Recent proposals by Ministers to exclusively cut spending instead of raising taxes suggest a remarkable policy shift, writes GARRET FITZGERALD
WITH THE Lisbon Treaty now behind us – hopefully successfully! – and Nama temporarily in suspense while the Greens make up their minds over whether they are for it or against it, this is an appropriate moment at which to turn back to the third crucial issue that must be resolved within the next nine or 10 weeks.
That issue is the fiscal programme in respect of which the Government earlier this year committed itself to the European Commission – and thus to the European Central Bank, which so far this year has provided €110 billion of liquidity to Ireland. And, of course, it is also upon the basis of this Government commitment that international financial institutions have thus far been willing to keep our State solvent by lending it an average of €1 billion every 2½ weeks.
However, there have been recent proposals by Ministers to totally reverse the balance between tax increases and spending cuts for 2010 fiscal adjustments.
Thus, Mary Hanafin told RTÉ Radio One's Morning Irelandprogramme last Wednesday that the 2010 spending cuts are now to be €4 billion, which (although she was careful not to mention this fact) would involve a virtual trebling of the previously announced figure of €1.5 billion spending cuts.
A rationale for this proposed dramatic policy shift can be deduced from Brian Lenihan’s statement (in an interview on Today FM radio’s The Last Word programme on August 28th): “There’ll be no more tax hikes.” This was subsequently confirmed by his statement of September 28th to international investors that “the balance of the corrective action in the next budget will have to come from the expenditure side”.
But that flatly contradicts the provisions of the fiscal adjustment programme announced by the Government last April. For, as can be seen from the official data in my table, no less than €2.5 billion, or five-eighths, of the fiscal adjustment then announced was to come from tax increases.
Neither Minister mentioned the fact that, in combination, these two adjustments to the April fiscal programme would involve a net transfer of no less than €2.5 billion from the tax increase side to the spending cuts side of the December budget. A result of this omission has been that, so far as I am aware, none of our newspapers, radio and TV have adverted to, let alone highlighted, this proposal for a dramatic shift in fiscal policy. Nor have the Opposition parties had anything to say about this development.
Yet such a massive switch in the balance of fiscal policy would represent the most sudden, and the largest, economic policy swing that I can recall ever taking place in Irish politics.
In my post-Budget comment here last April, I pointed out that our current financial shortfall is not in fact due to 2009 expenditure running beyond the planned level set out in the 2007 budget document. The budgetary crisis has been solely due to the fact that revenue has fallen €15 billion short of the planned level for this year as set out there. That is what has left our State grossly under-funded by comparison with all our euro-zone partners – as well as the UK.
And that is precisely why the programme announced in April, while providing for spending cuts of €6.7 billion up to and including 2011 – planned for more than €10 billion of tax increases.
What these two Ministers are now proposing would totally reverse the relationship between the two sides of the proposed budget, leaving us inevitably with miserably inadequate health and education services, which would severely inhibit our future social and economic development.
Why is such a fundamental shift in public policy being proposed? It is difficult to avoid the conclusion that since the summer break some Ministers have panicked about public reactions to their planned tax increases.
When, you may well ask, did the Government decide to make such a dramatic policy shift? It is my understanding that the Government has in fact made no such decision. Despite the Minister for Finance’s personal involvement in this campaign to shift the 2010 fiscal adjustment exclusively to expenditure cuts, the Government’s more balanced programme of last April in fact remains in force – and no such change has even been discussed by the Cabinet.
Thus, what we have been witnessing may only be a clumsy – and I would feel politically quite dangerous – attempt by some Fianna Fáil Ministers to pre-empt the Greens’ current effort to re-negotiate their participation in government.
What has been surprising is the involvement in all of this of the Minister for Finance – whose handling of his portfolio has hitherto been impressive. Given the potential instability of the Coalition, and in the absence of any Government discussion of, let alone agreement on, such a fundamental policy change, it has surely been unwise for him to announce such a shift in the balance of next December’s fiscal adjustment.
There may, of course, exist a case for some kind of shift in the balance of the 2010 fiscal adjustment towards more spending cuts and fewer tax increases – but certainly not on the huge scale that is now being put forward. For what is now proposed would leave the whole of the burden of adjustment to be borne by truly massive spending cuts, and would fail to restore tax revenue to a level capable of sustaining a modern developed economy.
And it would spare the better-off further tax increases – at the cost of transferring the pain to those who are most dependent upon our public and social services.
Fiscal programme 2010
Tax increases carried over, 2009 €1.75bn
Further 2010 tax increases €2.50bn
Expenditure cuts carried over €0.60bn
Further 2010 spending cuts €1.50bn
TOTAL €6.35bn