The Government promised pain and a plan for recovery but Eoin Martin can only find pain in Brian Lenihan’s budget.
A week ago, Brian Lenihan had the dubious distinction of delivering his first budget amid the most unfavourable economic conditions the country has faced in a quarter of a century.
This budget marks the beginning of a new phase of Irish life that may last some time. It was the Government’s chance to influence how we start the long recovery to better times. If Lenihan was not brave enough, that recovery may take longer than necessary.
The government faced an incredibly tough task last week. They faced a deficit of €15 billion following a collapse of the public finances. On top of this, the economy stands in recession so jobs were being lost and consumer confidence was disappearing. These two problems require opposite solutions so are very difficult to solve simultaneously.
The recession however has the potential to make the public finance situation even worse.
Everyone knew and was prepared for the fact that the budget would be harsh and painful. No one could fault Minister Lenihan for failing on that front. The proof of the pudding was not in hurting everyone however. The tragedy is that much of the pain is not calculated to actually improve things in the long run.
Lenihan promised at the outset of his speech that his budget would deliver some sort of strategic vision of where we would go over the next three years. We needed that but we never really got it. The recession is likely to be long and deep and if we leave ourselves short now, we’ll have even fewer options next year.
Bad leadership got us into this mess but good leadership now matters more than ever
The main problems with the budget are threefold. Firstly, it increases a huge number of taxes across the board. The one to two per cent levy is a tax on absolutely every income earner and everyone will also pay the increased VAT. On top of this there are hospital charges, fuel tax increases, motor tax increases, not to mention the fact peoples’ real income has fallen due to the increased cost of living.
All of this is bad because people will have so little spare money in their pocket that they will drastically cut their spending. Businesses will suffer and more jobs will go. It will be harder to get out of the recession and harder still for the government to raise tax revenue next year. This move is very short sighted and really quite damaging.
The second big problem with the budget is that Minister Lenihan plans to run a budget deficit of 6.5 per cent next year instead of 5.5 per cent as many economists advised. As an alternative to raising taxes, what the government ought to have done was make more drastic cuts to current spending. As it is, 40 per cent of what we borrow will go towards current spending which doesn’t help grow the economy.
Many people have rightly complained that, where the Celtic Tiger disproportionately benefited those at the top of society, pain is being spread more evenly but will be felt more keenly by those at the bottom. A better solution would have been to reform public sector pay and pensions – something that has been long overdue.
This sector of society would be better able to bear the pain and the savings to the taxpayer would be enormous.
Regrettably, the government also chose to do the third big thing economists hoped they would not do. Minister Lenihan hacked €1.3 billion off capital expenditure such as road building and public transport. Again this shows a lack of forward planning because it makes it much harder to get out of the recession. If we’re not building, we’re stagnating. Worse, we could be emigrating and paying for the privilege.
Many students now in UCD may be hoping the recession will be over before they emerge into the jobs market. To some extent, third level students have not been hit too badly. There are modest increases in capital funding both for third level colleges and for Research and Development projects. The government would be well advised to seek better value for money than they have done heretofore.
There is also no increase in tax on beer or cider. That’s about where the good news ends. The really bad news is the massive 66 per cent increase in registration fees from €900 to €1,500. That’s even worse news for UCD students who also pay the new Student Centre levy. For prospective students, the decision not to increase the number of places in medicine is a severe disappointment.
It now seems more likely than ever that third level fees are on the way back in and that the increase in registration fees is only a stopgap measure. Students are at least insulated from some, though not all of the tax increases, but unfortunately they, like everyone else will notice that there is going to be a lot less money around over the next few years.
Despite this rather foreboding assessment of the budget, Lenihan did much that was good. Certainly his budget represented a dramatic shift in what has been presented by his two Fianna Fáil predecessors. As with Ray MacSharry’s infamous 1987 budget, the government has risked making itself very unpopular to do what it thinks is in the national interest.
The best thing the government can do now is to seek to streamline public services as much as possible so that Lenihan makes his task at least a little easier next year. Bad leadership got us into this mess but good leadership now matters more than ever. With careful management and a little luck, we hopefully will only see one or two more of these nasty new breed of budgets.