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Dude, where's my six billion? An economist's perspective on Budget 2011

Was everyone so busy denouncing what happened in the Budget, they forgot to look at what actually happened?

Ronan Lyons

SO, THERE I was, popcorn in hand, all ready to pore through the €6bn in savings in Budget 2011, like a vulture picking through the remains of some European tiger.

I listened to the Minister for Finance’s speech, keenly awating his switch from the mix of optimistic economic outlook and grandiose patriotic rhetoric to the nuts and bolts of fiscal measures. But no sooner was I sitting comfortably than the Minister was gone, and Deputy Noonan was making quips about who bullied Cowen when he was a schoolkid.

I sat back confused. Had my internet feed missed something? I listened to RTE DriveTime and grew convinced I had in fact missed the meat of the speech. Mary Wilson spoke with all the gravity of national mourning, while members of the public were furious. Some wondered how Lenihan slept at night, while large on-street protests were about to get underway, in what you could be forgiven for thinking was an eruption of popular outrage. Radio ads proclaimed newspaper analysis of the most draconian budget in the history of humankind. One blogger even wrote: “It has been said all day on television, radio and internet that our poorest are paying for the richest [sic] mistakes.”

So I decided to look through the various documents published on the Department of Finance’s website. And it seems that everyone was so busy denouncing what had happened in the Budget, they forgot to look at what it actually contained. In brief, the “non-debt” government deficit is expected to improve substantially next year, from €11.7bn in 2010 to €5.5bn. The “non-debt deficit” here means the gap between all government revenues and all voted current and capital expenditure. Indeed, the non-debt balance could be €2bn in surplus as early as 2013 by current trends.

Unfortunately, though, the national debt counts. And service on the national debt and next year’s promissory notes for the banks mean that the actual deficit will fall by a lot less, from €18bn to €14.5bn.

So why are people outraged? It seems people are outraged because their after-tax pay has been reduced by €20 on average a week. People seem to be outraged that someone on €175,000 a year will only stump up €3,500 in new taxes, taking their all-in tax rate to 43%, while someone on €15,000 will pay €400 extra, taking their all-in tax rate to 2.7%. People are outraged at a Budget that means someone on €55,000 a year (the typical public servant, for example) will sacrifice €24 a week in new taxes, while someone on the jobseekers benefit or the old-age pension will not have to make a contribution. Is this really what people who are “outraged” are actually outraged about?

The graph below shows the all-in tax rate this year and next year for a range of different salary levels, based on the assumption that people are putting aside 6% of their salary for their pension. It should hopefully be very clear from the trend from left to right that in an already very progressive system (i.e. people on lower incomes pay a lot less in percentage terms in tax), everyone is being asked to shoulder about extra two percentage points on average in tax. That means, of course, that someone on €100,000 will be hit by this budget five times as much as someone on €20,000.

All-in tax rate for various income levels, 2010 and 2011All-in tax rate for various income levels, 2010 and 2011

This is a relatively important reform of the tax system. It is one of three major reforms that will be needed over the 2010-2015 period, along with another reduction in tax credits, to bring us back into line with our eurozone peers, and the introduction of an annual property tax. (Incidentally, the removal of stamp duty without the introduction of an annual property tax is one of the odder measures of this Budget.) These two further moves, along with some gentle economic growth, could mean that public revenues reach as much as €58bn by 2015.

Nonetheless, the government had promised to bring about €6bn in savings in this Budget and tax measures will deliver only about €2.5bn. Where will the rest come from? Well, here the outgoing government has – perhaps understandably – relied on some low-hanging fruit. Capital spending was always going to fall from peak levels of €9bn in 2008 to about €4bn by 2014 or so, to bring us back in line with our OECD partners. This budget takes us from €6.3bn planned for 2010 to €4.7bn planned for 2011. This is a one-off easy €1.5bn or so to find and no future government will have this luxury. Ditto the approximately €600m the Government has found through “asset disposal”, selling mobile phone licenses and various other one-offs.

This means that we are up to €4.5bn of the €6bn adjustment this year, without looking at the single biggest line in the Government’s finances, the €55bn in current public expenditure. This is projected to fall to €53bn next year, but it is a relatively small fall in spending in the grand scheme of things. This is due almost entirely to the government tying its hands at the start of the year through the Croke Park deal. The bald truth is that current expenditure by the government will need to fall to about €46bn a year by 2014/2015 if the Irish government is to reach its targets.

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Watching the reaction on Twitter, I feel I might be the only one, but I am actually more optimistic now than two days ago about the prospects of Ireland getting its deficit back under control by 2015. That is not an excuse for complacency, however. In reality, there are four main headings to current expenditure: social welfare, health, education, and “the rest”. Social welfare is – by and large – out of the hands of any government and one can only hope that the bill falls steadily by perhaps 2% a year, to reach €19bn. Therefore, it will take proactive 5% year-on-year reductions in health, in education and in other current expenditure, if Ireland is to reach its targets. In that sense, every Budget until 2014 will be as tough as this one, when it comes to spending.

The easiest answer, when faced with a difficult task, is to give up and despair. In this, the media must share some culpability. After all, advertisers have to record their ads about “draconian budgets” (and professional protestors have to book their marching slots) well in advance. The blog I quoted earlier went on to say about Budget 2011:

I feel guilty, I feel fear for the future of this joke we call Ireland, the children of the future will be left with a billion euros bill, they will be left with sheer tortured life’s. Many of our elderly and young will taste death thanks to our politicians.

There is, however, no way you can spin the numbers of Budget 2011 so that it looks like the poor, young and old, are paying for the rich. As I mentioned last week, for every euro being pumped into the banks, two euro are being borrowed for the black hole of public expenditure. The spending cuts and tax increases Ireland is enduring at the moment are a natural reaction to Ireland’s over-spending and under-taxing during the 2000s, not the bank bailout.

While it may make terrible headlines, yesterday’s Budget was not some draconian horror show visited on the Irish public, a symbol of our lost sovereignty. It was instead a relatively important step back towards fiscal sovereignty. It is up to those who can see this to make sure reasoned debate about restoring Ireland’s public finances into balance replaces blind rage.

Read more like this at Ronan Lyons' blog>

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