Some Thoughts on the Budget

 
 

Brian Lenihan toned down the rhetoric considerably for his second budget speech in just a few short months. The first one last October hadn’t gone down well with its call to patriotic duty. This time everyone just wanted to get the bad news over with.

lenihanThe government’s decision to place the emphasis on tax increases rather than spending cuts probably has two origins. Firstly, previous spending cuts like medical cards and the pension levy have been hugely politically unpopular and were perceived to be inequitable. Secondly, Fianna Fáil has a great penchant for attributing blame for tough decisions to third parties. In this case, An Bórd Snip Nua isn’t ready with its report on public sector reform yet because it was not originally envisaged that it would be needed so quickly.

As Bank of Ireland pointed out during the week, consumers will now have so much money taken off them each month by the State that their spending will fall sharply. Given that lower consumer spending was one of the causes of the government’s revenue deficits in the first place, it seems like we’re making things worse. It was good that for the first time, the government genuinely spread the pain evenly across all of society with those who have more being asked to pay more. It’s also positive that international commentators, particularly in Europe, now believe we’re serious about sorting our mess out.

The big gamble of course is the National Asset Management Agency – the new “bad bank” that will buy toxic loans from Irish banks at a discount and try to recover the debts over time. This is a vital part of the budget and the government not only needs to give it a lot of thought, they must also be very honest and open about what they’re doing.

The bad loans concerned could be worth up to €90 billion but the government only wants to pay maybe half of that amount to banks. It’s a huge risk. It doesn’t help that the last time Brian Lenihan asked us to trust him – with the €400 billion bank guarantee scheme – it didn’t entirely work. If this doesn’t work we will be finished.

It also doesn’t help that we know so little, like what if these loans were for properties in Bulgaria? It’s hard to be optimistic that we’ll make a profit or even break even on this scheme. That said, the other options of setting up a “good bank” to get lending again or nationalising all banks are not panaceas either and are equally bedevilled with risks. The government are to be commended for taking bold action but they have a very onerous duty to show us they know what they’re doing.

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