductions in public sector pay and welfare rates should or could be imposed. But by December dramatic changes had been flagged, argued for and implemented with surprisingly little resistance.
This year the pre-budget debate has once again begun early. Already, a similar consensus has emerged around the need for a further €3 billion in cuts. Again, the debate about how that further reduction is to be achieved will rage across the summer and autumn months.
The Government’s room for manoeuvre is even narrower than it was this time last year. The commitment in the Croke Park agreement not to reduce individual public sector pay or public sector pensions means that, even if he felt it wise to do so, the Minister for Finance cannot return to that source for savings. Ultimately, reductions in the numbers on the Government payroll and savings delivered by public sector reform will reduce the pay and pensions bill. In the short term, however, it will not do so on anything approaching the scale delivered last year by cuts in pay rates.
Having cut welfare rates last year for all except old-age pensioners, it would be extraordinarily difficult and most would say unfair to impose further cuts on such recipients this year, especially since deflation is less apparent.
A cut in the old-age pension itself is extremely unlikely, but headlines suggesting such cuts may actually assist the Government in its political task, because they emphasise the difficult choices facing the government.
Yet again this year, politicians and public service decision-makers are being subjected to a range of conflicting advice from economists and other specialists in the public debate.
Some economists argue against any further income tax increases, and contend that a property tax is the most efficient, effective or equitable means of broadening the tax base. They even deride those politicians who don’t agree with them as lacking courage or failing to show leadership.
However, others, including other economists, argue that a property or services tax would merely be a further surcharge on those already carrying most of the increased income tax burden.
Inevitably there would be demands for the elderly, social welfare recipients, those in local authority or social housing and probably the lower paid to be exempt from such a property/services charge.
Even if ultimately such a tax was shaped by the size and value of homes and/or the level of service usage, it is the large base of working and middle-class taxpayers who would have to find money from their current incomes to pay it. It is difficult to see how one can argue that taking additional money from these households through income tax would be a bad idea, but requiring them to pay a property tax from their after-tax income is a good idea.
Some argue, as this paper’s economics editor did on Thursday, that consumption taxes could and should be increased in December. Those of this view are dismissive of concerns that this would be ineffective because of the open nature of our economy. Other economic commentators contend that we have maxed-out on the return from excise duties and Vat, and that any increase in these would not only endanger the recovery of consumer spending but trigger an increase in cross-Border or illicit shopping, particularly in alcohol and cigarettes.
It seems that Government attention is turning to a widening of the income tax base itself by seeking some contribution from those currently earning, but exempt from tax. While the concept of a minimum contribution to the tax burden from all income earners was flagged in last year’s budget speech, there has been very little public engagement on the issue since. Final decisions on whether or how the Government is to do this will have to be made soon if it is to have sufficient time to explain and justify these changes to the electorate.
The Government has already flagged that it proposes to achieve €1 billion in cuts in the capital budget. Some commentators, along with both Ibec and Ictu, have argued that expenditure on large-scale infrastructure projects needs to be maintained. Now, however, the ESRI and others argue that such expenditure is not the appropriate stimulus.
The need to find another €1 billion in cuts from current expenditure means that the estimates process has begun even earlier than last year, with initial bilaterals having already been held between Finance and the main spending departments. Ministers have been asked to revisit the menu of cuts identified in the McCarthy report and justify their non-implementation, or advance alternative proposals for savings. In its scheduled or maybe even special meetings between now and the August break, the Cabinet may get to focus almost exclusively on broad budgetary strategy.
Interestingly, the closure of the Dáil for the summer has coincided with an improvement in the quality of public debate about the budgetary challenges. It is a very good thing that the wider debate about the budget has already commenced. Our politics had a relatively “un-silly” summer season last year. There is again much of substance on which to deliberate calmly over the quieter summer months.
The Government’s room for manoeuvre is even narrower than it was this time last year.