Where do we go from here?

It will take some time for people to digest the full consequences of yesterday’s budget. And once they’ve got their heads around that they have to remember that there are at least 2/3 budgets more like this to come.

The big headlines are the tax hikes and the bad bank proposals. But there are other measures in here that will cause problems, and there will be more that will leak out over the coming week such as the doubling of the price of a driving test from €38 to €75 apparent to cover the cost of a new computer system to allow you to book the time and preferred location of your test.

Straight off the tax hikes are massive there is simply no getting away from it. The levies apply to more of your income than a tax rate increase would and so 1% of the levy increase is more than a 1% increase in the tax rate. With the income levy for someone on 20K being 2% and also the health levy doubling to 4% means a minimum increase in the tax rate of 4% for someone on quite a modest income. And that is the minimum increase! It will take some time for the impact of those increases to be felt by people, but feel them they will and they will then act accordingly.As people will have less to spend so will discretionary items like eating out and buying small extras and such like will be the first to be hit leading to still more unemployment in those sectors. You can expect small businesses up and down the country to suffer as the year goes on. I had thought that the worst of the retail lay-offs might have been gotten out of the way in the spring of this year as those that had not made enough in the sales to carry them through decided to shut up shop. Now the bleed will continue throughout the year. And it will be those small cuts that won’t get the headlines of a Dell or Waterford Crystal will hurt in every small town and village up and down the country. I’d not be surprised to see mass cancellations of family summer holidays abroad if people can at all recover their money from the travel agents.

We’re seen almost nothing of substance looked at in this budget in the context of reducing our cost base for government that salaries in particular as you go up the food chain in the public sector are going to be benchmarked against those same but now declining salaries in the private sector. Not just judges but department secretaries, heads of agencies and various quangos. How much north of a six figure salary do these folks need and are those salaries competitive in the real sense of the word? After all what job is going to pay them the same in the private sector?

Of course the minute someone says we need to reduce public spending the example of the hard pressed Garda or nurse or teacher is wheeled out to defend the entire public sector bill. Well, it might surprise people but not everyone in the public sector is a teacher or Garda or nurse. There are plenty of people working in offices doing administration work that could and should have been long ago reduced in numbers. We merged all the health boards into the HSE, and not one person lost their job as a result. In the north the merger of boards in the health area resulted in circa 1,500 jobs being eliminated, 1,500 from a considerably milder restructuring than the HSE involved and in a small about a 1/3 of the size. That would be a 4,500 reduction right there. FG had proposed only last week that a redundancy program in the public service should look to reduce head count by 15,000. Of course FF has looked at this idea of controlling numbers in the public sector before, they have committed in other budgets under McCreevey and Cowen to freeze numbers and even to have reductions but still the numbers grew.

And we must ask why wasn’t the tax base widened in the good times when we could have afforded it. A property related tax which could be offset against income tax and introduced 6/7 years ago might have reduced the size of the bubble while also getting people used to the idea of a broader tax base. But nope those choices were funked and now when it is most difficult we’re considering these changes.

There are positive elements to the budget the ideas on IP look interesting and the stamp-duty trade-in seems intriguing though it is noteworthy that the summary of measures document refers to this as not costing us anything when surely the postponement of the payment of the duty must end up costing us something in this calendar year even if the money might come back to us later. The commitment to 2.5% of GDP for R&D is good too but commitments made do not so easily translate into commitments kept with this government.

I’m going to avoid the “killing the patient” analogy especially given the fact that the HSE probably have it under copyright pending. What we are doing is playing catch up and not very well at that. This is a government that missed the right time to make adjustments back when the signs were there that choppy waters lay ahead. Such adjustments could have prevented the rapidly increased deficit in the public finances. It was only two years ago in the lead up to the last election that FF and in particular the then minister for Finance, Brian Cowen refused to consider any changes in stamp duty, only to then U-turn in the middle of the campaign and who also didn’t act to control current public spending in either his 2006 and 2007 budgets on either side of the election. Had he acted prudently then the gap would not nearly be as high as it is now.

And remember these levies will have to be translated into new tax rates come December, unless FF are committed to the idea that somehow this doesn’t represent an increase in taxes. So how the bald statement that we now have tax rates of a 25% and 46% and 53% tax rates will impact on the Christmas shopping is anyone’s guess. I would expect to see 4 tax rates including a new one of say 5/10% on those on the minimum wage. That seems the direction that Lenihan is intent on going.

While big items were the tax increases by way of the levies and the developer bail out, it is often the one-liners that can prove most problematic. Take the extra one year of free pre-primary education for example. Where are the staff and buildings going to come to do this? I was a wee lad back when a promise to reduce the school going eligibility from 5 to 4 years was tried and it was complete chaos. And it’s not like a 3 year old is simply half a 6 year old. They have very different needs and would require very different skills to the teaching their older siblings. And let’s remember that the school building has been heavily reduced and is considerably behind where it was intended to be a number of years ago. Where will these toddlers be taught? Who will teach them?

  • Congal Claen

    Whilst the measures are tough, tougher measures are probably needed. The house price inflation in the Republic, and associated debt, was completley out of touch with reality.

    Meanwhile Gordon Clown is still in the casino with his last credit card approaching it’s limit. Hoping to gamble our way back to the norm that was a situation were only those in the top 1% salary bracket could buy an average priced house – using normal bank lending practices.

    I wonder will Clown be offering up his own luxurious pension provision a la Fred Goodwin. Afterall, Fred only destroyed one bank…

  • TonyB

    It’s all a tad like shuffling the deckchairs on the titanic. It’s not that change is needed, but the dimensions of change are wrong. The Fianna Fáil that created so much wealth and prosperity is now proven to have been in league with the devil, and the price must be paid. There must be redundancies in the public sector; there must be a clawback of political spending – like spending prioritised in marginal constituencies – an official termination of the decentralisation programme, and appropriate taxation on capital gains to curb the potential for further speculative growth. Paddy Power has 2009 as 1/2 favourite in the running for the year of the next general election. Narrow and all as those odds might be, those of 5/2 for 2010 look distinctly churlish.

  • Scaramoosh

    For an economy to recover, there needs to be a way of stimulating demand……..it is difficult to see where that way is going to come from.

    I have just heard of a delivery service that is going to allow people to source their shopping online from the North and have it delivered in the South on the same day. Hard to see how anyone can compete with this?

  • An fhirinne gharbh

    I still haven’t heard a detailed discussion about the Assets Agency (although a really expert discussion might be lost on me). It’s not re-assuring to hear Brian Lenihan admit that he hasn’t got a clue as to the value of bad debts the Agency will take on.

    If they’re seriously worried about cross border shopping they really need to lower VAT.

  • Dan Sullivan

    The worst aspect of the NAMA (National Assets Management Agency) is that the state has started the process by saying it is going to buy these loans and giving the book value of what it plans to buy. It should have been more circumspect about the scope of what it was going to by before opening negotiations. By telling the banks that it is intent on buying X amount it has given an advantage to the banks in the negotiations.

    This in part is what FG had come out in favour of the good banks idea instead of the creation of bad bank. In essence the FG proposals was spin out good banks from the performing components of the banks and to let the international subordinate bond holders take the hit first and for the state to then step in and picks up the remaining pieces. Instead the state is stepping in and taking the hit while letting those so called canny risk taking investors off. Lenihan suggested last night on Prime Time that to go with the good banks idea would be for Ireland to default on loans, huh? Ireland didn’t lend that money to property developers, the banks did, and bond holders invested in the banks. The state didn’t borrow from those bond holders, the banks did! I have to wonder to what extent Lenihan is a prisoner of his advisers as he doesn’t appear to have a feel for this area at all. Being bright isn’t enough.

  • TonyB

    AFG – Brian Lenihan said on Pat Kenny this morning that even though the increase on VAT to 21.5% was a mistake, he didn’t reverse it because he simply didn’t want to give up any revenue. He also made the argument that apart from the North, the bulk of the UK economy saw no benefit, and the receipts were down as a result. So he would not repeat that mistake, that was the argument. I guess it seems logical, although simplistic. In a more general sense though I’m with the chorusline on absence of stimulus. A lady on the Pat Kenny show right at the end lambasted the Minister saying that while he is trying to build a stable economy, she doesn’t have a stable economy, and her mother who had lost her job doesn’t have a stable economy. Spoke very well, actually.

  • TonyB

    Dan, I’m no expert, but I saw Lenihan on Prime Time and I thought that because the government had guaranteed the loans in Irish banks back in October, effectively that meant that the country was supporting the bondholders, and not the banks themselves. Therefore to create ‘good banks’ would not remove the liability for the toxic debt that the state retained.

  • Mack

    TonyB – I think that is the case, but only for the next 18 months.

    Could the banks survive that short period if the guarantee isn’t extended? Could the government make up any funding shortfall until then?

    In 18 months time let the banks fail, have the state guarantee depositers only. The bank failure will wipe out the shareholders, and the bank’s own creditors, after that the banks assets can be auctioned off and we start over with a clean slate.

  • Jo

    Its an easy substituion for actually thinking about the ecnomy to suggest the tired old “sack the civil servants” mantra.

    “In the north the merger of boards in the health area resulted in circa 1,500 jobs being eliminated,”

    Exterminated, perhaps?

    “That would be a 4,500 reduction right there…”

    4500 families without a wage earner…hooray?

    What is the average public sector wage in Ireland? £16000? Throwing thousands out of work anywhere else would be greeted with horror- but because they “are just” public sector workers, this is something we should applaud…?

    Get lost.

  • Mack

    Jo – the average public sector wage is €50,000 (more than 3 times your guess!), 30% higher than in the productive sector (that actually generates the wealth used to pay the wages). Irish wages in general are the second highest in the Eurozone (after Luxembourg) and among the highest anywhere in the world.

    http://ronanlyons.wordpress.com/2009/02/04/public-sector-pay-in-ireland-the-e50000-question-its-not-that-difficult/

    Money has to be generated before it is spent, especially within a currency union like the Euro. We can’t just say we’ll pay everybody 70,000 units and not tell them what that means (like the UK can by devaluing Sterling) – the people who decide the unit value reside in Brussels not Dublin.

    We borrowed too much in the recent past – the Irish money supply was expanding at 35% per year! Sucking borrowed European money into the economy that was spent and taxed and redistributed as higher public sector wages. Once the party (borrowing) stopped, the private sector industries responsible (banking, construction, real estate) deflated pretty rapidly, unfortunately we have a public sector still dependent on money coming in that simply doesn’t exist anymore!

    What should we do? Live in cloud cuckoo land and have the government continue borrow that money until we all go bankrupt? With the public and private economies bankrupt we’d be completely, utterly, screwed – withdrawing from the Euro to become the Zimbabwe of the north…

  • TonyB

    We’re correcting the tax reductions of recent years with levies, but how do we correct public sector benchmarking? The pension levy only goes so far. I am acutely aware of how unpalatable redundancies are whether in the public or the private sector, but the reality is that the government persisted to benchmark against a bubble in the private economy to minimise the threat of industrial action, and now we have an overpaid public sector supporting a shrinking economy – and therefore with less of a service base to support. It’s neither social or economic, it’s just math.

  • Jo, let’s just imagine there was a private sector company called DoinFeckAll and you had a subscription to it for say €150 per month. Would you keep up the subscription even if you realised that you were getting nothing in return? Or would you keep it up just because it gave someone a job?