After the justified hoopla from Ireland’s rugby grand slam and Bernard Dunne’s boxing heroics, all eyes will be focused on the forthcoming Budget on April 7.
Four cabinet meetings are to be held to grapple with the gaping hole in our public finances. The three previous attempts to shore up the fiscal deficit have failed.
Government expenditure for 2009 is set at €55 billion, while total revenue is forecast to be €35 billion. We have promised our Euro zone colleagues that we will keep this year’s shortfall to less than 10 per cent of GDP. This means further measures of €4.5 billion are required to curb the gap.
The Minister for Finance Brian Lenihan jr said in January that there would be no further budget this year because further tax hikes would only deflate the economy. Instead spending cut backs would be implemented on the advice of An Bord Snip.
Now all the speculation is about further tax increases. This is despite the introduction of 17 new taxes and increased revenue of more than €2 billion in the original Budget on October 14.
The Government still seems to think we can tax our way out of this recession. This is a sadly mistaken and seriously damaging view. Let’s imagine the cabinet were the board of directors of a retail shop. Last Friday’s monthly sales statistics from the CSO showed that on average overall volumes are down a record 20 per cent over the past year. Tax revenue has dropped similarly.
The last thing any shop keeper would do, faced with weak demand would be to raise prices. Instead they would cut costs, promote special offers, and manage their cash flow.
The Government is said to be considering raising the basic 20 per cent standard rate of income tax to 23 per cent and increasing the 41 per cent upper rate to 47 per cent. Each of these measures would extract an additional €1.8 billion.
This is a sadly mistaken and seriously damaging view. There is a variety of adjustments that can be made to tax credits, bands, and allowances. All of these measures will increase the tax on work.
In the 1980s we learned about the ‘tax wedge’ - that is the difference between gross pay and net pay. This cost on employment damages competitiveness. The greater it is, the more quickly unemployment will reach 500,000.
There is limited scope for extra indirect revenue in the areas of: excise duties on the ‘old reliables’ of alcohol and tobacco; a modest carbon tax on fuel; removal of some tax shelters/reliefs and stricter measures on tax exiles.
However, it is absolute folly for the Government to believe that extra direct taxation can solve our problems. Any prospect of an early economic recovery will evaporate if wrong options are pursued.
I have consistently advocated that a reduction of €7 billion in public expenditure as the only way forward. Failure to confront the downsizing of Government will reduce Ireland to a welfare state and only hasten the prospect of the International Monetary Fund running our affairs.
Capital expenditure has to be cut by €3 billion from the projected €8.2 billion this year. It is a scandal that it has taken two years to adjust the National Development Plan to an affordable, sustainable and realistic level.
Current spending, despite all the talk, has not yet been cut. We have merely stopped its growth. The costs of demand led entitlements, arising out of the recession will mean extra welfare and other expenditure in excess of €2 billion. A start has to be made on reducing our public service payroll of 370,000 staff. A reduction of five per cent in public administration numbers each year for two years could save €1,200 million.
Let’s not forget bad value for money. The latest example was revealed last week. I was shocked to see that the top 50 earners in Ireland’s third level institutions are receiving a payout of €10 million annually
These professors, university presidents, and directors are on mega salaries with the minimum of lecture hours - typically six hours per week. If the Government fails to tackle cost control, this budget will solve nothing.
The outcome of the next General Election may well pivot on the content of the April Budget. The political stakes could not be higher.
