Early Budget will have only a limited impact
Published 08/09/2008 | 11:31
When the facts changed, the great economist John Maynard Keynes changed his mind. Brian Cowen and Brian Lenihan changed the date.
Whether they have changed their minds about anything is hard to say, since we have been told very little about what was in their minds to begin with. But the facts have changed so dramatically that new thinking was clearly called for.
Last December's Irish Budget was framed on the basis that the economy would grow by 3% this year. This was not regarded as particularly optimistic at the time.
After all, growth was 6% in 2007. I freely admit that I thought the Department of Finance had been wisely cautious in its estimates of just a 3% rise in government revenues this year. Alas, the speed of the construction collapse caught most of us out. Back then, a forecast of 40,000 new houses would have been regarded as pretty pessimistic. Now, it is generally accepted that 30,000 is a more likely figure.
I was always gloomy about the impact of the global credit crisis, and still am.
That crisis has begun to add to the construction crisis in recent months. Last week’s Live Register figures again show that construction workers account for the bulk of those signing on, but that job losses in other areas are increasing, as evidenced by the rise in women on the register.
Things will eventually get better — they always do — but not yet. The Cabinet clearly felt that even another three months of figures ever further from Budget projections could not be tolerated. It is not good for confidence, not good for investment, and most certainly not good for the Government.
The Department of Finance did seem a bit too optimistic in June, when it projected a €3bn shortfall in tax revenues this year. It is difficult, and arguably dangerous, for finance ministries to make dire predictions.
But the result is that the "adjustments" to spending announced at the time — €400m this year and €1bn next year — look like a fly swat in the face of a shortfall of around €6bn this year and total Exchequer borrowing of €11bn.
Charlie McCreevy, not for the first time, may be getting some of the blame over in his old office in Merrion Street. His monthly "profiles" were intended to help control public spending. They seem to have worked, too. But they now present a monthly snapshot of the shortfall in tax revenues, providing fodder for all kinds of unhelpful headlines.
There is reported to be particular fear of the November returns, when self-assessment taxes come in. Lower profits and stock market and property losses would make a mockery of the profile of a €6bn rise in income and corporation taxes. The October Budget will start from the new realities. It will project little or no growth in the economy next year, which means little or no growth in tax revenues before any Budget changes. It will also have to project a government deficit well in excess of the EU limits of 3% of GDP.
The really key decision on October 14 is what the planned post-Budget deficit will be.
It is early days, of course, but at this stage it is hard to see how the Budget can avoid taking at least a couple of billion out of the economy next year. This is despite the clear hints that there will be some rescue packages in coming weeks and in the Budget, especially for the housing market.
No doubt Irish ministers will have noted Gordon Brown's plans for a deferment of stamp duty, although it does not seem to have done the embattled British prime minister much good. Irish first-time buyers do not pay stamp duty, so they might get some direct relief. There may be even more interest in the idea of a "shared equity" scheme, where the taxpayer buys part of the house, and can sell it to the homeowner later, when times are easier.
There may also be measures to assist business, under the guise of improving competitiveness. Big business and little business, in the competing forms of IBEC and ISME, were both suspiciously welcoming of the news. A new Budget will provide a new framework for the stalled pay talks and an early Budget means it may not be too late. But the likely spending projections will certainly leave no room for inflation-linked pay for government workers.
Make no mistake about it — any Budget stimulus for the property market, business, banks or whoever, will be paid for elsewhere in the Budget. The indications were that the emphasis will be on spending restraint rather than higher taxes — but watch out for a carbon tax "to help the environment".
These are tricky waters for a Government. It cannot rescue the Irish economy from the downturn, and it cannot rescue the property market from a major price fall. Time will produce a global recovery — but no one knows how long it will take. Cheaper property is a fact of life.
The Government can set out its medium-term parameters for the annual rise in public spending and the size of the tax burden. It can set about getting the best possible public services for that money, and encouraging efficiency in the private economy.
The Budget, whatever its date, should fit into that framework.
Spending growth can be a bit higher while the downturn lasts -— but only a bit. Borrowing can be a lot higher. Pretending that much else can be done is a snare and delusion.
Brendan Keenan writes for the Irish Independent. He can be conrtacted at firstname.lastname@example.org