John Bruton

Opinions & Ideas

Category: Ireland’s Budget

IRELAND’S BUDGET….KEEPING AUSTERITY IN PROPORTION

Ireland faces another difficult budget in the next week or so.  Irish people have seen the value of their assets fall, and most of them have seen a fall in their incomes through a combination of  wage reductions and tax increases.

But it is important to keep “austerity” in proportion
  • Real GNP is back now to the  level it was at in 2004, but it is still  60% higher than it  was in 1997 (in 2007 it was 90% higher than it  was in  1997)
  • Household net worth (which takes account of borrowings) is back to the  level it was in  2003 
  • Consumer spending in the first quarter of 2012 was  back  to the  level it  was  in 2006, but  is  still 80% higher than it was in 1997 (Admittedly there are more people in the country than there were in 1997, do  consumer spending per person is not 80% up on  1997)
  • Ireland has regained competitiveness. Its real exchange rate vis a  vis the rest of the euro zone has recovered from the worst excesses of the bubble economy and is now back to the  level t was at in  2000, but Ireland is still  a good deal less competitive than it was in 1997.
So, overall, the spending power of Irish people is  still there, but it is differently distributed than it was at the height of the boom, and than it was back in  1997, when  the country had a solidly based economy, that had not been  pumped up artificially by borrowing. Some of the changes that will be made in the budget  will be ones that we would have had to make anyway, evn if our creditors were not demanding them, because of the eventual  ageing of  our society and the extra costs that will bring.

IRELAND’S BUDGET……A BETTER WAY TO PLAN THE NATIONS’ FINANCES

Work is now intensifying on the preparation of the budget for 2013.

It is part of a process of reducing the gap between revenue and spending (including spending on interest payments) to   3% of GDP, in accordance with EU rules and the Maastricht Treaty which the Irish people approved in 1992. This reducing of the gap is called ”fiscal consolidation”.

In 2009, the fiscal consolidation was 7.6 billion euros, 
in 2010, 6.4 billion,
in 2011, 6.1 billion, and
in 2012, 3.8 billion.

 
In the budget now under preparation, a consolidation of a further 3.5 billion has to be made for 2013.
For 2014, a consolidation of an extra 3.1 billion euros must be made.
And , finally, to  get on target, yet another consolidation of 2 billion  must be made for 2015.
While these figures show that a consolidation of 22 billion has already been made, and the remaining consolidation is “only” 6.6 billion, the truth is that the further one goes along a road like this, the harder it gets.
The “easy” tax increases or spending reductions are made in the earlier rounds, and the much harder ones tend to get postponed to the later stages. We are now getting to the hard part.

I think there is a strong argument for announcing, upfront next month, a full programme of all the  cuts and tax increases  for all three remaining  years- 2013,2014 and 2015. We should have a three year budget, rather than a one year one.
Doing the job one year at a time adds to the uncertainty, and does not reduce the pain. It also prevents people seeing what the real alternatives are.
The last time Ireland faced a similar crisis , in 1981, I was the Minister for Finance. Within 4 weeks of taking office I introduced and passed an emergency budget in July 1981.
I then prepared a White Paper on how the country could avoid getting into the same sort of mess again.
It  was entitled “A Better Way to Plan the Nation’s Finances”. Unfortunately, because the Government had no Dail majority, and fell on the proposed budget for 1982, I did not get a chance to implement the reforms I had proposed in the White Paper.
But the reforms proposed in that paper are just as relevant to today’s problem, as they were to those of the early 1980’s.

In “A Better Way to Plan the Nations Finances,  I suggested a new timetable for budget preparation for the following year which would see the proposed tax and spending measures published  in the previous October, allowing 2-3 months for debate, and even changes, before the measures took effect.
The 1981 White paper suggested that the budget be  accompanied by estimates of the tax changes and spending  changes that would be needed to stay on track for the subsequent  two years….a sort of three year budget. That would have taken a lot of the secrecy out of budget preparation, and given everybody a greater sense of involvement with the choices that had to be made, and a sense of   how difficult they were.
By having the debates ahead of time, the possibility would be opened up of making amendments in a non dramatic way.  It would not be so much a question of dramatic “climb downs” and “U turns”, but rather of listening and learning from rational debate.
And the  1981 White Paper suggested a  change to Dail procedure to allow opposition parties to make detailed  proposals for amendments to spending plans, so long as they put forward equally detailed alternative ways of bridging the gap.
It also proposed an independent Public Expenditure Commissioner who would analyse the choices for the Dail.

It seems to me that it would be very helpful today if information was published, on a regular basis, by someone like a Public Expenditure Commissioner, comparing different types of public spending  and tax breaks here, with those applying in other  jurisdictions, like Northern Ireland, Germany or Spain.
For example, we could usefully know how things like

 medical consultant’s salaries,
 teacher’s salaries,
 public service pensions, and
 jobseekers allowances,
 here compared with the other places.
It would also be useful to be regularly informed what particular medical procedures cost in different hospitals in Ireland, and in hospitals in other countries.
One could also compare the unit costs of the courts and legal proceedings, and of prison services here with other countries.
 
Publishing this sort of information routinely, and setting out the budget over three years ahead, would make the Government’s political task easier. And  it would help people to see where their money was going and why.

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