8 Dec 2010

Ireland budget: a rhetorical exercise?

The spending cuts in Ireland outlined by Finance Minister Brian Lenihan were “not a normal budget, but the environment in which it was delivered is not normal”, writes economist Dr Peter Stafford.

Irish Finance Minister Brian Lenihan. (Reuters)

Last week, the Irish government unveiled its four year plan to restore order to the rapidly deteriorating economy and banking sector. The report, entitled The National Recovery Plan 2011 – 2014, outlined that two-thirds of the required budgetary adjustment over the next four years should be through expenditure reductions and one third should be raised by taxation. The report was endorsed by the main Opposition parties, the EU and the IMF, and contained the suite of measures which under normal circumstances would be announced in a budget – a cut to the minimum wage, increases in the income tax thresholds, the introduction of an annual property tax, and so on.

The purpose of Tuesday’s Budget was to give detail of the reforms which will be taken in the next year. Overall, Ireland needs to make a €15billion correction in its finances to bring income and expenditure back into equilibrium. Of this €15billion, some €6billion of reform will be frontloaded into 2011. Because of the release of the National Recovery Plan last week, there was very little new for the minister to say. It is unlikely that the present government will be in power once the Budgetary measures have gone through their parliamentary process, so Tuesday’s Budget statement was as much a rhetorical exercise in party politics as a blueprint for reform.

This was not a normal budget, but the environment in which it was delivered is not normal.

Brian Lenihan gave his usual bravura performance, noting that Ireland is now a country emerging from recession. He quoted endless statistics predicting healthy levels of economic growth once the fiscal correction had been made. The minister noted a drop-off in redundancies and a healthy export market. Indeed, if Department of Finance projections are correct, by 2014, Ireland could be enjoying 2.75 per cent GDP growth. Already, the exchequer deficit between expenditure and income is narrowing, and the cost of servicing the national debt is being brought under control.

The statement, while unusual in that it had been upstaged by last week’s report, did contain some semblance of normality. Petrol and diesel taxes have gone up. Social welfare costs will be scaled back to 2007 levels. Child benefit will be reduced by €10 per week. New workforce activation measures will be put in place. A top limit of €250,000 will be placed on the salaries of public sector workers (including the next President of Ireland). The Taoiseach will have his pay cut by €14,000, and public sector pensions will be scaled back.

Income tax will be increased, to bring more people into the basic rate and, coinciding with the introduction of an annual property tax, stamp duty on house sales will be reduced to 1 per cent for houses below €1m.

Commentators and the media were expecting the worst. Having seen George Osborne take radical steps in the UK, many were bracing themselves for an Irish version of “slash and burn”. As it happened, while the impact of the Budget may be uncomfortable for many, the mood amongst politicians and party hacks in Leinster House last night was of calm acceptance that while the fiscal correction will have an electoral consequence, what was done yesterday was proportionate and necessary, given the dire economic backdrop.

This was not a normal budget, but the environment in which it was delivered is not normal. The measures announced were supposed to be the practical next-steps in implementing the national recovery plan. However, the people who will oversee the implementation of the announcement are currently sitting on the Opposition benches.