The budget on Tuesday was one of the most interesting in years. The range of tax increases, particularly the income levy of one per cent for income up to €100,000 and two per cent on income over €100,000 received the most comment.
However, it is the borrowing requirement and its correlation with public spending that is most interesting. The budget deficit for 2008 will probably be in the region of €8 billion. The estimated budget deficit for 2009 is €12 billion.
This is based on the assumption that Gross National Product (“GNP” ) will only contract by one per cent in 2009. If the contraction is higher than that then the budget deficit will be much higher. The general consensus is that a one per cent contraction in GNP is an optimistic figure so borrowing could be higher than €12 billion next year.
In 2010 and 2011, if the world economy does not improve dramatically and there is a strong likelihood that it won’t, borrowing in those years will also be in the order of €12 billion unless further significant tax increases and slashes in public spending take place.
If the government have to capitalise the banks by injecting capital for equity as many other countries have had to do, an additional €20 billion to €30 billion could well be required.
Therefore if everything went against us, the national debt could have increased by between €64 to €74 billion by the end of 2011 which is a staggering figure. To put it in context, if the government introduced a further five per cent income levy in 2009 that would generate €5 billion per annum, which by the end of 2011, would equate to €15 billion.
The interest cost on the full additional borrowing alone would be the region of €3.5 to €4.5 billion per annum. A useful analogy would be to compare the above to an average household. If the income coming in to the household was bolstered by significant once off bonuses (the equivalent of the VAT and other taxes of the housing boom ) then the householders have the option of matching spending with that bolstered income or taking a conservative view and holding spending back to what they perceive as their maintainable income.
The government decided to spend what was coming in. The household bonus has now disappeared. The householders now have the decision to reel back spending or borrow to maintain the lifestyle that they have become accustomed to.
The government have decide to borrow to maintain the lifestyle i.e. the government services that we are used to. The government is taking a major gamble. They are assuming that in 2009 the contraction will be one per cent, an improvement of .75 per cent over this year’s result, and that things will further improve in 2010 and 2011.
They are also assuming that they will not need to capitalise the banks in the near future. If they are wrong we will be paying for their mistake for many years to come with higher taxes and reduced public services.
