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?

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